By: A.J. Cook


The rich put their faith in trusts for years -- now it's time for ordinary folk to do the same. Have you heard what people are saying? If you want to solve all your problems, just set up a trust. Then kiss your financial woes goodbye. Are they right? The first step is to figure out what a trust is.

Trusts are legal documents that have as many tricks as a dog and pony show. They can, for example, save taxes, avoid will probate costs, provide support for elderly parents, pay for a child's education, protect assets from future creditors, give delayed donations to a charity, keep children from frittering away their inheritance or make it easier for someone else to manage assets in case of illness.

Sounds like something a person should learn about. The following are involved in a trust: the grantor, the person putting money or other assets in it; the trustee, a person or institution, like a bank, controlling its assets and taking marching orders from what is written in the document; and the beneficiary, a person, several people, a charitable organization or any combination benefiting from it. One person or organization can serve in more than one capacity.

This handy legal tool is very flexible. It can become effective while the grantor is still alive or at death by putting it in a will. It can be either revocable or irrevocable, which means you give up the flexibility to change beneficiaries or terms. In any case, assistance of an attorney is essential.

Here's how a few irrevocable trusts work:

• Life Insurance Trust. Joe puts a life insurance policy into a trust and each year puts in money so the trustee can pay the premiums. After Joe dies, the insurance proceeds are used to support his wife during her life, then the children get the remainder. A local bank is trustee. Purpose: This trust saves estate taxes by keeping insurance proceeds out of Joe and his wife's estates.
• Trust for an elderly parent and a charity. Joe puts $200,000 into a trust for his elderly mother. The trustee pays her annually a fixed percent of its assets. When she dies, the remaining assets go to the charity he names in the document. The trustee is Joe's wife. Purpose: This trust provides for Joe's mother and gives him income and estate tax deductions.
• Educational trust. Joe puts $5,000 each year into a trust for his son. The trustee pays for the child's education and support. The son gets one-third of the remaining assets free and clear at ages 25, 30 and 35. Purpose: This trust builds an education fund and then delays outright distributions until after the child gains a little maturity.
  
• Trusts to protect assets from creditors. Dr. Joe, concerned someone will sue him one day, establishes a trust for his children.  He puts half what he owns into it. Purpose: The trust protects its assets from litigation by future patients.
  

The Moral: A good trust is as handy as a pocket in a shirt.

Credit Trust in a Will. Joe and his wife together have an estate, including life insurance, worth between $675,000 and $1.35 million. The couple balances their estates so half of their assets are owned as separate property by each. They then prepare wills saying on the death of the first to die the amount of the estate tax exclusion ($675,000 this year) will go into the credit trust for the survivor's benefit. When the survivor dies, the assets go to their children. Purpose: Eliminate estate taxes for Joe's and his wife's estates. A credit trust may also be used with a living trust.

Marital Trust in a Will. Ann has an estate , including life insurance, worth $2.5 million. In her will she provides for a marital trust. This trust says all of its income goes to her husband and enough from principal for his support with the remainder to her family. Purpose: If Ann predeceases her husband, it eliminates her estate taxes, gives him security and ensures that assets after his death stay in her family.

Living Trust. George puts all his assets into a living trust. He can withdraw anything or everything at any time. He appoints himself as trustee. When George dies, what remains will be distributed equally among his children.

A variation of this is where George can't revoke or withdraw assets himself but someone else, like his daughter, can. This could protect George from dissipating his own wealth if he becomes incapacitated..

In either situation, George also signs a simple will just in case all his separately owned assets aren't in the trust when he dies. Purposes:

• Make it easier for some one else to manage George's assets in case of his illness or disability.
  
• Reduce administrative and legal costs at George's death if he owns property in various states.
• Avoid probate costs and ensure privacy if all of George's separately owned assets are in the trust when he dies.
  

Advertisements and hucksters shout the virtues of the living trust. They claim it saves income or estate taxes you can't save with a will. It doesn't. The advertisements also say a living trust saves probate costs. It might. But will it save enough to offset the costs of the trust document, which is more involved than a will, a backup will and the cost and inconvenience of continuing to title all of your separate assets to the trust the rest of your life? This means filling out forms from banks, brokerage firms etc. If real estate must be transferred to the trust, certain legal questions must be answered. For example, will the mortgage, if there is one, allow the transfer?

Should you have a living trust? Maybe. Make a decision after you know the cost and legal differences between a living trust and a will and a will alone. Each individual case is different.

The Moral: Trust - - but verify.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
Disclaimer
Released 5-15-00 and 5-22-00