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Personal trusts growing in popularity

Baby boomers and their parents are among the most prosperous Americans in history.

Consequently, we're in the midst of the biggest transfer of wealth this country has ever seen. Within the next 15 years, trillions of dollars will pass from one generation to the next.

Combine that with the wealth effect from the stock market boom and you have an acute need for professional money management and estate planning.

One form of estate planning and money management that's increasingly popular is personal trusts. In addition to doling out assets to your heirs, a trust can keep your estate out of probate court when you die.

Personal trusts
There are dozens of types of trusts. A personal trust is created to hold property, manage it and then pass it on to heirs when the creator of the trust -- the grantor -- dies. In its simplest form, a trust needs a grantor -- the person with the assets; a trustee -- an administrator who oversees the trust; and a beneficiary -- who may be the grantor during his or her lifetime; or an heir who receives the assets after the grantor dies. In some cases, the same person can be all three.

A very common personal trust scenario would have a husband and wife each creating a trust. When one spouse passes away, their trust would pass seamlessly without taxes to the other spouse. When that spouse dies, the trust goes to the children or other beneficiaries.

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There are several reasons why you might consider creating a personal trust.

  • Avoid probate: The estate doesn't have to go through probate court because the assets aren't held in the individual's name, they're held in the name of the trust. This saves time and legal fees.
  • Privacy: A trust is a private document. No one but the parties involved can see it. Documents concerning estates that go through probate court are open to the public.
  • Minimize taxes: Assets in the trust get a stepped up cost basis upon your death. So, if you bought property for $100,000 and it's now worth $300,000, the property will have a new cost basis of $300,000 when it's transferred to your heirs. This means they could sell it without getting hit with a huge tax gain.
  • Provide for ongoing management of the estate: A trust allows you to make sure your estate is managed and continues to grow while providing for your needs and, eventually, the needs of your heirs. A will, on the other hand, just dishes out the property after your death.

"If there's a need for asset management and they're looking for an estate plan and someone to carry out those plans -- that's where a trust would come in," says Allen Smith of First Citizens Bank in Raleigh, N.C.

"Normally, it's when you have a little higher net worth and you want to move your assets from one generation to the next in the most tax efficient manner."

The trustee is a key position. The trustee has a fiduciary responsibility to see that the assets are managed properly and distributed according to the wishes of the grantor.

But no credentials are required to be a trustee. Many times, the grantor will also be the trustee during his or her lifetime, and will name a successor trustee to take over after he or she dies.

If you're setting up a trust with yourself as trustee, you could name your sister, brother, son or daughter to be the successor trustee, especially if a professional manages the assets. An example of that would be if the assets consist primarily of a stock portfolio that's managed by a brokerage. The trustee would still have to see that funds were dispersed according to your wishes, that taxes were paid and that all people involved in managing the trust were paid, also.

Professional trustees
But there are also reasons to select a professional -- an outsider -- to be trustee. Naming a family member as trustee could be disruptive. It might make other siblings jealous, or perhaps it's just too much work. That's where a bank can come in handy.

Banks, with their escalating desire for fee-based income, are trying to grow their trust services by attracting the people who own that enormous money pool.

"Our personal trust business has been increasing," says Kevin Briggs at Union Bank & Trust in Minneapolis. "All the big financial institutions, whether banks or brokerage firms, are opening wealth management areas. It's all the money changing hands in the next 10 or 20 years."

Attorney Michael Palermo of Lexington, Ky., says naming a bank as trustee can be a peacekeeping strategy.

"The biggest single question I get is about (trustee) misconduct. It's usually a family member, never a bank. It's 'How can I do this? He's not giving me that. He's not communicating with me.'

"The problem would be if broad discretion is given to the trustee as it often is when the beneficiaries are young children," says Palermo. "The trustee would have to make sensitive family decisions as to the appropriateness of giving out the funds. 'Does Sally have enough talent to go to Julliard or would it be a waste of money?' The bank isn't well situated to do that."

Union Bank & Trust's Briggs says they would first look at the trust to determine the grantor's wishes.

"If it doesn't look like Grandpa thought Johnny should own a Porsche, we probably wouldn't grant that distribution. Johnny would probably have the right to try to move the trust someplace else, but there probably wouldn't be too many places that would allow Johnny to do that."

Co-trustees
Having a family member act as co-trustee, an adviser to the bank, can help when it comes to personal decisions about individual heirs.

Another reason to hire a bank is because many of them will also manage the assets to make sure they're invested properly.

"Some beneficiaries can deplete principal, others we only pay out the income generated from the trust," says Briggs. "The investments have that in mind. It's structured so the portfolio has a lot of income-generating assets in it vs. a growth stock that never pays a dividend."

A consideration in choosing a bank is whether the estate is big enough. Most banks would want the trust funded with at least $400,000. Some won't take less than $1 million.

"Some trust companies may have minimums, others may be more lenient," Smith says. "The more money you have, the more you need a trust. If you have a couple hundred thousand, do you need a trust? Probably not."

But don't underestimate your wealth, advises Briggs.

"It looks like people who have been retiring in the last 10 to 20 years have done a fairly good job of saving. A lot of people don't realize how much they have. Once they start putting it down on paper it adds up quickly."

Banks don't draft the documents creating the trust. You'll need to first see an attorney for that. He or she will help you figure out which of the many types of trusts is right for you and your family. Then you approach a bank about trustee services and administering the trust.

"We review the documents and, if necessary, talk to the client about changes that may need to be made. We can help with the structure," Smith says.

A bank can be hired simply to act as trustee or also to manage the assets. Many banks will also assist a family member or whoever is named as trustee to fulfill his or her duties by providing accounting and safekeeping of documents.

Fees and costs for drafting, administering and managing a trust will vary depending on where you live and how complex the trust is.

Attorney fees for drafting the document will probably run about $1,000-$1,500 if there's a husband and wife involved. A less complicated trust could cost about $500. Banks usually charge a fee to act as trustee, more if they are also managing the trust's assets. The fee will be a percentage of the assets.

While banks have been offering trust services for a long time, brokerage firms and now credit unions are looking to invade that turf. Make sure the attorney who drafts your document is an experienced estate-planning attorney. Get some advice from him or her as to which institution might be the best trustee.

-- Posted: May 15, 2001

 

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