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Myths and Misconceptions About Trusts |
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Lots of myths and misconceptions surround trusts, including the notion that trusts are only for the wealthiest people. In fact, many members of the middle class today use personal trusts to minimize estate taxes, provide for loved ones or favorite charities, or manage financial affairs during and after their lifetimes. What is a personal trust? A personal trust is a legal arrangement to which a person transfers assets such as investments, life insurance policies, or real estate. You can customize a trust to direct your assets where you want them. Once you establish a trust, the assets are then administered by a trustee (or trustees), which can be a bank, a mutual fund complex, or an individual. The trustee is responsible for investing and managing the assets for the trust's beneficiaries under terms set by its creator. What are the benefits? People set up trusts for a variety of reasons. They may want to minimize estate taxes. Or they may want to preserve their privacy. When you dispose of your assets or transfer your assets via a will, it’s a public document, and anybody can go to the courthouse and read about your assets and the disposition of your wealth. A trust is a private document that allows for the transference of assets in a very private manner. People also set up trusts to ensure the uninterrupted management of their assets during a time of incapacitation and/or death. Depending on where you live, a trust can avoid a costly and lengthy probate, or legal validation, of a person’s estate after death. Who should consider establishing a trust? Generally speaking, any married couple with more than $625,000 in assets should consider an estate plan with, at minimum, a bypass trust. That’s because any assets over $625,000 are subject to federal estate tax. In some states, a personal trust may make sense for smaller estates too. For example, someone in California may want to establish a trust during his or her lifetime to avoid subjecting family members to that state’s probate process, which is required for estates with assets of $60,000 or more. It’s a myth that you must have a large amount of money to justify creating a personal trust. The tax benefits are only one factor. Consider a person who has assets of $150,000 and a child with a disability. That person is probably in greater need of estate planning than someone who has $1 million. If you have young children, you may also want to establish a trust to specify how your assets would be distributed if you die before your children come of age; without any such provisions, your children could receive their full inheritance when they’re 18 or 21, depending on the state. Is there a "right" time to establish a trust? No. Regardless of age, anybody with a certain amount of assets who has a dream or a plan for where they would like those assets to go should establish a trust. We have had clients as young as 18. Unfortunately, only about 25% of adults nationally have taken the steps to create any sort of estate plan, whether it be a trust or a will. I say "have taken the steps" because everyone has an estate plan. If you haven’t created it, the state where you live will determine your estate plan. But you shouldn’t just sit back and let the state government determine your plan. Rather than looking at an estate plan as dealing with death, people should view estate planning as an intergenerational approach to asset management. What are the most common trusts? There are a number of different kinds of trusts, but they fall into two main categories: revocable and irrevocable. A revocable trust, which can be amended or terminated by the person who sets it up, offers the greatest flexibility. An irrevocable trust has less flexibility because it cannot be amended, but it has attractive tax benefits. One of the best-known kinds of trusts is a living trust, under which your assets can remain in your control during your lifetime, with the trust either continuing for the benefit of your beneficiaries or being distributed after your death. A living trust is usually revocable. Other widely used personal trusts include:
What are some of the myths and misconceptions about establishing trusts? One of the main myths I’ve encountered about trusts is the belief that you give up complete control when you create a revocable living trust. It’s not true at all. When you create a trust, you’re transferring assets to another entity, but you—the grantor, the person who created the trust—can maintain control by being the trustee. You can make changes in the terms of the trust too. There’s also a misconception that it’s extraordinarily costly to establish a trust. It doesn’t have to cost a lot. Costs do matter, so you should know how much you are paying to set up and administer your trust. But don’t forget that the alternative of not creating a trust can be extraordinarily costly. Here’s a simple illustration: If one spouse has $700,000 and the other spouse has nothing, without an estate plan, on the death of the surviving spouse—just given today’s numbers—the estate would probably owe $35,000 in taxes. That’s a very high price to pay for not having an estate plan. What does a trustee do? The trustee is one of the most important positions within a trust. The trustee assures that all the trust assets are being managed appropriately, and that includes the accounting, the recordkeeping, the bill paying, the discretionary distributions, and the interpretation of the trust document to make sure that the plan is being implemented appropriately. Most individuals who create a revocable living trust choose to serve as their own trustee—in other words, they continue to oversee the management of their investments. But there is a point in every living trust when the individual who created it no longer can serve as trustee—either due to death or incapacitation. At that point, the role of the successor trustee becomes critical. What should be the considerations in selecting a trustee? Naming a trustee is a business decision just like any other business decision. Because a trustee is charged with so many responsibilities, it should not be a position that you give to somebody out of love. Unfortunately, many people put a lot of time and effort into creating the plan, but don’t really consider the role of the successor trustee. An alternative to naming a person as your trustee is to select a corporate trustee. Choosing a corporate trustee saves your family members from a lot of responsibilities, and the more dollars involved, the greater those responsibilities are. Many people choose to name a family member as cotrustee with a corporate trustee. Won’t a corporate trustee be a costlier option? The role of a trustee is so multifaceted that there are going to be a number of costs associated with it, regardless of who’s serving in the role. Let’s assume you name your son or daughter to be your trustee. Upon your death, he or she will have to hire somebody to do tax returns, the custodial functions, the record keeping, the collection of all principal and income from the investments in the trust, and the proper allocations among principal and income accounts. Somebody has to do the document review to ensure the estate plan you created is still in compliance with federal and state laws. The individual trustee will be hiring an accountant, an attorney, and probably a financial institution to be custodian of the assets. It’s probably a lot more efficient to have one institution—a trust company—perform all of those functions. Another important consideration is the potential for litigation. An individual trustee or a corporate trustee assumes fiduciary responsibility—not just to the grantor of the trust, but to the beneficiaries of the trust. That individual you have named—a son, daughter, or friend—has assumed personal financial liability. Why would they want that? It’s much wiser to give that liability to an institution that deals with such issues on a daily basis and employs professionals to make sure that everything is done appropriately. What kinds of corporate trustees are there? Traditionally, banks always administered trusts. That has changed. Today, financial institutions have come into the business, chartered so that they can provide trust services. We bring a philosophy emphasizing service, investment performance, and low cost. |
