Morgan Stanley
  • Wealth Management
  • Oct 7, 2022

Thinking About Your Legacy? Why You May Need a Trust

You can’t take it with you, but through a trust, you can define how you want your life’s work and wealth to continue to benefit the people and causes you love and care for.

Mention the term “trust fund” and many people are likely to imagine young slackers living off their family’s largesse or an older generation of parents and grandparents dictating life choices and conditions to their descendants.

Indeed, among the available tools for protecting and transferring assets, trusts may be the most misunderstood. Put simply, a trust can be a flexible and effective way for families to solve their financial issues and manage many types of challenges involving how to transfer assets and wealth to help ensure a lasting legacy.

And trusts aren’t just for ultra-wealthy families with complex holdings. Trusts can help older parents with special needs children who require long-term care as adults; if the grantor is the sole owner of a small business, the grantor  may be able to implement a buy/sell arrangement within the  trust; or those setting up a legacy of continuing donations to charities and organizations.

In short: You can’t take it with you, but through a trust, you can define how you want your life’s work and wealth to continue to benefit the people and causes you love and care for. 

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The Basics of Trusts

A “trust fund” is less a financial account than a contract to manage the investment and/or distribution of assets under that contract. Every trust has three components: 

  • Grantor: The person who transfers assets into the trust.
  • Beneficiary: Any person(s) or institution(s) receiving assets or money from the trust.
  • Trustee: The legal owner of the trust assets who administers, invests and makes distributions to beneficiaries, based on directions in the trust documents. Trusts can have more than one trustee.

Trusts are “revocable” or “irrevocable.” A revocable living trust lets the grantor make changes, such as adding or removing assets and beneficiaries, as well as  other adjustments. A revocable living trust doesn’t offer tax or asset protection advantages during the life of the grantor, but it can be used for incapacity planning, to avoid probate, and to keep assets in further trust upon the death of the grantor.

At your death, your revocable trust becomes irrevocable. Generally, an irrevocable trust cannot be changed or amended. Thus, the terms of the  now irrevocable trust allow you to control the future management and distribution of assets for the beneficiaries.  Yes, you can control how assets are distributed after your death. But, you can also establish an irrevocable trust during your life. An irrevocable trust created during your lifetime can be used  to reduce certain tax liabilities, protect assets from future creditors, leave assets in further trusts for a surviving spouse, children and/or charities, or other estate planning goals you may have. 

Choosing a Trustee

Given what’s stake, the choice of trustee can be critical, but not always immediately so. For a revocable trust, for example, you can simply name yourself and/or your spouse as the current trustee(s).

 When you are not around to serve as trustee, however, you may want to consider an experienced professional or corporate trustee. Why? Because an irrevocable trust typically involves more sophisticated accounting, decision making and tax planning. Before selecting a trustee for an irrevocable trust,  you need to carefully consider who can best serve your needs and those of your beneficiaries in managing the assets held in trust. 

Trusts, the Advantages

Some of the advantage of establishing a trust include:

Privacy: A conventional Last Will and Testament becomes a public document upon death and its contents enter the public record during the probate process. However, assets held in trust remain confidential.

Creditor protection: As an independent entity, an irrevocable trust may protect the trust assets  from creditor claims, whether yours or your beneficiary's. Assets in revocable living trusts, however, are still considered your property and are subject to the claims of your creditors.

Tax advantages: Assets placed in an irrevocable trust generally aren’t counted as part of your taxable estate anymore. This can help reduce future estate tax liabilities that may be imposed by federal and state governments.  

Charitable giving: Trusts can offer flexible charitable-giving options. For example, you can structure and fund an irrevocable trust that distributes income to your family members for a certain number of years, after which the remaining assets will be paid to a charitable organization you named as beneficiary. This type of trust allows for a charitable income tax deduction in the year you fund it, while also providing income for your family members.

Asset distribution: Transferring assets to family members after death isn't always simple. Let's say you own a business and have three children, but only one wants to run the business after you die. Placing a wholly owned  business in a trust and purchasing a life insurance policy that the trust owns could allow one beneficiary of the trust to purchase  the business from the other beneficiaries, which allows the other beneficiaries  to receive the cash proceeds from the insurance policy instead of an interest in the business, without forcing the sale of the business.

Securing Your Legacy

Building, protecting and passing on a legacy involves much more than investing wisely. It requires careful analysis of your objectives, intelligent structuring of your assets and integrated, strategic planning and implementation. A trust can be a valuable tool for ensuring continuity in achieving the financial objectives you envision for your family, your wholly owned business and philanthropic legacy for years and even generations to come.

Your Morgan Stanley Financial Advisor can connect you with a Trust Specialist or other estate planning resources within Morgan Stanley to help you look at the options, and which might be the best fit for you.

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