Navigating Life With an Inherited Trust
By Brian Famigletti, Managing Director & Head of Marketing
Trust funds can come with many emotions: gratitude, security, and likely some anxiety too. The promise of financial stability may be reassuring. The vast expanse of associated estate, tax, and investment complexities is equally daunting.
But inherited trust funds don’t have to be overwhelming. Here are the key things to know — and critical first steps to follow — to ensure your inheritance lasts long and goes far.
What Are Trust Funds?
First, it’s important to identify the type of inheritance you received.
You can inherit assets outright, with complete control over them. Or, you can inherit money in a legal entity called a trust.
A trust can either be revocable or irrevocable. The terms of a revocable trust can be changed after it is created. Those of an irrevocable trust can never be modified.
It’s also important to understand exactly how trusts work from a legal standpoint.
It’s a common misconception that beneficiaries own the assets in an inherited trust. In strict legal terms, the trust itself owns the assets. A trustee, appointed by the grantor, holds the purse strings.
The grantor — a parent or guardian, for example — writes rules determining regular distributions of trust income to the named beneficiary (or beneficiaries). The trustee — think lawyers, law firms, trusted family or friends — then decides how the assets are managed and invested to meet the grantor’s wishes.
Get To Know Your Trustee
Trusts are fraught with legal and financial complications, not to mention potential pitfalls. For those reasons, it’s usually best not to go it alone.
For the beneficiary of an inherited trust, it can be beneficial to consult with a number of different parties to understand different dimensions of the trust. Putting together a proper team can help ensure the inherited fund flourishes.
This should often start with the aforementioned trustee. The trustee is legally required to act in the benefit of the trust. But the specifics of how they invest are at the trustee’s discretion — as are any distributions to beneficiaries beyond the trust’s rules.
So it can be crucial for beneficiaries and trustees to get on the same page in terms of investing philosophy. It’s also important to establish a solid foundation of trust to make it easier to resolve any potential disagreements in the future.
Put Together a Team
Additionally, more wealth will impact your tax-saving and investment strategies. Legal and financial advisors can help alleviate confusion on a number of levels, including:
- Understanding the fine print. How many beneficiaries does the trust have? What are the age and distribution restrictions? Does the trust end once the beneficiary reaches an age, or last a lifetime? An estate attorney can help you understand the trust’s rules and what actions to take if you question the trustee’s investments or other decisions.
- Discerning your total wealth. Knowing how much wealth you’ve inherited and what kind of access you have to it is critical. Advisors can conduct cash-flow and tax analyses to determine your total net worth.
- Managing fees and taxes. If the estate is large, your advisor can help you negotiate trustee fees after comparing them with state averages. Beneficiaries are taxed on their distributions, but the trust typically pays other taxes imposed on assets. Inherited wealth may also push you into a higher tax bracket, necessitating more tax-efficient investment strategies.
- Aligning your trust with your goals. An advisor can help you set goals that match your cash flow and expected return on your investments. If your income is high enough, you may even be able to live on the returns of your investments, leaving the assets in the trust to compound and grow over time.
If you’ve recently inherited a trust and feel overwhelmed by the complexities, don’t hesitate to reach out to Griffin Asset Management for a consultation. It may be the most essential step on your path to sustained success.
Sources:
Sunnybranch: What Should You do if You Inherit a Lot of Money?
Bank of America: Understanding Trusts
Helsell Fetterman: Irrevocable Trusts
Bernstein: Inheriting Wealth? Avoid the Pitfalls of Prosperity
