Making Heirs Work for Their Wealth
Trusts can be a helpful and cost-effective estate planning tool, or they can be a large and unnecessary expense. It depends on your circumstances and wealth.
Here are the answers to some frequently asked questions about trusts:
* What is a trust? In the simplest terms, a trust is a bucket that you create to hold money or property or both. A trust can be created to function during your lifetime or can be made to take effect after your death.
Every trust has a trustee--the person or institution in charge of ladling out the money to your heirs, or the people you want to benefit. The trust provisions you create are what determine the size of the ladle and how frequently it can be used to dip into the bucket.
Some trusts are designed to save money. A living trust, for example, is created during a person’s lifetime to avoid probate, the potentially expensive court process otherwise used to distribute a person’s money and possessions after death. A bypass trust, by contrast, goes into effect at the creator’s death and is designed to avoid or reduce estate taxes, which are levied on estates worth more than a certain amount (the minimum exemption is $675,000, although that figure is scheduled to rise until it reaches $1 million in 2006).
Bypass trusts come in many flavors, including marital bypass and qualified terminable interest property (QTIP) trusts. All are designed to receive assets at a person’s death and protect them from estate taxation, but they have different kinds of restrictions on how the assets may be used. A living trust may contain language that creates a bypass or other trust at death.
Other trusts, such as custodial or spendthrift trusts, are designed to prevent the beneficiaries from having full access to the money. Parents with minor children, for example, might create a custodial trust that allows a trustee to pay educational and living expenses for the children but delays outright cash distributions until the children are a certain age, typically 21 or older. Families with a mentally disabled child, or one with a serious inability to handle money, may create a custodial or spendthrift trust that lasts the child’s entire life.
Family incentive trusts, the subject of the accompanying story, include provisions that restrict how money is to be paid out after the parents’ death, usually tying distributions to certain behaviors that the parents want to encourage (hence the name “incentive”). These tend to be complex trusts that can have higher-than-average creation and administrative costs.
* How much does a trust cost? All trusts have costs for their creation and for administration once they go into effect. The costs of creating a trust vary by the trust’s complexity and usually range from $2,000 to $10,000 or more.
Once created, the money must be managed and annual income tax returns must be filed. (The exception is the living trust, where the creators manage their own money and file their own returns as though the trust did not exist.)
Typically, trustees charge annual fees that equal 1% to 2% of the assets in the trust in exchange for managing the assets. Nonprofessional trustees, such as family members or friends, may waive the fees, although by law they are entitled to collect reasonable compensation for their work, and most will need to hire professional tax preparers to deal with annual filing requirements.
Professional trustees, including accountants or lawyers, may charge their regular hourly fee to take care of the trust’s administrative functions. Corporate trustees, such as banks or trust companies, typically charge 0.75% to 1.5% of the trust’s assets annually.
The more complex a trust’s provisions and the more professionals involved in administering the trust, the higher the annual cost. Even attorneys who promote family incentive trusts agree that the expenses involved mean families with assets of less than $500,000 should probably avoid such complicated trusts. Some attorneys say families should have at least $1 million to $2 million before considering a family incentive trust.
* When is a trust required? Legally, a trust is never required, although it can be a smart move in many situations. Most Californians with assets worth more than $100,000 should at least consider a living trust to avoid probate, for example, and marital or other bypass trusts often make sense for those whose net worth exceeds the federal estate tax exemption limit. Custodial trusts are often a good idea for parents with minor or disabled children.
* What other issues should I consider before creating a trust? Think carefully about who you want as a trustee or trustees, and how much power you want to give them. Appointing a family member to preside over other family members’ assets can save money, for example, but create unbearable tensions.
Many experts advise giving trustees some leeway in making decisions, but too much flexibility can lead to disputes with heirs. You may also want to give your heirs some way to replace an incompetent or inattentive trustee.
* How can I learn more? Several books and Web sites offer primers on trusts and estate planning. Some to try include “Plan Your Estate” by Denis Clifford and Cora Jordan (Nolo Press, 1998) and “Beyond the Grave” by Gerald M. Condon and Jeffrey L. Condon (Harperbusiness, 1996).
Web sites include Nolo Press’ https://www.nolo.com, EstatePlanningLinks.com at https://www.estateplanninglinks.com and Estate Planning for California Residents at https://www.ca-probate.com.
Estate planning is a complex and difficult area even for the most avid do-it-yourselfer. People with assets of more than about $500,000 should consult an estate planning attorney for help. A list of certified estate planning specialists can be obtained from the California Bar Assn. at https://www.calbar.org, or call your local bar association, listed in the Yellow Pages under “Attorney Referral Services.”
