It’s not only heiresses and socialites who can benefit from a trust. Used in the right circumstances, a trust can be a helpful estate planning tool to pass assets to your children, take care of your affairs if you are incapacitated, or dole out your wealth — whatever its size — in a certain way.
“The first objection we always get is ‘I’m not rich, I don’t need that,’ ” said Debra Gauthier, a trust officer and certified financial planner at Wells Fargo Private Bank in Miami.
“Most people don’t understand estate planning, until their parents die and they see how complicated it can be,” she said. “It is necessary to do some planning before that happens.”
Trusts can be part of a simple estate plan that includes a will, power of attorney and living will.
But people don’t like to think about mortality, Gauthier said, and they don’t know the benefits of trusts, which can be complex.
“They really don’t understand that it makes the administration of your assets simpler — to transition wealth to your family, and to take care of you if you become incapacitated,” she said.
Deciding whether you need a trust or not can be confusing. What is a trust? It is a legal entity that allows you to put conditions on how your assets are distributed after you die. It can help minimize estate taxes and avoid probate. It can also be used to protect an heir’s assets from creditors.
But don’t let fear push you into a trust, said Bruce Stone, an estate attorney with Goldman, Felcoski & Stone in Coral Gables. “Trusts can do some things for you, but don’t get sold something that you don’t need.”
Stone said most don’t have to worry about estate taxes, which kick in at $5.25 million. Since that’s per individual, a married couple has more than a $10 million exemption.
“Essentially, the estate tax has been repealed,” for most, said Stone, also an adjunct professor at the University of Miami School of Law.
There are two main types of trusts: a living trust, created when you are living, and a testamentary trust, which goes into effect after your death.
The person who creates the trust is called a “grantor,” “donor” or “settlor.” The grantor chooses a “trustee” to manage the trust, and the “beneficiary” who will receive the assets. The grantor, trustee and beneficiary can be the same person. The trustee also can be a friend, relative, financial institution or financial advisor — anyone you trust with your money.
Living trusts can be revocable, which means you keep control of assets in the trust, and can change the terms of the trust at any time. This is the most common type of trust. In an irrevocable trust, you typically cannot make any changes to the trust, but the assets within it are not subject to estate taxes. There are also many specialized trusts.
Barry Nelson, an attorney with Nelson & Nelson in North Miami Beach, said he sets up a revocable living trust for all of his clients who want an estate plan. Then clients can transfer assets to them as needed. Assets in a trust avoid probate, a court process that can drag on as creditors are contacted and paid before beneficiaries get their money.
Trusts also are private, unlike wills, he said. “The probate avoidance, secrecy, reduced legal fees (by avoiding probate) and expedited process — those aspects really relate to everybody,” he said.
There are downsides to trusts, Stone said. The “trustee,” or person managing the trust, has to follow certain legal rules. A separate tax return has to be filed for certain types of trusts. And to create a trust, you have to look into the future and answer hard questions: What if the trustee is incompetent? What if the trustee dies?
Here are four groups that may benefit from a trust:
A couple with young children
“When a couple has their first child, they often stop and think, ‘What would happen if both of us die?’ ” Stone said.
Most people can look back at themselves at 18, and realize it’s not an age where you’re responsible enough to handle a chunk of money, he said.
“So you look in the crystal ball and decide, when are the kids mature enough to take these assets without further supervision?” Stone said.
If you don’t want your kids to get their hands on everything at 18, you can use a trust to divvy out assets over time. If you don’t have a trust, the assets would go into a guardianship, “which is the last place you want them to be, especially in South Florida, because of the incredible bureaucracy and expense,” Stone said.
A couple may decide to give half the assets at age 25, and half at age 30. Or give distributions at age 25, 30 and 35. You can decide on the ages and the rules, Stone said.
“The idea is protecting assets until the kids are old enough to handle them on their own,” he said.
Gauthier said the child also can be appointed as a co-trustee, perhaps around 20 or 21, to help take on the responsibility of managing the money, investing and saving.
“That can be empowering and help them become more financially responsible,” she said.
Nelson said he created trusts that would dole out half of his kids’ inheritance at ages 30, 35 and 40. The other half would stay put as a safety net, to be used only as needed. “It’s a trust fund to pass from generation to generation,” he said. “I call it my ‘Salvation Army avoidance fund,’ so nobody ends up penniless.”
The goal is “not too much, too soon,” which takes away the incentive for kids to succeed on their own, Nelson said.
A single person
If you want someone to handle your affairs if you are incapacitated and are unable to do so, a power of attorney is a simple way to accomplish that, Stone said. You don’t need a trust.
“A power of attorney gives someone the ability to sign your name to anything, so you have to trust that person,” he said. “But that power stops when you die.”
However, if you want someone to take over your affairs, plus a way to designate where your assets go when you die, a trust can do both, Stone said.
Appointing a successor trustee, someone to take over your duties as trustee if you become incapacitated, also avoids guardianship, where the courts step in to administer your affairs, Nelson said.
Think carefully about who you name as a trustee, and have a back-up, Gauthier said. One tactic is to name a financial institution and an individual as co-trustees, so you have the financial management expertise and the human touch. If a financial institution is already handling your investments and charging a 1 percent annual fee, becoming your trustee would likely raise that fee to 1.25 to 1.5 percent, Gauthier said.
A couple with grown children
Say you have older, responsible kids. Why would you need a trust? It may protect your kids’ inheritance in the future, Stone said. While a revocable living trust you set up for yourself is not protected from creditors, under Florida law, assets that you pass to heirs in a trust are protected.
For example, if your son is a doctor who gets sued for malpractice, an inheritance in a trust would be protected. If your daughter goes into business and defaults on loans, creditors would not be able to touch the assets in a trust.
“Most people don’t live in fear of creditors,” Stone said. “But a trust can protect any child from potential creditor concerns.”
Another issue is children in bad marriages. If a child divorces, a trust can protect assets from a greedy ex-spouse, he said.
Families with second marriages
If a husband and wife have children from previous marriages, a trust can direct who gets assets if one dies.
For example, if a couple doesn’t have a trust, and one dies, everything in the couple’s joint accounts goes to the surviving spouse. That’s the case even if the deceased person intended to leave money to children from a previous marriage.
“We see that all of the time,” Gauthier said. “The titling of accounts is one of the most important parts of planning.”
A family with a special needs child “needs a trust to take care of that family member, and to protect their government assistance,” Gauthier said. A family member who is not good with money also can benefit from a trust, to have assets portioned out to them over time.
Can you DIY?
“In some cases it can work, but it’s easy to mess it up,” Stone said. He remembers the owner of a huge resort used a $99 will and trust kit he got in the mail to manage his $5 million estate. The estate racked up $500,000 in legal bills trying to fix the mistakes.
Look for an estate planning attorney, he said.
“If you’re scared of lawyers, go to a good financial planner or a trust planner at a bank,” he said, but be careful that the person you go to does not use the process to get their foot in the door to sell you other products that you don’t need.
“Sometimes it’s hard to distinguish whether someone is trying to sell a product or give you advice,” Gauthier said. “A product pusher sometimes sounds like a product planner.”
An estate plan that includes a will, trust, power of attorney and living will cost $1,500 to $3,000, the experts said. The price could rise to about $5,000 with the addition of specialized trusts.
If you open a trust, read it or have your attorney or financial planner summarize it to make sure it does what you think it does. Then, you have to retitle your assets to go into the trust. Revisit your plan every few years, because you’re financially active all of the time, Gauthier said.
“If you do get a trust, don’t go home and put it in a drawer or safety deposit box” and forget about it, she said.