Business Matters Selecting the right trust is the centerpiece of estate planning

By Kevin Fitzgerald

I recently attended an elder law seminar where a number of important issues were discussed, some of which could apply to my own situation. Although I took some notes, I didn’t get the definitions for some of the key terms used in establishing trusts. Could you fill me in?

— A.O., White Plains

Financial success means more than accumulating wealth. It means preserving and growing investments to maintain a comfortable lifestyle through retirement. It also means taking steps now to transfer assets to heirs or a preferred charity after death. A well thought out estate plan can help assure a distribution of assets according to your wishes, and provide your family or favorite charity with assets well into the future. One of the most useful estate planning tools available today is the personal trust.

Benefits of establishing a trust

Trusts are legal arrangements that allow an individual to efficiently and privately transfer assets to heirs outside of probate. Trusts allow uninterrupted management of assets and are designed to assure that the monies will be used exactly as intended. Through proper estate planning, a trust can avoid liquidation of valuable assets in order to pay estate taxes.

Depending on the investment vehicle, a trust can also provide for ongoing investment management of assets if desired. There are many different kinds of trusts, often designed to reduce income and estate taxes. The type of trust selected will depend upon an individual’s personal financial situation and future objectives. There are three key participants in any trust:

€ The grantor is the person who establishes the trust and places assets in it. The grantor also executes a trust agreement, which specifies the terms under which the trust is to be administered.

€ The beneficiaries are the people named to receive trust assets.

€ The trustee is responsible for administering the trust and its property for the exclusive benefit of the trust’s beneficiaries.

The trustee may be an institution or an individual; the grantor may also serve as a trustee in many types of trusts.

How a trust works

When a trust is created, the grantor transfers ownership of the assets placed in the trust to a trustee. The trustee is responsible for distributing income and principal to the beneficiary or beneficiaries of the trust according to the terms specified by the grantor in the trust agreement. The trustee holds legal title to the assets in the trust for the benefit of the beneficiary or beneficiaries, but does not hold beneficial title. This means that the trustee has the responsibility of carrying out the terms of the trust in a manner most advantageous to the beneficiaries.

It is important for the grantor to select a trustee with the skill and time to manage assets wisely. Serving as a trustee can be a tremendous burden if the individual or entity is not qualified or prepared for the job. Some of the trustee’s duties, besides the ones already mentioned includes handling transactions; preparing and filing federal and state income tax returns; maintaining records for all income and principal transactions and preparing periodic statements; distributing income and principal as authorized by the trust document, including discretionary distribution, and ensuring that all transactions are prudent and in the interests of all beneficiaries.

A grantor should also appoint a successor trustee at the time a trust is drafted. A successor trustee becomes the trustee if the current trustee dies, resigns or becomes incapacitated.

Types of trusts

A testamentary trust is created by a will and is not established until after the death of the grantor. Testamentary trusts allow the grantor to control assets after death and stipulate how assets are divided and under what circumstances heirs may access those assets.

A living trust takes effect during the grantor’s lifetime and allows him or her to set aside assets for heirs while still receiving income or other benefits from them. A living trust can be revocable or irrevocable. A revocable living trust gives the grantor the right to retain control over trust assets and the right to change or cancel the trust, the trustee or any beneficiary.

However, income from any assets placed into a revocable living trust continues to be taxed to the grantor for income tax purposes. An irrevocable living trust cannot be changed or terminated except in rare circumstances, and the grantor relinquishes full rights to the assets while alive. In many cases, income from assets placed in an irrevocable living trust may not be taxed to the grantor for income tax purposes.

There are other types of trusts as well. Those designed to meet specialized estate planning objectives include the Charitable Remainder Trust (CRT), the Life Insurance Trust and the Minor’s Trust.

Investment options

Consider consulting a financial professional to help organize and implement estate-planning goals by providing access to a broad range of financial products and services. If neither the grantor or the trustee are interested in the daily responsibility of managing trust assets, some full-service investment firms offer designated trustees to handle the daily administration of your trust as well as manage the investment of your trust assets. Besides stocks, bonds, mutual funds and annuities, some full-service firms allow you to invest your trust assets among the following investment management programs:

€ Customized Portfolio Management programs make available a number of top investment managers who ordinarily handle only large accounts, often with multi-million-dollar account minimums. Through these programs, these managers are available to individual investors for a much lower account minimum, usually $100,000.

€ Mutual Fund Consulting programs provide investor profiling, asset allocation, investment management by leading firms, and ongoing performance measurement.

PaineWebber does not provide tax or legal advice. You must consult with your attorney and tax advisor regarding your specific situation.

The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Kevin FitzGerald is First Vice President-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 654-6162, ext. 448.