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By Daniel Loftus
• Oct 19, 2023
Wealth Strategist, TD Wealth
TD Bank, AMCB

One of the biggest misconceptions about trust planning is that the grantor – the person who created the trust – will have less control over their personal assets if they transfer ownership of those assets to a trust. It can be viewed as quite the opposite.

Placing assets into a trust allows the grantor to maintain control over their assets by laying out the blueprint for how the assets should be managed, sold, or distributed both during the grantor's life and after their demise.

Additionally, a trust may provide a layer of protection between the assets and the creditors of the trust beneficiaries. In addition to control and asset protection benefits, there may be potential income and estate tax savings available that individuals may take advantage of by using a trust to own their assets.

At the highest level, there are two common types of trusts an individual could create to own their assets. These can be classified

as revocable trusts and irrevocable trusts. Let's look at the use and benefits these trusts provide.

A Revocable Trust is a legal document by which the grantor transfers ownership of assets to the trustee(s) of the trust. The trustees of any trust have a fiduciary responsibility to manage the assets in the best interest of the beneficiaries. The grantor may name themselves as the trustee of the trust, which will allow them to maintain control of the assets owned by the trust while they are alive and have capacity to act as trustee.

A revocable trust is not used to transfer assets out of a grantor's estate to shield the assets from estate tax and gift tax on any future asset growth. Additionally, a revocable trust does not provide any additional asset protection from creditors of the grantor. A revocable trust can be terminated, amended or restated at any time during the grantor's life, allowing them to ensure their estate plan is up to date with their most recent intentions.

An Irrevocable Trust is a legal document by which the grantor transfers ownership of assets to the trustees of the trust and cannot change the terms of the trust after its creation. An irrevocable trust can be used to transfer assets out of a grantor's estate to shield the assets from estate and gift tax on any future asset growth. Additionally, an irrevocable trust, if structured properly, may shield assets from both the creditors of the grantor and the beneficiaries. In these cases, it is usually recommended that a grantor not be a trustee of their irrevocable trust, as this generally may defeat the purpose of transferring the assets into the trust.

Benefits of trust ownership when planning for businesses and real estate

Transferring an illiquid asset like a business and/or real estate holding into a trust can present both opportunities and challenges. Selling an illiquid asset generally takes longer and, in the case of a business, the livelihood of employees (including family members) may depend on it; and the likelihood of a disagreement may be magnified if there are multiple business owners after the current owner dies. However, benefits from trust ownership of a business or real estate can range from increased control and cohesion of business assets to general income and estate tax savings.

For example, placing a business into a revocable trust during life allows a business owner to maintain control over the business during life while also laying out the blueprint for how the business should continue after they have passed or become unable to run the business. This allows for continuity as successor trustees selected by the grantor will have the power to control business assets and provide for the trust beneficiaries. Furthermore, when the owner of a business dies or unexpectedly becomes unable to run the business, their business often suffers.

Trusts are a key tool for business succession readiness planning as they will allow for a smoother transition of the business through naming one or more successor Trustees who will immediately step in and take control.

The type of trust to create and the timing of any transfers to the trust all revolve around the objectives of the grantor and the facts and circumstances impacting those assets. Aside from some of the previous benefits associated with a lifetime transfer of the business to a revocable trust, let's look at some other potential objectives.

Does the grantor want to keep the affairs of the family private after the grantor dies?

Probate is the process by which the court will process an estate and eventually distribute the assets to the beneficiaries. Whether revocable or irrevocable, upon the death of the grantor, the assets owned by a trust will be able to avoid the probate process.

A trust created and funded prior to death will provide discretion for beneficiaries, as assets and distributions are not a matter of public record. Creditors have up to one year to make a claim against assets passing through an estate. Therefore, any assets held in the estate are subject to the one-year creditor waiting period before distribution. Comparatively, a trust may make partial distributions to beneficiaries during the probate process so long as it is suitable. Precaution should be taken to consult with legal and tax advisors before requesting any trust distributions during the probate process.

Does the grantor want to keep the business or real estate in the family after the grantor dies?

Using a trust also allows a grantor to determine how the illiquid assets will be owned and operated along with the terms of future distribution for the trust beneficiaries. For example, the grantor with an operating business may want to differentiate between beneficiaries 'in the business' and those that are not. This would allow the trust to institute rules and procedures that ensure the business is a sound investment for all trust beneficiaries while rewarding those individuals who actively run it.

Where a trust owns real estate like a family vacation home, it could provide for the upkeep and management of the property with rules around usage and even provide rules in the event certain beneficiaries desire to sell the portion of the property owned by their individual trust share.

Does the grantor want to achieve tax efficiency?

Trusts are an important tool for maximizing a family's wealth which can offer increased income and estate tax savings. Grantors should consider the different jurisdictions available to them as there are many benefits of trust ownership if you are a business owner located in a state which imposes higher income taxes.

For example, Delaware does not impose an income or capital gains tax on trust income where there are no Delaware resident beneficiaries of the trust. It is important to note that a careful review of the current state's tax laws must be completed before any decision is made regarding the impact of transferring ownership of assets to a trust located in another state for purposes of tax savings.

Trust ownership can also provide significant gift and estate tax savings for the benefit of the trust's beneficiaries. If a grantor expects the value of their business, home, or other asset to increase in value over time, they could consider make a gift of the asset (or partial) to an irrevocable trust during life. The value of the asset will be reported as of the date of the gift. Any growth thereafter will not need to be reported on an estate tax return after the grantor has passed away and that growth will be protected from estate tax.

TD Wealth® Disclaimers

TD Wealth® is a business of TD Bank N.A., member FDIC (TD Bank). Banking, investment management and trust services are available through TD Bank. Securities and investment advisory products are available through TD Private Client Wealth LLC, a US Securities and Exchange Commission registered investment adviser and broker-dealer and member FINRA/SIPC (TDPCW). Epoch Investment Partners, Inc. (Epoch) is a US Securities and Exchange Commission registered investment adviser that provides investment management services to TD Wealth. TD Bank, TDPCW and Epoch are affiliates.

The information contained herein is current as of October 2023. The views expressed are those of the guest author and are subject to change based on tax and other laws.

This material is for informational and educational purposes only and does not constitute investment advice, tax, legal, accounting or estate planning advice.

The planning strategies mentioned here may not be suitable or tax efficient for you. You should review the strategies discussed with your legal counsel, independent tax advisor and accountant/CPA prior to making any decisions.

Federal and state tax rules and requirements are subject to frequent change. TD Wealth does not provide legal, tax or accounting advice to its clients. This article is not a substitute for such professional advice or services. It should not be relied upon by you,

your estate, your fiduciaries, or any of your beneficiaries as legal or tax advice or as a basis for any decision or action that my affect your finances. Prior to making any decision or taking any action that may impact your estate plan, you should consult with your attorney, independent tax advisor and accountant/CPA for a complete analysis of the legal and tax implications applicable to your particular situation.

If there are any errors or omissions, you understand that this summary is general in its scope; educational only in nature; and may not be relied upon as legal or tax advice in making any determination whether to take action. TD Wealth shall not be responsible for any loss sustained by any person who relies on this summary.

TD Bank and its affiliates and related entities provide services only to qualified institutions and investors. This material is not an offer to any person in any jurisdiction where unlawful or unauthorized. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. All rights reserved. All trademarks are the property of their respective owners. The TD logo and other trade-marks are the property of The Toronto-Dominion Bank or a wholly-owned subsidiary, in Canada and/or other countries. ©2023, TD Bank, N.A.

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