Trusts 101
By David Disraeli, the Personal CFO
There is an enormous amount of confusion about trusts. As my practice includes estate planning, I come across a large number of highly educated people who have misconceptions about trusts and the benefits they may provide. In general, there are two types of trusts, one that is revocable and one that is not. A "living trust" is a term that is used to describe a revocable trust. This type of trust provides no asset protection since it can simply be revoked. The reasons people create living trusts are to avoid probate, keep their estate private and cut off potential challenges by disenfranchised heirs. If properly funded a living trust makes an immediate, private transfer. The problems with living trusts are numerous, the most important problem is the trust has to be dealt with for the rest of your life, or it will not provide the benefits it was designed for. As an example, if you want to avoid probate on brokerage accounts, property, or vehicles, you must open accounts in the name of the trust or change them over to the trust. This means potentially having to keep a copy of the trust in your car. Sometimes, institutions will accept a certification of trust instead. In any event it is a fair amount of effort. For more on this topic you can see my post here: http://www.agingparents.net/why-you-dont-want-a-living-trust/
So what is a trust exactly? A trust is a unique tool that allows you to place assets for your or someone else's benefit. A trust has a creator (grantor) one or more beneficiaries and a trustee. The trustee decides who gets what and when based on the language in the trust. So why should you care?
There are thousands of reasons to consider using a trust. For now, I will cover the most important reasons. If money is left to a minor you have a problem. Minors cannot hold property. The state must appoint someone to manage the money. This should scare anyone. If all your money goes to your spouse by will and your spouse either predeceases you or dies in the same accident, it may be that your children are next in line. Other reasons trust come in handy is that they allow you to manage your life's savings from the grave. If you leave a person a substantial amount of money and they are not prepared to manage it - you could do more harm than good. A trust dictates what the beneficiary may receive and when. A trust, if created properly may be lawsuit proof, bankruptcy proof, divorce proof, even IRS proof. Only the trustee(s) and the beneficiaries may access the property.
Suppose your children are grown, stable and responsible so you think it is ok to leave them your estate outright. Suppose further that at some point one of these children die, leaving your money to their spouse. You may be okay with this but you may also disinherit your grandchildren. We already covered divorce but it bears repeating. You do not know when or if a divorce will occur in your family and you have seen marriages fail that you never thought would fail and marriages survive that you were sure would fail. We all have. A trust ensures that your assets do not wind up in the wrong hands. If a child dies, their share either goes to their heirs or to another sibling - keeping it in your bloodline.
Clearly there must be some downside to using trust right? Yes there are, here are a few:
They cost money to set up
The right trustee today may be the wrong one down the road
The beneficiaries must request excess distributions from the trustee
Trust tax rates are higher than regular rates
The benefits must be weighed against the disadvantages. There are techniques to address three of the four downsides mentioned. You can provide a mechanism to have a trustee removed. You can name someone who knows your family to act as trustee. The trust can be invested in things that do not produce a large amount of taxable income.
For more information, contact David Disraeli, President of The Personal CFO, Inc. at 512-464-1110. David Disraeli is not an attorney and cannot render legal advice. Book a call here: