SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Are Trusts the Best Way to Leave Money to Your Heirs?


First, this is a general comment. Every person’s situation is different. I could say “95% of people don’t need this,” and you could be in the 5% who do. So, don’t ever make personal investment or estate planning decisions based on an online post, contact an actual investment advisor or attorney - most will have initial conversations for free (I do).

Trusts originally served four primary purposes. (Yes, there are others, but these, historically, have been the big four)

  1. Avoiding probate. Probate is seen as a “big, long, expensive, painful” process. It takes court filings, hearings, money, etc. General consensus has been to put all of a person’s assets into a trust or have a pour-over will that moves things to a trust when the person dies to avoid probate.

    Depending on the state where someone lives, this may or may not still be valid. I don’t know the probate process in all of the states. (I’ve only probated wills in two states). In Texas, this concern is over-blown. The process of probating a will is not that expensive. If an estate is too small for a normal probate process, there’s even something called the “small estate affidavit” that allows heirs to “skip” most of the formal probate process. I personally think, in Texas anyway, the use of a revocable/pour-over trust for purposes of avoiding probate is unnecessary;
     
  2. Avoiding taxes. Depending on the year, the estate tax exemption has ranged from $0 to $11m for couples and everything in between. This means if someone had as little as $500,000 (which I realize for a lot of people is a TON of money, but there are millions of people that have more than that in this country), that person’s heirs could (again depending on the year), find the government taking upwards of 33% and 40% of that when they inherit. This is particularly problematic if a large amount of real property (land) is included in the inheritance because that isn’t particularly liquid.

    What happens when there is family property? For example, should a family own a ranch worth $5m.  When parents die, the children inheriting the ranch will have to either come up with $2m cash or sell the property to pay the 40% tax. The other option would be for the parents to setup trusts to transfer outside of estate taxes years ahead of their demise. (It is more complicated than that, but that is the general premise).

    Since the estate tax exemption is currently around $11m for couples, this is much less of a problem today than it was in the past. Of course, there are democratic candidates calling for the elimination of the exemption and taxing estates at 100%…so this could go back the other way. I refer to the constant changing of the estate laws as the “Estate Lawyer Employment Acts.” You should have seen the mad scramble at the end of 2012 when there was a chance the exemption was going to $0 (didn’t happen);
     
  3. Protecting Minors. For parents who have a lot of money or who may have life insurance policies with large payouts, upon their deaths, they don’t necessarily want their 12-year-olds to have a million dollars at their disposals. A trust continues to be a good way to help manage the funds until any children are old enough to manage the funds independently.
     
  4. Liability Protection. If a person moves assets to an irrevocable trust in which that the person is not the named trustee, the assets can be shielded from liability. Meaning if I have the right to income and “expenses to maintain my standard of living” but NOT the right to actually control the trust, and I get sued for $10m, that trust, if setup correctly and in advance, might protect against that judgment or from creditors. This is still a legitimate use of trusts, but I personally prefer investment companies, particularly in Texas with how strong the corporate liability shields are and/or the difficulty (if not impossibility now) of piercing the corporate veil in the state. 

Of course, there are some MAJOR disadvantages to passing assets via a trust:

  1. No step-up in basis. To me, this is the number one reason to be cautious about using trusts (living trusts aside). A step up in basis means the heirs don’t have to pay capital gains tax. So if a trust includes stock ABC that was bought at $100,000 for $1 per share that is now worth $10 per share (so $1m total), without a step-up in basis, that’s a $900,000 capital gain the heirs will have to pay in taxes. If you get a step-up in basis, you don’t have to pay that tax;
     
  2. Tax inefficiencies. During the lifetime of the trust creator, trusts are tax inefficient, particularly irrevocable trusts. LLC’s, if you have real estate, tend to be a much better vehicle from a tax rate perspective. Why put something into a trust that’s going to get taxed at over 33%, when if it is put into an LLC, the tax rate will be lower on the property. (TALK TO YOUR ACCOUNTANT/LAWYER ABOUT THIS AND WHETHER IT ACTUALLY HELPS IN YOUR SITUATION);
     
  3. PODs. For many assets, it’s just as easy to pass them via a POD (payable on death)/beneficiary designation. IRAs, bank accounts, insurance, brokerage accounts, etc, all allow holders to designate beneficiaries upon death. This happens as soon as upon death — no need for probate, trusts or anything else. MOST assets can be passed this way, which eliminates the need for paying for a trust).

The answer to the question “Are trusts the best way to leave money to heirs” is “it depends.” Why are you using one? What state do you live in? How much do you have in assets? What KIND of assets are they (real property, cash, stocks?); How old are you? How much life insurance do you have? Do you have kids or young heirs? Do you care what your heirs do with the money?

No matter what people decide for dispersal of wealth after death, it is better to make these plans when young, than when on death’s doorway. Doing it later in life removes options. Trusts aren’t as necessary as they used to be — which doesn’t mean they aren’t necessary — it just means people need to have discussions with their attorneys and advisors.

 

Christopher Welsh is a licensed investment advisor and president of Lorintine Capital, LP., LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and and Lorintine CapitalBlog.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Minimum Effective Dose (MED) For Cash Flow Planning

    Financial planners can usually give generic advice that will be appropriate for the majority of Americans, and that’s the goal of this article. If we can get the fundamentals of cash-flow planning right (where to put your money after you earn it and pay your taxes and bills), we’re 80% of the way towards maximizing our financial situation.

    By Jesse,

    • 0 comments
    • 232 views
  • Are You Breaking Even? Or Losing?

    Among the good reasons to trade options is the need to meet or surpass your breakeven yield. This is the yield you need just to preserve your purchasing power; and it higher than most people think. In fact, most people relying on moderate to conservative yields from stocks, mutual funds, real estate and savings accounts might be earning well below this breakeven level.

    By Michael C. Thomsett,

    • 0 comments
    • 263 views
  • Buy When You Have the Money, Sell When You Need the Money

    Money can be quite an emotional topic for many of us. Emotions can enhance our experiences and relationships in many ways, but they can act as mental roadblocks especially when trying to make wise financial decisions. One of the most common emotional roadblocks I come across when working with individuals is an unwillingness to invest idle cash to meet long-term goals.

    By Jesse,

    • 0 comments
    • 584 views
  • Strategy Selection vs. Risk Management

    "A billion here, a billion there, and pretty soon you're talking about real money." Everett McKinley Dirksen. Let’s begin with the bottom line: When I talk to anyone about the concept of choosing an option strategy (or two) to adopt for trading, I stress that the strategy should have certain characteristics.

    By Mark Wolfinger,

    • 0 comments
    • 305 views
  • Blending Anchor Strategy

    Anchor and Leveraged Anchor investors frequently ask why the strategy only trades SPY and SPY options rather than individual stocks, other indexes or commodities. We avoid individual stocks because of tracking and divergence issues.

    By cwelsh,

    • 0 comments
    • 396 views
  • Fundamental Volatility and Stock Prices

    Every options trader must wonder whether any connection will be found between the company's fundamentals and stock prices (and in turn, option valuation as well). Because options are derived from stock price behavior, the analysis of stock movement is crucial to selecting options wisely; and that relies on volatility in the reported profit and loss over several years.

    By Michael C. Thomsett,

    • 0 comments
    • 422 views
  • Bullish Short Strangles

    A bullish short strangle sounds like a complicated strategy, but it’s really quite simple for those familiar with option terminology. A short put is combined with a short call to where the position starts with some amount of positive delta overall. This distinguishes itself from a delta neutral strangle, where both the short put and short call are sold at the same delta.

    By Jesse,

    • 5 comments
    • 676 views
  • Eight Mistakes Every Forex Trader Should Avoid

    The forex market is currently the largest financial market in the world and, due to its highly liquid nature and low barriers to entry, is only expected to grow. Becoming a forex trader requires minimal effort and with a decent internet connection, a laptop or computer, and some spare money to invest, you can start in no time.

    By Kim,

    • 0 comments
    • 492 views
  • Put/Call Parity - Two Definitions

    Put/call parity is a term options traders use to mean one of two things. The simplest definition and the one most applicable to most options traders compares the similarity in the bid/ask spread and the net debit or credit resulting from this.

    By Michael C. Thomsett,

    • 0 comments
    • 546 views
  • Put Selling: Strike Selection Considerations

    When selling puts, such as we do in our Steady Momentum PutWrite strategy, there are many questions a trader must answer: What expiration should I use? What strike should I sell? Should I choose that strike based on delta or percentage out of the money?

    By Jesse,

    • 0 comments
    • 583 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs