Using Trusts to Preserve Private Wealth

Overview

Trusts are flexible legal tools used in estate planning to control how assets are managed and passed to beneficiaries. Beyond merely avoiding probate, well-structured trusts can protect assets from creditors, preserve family-owned businesses, provide for family members with special needs, and achieve tax planning goals. In my practice advising families and business owners, the most successful outcomes come from selecting the right trust type, funding it correctly, and updating it as laws and family needs change.

(For official background on trusts, see the IRS guidance on trusts: https://www.irs.gov/businesses/small-businesses-self-employed/trusts and general consumer information from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/.)

How do trusts work in practice?

A trust separates legal ownership (held by the trustee) from beneficial ownership (held by beneficiaries). The grantor (also called settlor or trustor) creates the trust document that states the trust’s purpose, names the trustee and beneficiaries, and lists distribution rules. Trustees have fiduciary duties to manage assets prudently and act in beneficiaries’ best interests.

Common operational steps I use with clients:

• Identify goals: tax minimization, asset protection, control over distributions, or Medicaid/special-needs planning.
• Select trust type: revocable vs irrevocable, grantor vs non-grantor, dynasty/generation-skipping, charitable trusts, or special-needs trusts.
• Draft clear powers and trustee standards with an estate attorney.
• Fund the trust: retitle bank, brokerage, real estate, and business interests into the trust’s name.
• Review periodically: tax law changes, family events, and asset changes prompt trust updates.

Which trusts help preserve wealth?

A short guide to commonly used trust types and their primary wealth-preservation roles:

• Revocable living trusts: Avoid probate and provide continuity of management if the grantor becomes incapacitated. They offer flexibility but limited creditor or tax protection while the grantor is alive.

• Irrevocable trusts: Remove assets from the grantor’s taxable estate and can provide strong creditor protection (depending on state law). Examples include irrevocable life insurance trusts (ILITs) and certain asset-protection trusts.

• Grantor trusts: Often used to shift future appreciation out of the grantor’s estate while the grantor pays income tax on trust income (allowing the trust assets to grow tax-free to beneficiaries in some strategies).

• Generation-skipping and dynasty trusts: Designed to preserve wealth for multiple generations and reduce transfer taxes over time (see our in-depth: Generation-Skipping Trusts and Dynasty Planning).

• Special needs trusts: Protect eligibility for means-tested benefits while providing supplemental support for a beneficiary with disabilities (see: Funding Guardianships and Special Needs Trusts).

• Trusts with protector provisions: Add flexibility by allowing an independent protector to modify or correct trust terms under specified circumstances (see: Using Trust Protectors to Enhance Asset Protection).

Tax considerations and current context (as of 2025)

Tax rules affecting trusts change frequently. Trusts are taxed under special rules: non-grantor trusts may face compressed income tax brackets, while grantor trusts typically report income on the grantor’s return. Estate, gift, and generation-skipping transfer (GST) tax exemptions and rates are subject to change and vary by year. Because of that volatility, I avoid quoting a single exemption number here; instead, consult the IRS and your tax advisor for current thresholds and strategies (IRS: https://www.irs.gov/).

A practical approach in 2025 is to plan with both current law and the possibility of future changes in mind. Many clients use portability, lifetime gifting, and specialized irrevocable vehicles to lock in tax advantages while retaining some flexibility.

Funding is critical — don’t overlook it

A trust must be funded to work. I repeatedly see clients create detailed trust documents but fail to retitle assets. Common funding steps:

• Move real estate into the trust by executing new deeds.
• Change beneficiary designations and transfer ownership of retirement accounts carefully (note: IRAs often should not be transferred to a revocable trust without tax planning).
• Retitle bank and brokerage accounts and update corporate ownership records for business interests.

Unfunded trusts lead to probate, unintended heirs, and lost protection.

Choosing fiduciaries and safeguards

Selecting trustees and successor trustees is one of the biggest long-term decisions in trust design. Options include:

• Individual trustees (family members or trusted advisors)
• Corporate trustees (banks or trust companies)
• Co-trustees or trust advisory boards to balance expertise and family interests

Include successor trustee provisions and clear trustee powers. Consider mandatory accounting, distribution standards, and dispute-resolution clauses to reduce litigation risk.

Asset protection limits and state law

Not all trusts are equally protective. Domestic asset-protection trusts and irrevocable trusts offer varying protection depending on state statutes and timing (e.g., look-back periods for fraudulent-transfer claims). Offshore trusts still exist but carry added complexity, reporting, and costs. Always confirm with counsel how state-specific law and fraudulent-transfer rules apply.

Practical strategies I use with clients

1. Start with goals, not instruments. A trust is a tool; the question is which tool fits your goals.
2. Use a revocable trust for incapacity planning and probate avoidance, then layer an irrevocable trust for tax or creditor protection when appropriate.
3. Fund early. Establish trustee relationships and transfer title soon after signing the trust.
4. Use limited powers of appointment to give flexibility without full control that could expose assets to estate tax.
5. Coordinate trust planning with retirement account, life insurance, and business succession planning.

Common mistakes and how to avoid them

• Failing to fund the trust. Fix: Create a funding checklist and confirm transfers.
• Treating trusts as one-size-fits-all. Fix: Match trust type to objectives and family facts.
• Ignoring tax reporting and distribution requirements. Fix: Engage a CPA familiar with trust tax rules.
• Appointing an unsuitable trustee. Fix: Consider professional trustees for complex or multi-state assets.

Step-by-step checklist to preserve wealth with trusts

1. Define objectives: probate avoidance, tax planning, asset protection, special needs, or philanthropy.
2. Choose the trust type and draft terms with an estate attorney.
3. Select trustees and document successor appointments.
4. Fund the trust (deeds, account retitling, beneficiary updates).
5. Coordinate with tax advisors for income, gift, and estate tax planning.
6. Maintain an annual review schedule and update after major life events.

Example scenarios

• Business owner: Transfers minority shares to an irrevocable trust and uses buy-sell agreements to protect enterprise value from creditor claims and to plan succession.
• Family with a disabled child: Uses a special needs trust to provide supplemental care without disrupting SSDI/Medicaid eligibility.
• Multi-generational family: Establishes a dynasty trust to hold concentrated assets and manage distributions over decades while limiting transfer taxes.

FAQs (short answers)

• How does a trust avoid probate? Trust assets titled in the trust’s name pass to beneficiaries per the trust document, bypassing probate court.
• Are trusts only for the rich? No—trusts help many families manage incapacity, avoid probate, and control distributions.
• Can I change my trust? Revocable trusts are changeable; irrevocable trusts generally are not unless the document or state law allows modifications.

Professional disclaimer

This article is educational and not legal or tax advice. Trust design, funding, and tax treatment depend on individual facts and state law. Consult an estate attorney and tax advisor before creating or changing a trust (IRS: https://www.irs.gov/; Consumer Financial Protection Bureau: https://www.consumerfinance.gov/).

Authoritative resources

• IRS — Trusts and Estate Tax: https://www.irs.gov/businesses/small-businesses-self-employed/trusts
• Consumer Financial Protection Bureau — Estate planning basics: https://www.consumerfinance.gov/consumer-tools/estate-planning/

By aligning clear goals, correct funding, and professional coordination, trusts can be powerful tools for preserving private wealth for current and future generations.