Posted on: February 1st, 2022
You may have one or more trusts currently set up to help you achieve your financial goals for yourself and your family. If you don’t, you may choose to do so at some point in the future. The large number of trust options that are available—from charitable trusts to marital trusts—means you may very well identify at least one that you find makes sense for your financial situation.
But here’s the thing: If you haven’t reviewed your trust recently and assessed whether it’s still on track to deliver the results you want and expect, you could be putting some of your future financial plans at risk.
That’s potentially true even if you set up a trust just a few short years ago—and it’s more likely if it’s been five years or more since you reviewed your trust. Changes in the tax laws, developments in the financial markets and maybe even events within your family could mean that your trust is no longer ideally positioned to reflect your needs and wants.
That’s why it makes sense to pull up those trust documents and give them a careful review. Here’s some advice on how to go about doing it.
One good way to approach a review of your trust or trusts is a checklist method. There tend to be a number of trust-related errors, mistakes and issues that arise frequently. Before you dig deep for esoteric problems, make sure you’ve got the basics covered.
For example, examine your revocable (or “living”) trust with an eye toward the following concerns that can have a big impact if they’re not set up as you want them to be.
Tackling the basics is a great start. But one of the steps that affluent families are increasingly taking these days they say adds additional value to their financial lives is to stress test their trusts (as well as other components of their wealth planning).
Stress testing is a process for examining and challenging some (or even all) of the wealth planning steps you’ve taken so you can assess the likelihood that they will deliver the results you expect them to in a variety of situations and scenarios. A stress test can give important insights in two areas.
(Note: You can also stress test wealth strategies that you’re considering implementing, to see whether they’re likely to behave as anticipated. This can help you decide whether you want to go forward with the proposed strategy or consider an alternative.)
Consider some hypothetical results that could occur when a trust is put through the stress testing process.
However, they hadn’t tied those two new residences into their trust—which meant that if they died, there would be probate in three different states.
Correcting a potentially disastrous error. Another stress test revealed that a couple’s previous advisor had structured a special type of marital trust incorrectly. The husband was a U.S. citizen while the wife was not. The plan should have provided that the husband would leave his assets in a special type of marital trust (a QDOT) for non-U.S. spouses to provide a marital deduction. The trust was set up backward—with the wife’s assets set to go to the husband in a QDOT. With that trust arrangement in place, the non-U.S. spouse would have incurred an immediate tax bill of approximately $20 million—rather than get the tax deferral on the assets that they expected to receive. The new advisor rewrote the entire trust to address this fatal flaw.
It doesn’t necessarily take long for a trust to become outdated or suboptimal—and potentially cost you a lot of money because of it. If your life hasn’t changed, chances are the tax environment has—and vice versa.
Best bet: Do a thorough review of your trust documents and stress test them to see if they’re still set up to deliver as expected.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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