Trusts are offered in all shapes and sizes and can be used effectively to solve various planning challenges.
Do you want to ensure that a minor child cannot blow his inheritance at a Ferrari and will encourage him to go to college instead? That’s why trust works.
Do you want to save on real estate tax? That’s why trust works.
Want to protect your assets from Medicaid real estate collection or long-term care costs? That’s why trust works.
Do you want to protect family heritage assets (e.g., lake houses and farms)? That’s why trust works.
But trust “dos well”, but that doesn’t mean trust is the best option. Trust is often a solution proposed without taking into account the appropriate challenges of using trust.
The question is whether the juice is worth squeezing. Let’s look at trusting the underside of the plan through the lens of hypothetical circumstances in which the authors are sure to pick the facts and make sure to choose the type of trust that presents the problem.
Hypothetical situation
John and Jane’s net worth is $2.6 million, consisting only of non-retirement investment accounts. John and Jane have been married for 40 years and have three children (two since this marriage and one since Jane’s first marriage). John dies first. The estate plan drafted by John and Jane has gained a share of John’s assets ($1.3 million), and Jane falls into spouse trust to provide creditor protection and eliminate property taxes (both can be achieved with this type of trust).
What are the drawbacks? Taxation.
This type of trust is an individually taxed entity that requires both its own tax ID number and its own annual tax return. This alone adds the complexity and cost to help Jane navigate, as she is responsible for both her tax return and her trust’s tax return. But there’s more.
In 2025, couples filing their tax returns did not reach the top tax range of 37% until they made $751,600. That contrasts with confidence, reaching a top tax bracket of 37% for just $15,650. This means trust pays higher taxes.
The higher tax blow can be reduced with distributions to Jane (which effectively shifts tax burdens to her at her own marginal tax rate), but there is complexity in navigating the best strategies to shift the required trust burden and the drafting of professionals.
Ownership and Management
In their entire marriage, money is their money, subject to their control and ownership.
Either one can do anything he or she wishes with money. It changes when everything falls into trust.
Trust only works because of the difference between actual ownership and control. But that could be a shock to Jane. She can no longer do as she wants with her trust assets. She is completely limited to the rules declared in the Management Document (The Trust). and control of state law if the document is not sufficiently specific or does not provide instructions.
Jane has never felt comfortable interpreting trust, not a trustee before. Not to mention understanding of trust law bodies written in law and later interpreted through trials.
So, a practical matter, she needs legal advice via a paid lawyer to understand her new relationship with trust and her responsibility to the trust assets and beneficiaries.
The key part is that Jane does not own the money in the trust. Instead, there are two different sets of people who need to provide services.
First, Jane is the beneficiary of the trust’s current income. But equally importantly, the trust must serve the children as it is the so-called remaining beneficiaries, as well as the children.
Report
As part of the above law, Jane has a new reporting responsibility. She is obligated to reasonably notify all beneficiaries of the trust, their investments, income, distributions and expenses.
This makes the requirement that Jane provide an annual report to all beneficiaries (i.e. her children) detailing the trust and its transactions and holdings.
A detailed report that gives children knowledge to understand whether Jane is fulfilling her fiduciary duties.
responsibility
If Jane fails in her fiduciary duties, she is subject to the possibility of personal liability from the remaining beneficiaries (her children). That is, if she fails as a trustee, her children can sue her. Of course, lawsuits from children are rare, and Jane has other tools to protect herself (particularly she has the threat of denying a child who still sues a portion of her name for a portion of $1.3 million).
Is it worth squeezing it out?
Trusts are undoubtedly a great planning tool in a variety of situations. But they don’t come without costs. Someone should help Jane and John understand whether the juice is worth squeezing.
Beau Ruff, a licensed lawyer and certified financial planner, is planning director for Cornerstone Wealth Strategies, Kennewick’s full-service independent investment management and financial planning company.
