As your wealth grows, so does the complexity of protecting it. A common question I hear from high net worth individuals is: At what point should I create a trust to protect my assets? 

You have built a solid financial foundation, and might wonder if it’s time to take the next step in estate planning. Trusts can be a tool, but timing is everything. 

Let’s break down when creating a trust makes sense, the key triggers for this decision, and how trusts can fit into your overall financial strategy.

Also, keep in mind this insight is not meant to be legal advice for your particular situation, and that you should follow up with the necessary professional(s) for your situation. 

What Is a Trust and Why Does It Matter?

A trust is a legal entity you create to hold and manage assets. Trusts allow you to protect, control, and transfer your wealth to beneficiaries according to your wishes. 

Unlike a will, a trust keeps your estate out of probate, offering privacy and efficiency when it comes to passing on your wealth.

For higher net worth individuals, creating a trust can help protect your assets from creditors and potential legal actions/ lawsuits, shield your heirs from excessive taxes, and ensure your estate plan remains intact. 

Types of Trusts for You To Protect Your Assets

1. Revocable Living Trust

This trust allows you to maintain control over your assets during your lifetime, and you can change or dissolve the trust at any time. 

It’s ideal for those who want flexibility and want to avoid probate, but it doesn’t offer as much protection from creditors. Reason being you still maintain control over the assets, and the limits the shield of your assets.

However, if you were to die with a revocable trust, the assets within the trust will be shielded as an irrevocable trust.

2. Irrevocable Trust

An irrevocable trust provides significant asset protection, as it removes the assets from your estate. Once established, you can’t change or revoke it, but it offers protection from lawsuits, creditors, and estate taxes.

Compared to revocable trusts, irrevocable trusts are less flexible, but if you release all control over the assets in the irrevocable trust you achieve both estate and gift tax benefits.

3. Dynasty Trust

A dynasty trust allows you to pass wealth from generation to generation without estate taxes. If your goal is to protect and grow your family’s wealth long-term, this trust can ensure your assets are preserved for future heirs.

Also, if the trust is created in a State that has abolished the rule against perpetuities; then, the trust will in theory last forever. As long as there are assets to protect.  

4. Charitable Trust

Do you have philanthropic goals? A charitable trust allows you to donate assets to charity while receiving tax benefits.

Also, adding in the ability to transfer assets to non charitable beneficiaries. Either with a charitable lead trust or a charitable remainder trust.

With this high level overview of Trust completed. How do you know when you should set one up?

Key Indicators That It’s Time to Create a Trust To Protect Your Assets

As with many aspects of personal finance, the timing of creating a trust depends on your circumstances. Below are several indicators that suggest you’re at the right point in life to consider setting up a trust.

1. You’ve Accumulated Significant Assets

With your net worth growing, now’s the time to think about a trust. Once you hit the positive net worth milestone or own multiple properties, you’ll want to protect those hard earned assets from potential risks like lawsuits, divorce, or large estate taxes.

Let’s consider a hypothetical client named Jane, who inherited several properties and investments. At first, she may be unsure whether a trust is necessary. 

After discussing her long-term goals, including protecting her assets from future creditors and making things easier for her children, the benefits of creating a trust become clear. 

She can establish a revocable trust, and she now has peace of mind knowing her estate is protected.

2. You Own Real Estate or a Business

Owning real estate, especially in multiple states, can complicate the probate process. A trust ensures that your properties pass to your beneficiaries without the hassle of probate. 

For business owners, a trust can secure business continuity and allow you to structure how and when your business passes to your heirs. For example, if you own properties in three different states and run a successful family business. 

Without a trust, your heirs would have to navigate probate in each state. A time consuming and expensive process. 

With a living trust, both your properties and business would transfer seamlessly upon your passing.

3. You Want to Protect Your Family’s Privacy

With a Higher net worth individuals often face competing demands in regards to their estate. Probate is a public process, exposing your financial affairs to anyone interested. 

By design probate is meant to take some time to complete; giving everyone with rights or claim to the assets a chance to present evidence proving their claim. 

A trust, on the other hand, keeps the details of your estate private. This can be especially important for individuals who prefer to keep their wealth and asset distribution under wraps.

You do not need to be a high profile individual/family to necessitate the need to eliminate public scrutiny. Creating a trust allows you to maintain your privacy while also ensuring your estate plans is carried out exactly as you wished.

4. You Have Children or Dependents

If you have minor children, special needs dependents, or beneficiaries who may not be financially responsible, creating a trust is a must. A trust allows you to control how and when your assets are distributed. 

For example, you can ensure that your children don’t receive a lump sum of money at age 18, but rather have staggered distributions over time.

For example, establishing a trust for young grandchildren, with clear guidelines on when and how they would access the funds. The trust gives you control over the grandkids’ financial future, ensuring they will not receive a large sum too early in life.

5. You Want to Protect Your Assets from Future Risks

As you accumulate wealth, it’s not just about making more money. It’s also about protecting what you have.

Lawsuits, divorce, and creditor claims can all threaten your estate. An irrevocable trust can shield your assets from creditors and lawsuits. 

While it involves giving up some control, the trade-off in asset protection can be well worth it, particularly for those in high risk professions like doctors, business owners, and/or executives.

Now that you know when to create a trust, let’s discuss how life events present opportunities for protecting your wealth.

Life Events That Signal It’s Time for a Trust To Protect Your Assets

While significant wealth and complex estates are good reasons to consider a trust, certain life events can also prompt this decision. Let’s look at some of the triggers that signal it’s time to create a trust.

1. Marriage or Divorce

Getting married or divorced can significantly impact your estate plan. If you’re getting remarried and have children from a previous marriage, a trust can ensure your wealth is distributed according to your wishes. 

Protecting both your new spouse and children. After a divorce, it’s essential to update your estate plan to reflect your new financial circumstances and protect your assets from future ex-spousal claims.

2. Retirement and Legacy Planning

Retirement is an ideal time to review your estate plan. You’ve likely built a significant nest egg, and it’s time to think about how you want to pass that wealth to the next generation. 

A trust can help you minimize estate taxes and ensure your legacy lives on. For retirees, setting up a trust is also a way to ensure that your finances are managed if you become incapacitated. 

There is comfort in knowing that a trust will take care of financial affairs should you no longer be able to do so.

3. Health Concerns or Aging

If you or your spouse are dealing with health issues or are aging, now is the time to create a trust. An incapacity clause can ensure that your assets are managed according to your wishes, even if you can’t make decisions yourself. 

This is particularly important for high net worth individuals with complex estates. The likelihood of something significant happening is rare; however, wouldn’t you like to know that your assets are taken care of in a manner that you determine well beforehand.

How a Trust Fits into Your Overall Financial Plan

A trust is a powerful tool, but it’s only one piece of your financial puzzle. It works best when integrated with a comprehensive financial plan. 

That means aligning it with your investment strategies, insurance policies, and other estate planning documents, like your will and powers of attorney.

What’s Next: Is It Time to Create a Trust To Protect Your Assets?

After reading this you may be thinking; not if you should create a trust, but when. Whether you’re approaching retirement, experiencing significant life changes, or simply want to protect your wealth for the next generation, a trust can provide peace of mind. 

To get started, consult with a financial planner or estate planning attorney who can help you understand your particular situation from a financial and legal perspective. 

Creating a trust may seem like a big step, but it’s one that will assist in protecting your wealth and legacy for years to come.