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The Wealth Counselor
Harnessing the Power of Trusts to Help Your Clients Protect Their Heirs
Happy 2017! Hopefully, you’re beginning to recover from the holiday season and getting ready for a busy and prosperous year.

As you settle back into your routine, here’s a question to ponder: Are all your clients’ estate plans structured to provide long-term protection against court interference, creditors, bankruptcy, divorcing spouses, and financial mismanagement?

As a financial advisor, you need to assume that “Murphy’s Law” is always potentially in play: if something can go wrong for your client, it very like will go wrong. You can provide great value to clients when you help them anticipate and plan for contingencies.

If your client’s current estate plans do not provide long-term protection against court interference, creditors, bankruptcy, divorce, and financial mismanagement, while still providing flexibility to deal with the inevitable changes in tax law, then they might benefit from trust-based estate planning. This process ensures peace of mind for your clients and enables beneficiaries to retain and even grow their inheritance.

Here are two common types of trusts that almost everyone needs.

Revocable Living Trusts

A revocable living trust can be used to manage and ultimately transfer various assets, almost anything from real estate, investments, life insurance proceeds or policies, bank accounts, and more. This type of trust allows your client to name himself/herself as the trustee while still living, appoint a successor trustee in the event of incapacity or upon death, and make changes and updates as needed. It also keeps the estate out of probate and centralizes assets to be distributed to or managed on behalf of the heirs. These trusts can also incorporate long-term flexibility in the form of trust protectors or decanting powers to account for the uncertainty about the estate, gift, and income taxes.


Let’s assume a mother wants to divide her estate equally among her three daughters, Alicia, Bryn, and Callie. She puts Alicia on a transfer-on-death (TOD) deed for the house, names Bryn as beneficiary on a life insurance policy, and puts Callie in joint tenancy on a bank account. Each of these assets is worth $100,000 for a total estate of $300,000.

Ten years pass. Mom lets the life insurance lapse due to increased premiums. She also sells the house and puts the proceeds into the bank account. What happens when Mom dies? Alicia gets nothing because the life insurance is no longer in effect, and Bryn also gets nothing because a transfer on death deed cannot transfer what the mother did not own at death. Callie gets the $200,000 in the bank, and it’s up to her whether to share with her sisters. Callie’s inheritance in the bank account can be seized by a creditor, bankruptcy court, is also subject to court interference if Callie becomes incapacitated, and may disqualify her from any public benefits that she is receiving.

Now, what if Mom puts these assets into a revocable living trust, rather than using the piecemeal approach? By putting the house and bank account into the trust and naming the trust as the death beneficiary of the life insurance, she can designate within the trust equal distribution of all assets equally among the daughters. Even if she lets the life insurance lapse and sells the house, the $200,000 trust fund is distributed evenly among the siblings as she intended. The trust allows Mom to focus on the important aspects of legacy and financial planning, rather than worrying about every last title, beneficiary designation, and bank account signature card. A fully funded trust adapts to the changes in Mom’s financial situation.

For clients who already have a revocable living trust, working with us to convert the distributions to beneficiaries in the trust from outright or staggered (an all-too-common approach) into lifetime beneficiary trusts can provide an additional layer of protection, while offering you a unique business opportunity. A lifetime beneficiary trust holds the assets on behalf of the beneficiary, offering freedom from court interference, loss of government benefits, creditors, bankruptcy, and divorcing spouses throughout the beneficiary’s lifetime. So, instead of the money being transferred to the daughters, the trustee would manage the funds and make distributions to them over the course of their life. Since these trusts need long-term asset management and you have an existing relationship with your clients, your services in selecting appropriate investments and financial products can be suggested in the trust document, a good way to build relationships with the next generation and reduce the loss of assets after the death of a client.

Standalone Retirement Trust

What if your client has a large retirement account to pass to his heirs? If he uses “plain-old” beneficiary form planning and names each beneficiary, most beneficiaries will cash in an account after a client’s death. This makes the assets vulnerable to creditors, divorce settlements, mismanagement, and other pitfalls. You also lose the assets under management and, sometimes, even the opportunity to discuss options with the beneficiaries because everything happens so fast. A standalone retirement trust (SRT) can improve the outcomes for beneficiaries and provide you with a business opportunity. Under an SRT, the retirement account is payable to the trust upon the client’s death, and the trustee of the SRT can employ the account’s “stretch out” feature, distributing the required annual minimum distributions to the beneficiaries while the investment account continues to grow tax-deferred.


A father designates his tax-deferred IRA (worth $500,000) to be distributed equally among his five children upon death. For our purposes, let’s just look at one of the children—a 25-year old son, Bob, who hasn’t learned yet how to manage money well.

Without trust-based planning, Bob immediately receives his $100,000 share of the IRA when Dad dies. After the government takes about one-third in taxes (which could be more or less depending on Bob’s tax bracket and state of residence), Bob decides to spend the rest on a sports car he’s always wanted. Not only has the money now stopped working for him, but if anything happens to the car, Bob’s inheritance is lost. You’ve also lost the assets under management and probably the opportunity to work with Bob on his financial needs. All around, this is an undesirable result that most clients do not want for their family.

However, with an SRT, the trustee can regulate how much of Bob’s money is distributed to him each year, allowing the rest of his inheritance to grow over time. While Bob doesn’t enjoy the instant gratification of his dream car, he will eventually see his investment grow, possibly by many times more than his original $100,000 inheritance. Just like the lifetime beneficiary trusts, the SRT requires the assets continue to be managed and invested. As a result, your services in selecting appropriate investments and financial products can be suggested within the trust document, a good way to build relationships with the next generation of clients and reduce the loss of assets after the death of your current client.

How to Help Your Clients

We’ve highlighted two particularly important trust-based planning options in this note. There are also countless other trust-based strategies available to help your clients achieve their specific goals. If you have questions about how to approach your clients about their planning (and grow your business in so doing), we are standing by to give you needed insight. Call us anytime you or your clients need help with or have questions about estate planning.

Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692

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