Advice offered by Marc Hebert, president of The Harbor Group Inc., a certified financial planner. If you have any questions about finance or if you’d like to suggest a future topic, email [email protected].“Do we need a trust?” This is one of the most common questions people have when they start to discuss their estate planning needs. In its basic form, a trust is a legal vehicle for managing financial assets for the benefit of yourself or someone else. The property owner (called grantor or settlor) transfers legal ownership to a person or institution (called the trustee) to manage that property for the benefit of another (called the beneficiary). It sounds simple, and it can be, but trusts can also be very complex.Given this, there are some misconceptions about trusts. This can lead to their being unused or misused. Here are just a few. Misconception number one: most trusts have an objective of saving money on estate taxes. This really depends on the type of trust and the size of the estate. Whether or not a trust will impact estate taxes is also based on the tax law in effect at the time the grantor dies. Besides estate taxes, trusts can also save income taxes. One example is charitable remainder trusts (CRT). The donor puts assets in the trust that qualify for an income tax deduction. Doing so also removes assets from the donor’s estate and thus saves estate taxes. The CRT pays out regular income to the donor. Then, upon the donor’s death, the assets pass to the charity. Misconception number two: my estate is too small to worry about having a trust. This is the time to take a reality check on the size of your estate. You can do this by adding together your assets, retirement plans, life insurance, and the value of your home. Your estate may be larger than you realize. No matter what the size, trusts can be used to manage assets and control their distributions in a private way, as they avoid the public exposure of probate court. Here is an example of how trusts can control assets. If something happened to you and you have a child who is a young adult, do you really want your 20-year-old child to have control of your estate? Trusts can hold money over time so beneficiaries do not receive large lump sums all at once. You can cater trust distributions however you want, such as to include children from another marriage that you would like to benefit from. A trust could even have provisions to manage your money should you become incapacitated and lose the ability to manage the money yourself. Another myth is that by creating a trust you are giving up flexibility. This isn’t necessarily the case – revocable trust provisions can remain under the control of the trust creator and be changed as he or she sees fit during their lifetime.You should always name a friend or relative as trustee is yet another myth. The job of a trustee is to manage and distribute trust assets according to the terms of a trust document. Not everyone is up to the task of being a trustee. Failing to administer the trust properly can be costly from an investment or tax standpoint. An older family trustee may die before the trust provisions have been carried out. Naming a successor trustee is wise just in case the first is unable or unwilling to serve. It is often a prudent idea to have professional management of a trust, either as a co-trustee or the only trustee. Just be sure to include provisions in the document to remove a professional trustee if they aren’t doing their job. Finally, another myth is that trusts offer protection from creditors. While some trusts are specifically designed to protect a grantor from creditors, not all do so. Asset protection can be very complicated and expensive, so if you need to have these protections, make sure to discuss them with an expert in the area.
Advice offered by Marc Hebert, president of The Harbor Group Inc., a certified financial planner. If you have any questions about finance or if you’d like to suggest a future topic, email [email protected].
“Do we need a trust?” This is one of the most common questions people have when they start to discuss their estate planning needs. In its basic form, a trust is a legal vehicle for managing financial assets for the benefit of yourself or someone else. The property owner (called grantor or settlor) transfers legal ownership to a person or institution (called the trustee) to manage that property for the benefit of another (called the beneficiary). It sounds simple, and it can be, but trusts can also be very complex.
Given this, there are some misconceptions about trusts. This can lead to their being unused or misused. Here are just a few.
Misconception number one: most trusts have an objective of saving money on estate taxes. This really depends on the type of trust and the size of the estate. Whether or not a trust will impact estate taxes is also based on the tax law in effect at the time the grantor dies.
Besides estate taxes, trusts can also save income taxes. One example is charitable remainder trusts (CRT). The donor puts assets in the trust that qualify for an income tax deduction. Doing so also removes assets from the donor’s estate and thus saves estate taxes. The CRT pays out regular income to the donor. Then, upon the donor’s death, the assets pass to the charity.
Misconception number two: my estate is too small to worry about having a trust. This is the time to take a reality check on the size of your estate. You can do this by adding together your assets, retirement plans, life insurance, and the value of your home. Your estate may be larger than you realize. No matter what the size, trusts can be used to manage assets and control their distributions in a private way, as they avoid the public exposure of probate court.
Here is an example of how trusts can control assets. If something happened to you and you have a child who is a young adult, do you really want your 20-year-old child to have control of your estate? Trusts can hold money over time so beneficiaries do not receive large lump sums all at once. You can cater trust distributions however you want, such as to include children from another marriage that you would like to benefit from. A trust could even have provisions to manage your money should you become incapacitated and lose the ability to manage the money yourself.
Another myth is that by creating a trust you are giving up flexibility. This isn’t necessarily the case – revocable trust provisions can remain under the control of the trust creator and be changed as he or she sees fit during their lifetime.
You should always name a friend or relative as trustee is yet another myth. The job of a trustee is to manage and distribute trust assets according to the terms of a trust document. Not everyone is up to the task of being a trustee. Failing to administer the trust properly can be costly from an investment or tax standpoint. An older family trustee may die before the trust provisions have been carried out. Naming a successor trustee is wise just in case the first is unable or unwilling to serve. It is often a prudent idea to have professional management of a trust, either as a co-trustee or the only trustee. Just be sure to include provisions in the document to remove a professional trustee if they aren’t doing their job.
Finally, another myth is that trusts offer protection from creditors. While some trusts are specifically designed to protect a grantor from creditors, not all do so. Asset protection can be very complicated and expensive, so if you need to have these protections, make sure to discuss them with an expert in the area.