The Advantages of Trusts

By Nancy Zambell, Contributing Editor

In last week’s issue of Financially Fit, we discussed the importance of creating a will so that your assets are left to the heirs of your choice—not the state or federal government—upon your death. 

I briefly mentioned that a will does not preclude your estate from passing through probate—an often time-consuming and expensive process that can quickly decrease the value of your estate. 

To solve that problem, folks who have built substantial assets that need to be protected from unwanted and unnecessary taxes, or those who have heirs who may need special consideration or who need assistance with handling their inheritances, often establish a trust—which, when combined with their will—will ensure (as best as possible) that their estate is handled in accordance with their wishes. 

A trust is simply an agreement under which money or other assets are held and managed by one person for the benefit of another. Trusts may be established orally, in writing or by conduct. 

There are at least three parties involved in trusts:  

• The trustor, or grantor, donor, or settler, is the person who creates the trust and provides the property included in the trust.
• The trustee is the individual, institution or organization that holds legal title to the assets in the trust and has the ultimate responsibility for managing and administering them. A trustor is sometimes also the trustee and it is possible to have more than one trustee.
• The beneficiary is the person or entity who benefits from the trust.

Different trusts meet different goals.  

For example, some trustors find that an irrevocable trust—one that cannot be changed during its term—to be the best vehicle to minimize both their estate and probate taxes. Some of the advantages of an irrevocable trust include: 

• Income from the estate may not be taxable to the trustor.
• Trust assets may not be subject to death taxes in some states.

These advantages, however, may disappear if the trustor receives income from the trust, uses trust assets or controls the administration of the trust in a manner inconsistent with IRS requirements. The biggest disadvantage is once an irrevocable trust is established, it cannot be changed. 

For flexibility, most people choose a revocable trust. 

One type, a testamentary trust, is created as part of your will. It normally passes through your estate and is subject to probate and sometimes an estate and generation-skipping transfer tax at the time of your death. Trustors like these vehicles as they allow significant control over the distribution of the estate. As well, many offer substantial future tax savings, such as an exemption from death taxation on the later death of a trust beneficiary.  

But by far, the most used revocable trust is a living, or “inter vivios” trust, created during your lifetime. Its biggest advantage is that a living trust is normally not subject to probate, although it is generally still included in your taxable estate.  

You are usually the trustee, until your death or incapacitation. After that, the reins pass to the successor you appoint—generally family, friends, attorneys or bank trust departments. 

The advantages of living trusts are many: 

• Removes the trust assets from probate, saving time and money.
• Avoids publicity, as there is no public record of the trust.
• Speeds up the distribution of your estate’s assets, particularly if you own property in more than one state, as it allows you to avoid opening probate in each state.
• In some states, a trust provides limited protection from creditors.
• Avoids any contention or confusion about whom you want to act on your behalf after your death or incapacitation.
• Allows you to add or withdraw assets during your lifetime.
• Enables you to change the terms and manner of administration whenever you like.
• Allows you to retain the right to make it irrevocable.

The biggest disadvantage is trusts are not inexpensive to create and you will need professional assistance, preferably an estate-planning attorney and accountant. In addition to the fees to set up a trust, you may also incur fees for transferring your assets into it. But if you have a substantial estate, it is well worth the cost. 

Once you decide that a trust would be beneficial to your heirs, you will need to do a little prep work. 

First of all, you need to decide the purpose, duration and type of trust you want. Next, you will have to name a trustee, as well as a contingent trustee. Then, you must determine which assets to include in the trust and retitle them in the name of the trust, accordingly. Your estate attorney can assist you in this endeavor. For example, assets such as retirement accounts and insurance policies would normally not be included, as they already have designated beneficiaries. And in some states, transferring real estate into a trust will incur extra taxes. 

The next step is more personal, and often more difficult, as you must consider family relationships, your heir’s personal financial and health situations, naming beneficiaries and contingent beneficiaries (and their particular inheritances, as well as any conditions for the inheritance), and circumstances for administering the delivery of the assets to beneficiaries. 

Once your trust is set up, make sure you notify your bankers and brokers and provide them with a copy of the document. You also will need a will for those assets that are not included in the trust. And lastly, it is imperative that you periodically review your trust and will, as personal situations change frequently. 

Although you may believe that your family will divide your estate according to your wishes, this is often not the case. Consequently, everyone needs a will, and if your assets are substantial, you will do your family a big favor establishing a trust and not burdening them with the decision-making and responsibility for distributing your assets. 

Happy Investing!

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm

 Disclaimer & Important Information

Financially Fit is owned and published by Business Financial Publishing, LLC of Washington D.C.  Business Financial Publishing is neither a registered investment adviser nor a broker/dealer.  Readers are advised that this electronic publication is issued solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security.

The views expressed herein are based upon our analysis of the issuer's public disclosures, and assumes both their accuracy and completeness.

The opinions and statements included herein are based on sources (including the companies discussed and public sources) believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. We have not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. We encourage you to consult with independent financial advisors with respect to any investment in the securities mentioned herein. You should review a complete information package on all companies, which should include, but not be limited to, the Company's annual report, quarterly reports, press releases and all regulatory filings. All information contained in Financially Fit should be independently verified with the subject company. The foregoing discussion contains  statements which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected.

Financially Fit is intended only for residents of the United States. Financially Fit is not for residents of the United Kingdom and is not an approved publication by the Financial Services Authority in the UK.

The information contained in this newsletter is not intended to be a complete discussion of information regarding all of the current and/or intended business activities of the covered companies. Any opinions expressed in Financially Fit are statements of judgment as of the date of publication, are subject to change without further notice, and may not necessarily be reprinted in future publications or elsewhere.

Business Financial Publishing and its members, managers, writers and employees do not accept compensation from the companies discussed within Financially Fit, nor any of our individual newsletter publications (Growth Report, Rising Star Stocks, Supernova Stocks).

====================
====================

Financially Fit  is a free email newsletter from BrokerAdviser.com (http://www.brokeradviser.com)