January 10, 2023
When you have a product or service that you hope to provide to the public, your job of selling is easier when the public is already familiar with your line of work. Everyone knows what an automobile is for, or what a barber does. When new products burst upon the scene - for example, in the consumer electronics arena - potential buyers have to be shown the uses and benefits before they become interested.
In the financial services marketplace, there can be a bit of consumer confusion. That's why an important part of our marketing efforts consists of listening to and answering questions, from our clients and those who might become our clients. The benefits of trust-based wealth management plans are not easily reduced to bul-let points or sound bites. Here are the questions that we heard most often in the last year.
1. What is the purpose of setting up a trust?
A trust provides for family financial protection. It creates a structure for delivering financial resources to multiple beneficiaries over a span of time, sometimes generations. Current beneficiaries receive the trust income, and others receive the trust principal in the future, when the trust terminates. Many trusts also authorize the distribution of principal to current beneficiaries in some circumstances.
Within this framework, trusts can be remarkably flexible. See the Checklist of possible trust purposes'94 on page 2 for a partial list of objectives that trusts may meet.
2. 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 accord- ing to its stated purposes, stepping into the shoes of the person who created the trust.
3. What is a living trust?
I've seen lots of advertisements about them. Are they popular?
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, consistent with the grantor's vision.
- Protection in the event of incapacity. Trust management continues, even if the grantor becomes unavailable for any reason, such as medical problems.
- 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 pub- lic during the probate process, while the terms of a trust normally are not publicized.
4. How old should you be to set up a trust?
There is no 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.
5. When I set up a living trust, do I lose control of my assets?
No, not unless you make your trust irrevocable. When your living trust is revocable, you'92re in the driver'92s seat. You can change successor beneficiaries, add more assets, withdraw assets, and make any other adjustments that you wish to make from time to time.
6. Can I be my own trustee?
Yes, you can be the trustee of your trust, or you can have a trusted 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.
- To put all the chores of trust administration into experienced hands.
7. How much income does a trust generate?
Using a trust doesn't necessarily change the amount of income that an investment 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.
8. Does a living trust eliminate the need for a will?
As a practical matter, no. One still needs a will to dispose of assets not placed in the trust, and to tie up loose ends. Keep in mind that a modest probate estate can have advantages. Once probate proceedings have given any alleged creditors their day in court, later claims against the estate are generally barred.
9. Is trust service expensive?
Not when you select us as your trustee. People are often surprised to discover their annual fees compare favorably with the annual fees of other investment managers, notably hedge funds. As one of our trust customers put it recently, "Do you know, I really feel like I'm flying first class for the price of coach."
10. How can I learn more about trusts?
Make an appointment to meet with one of our trust professionals at your earliest convenience. We will be pleased to tell you more.