Estate Planning Part 2, Trusts


In Episode 6 of Your Wealth Curve, I once again sit down with attorney Brad Shalit of Connell Foley in N.J. to examine more closely the concept of a trust in your estate planning and how it can provide protection for your assets. Brad suggests to a large majority of his clients to set up a trust in their estates and then to use them to hold and distribute their assets. Brad says that a properly structured trust can provide the maximum amount of protection for your assets with little or no downside at all.

What is a Trust?

There are different types of trusts for individuals and businesses. In this episode, Brad focuses mainly on one type of trust – the dynasty trust. When there is wealth in a family, a dynasty trust aims to protect this wealth for future generations and to guarantee the assets stay in the blood line. In some states, there is no time limit on how long a trust can stay intact. In the trust, the assets can grow free from the reach of creditors, a divorcing spouse and any potential bad spending habits of a beneficiary.

The assets in a trust may also be exempt from estate taxes, saving your beneficiaries a large amount of money over the years. By contrast, if you were to leave your money to your children without setting up a trust, the money would be subject to estate tax. When your children then left it to their children, it would be subject to estate tax again. If you try to get around this by simply leaving money to your grandchildren at the time of your death, generation skipping taxes would apply.  Once the assets are transferred, they become immediately subject to your children’s creditors – whether they are debt collectors, an ex-spouse, the IRS, etc.  A trust provides protection from all of these things, says Brad, and refers to the properly structured trust as “free insurance for your money.”

Creditors and Predators

As individuals, we are susceptible to debt collectors, bankruptcy, student loan debt and divorce, which Brad says is statistically the most likely creditor. In a divorce, inherited assets and the growth of these assets, without an established trust, can potentially be subject to equitable distribution, and can also be used as income in an alimony calculation. If non-active assets are in a trust, they are generally exempt from both equitable distribution and are held outside any calculations for determining alimony. Without a trust, your former spouse could claim access to any inheritance you may have received even after the divorce, but having your inheritance inside of a trust prevents this from ever happening.

Assets in a trust are typically distributed incrementally, depending on the age of the children at the time of death. Usually a beneficiary would receive three equal payments at ages 25, 30 and 35, but the distribution details are flexible and can be set up in any way you wish. You can also set up a trust without mandatory distributions, in essence “giving your children the keys to the trust” and allowing them to access funds for what they need when they need it. You can dictate the level of control your children have over the trust as well – they can have “all-access” so to speak, or can be managed by an outside trustee who can act as a disinterested sounding board for questions regarding legitimate asset distribution. Brad suggests that anyone with substantial assets, say $500,000 per child, should create a trust as part of their estate plan.

Protecting our Life Insurance Benefits

Another reason to consider setting up a trust, according to Brad, is to protect any life insurance benefits we may receive as the surviving spouse or beneficiary from taxes and creditors. Many people are under the assumption that life insurance is not taxed, but the reality is that while any money from a life insurance disbursement will not be subject to income tax, it will be subject to the death tax when it is passed to our children. If life insurance is owned by an irrevocable life insurance trust, the death benefit will be held in trust and applied for the benefit of your loved ones but protected from creditors and taxes.

How is a Trust Taxed?

In a traditional dynasty trust created during life, the trust does not exist for income tax purposes while the grantor is still alive. In the alternative, the income in the trust can be taxed to the beneficiary. A trust may also pay its own income tax, but the maximum rate applies at a lower amount of income than the individual would pay.

When creating your estate plan, it is important to consider all the benefits of creating a trust for our loved ones after we die. Brad says creating a trust offers a substantial amount of flexibility in distributing our assets with the maximum amount of protection that comes along with it. Creating a trust and conducting business from within the trust can offer so much protection now and will save us from all the estate planning leg work later. Whether you are starting a business, making investments, buying property, etc., Brad says doing these things from within a trust makes it so much easier when looking ahead to what happens after you are gone. A trust is set up relatively easily, says Brad, and then simply filing a tax return for the trust is the only maintenance required. “If you can protect your assets now,” says Brad, “why wouldn’t you?”


When thinking about your estate plan, Brad offers the following suggestions:

  • Everyone should have a property and casualty insurance agent and should own an umbrella policy.
  • If you own a business and operate it under an LLC, remember that the assets within the LLC are subject to an individual’s personal creditors. It only protects the owners from liabilities within the entity. As there is no creditor protection for the individual, do not rely on an LLC for asset protection against personal creditors when creating your estate plan.

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