Should You Create a Trust?

by Rick Kahler

Realtor Tips for Preparing Home for Sale photo

A trust, done correctly, can go a long way to preserve wealth after the death of the wealth accumulator. We explore what ‘done correctly’ means and whether a trust might make sense for your accumulated wealth.

When passing wealth to your kids, consider creating a trust to limit the later generation’s ability to tap into the principal. There is no question that a trust, done correctly, can go a long way to preserve wealth after the death of the wealth accumulator.

Let’s explore what “done correctly” means.

1. Trust law is complex. Engage an accountant and attorney with strong skills and expertise in trusts.

2. Be sure the assets you intend to go into the trust will actually transfer.

3. Retirement plans like IRA’s, 401(k)’s, and profit sharing plans will pass to whomever you listed as the beneficiary. This must be the trust. In addition, the trust must include a number of special provisions in order for a retirement plan to be distributed according to your wishes and not as a fully taxable lump sum.

Annuities, insurance policies, and accounts with a TOD (transfer on death) clause will also pass to the named beneficiary.

Assets held in joint tenancy will not pass to the trust. Many married couples jointly own most of their major assets, such as the family home, investment real estate, brokerage accounts, or bank accounts.

You deserve a comfortable retirement.

That's why our weekly newsletter, After 50 Finances, is dedicated to people 50 years and older.

Each week we feature financial topics and lifestyle issues important to the 50+ crowd that can help you plan for and enjoy a comfortable retirement even if you haven't saved enough.

Subscribers get The After 50 Finances Pre-Retirement Checklist for FREE!

Sign up today for your comfortable retirement.


We respect your privacy. We hate spam. Unsubscribe at any time.

4. Be sure there are enough assets in the trust to justify the trustee fees. Most professional corporate trustees charge $3,500 to $10,000 annually, or up to 1% of the trust assets. If a trust with $100,000 incurs an annual fee of $3,500, your hard-earned estate will benefit the trustee as much as your heirs. A trust probably doesn’t make financial sense if the total fees will exceed 2%.

5. If a trust still seems like a good strategy after the above caveats, the next question is how much to limit heirs’ ability to withdraw money. From an actuarial standpoint, it’s fairly simple. If you limit annual withdrawals to 3% of the principal, there’s a strong probability of the money lasting several generations with its buying power intact. Provided, that is, the trustees pay close attention to the next point.

6. To generate sufficient returns to pay out up to 3% annually to heirs and also keep up with inflation, the majority of the portfolio must be invested in assets that will grow over time, such as stocks, real estate, and commodities. It needs to be broadly diversified among many asset classes and countries. The trustees must also limit the fees paid to manage the investments. Many corporate trustees have an inherent incentive to use their own bank’s mutual funds, which can have annual fees as high as 1.5%. One way to avoid this conflict of interest is to instruct the trustee to place the funds with a fee-only investment advisor who has a largely passive approach to managing money. This could cut the portfolio fees by 50% or more.

7. Finally, before setting up any trust, pay close attention to taxes. Here is the problem. If the trust retains enough earnings to increase the principal to offset inflation, it will have to pay substantial income tax and will probably need to restrict withdrawals to 1 or 2%. All of a sudden a multi-million dollar inheritance becomes simply a source of secondary income similar to Social Security.

Trusts are valuable estate planning tools, but like any other powerful tool, they are best employed by someone with the skills to use them well.

Reviewed July 2023

About the Author

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com.

Sign me up for a comfortable retirement!

Every Thursday we’ll send you articles and tips that will help you enjoy a comfortable retirement. Subscribers get a free copy of the After 50 Finances Pre-Retirement Checklist.

We respect your privacy. We hate spam. Unsubscribe at any time.

Sign me up for a comfortable retirement!

Every Thursday we’ll send you articles and tips that will help you plan for and enjoy a comfortable retirement. Subscribers get a free copy of the After 50 Finances Pre-Retirement Checklist.

We respect your privacy. We hate spam. Unsubscribe at any time.

Will You Be Leaving Thousands In Social Security Benefits Unclaimed By Filing at the Wrong Time?

Pin It on Pinterest

Share This