Blog: Spirit of Money, Financial Fluidity
by munificent

WSJ Trust Funds

Rather than the standard Mom and Pop revocable family trusts, there are some powerful family foundations and charitable remainder trusts..that fund family charitable projects, and leave property to 501 (c) 3's-or private charities-they are still a writeoff (but for how long?) and they help clarify families values and legacys

Date:   12/25/2005 9:31:35 PM   ( 16 y ) ... viewed 1606 times

Demystifying Trust Funds

By RACHEL EMMA SILVERMAN
Staff Reporter of THE WALL STREET JOURNAL
December 24, 2005; Page B1

Once a financial-planning tool mainly of the super-rich, personal trusts quickly are gaining ground with another set: the merely affluent.

While the word trust might evoke images of mind-bending financial complexity and Rockefeller-size bank accounts, in its simplest form a trust generally is nothing more than an agreement to hand over your assets to someone else -- a "trustee" -- who then minds them for your beneficiaries. Trusts can have a variety of tax and other advantages, and are soaring in popularity. Last year, U.S. personal-trust assets grew to $1.19 trillion, nearly doubling from $658.71 billion in 1998, according to VIP Forum, a research group. The overall number of trusts has more or less doubled in the past half-decade as well.

Driving that trend: a wave of baby boomers approaching retirement who are looking for ways to pass along assets to their heirs while avoiding tax hits and other hassles. But trusts also are moving beyond the realm of estate planning. For instance, doctors, executives and other individuals concerned about being sued are increasingly using trusts to protect their assets.

All of this is partly the result of changes in the legal landscape. Eager to cash in on the rising appetite among individuals for the protections that trusts can offer, lawyers are devising more-flexible versions -- making it easier, for example, for beneficiaries to switch trustees or make other adjustments as tax laws or family situations change.

There also have been overhauls in laws, which vary by state, including laws designed to make trust assets tougher for creditors to reach. Some states, including Delaware, Alaska and South Dakota, are competing aggressively for trust money from around the country, and are fiddling regularly with their trust codes, drawing billions of dollars into accounts in recent years.

For individuals, all of these changes add to the complexity of deciding if one of these things solves any problems -- or simply creates new headaches. Depending on how it is structured, a trust can be used to avoid the difficulties and expense of probate proceedings, save on estate taxes, support a favored charity while providing an income stream to the benefactor, provide for children from an earlier marriage -- or even support your pet after you die.

Richard Spirawk, of Pittsburgh, set up a trust to support an adult child who has had difficulties earning a steady income. He funded the trust with less than $100,000, and serves as the trustee himself, which can save money. "This was a way of establishing some assets that could be meted out for his needs over a long period of time," says Mr. Spirawk, who owns an industrial-materials trading company.

But trusts have downsides, too. They can have set-up costs of thousands of dollars, plus annual trust-management and accounting fees that can eat away some 1% of trust assets annually. They also can be highly complex, with lots of legal jargon, acronyms and tax rules, so it is important that a reputable trust lawyer carefully walk you through what you are signing.

One of the most significant points: Unlike most investments, in which you regularly can track performance, you might not be around to see if your trust ends up working as intended, given that many trusts kick in only upon death. It is smart to sit down and discuss your trusts with your heirs, to help prevent any fractious family fights or litigation down the road.

Trusts fall into two chief categories: "irrevocable," which means a trust's creator generally can't undo the trust after setting it up, and "revocable," which allows the trust creator to change the provisions at any time. You might want to consider an irrevocable trust if you are worried that you might be hit with estate tax. The reason: Since you are irrevocably shifting assets out of your ownership, the tax man may not consider some of those assets part of your estate. The federal estate tax affects individuals with estates larger than $1.5 million this year, and $2 million beginning Jan. 1.

Another reason to set up an irrevocable trust: to protect family assets from the possibility of lawsuits, creditors or a divorce in which one of the parties goes after assets. Rules vary, but the idea is "if you don't own it, nobody can take it from you," Las Vegas estate lawyer Steven Oshins says.

Burton Dean, 81 years old, a professor of management at San Jose State University in California recently set up a Delaware trust to benefit his six children, six grandchildren and generations beyond, funded by two life-insurance policies. The irrevocable trust is a so-called dynasty trust, which is a term for trusts that can last indefinitely. As long as assets are held by the trust -- and if the trust is funded and structured properly -- it can pass from generation to generation without additional estate taxes, allowing trust assets to multiply over time. "It's really to everyone's best interest to have the trust," he says.

Traditionally, many parents would leave money to their children either directly, or would create short-term trusts that would pay out when the kids reached specific ages -- say, some disbursed when a child reaches 25 years old, then more at 30, then 35 -- after which point, the trusts would dissolve.

But in recent years, more lawyers have advised parents to leave gifts or inheritances, even small ones, in long-term trusts. The idea is that money left in trust for as long as possible is safer -- from creditors, divorcing spouses and estate taxes -- than money given outright.

As more trusts last longer, they have become more flexible. Many newer trusts are designed to give heirs lots of control over trust money; in some cases, heirs themselves can serve as their own trustee. "It's not the same, archaic way that trusts used to be," says Redondo Beach, Calif., lawyer Alexis Neely, who has many clients in their 30s and 40s.

About two-thirds of all personal trusts are revocable living trusts, according to Tiburon Strategic Advisors, a financial-services consulting firm. That is because they are useful to avoid probate -- the legal process of administering an estate after someone dies -- and to designate someone else to manage your property if you become incapacitated, unable to manage your own affairs. For these reasons, they can be attractive for people with either large or small estates. They are called "living" trusts because they go into effect while you are alive. But before setting up a revocable living trust check with a probate lawyer in your state to make sure the cost to set up the trust doesn't exceed likely probate fees.

Once you decide a trust is the right way to go, you don't want to do the planning on the fly. It is worthwhile to use a lawyer who is a trust and estate specialist, given that even a slight misstep in designing a trust, could cause it to malfunction down the line or trigger unintended tax snafus.

There are a few ways to save money. For instance, many people opt to use as a trustee a responsible family member, friend or adviser. If you choose to use a bank or trust company, it is worth trying to negotiate expenses, particularly if you have a longstanding relationship with the financial institution or you have a multimillion-dollar trust fund.

Write to Rachel Emma Silverman at rachel.silverman@wsj.com


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