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Ask a Trust Officer

August 6, 2019

When you have a product or service that you hope to provide to the public, your job of selling is easier when the public is already familiar with your line of work. Everyone knows what an automobile is for, or what a barber does. When new products burst upon the scene—for example, in the consumer electronics arena—potential buyers have to be shown the uses and benefits before they become interested.

In the financial services marketplace, there is quite a bit of consumer confusion. That’s why an important part of our marketing efforts consists of listening to and answering questions, from our clients and those who might become our clients. The benefits of trust-based wealth management plans are not easily reduced to bullet points or sound bites. Here are the questions that we heard most often in the last year.

How’s the trust business these days? Has your business collapsed now that the federal estate tax exemption is so high?
The trust industry is doing very well, thank you for asking. Trust industry assets at the close of 2017 stood at a record $122 trillion, according to Trust Performance Report 2018. Average weighted growth in 2017 was 11%.

This growth continued despite the refocusing of the federal estate tax on the very wealthy. The increase in the federal estate tax exemption, coupled with the abandonment of all death taxes (inheritance and/or estate taxes) by most of the states, has changed some of the dynamics of estate planning. The importance of having a will to govern the orderly disposition of property after death hasn’t changed, however, and all of the non-tax benefits of trust plans remain in place.

So, trusts aren’t just for those with estates of $10 million or more?
Almost everyone with a net worth over $10 million will have considered a trust, and most will employ them. With new technology, trust services also can be efficiently delivered to the “mass affluent.” These are folks with investable assets of $500,000 and up. Many of these families will derive substantial benefits from a trust-based plan, even though they are no longer in danger of owing death taxes.

What is the purpose of a trust?
A trust provides for family financial protection. It creates a structure for delivering financial resources to multiple beneficiaries over a span of time, sometimes generations. Current beneficiaries receive the trust income, and others receive the trust principal in the future, when the trust terminates. Many trusts also authorize the distribution of principal to cur-rent beneficiaries in some circumstances.

How is a trust different from other investment accounts?
A trust has an independent legal existence that makes it durable. It can survive the incapacity or death of its creator. The trustee continues to manage the trust according to its stated purposes, stepping into the shoes of the person who created the trust.

What sort of investment return will a trust deliver?
No simple generalizations are possible about investment returns from trusts, because trusts may invest in anything. The fact that assets are being managed through a trust tells one nothing about the assets themselves.

In the typical case, a trust will contain a diversified portfolio of stocks, bonds, and mutual funds. An asset allocation plan will be developed for the trust, consistent with the purposes of the trust.

What is a living trust? I’ve seen lots of advertisements about them. Are they popular?
Living trusts are so named to distinguish them from testamentary trusts, which are created with a will and take effect after death. A living trust goes into operation during life. Usually, such trusts are revocable and created for the benefit of the grantor. Living trusts are popular for four key reasons:

  • Sound asset management. The trustee will provide professional supervision of the portfolio, consistent with the grantor’s vision.
  • Protection in the event of incapacity. Trust management continues, even if the grantor becomes unavailable for any reason, such as medical reverses.
  • Probate avoidance. Estate settlement is necessarily a public process, and it can be a lengthy one. Living trusts normally avoid probate completely, creating a zone of financial privacy. They continue to function, providing financial resources to beneficiaries, while the estate settlement process continues.
  • Financial privacy. The terms of a will become public during the probate process, while the terms of a trust nor-mally are not publicized.

I understand that married couples no longer need a trust plan for maximum protection from the federal estate tax. True? Something about “portability”—what is that, anyway?

It’s true. There’s an important estate planning option for married couples now. When a spouse dies and leaves all property to the surviving spouse, there is no estate tax— thanks to the marital deduction. However, under the old law that approach “wasted” the estate tax exemption of the first spouse to die. To preserve two exemptions, estate planners invented the “bypass trust” or “credit shelter trust.”

Now, a surviving spouse may inherit any unused federal estate tax exemption from a deceased spouse. All that’s needed is an election on the federal estate tax return of the deceased spouse.

Still, the marital deduction trust isn’t obsolete, even if it isn’t mandatory for tax benefits. Such a trust also offers professional asset management and creditor protection. In the case of a QTIP trust (qualified terminable interest property trust), it also fixes the inheritance of family assets after the surviving spouse dies. Many families find that these benefits are quite sufficient to justify having a trust plan.

Can I change my mind after I create a trust?

That depends upon what sort of trust we’re talking about. A charitable trust is normally irrevocable and can’t be modified. A trust in a will can be changed simply by amending the will.

Usually, this question arises about revocable living trusts, and in that case the answer is yes; you remain in full command. You can change the beneficiaries, add assets, withdraw the assets, even terminate the trust should you decide that it is not right for you and your family.

Whom should I choose as my trustee?
Choose us. We have the financial strength, the investment capability, and the experience that you need to make implementing your trust plan a success. You want a trustee who will be fair and impartial, and, more importantly, you want the beneficiaries to recognize and respect that impartiality. That’s us. Your trustee needs to manage your trust all year long, not be away on vacation or dealing with other pressing business. Again, that’s us—focusing on trust management every business day, all year long.

Do you have other questions?
We hope that this brief summary has stimulated your thinking and triggered more questions about how trust planning might benefit you and your family. One of our officers will be pleased to meet with you to discuss your situation and assemble the information that you need to move ahead with a trust of your own.

© 2018 M.A. Co. All rights reserved.

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