Want a Trust as part of your succession plan? You may think that trusts are all for the super-wealthy, but getting a lot of money is just one of many reasons why setting up a trust is an intelligent financial strategy.
When setting up your estate plan follow these three steps:
– Determine whether a trust is needed
– If the timing is right
– Choose a trustee
Determine the need for a trust
A quick exercise reveals when a trust makes sense for you: think of everything you own – immovable properties, savings and investments accounts, life insurance, personal property. Now think of any person or organization you’d give each of these assets to, either during your lifetime or at your death. Imagine picking up each asset and handing it over to the recipient you have chosen as you say: “I’m giving you this…”
Can you complete that transfer without any reservations, without any “if, ands, or buts” coming to mind? Or do you come across some stipulations about your gifts, like:
– To my wife but not the children from her first marriage
– To my husband then to my children, but not if it means more property taxes
– To my daughter, but not to her creditors or her husband
– For my grandson with special needs, but not if he is excluded from government assistance for his illness
– To my kids after all the higher education costs for my youngest child are paid in equal shares
Or you might just want to keep your legacies private without leaving any public record of how your assets are being distributed.
Those are all examples of circumstances that mean you can speak to your lawyer about building a relationship. In general, if your giving intentions take up more space than the blank line provides for a beneficiary designation, then you need a trust. The same applies to properties that pass directly by ownership, such as a home owned jointly with a siblings right to survival. When you want to do something more complicated than an outright move you probably need a trust.
Time Considerations
And how do you set up a trust? Firstly, you have to determine whether you want the trust to come into effect now, or at your death. Likewise, you may render the trust revocable, which enables you to alter the trust’s conditions at any time or irrevocable, implying that its terms cannot subsequently be altered once it is formed.
Most people establish revocable trusts to retain properties while living. On their death, then, these trusts become irrevocable. The purpose of doing this is to avoid probate time and expenses, as well as provide instructions for managing their assets in case they become disabled. Others who are less worried about probate costs will simply agree to establish a trust in their wills, to take action after they die.
During your lifetime, it’s also possible to establish an irrevocable trust, maybe in the form of an educational trust for children or to support a charity. This is generally done by benefactors who want to withdraw assets from their properties, generally to lower property taxes, or because they won’t use these assets. In their own lives and want others to benefit from this wealth now. Making a trust irrevocable also transfers tax liability away from the benefactor to the trust for the profits made by the be quested properties.
You will need to determine how long you want assets to be kept before they are officially dispersed. There is a particular rule in common law that prohibits trusts from surviving forever. However, several states have made it possible to get around this rule, so that ‘dynasty trusts’ could be formed. Such trusts, as the name implies, enable family wealth to develop for very long periods, without subjecting it to further taxation of gifts or properties.
In the first place, you should find the justification for forming a trust to decide how long the trust will last until the assets are passed to their ultimate beneficiaries. For example, if you think it’s best for you and your children to be in their 40’s, with careers and marriages well established, before they get a large amount of money, then you’d build dates for trust distributions appropriately. However, if you have a beneficiary that you believe would never grow up you may want to prolong the terms of the trust as much as you can legally.
Choosing a Trustee
Your most important choice by far is the choice of your trustee. The person or entity with the fiduciary duty to handle the assets of the trust and to follow all the provisions of the trust. This person may be you, in the case of a revocable living trust, or a stand-in for yourself when you can’t handle your assets any longer.
Typically this means appointing a trustee who is:
– Familiar with you, your financial condition and the beneficiaries you have chosen;
– Has a good understanding of financial management including taxation and investments;
– Is able and willing to invest the time and energy needed to supervise the trust, make distributions as necessary, and meet all the tax deadlines.
It may sound like a role for Superman, so take careful decisions. You may be blessed to have a trustworthy relative or friend who understands money management, as well as being loyal to your beneficiaries. Make sure that a secondary or co-trustee is appointed to assist your trustee, or step in when he or she is no longer available.
A corporate trustee may be preferred. The benefit here is that a corporate trustee may not have an expiry date. In addition, a corporate trustee, by definition has the expertise required to manage your trust. The drawback might be that the beneficiaries do not like dealing with an inexperienced trust office who may be a stickler by the law, rather than being open to their needs and requests. One workaround is to allow the beneficiaries, if they are not happy with the original, to employ another corporate trustee.
Getting Started
Trusts can certainly be difficult, and therefore costly to set up. But when built to represent your expectations and predict future life contingencies, they can provide considerable peace of mind that the legacy you wish to leave is firmly defined.
