Creating trust: The benefits of transferring a brokerage account into a living trust

10/09/2024 — Key takeaways:

• A client’s brokerage account can be transferred into a living trust, providing many advantages.
• When a trust is in place, the trust can act as an SBLOC borrower — enabling an SBLOC to be extended beyond the client’s life.
• When the trust is the SBLOC borrower, the risk of needing to sell off securities to cover the remaining balance is minimized because trusts don’t end with the death of an individual.

A revocable living trust is an estate planning tool that can provide your client with many advantages, both during their lifetime and after he or she dies. This type of trust is created by an individual (with the assistance of an estate planning attorney) and can receive, hold and manage the individual’s assets both during their life and after their death. One type of asset that can be transferred into a trust is their brokerage account. 

Maintaining control during life

While the trust becomes the legal owner of the brokerage account that is transferred into it, the trust’s creator (“Grantor,” “Creator” or “Settlor”) generally can maintain control of the brokerage account during their life. In other words, your client would not necessarily give up the ability to manage, contribute to, benefit from or make decisions regarding their brokerage account simply because he or she transferred legal ownership of the account to the trust. Depending on how the trust is drafted, the trust creator can retain the power to modify the terms of their trust and move property in and out of it to suit their needs and goals. This type of flexibility can be very useful for your client if their circumstances, goals and needs change over time.

Avoiding probate

One of the more significant advantages of a trust is probate avoidance. Generally, unless otherwise provided for via beneficiary designation or other non-probate transfer, any assets your client has not transferred into a trust during their life will need to go through the probate process before their ownership can be transferred from your client to another person or entity.

• The probate process can be time-consuming, expensive and stressful for your client’s family and loved ones
• A trust can be a good estate planning tool for minimizing the amount of probate that is necessary when your client passes away; it can ensure that investments in your client’s brokerage account can continue outside of probate

Providing restrictions and fiduciary protections

If your client’s assets (including their brokerage account) pass through a trust, rather than by beneficiary designation or the probate process, your client will have the ability to place certain restrictions within the trust that can dictate how and when its assets will and/or can be distributed.

This allows your client to reduce the risk that the assets they leave behind might be mismanaged or needlessly squandered by young and/or potentially irresponsible beneficiaries. Similarly, by transferring their brokerage account into a trust during their life, your client will be able to nominate a fiduciary agent or agents (a Successor Trustee) who can step in and manage the account in the event your client becomes incapacitated and/or unable to manage those assets themselves due to injury or illness.

Acting as the borrower

A trust can also act as the borrower in certain types of lending arrangements, such as in a securities-backed line of credit (“SBLOC”). With an SBLOC, the line of credit is extended to the borrower using the borrower’s securities as collateral. 

If an SBLOC borrower is an individual and the individual dies prior to fully repaying the outstanding balance of the SBLOC, there is a risk that the borrower’s securities (or some portion of them) may need to be liquidated in order to repay the remaining balance.

However, when a trust is acting as the borrower for an SBLOC, the risk of needing to liquidate securities upon your client’s death is less of an issue because the trust would not die or terminate with your client’s passing. That’s why an SBLOC made to a trust can extend the life of the SBLOC beyond your client’s life, and the securities held by the trust could continue being assets of the trust while the SBLOC is paid down or paid off completely.

If a client is resistant to an SBLOC, you can ease their mind by dispelling some of the old myths that don’t apply to today’s securities-backed lending. It’s especially helpful to be ready to discuss SBLOCs with clients who are anticipating a large expense  in the next few years, such as college expenses, a home renovation or a hefty tax bill.

ing tool that can provide your client with many advantages, both during their lifetime and after he or she dies. This type of trust is created by an individual (with the assistance of an estate planning attorney) and can receive, hold and manage the individual’s assets both during their life and after their death. One type of asset that can be transferred into a trust is their brokerage account. 

Maintaining control during life

While the trust becomes the legal owner of the brokerage account that is transferred into it, the trust’s creator (“Grantor,” “Creator” or “Settlor”) generally can maintain control of the brokerage account during their life. In other words, your client would not necessarily give up the ability to manage, contribute to, benefit from or make decisions regarding their brokerage account simply because he or she transferred legal ownership of the account to the trust. Depending on how the trust is drafted, the trust creator can retain the power to modify the terms of their trust and move property in and out of it to suit their needs and goals. This type of flexibility can be very useful for your client if their circumstances, goals and needs change over time.

Avoiding probate

One of the more significant advantages of a trust is probate avoidance. Generally, unless otherwise provided for via beneficiary designation or other non-probate transfer, any assets your client has not transferred into a trust during their life will need to go through the probate process before their ownership can be transferred from your client to another person or entity.

• The probate process can be time-consuming, expensive and stressful for your client’s family and loved ones
• A trust can be a good estate planning tool for minimizing the amount of probate that is necessary when your client passes away; it can ensure that investments in your client’s brokerage account can continue outside of probate

Providing restrictions and fiduciary protections

If your client’s assets (including their brokerage account) pass through a trust, rather than by beneficiary designation or the probate process, your client will have the ability to place certain restrictions within the trust that can dictate how and when its assets will and/or can be distributed.

This allows your client to reduce the risk that the assets they leave behind might be mismanaged or needlessly squandered by young and/or potentially irresponsible beneficiaries. Similarly, by transferring their brokerage account into a trust during their life, your client will be able to nominate a fiduciary agent or agents (a Successor Trustee) who can step in and manage the account in the event your client becomes incapacitated and/or unable to manage those assets themselves due to injury or illness.

Final thoughts

If a client does not already have a living trust, it may seem like a daunting 2-step process to encourage them to set one up and then use it to acquire an SBLOC. But another way to think of it is that you’re helping them twice: When a client opts for the benefits of a living trust, and you then educate them on how it can be used to acquire an SBLOC, it reinforces your position as a solution-provider.

And, of course, you keep their assets under management for yourself and your firm.