September 1, 2020
What do you think of when you hear the words “trust fund”? Many people will associate those words with the Astors, the Rockefellers, or the financial titans of the 19th century. Those families did indeed employ trusts for the long-term care of family wealth. But you don’t need to have billions to benefit from a trust-based wealth management plan, thanks in part to advances in technology. More and more affluent families these days are exploring the unique financial management and financial protection advantages of trusts. Here are questions that we hear frequently, and our answers.
What is a trust?
A trust is a formal, legal arrangement for the continuing care and management of property. Typically a trust is created when someone transfers money or property to a trustee—either an individual, a trust institution, or bank trust department. The trustee holds title to the trust assets and manages the trust fund solely for the benefit of one or more beneficiaries.
Can the person who creates a trust also be the beneficiary of the trust?
Yes, that is a very common approach. In a typical revocable living trust, a husband and wife might transfer their investment assets to the trustee with the expectation that the trustee will handle their investments for the rest of their lives. The trustee may remit trust income to the couple as needed, or may be authorized to pay their bills directly from the trust.
Can I be my own trustee?
Yes, you can be the trustee of your trust, or you can have a family member be the trustee. But that’s not a course we would recommend.
Some very important reasons to let us be trustee of your trust are:
• To gain access to professional management of your assets;
• To have someone available to stand in your financial shoes should illness or incapacity strike;
• To provide financial support for your loved ones during your lifetime and beyond; and
• To put all the chores of trust administration into experienced hands.
What’s the best age for setting up a trust?
As a practical matter, a great many people first give serious consideration to establishing a trust as they approach retirement, or when they do their estate planning. However, many young entrepreneurs have used trusts for their wealth management once they achieve early success. There really is no “best age.”
How is a trust different from other investment accounts?
A trust has an independent legal existence that makes it durable. It can survive the incapacity or death of its creator. The trustee continues to manage the trust according to its stated purposes, stepping into the shoes of the person who created the trust.
If a trust has an independent legal existence, does that mean it must pay income taxes?
In the more usual case, trust income is distributed to the beneficiaries and they pay the taxes. However, if the trust accumulates its income, yes, the trust does pay income taxes, and the tax brackets for trusts are very compressed.
Can I change my mind after I create a trust?
That depends upon what sort of trust we’re talking about. Usually, this question arises about revocable living trusts, and in that case the answer is yes; you remain in full command. You can change the beneficiaries, add assets, withdraw the assets, even terminate the trust should you decide that it is not right for you and your family.
What is a living trust?
Living trusts are so named to distinguish them from testamentary trusts, which are created with a will and take effect after death. A living trust goes into operation during life. Usually, such trusts are revocable and created for the benefit of the grantor.
Living trusts are popular for four key reasons:
• Sound asset management. The trustee will provide professional supervision of the portfolio, consistentwith the grantor’s vision.
• Protection in the event of incapacity. Trust management continues, even if the grantor becomes unavailable for any reason, such as health issues.
• Probate avoidance. Estate settlement is necessarily a public process, and it can be a lengthy one. Living trusts normally avoid probate completely, creating a zone of financial privacy. They continue to function, providing financial resources to beneficiaries, while the estate settlement process continues.
• Financial privacy. The terms of a will become public during the probate process, while the terms of a trust normally are not publicized.
How much income can I get from a trust?
Using a trust doesn’t necessarily change the amount of income that a portfolio generates. In a traditional trust, “income” means collected interest and dividend payments. With that approach, as interest rates and dividend yields rise and fall, income changes with them. Changes in asset values—growth in stock prices, for example—accrue to the remainder beneficiaries. Some trusts today take alternative approaches, defining income as a percentage of trust assets, or as a fixed dollar amount every year, or as a dollar amount adjusted for inflation—there are many alternatives to consider. However, if a fixed percentage is used to determine distributions, and the income falls short, the trustee will have to invade the principal to make up the difference.
Whom should I choose as my trustee?
Choose us. We have the financial strength, the investment capability, and the experience that you need to make implementing your trust plan a success. You want a trustee who will be fair and impartial, and, more importantly, you want the beneficiaries to recognize and respect that impartiality. That’s us. Your trustee needs to manage your trust all year long, not be away on vacation or dealing with other pressing business. Again, that’s us—focusing on trust management every business day, all year long.
Core competencies for trusteeship
Here are the basic benefits that a corporate fiduciary, such as us, provides in fulfilling the duties of a trustee:
• We treat estate and trust administration as a full-time job.
• We have facilities and systems for asset management that individuals lack.
• Estate assets and trust funds in our care are doubly protected, by both internal audits and regulatory oversight by state or federal officials.
• We have an unlimited life, while an individual may die, become incompetent, or just disappear.
• We bring long experience and group judgment to the job of investment management.
• We will treat all beneficiaries impartially, and most beneficiaries will appreciate that.
*We can withstand pressure when a wayward beneficiary asks for more from a trust than was intended, while an individual trustee might give in to requests for “more.”