The current financial climate has many of us thinking about the security of our investments and the assets we’re specifically setting aside to take care of our loved ones when we’re gone. Some local experts tell us that now may be the right time to access the various options, particularly when it comes to creating a trust.
Ed Ryrie, senior VP and trust officer for Regions Bank, describes a trust as a three-party contract between the grantor, trustee and beneficiary. “The grantor establishes the trust and appoints a trustee who carries out the various duties and responsibilities in the trust agreement. There are two types of beneficiaries: an income beneficiary who gets the income from the trust and a residual beneficiary who gets the money when the trust ends.” He adds that the trust agreement, usually drafted by an attorney, should explicitly state who gets the income or principal, what happens should any of the participants pass away, or whether there are any restrictions on the contract.
Ryrie says it’s never too early to start considering the creation of a trust. “It depends on the individual’s situation, but there’s usually a catalyst that prompts them to start inquiring about it,” he says. “We see couples in their 30s and 40s come in and ask for help in planning their estate, usually after the birth of a child or a health concern. We also get many who are approaching retirement and want to get things in order. Sometimes there’s a death in the family and they start thinking about their own mortality.”
Ellen Simmons, senior VP/manager of financial advisory services for Commerce Trust Company, says trusts are a very flexible way of owning assets and can be useful for many people. “The basic revocable trust is a good way of managing assets. Almost anyone who has assets of $200,000 or more should consider it,” she advises. Simmons says another popular agreement is the spendthrift trust, which protects the funds from unwise use. “It would protect your children from creditors and bad marriages, for example.” Especially when there is a doctor in the family, a spendthrift trust may come in handy. “It’s almost inevitable that when a doctor has children, at least one of them will end up in medicine. With all the malpractice concerns, a parent can protect their doctor child from malpractice suits by simply setting up a spendthrift trust.”
A trust is also a good way to leave money to charity. “We’ve seen a lot of interest in the charitable remainder trust in which the person who sets up the fund generates income from it, and once it ends, the balance goes to charity,” explains Simmons. “This type is normally used when somebody has highly appreciated stocks.” Simmons notes that people usually combine charitable remainder trusts with life insurance to replace assets. “When the person passes away or the agreement expires, the trust goes to the charity and the life insurance goes to the kids.”
Another option is the charitable lead trust. “Let’s say a person puts $1 million into it: There’s an income interest paid out to the charity, the lead. If the trust is set up for a 7 percent payout for 10 years, at the end of that period, the balance goes to the children and grandchildren,” Simmons explains. “The reason for an arrangement like this is 10 years later, it’s still $1 million. It benefits the charity for 10 years. But unfortunately, due to taxes, the value is reduced for the kids.”
For those with large estates, Simmons suggests, “They can give their children gifts up front. And for when they’re gone, they can set up a series of lead trusts for five, 10 and 15 years, getting an influx of assets every five years. It allows the donor to keep control for a long period of time and be able to get assets efficiently to family members and their favorite causes.”
Regardless of age or the dollar amount involved, it makes sense for a good number of people to establish a trust, according to Larry Koester, senior VP and senior trust advisor for UMB Asset Management Group. “You could be in your 30s with young children. What if both of you got into an accident while on a trip? What would happen to your kids if both of you become incapacitated?” he asks. “For many young couples, chances are, they don’t have anyone to step in and manage their financial affairs.” Koester says that’s when a successor trustee, usually a corporate entity, would take over. “A corporate trustee could step in seamlessly and take over management of someone’s affairs. From a financial perspective, there would be someone there to pay the bills,” he says.
Koester says a trust document can be more complicated and end up costing more in attorney’s fees, but there are definite advantages over a will. “A trust account is a private document. When you leave a will, it becomes public record after your death through the probate system. For some people, a will works just fine if they don’t care so much about it being a public record or if they don’t have substantial assets,” he explains. Koester adds that a trust also protects someone who becomes incapacitated but continues to live. “You have the comfort of knowing someone can continue to manage your affairs, you can’t do that when you have only a will.” He points out that both wills and trusts allow for someone to dictate the terms of how assets are passed down. “You can keep money in a trust for your children and release a portion of it for when the child turns 25, then a little bit more at age 30, and so on. You can do that with a will, but it’s a little trickier.”