Trusts for the rest of us — why this tool isn’t just for the wealthy
ROBERT OSTBERG Purchase photo reprints »
While having a trust may conjure up images of wealthy socialites, everyday Americans can benefit from them.
According to three area financial planners, the main reason to create a trust is to allow you to have more control over your assets, especially if you become unable to manage them.
Also, trusts allow for immediate dispersal of assets without going through probate court. Your heirs will be able to save on probate costs and taxes, as trusts supersede wills.
“The primary benefit of a trust is it helps people control the different things they own,” said Dennis Gero of Ameriprise Financial Services in Northampton.
“We live in the world of the 99 percent. Here in the Pioneer Valley there are a lot of people who will die with assets over $10 million — they just don’t know it yet,” said Allen Davis, owner of Davis Financial Group in Hadley.
While planners say trusts can be useful tools for the average person, it is important to get professional advice before deciding if creating a trust makes sense for your family.
The most common type of trust is a revocable trust.
“A revocable trust you own and control for your own benefit,” said Robert Ostberg, owner of Ostberg & Associates in Northampton. This type of trust can be changed at any time depending on life’s circumstances and personal preferences.
“When an asset is owned in trust, the trustee becomes the owner and they have a much easier time administering assets in case of death,” Ostberg said.
A revocable trust “is the toll gate between dead people and their heirs – the trust bypasses the probate toll gate – it’s like using an EZ-Pass,” Ostberg said, referring to the highway toll system.
An irrevocable trust, on the other hand, cannot be changed. Depending on when it is put into place, it may affect financial outcomes.
Gero, who specializes in retirement planning, gave the example of trying to protect assets should you need to be placed in a nursing home. If your assets are protected with a irrevocable trust, the cost of nursing home care would to all or some extent be covered by Medicare, as the assets in the trust would not be counted.
However, Gero said irrevocable trusts must be set up at least five years before and that most people don’t want to surrender control of their assets so far in advance.
“Spend-thrift trusts” are set up to manage distribution and rules of distribution in the case that your heirs may not be as financially responsible as you would like them to be. Davis said that an important term in this and other types of trusts is “health, education, maintenance and support” (HEMS), which allows the recipient of the trust to petition the trustee for costs related to those terms, for example if the recipient decides to attend college.
A conduit trust distributes retirement assets after death, said Davis. “Retirement assets are heavily taxed after death,” he Davis.
The rate of taxes heirs might expect to pay in Massachusetts on retirement assets is 43 percent. He said that spouses inherit more easily and with less expense, but if the retirement assets are going to children or other family members, a large bite is taken by taxes — unless there is a conduit trust in place.
A life insurance trust is used to distribute assets easily following death. “That way, the life insurance assets are outside of the estate,” Davis said.
Then there is the “child with special needs trust.”
“This type of trust provides for a child with special needs for their care after the parent is gone,” said Davis.
He noted that a trust of this type can provide certain assistance while allowing the child to receive federal and state benefits.
Trusts help people of any level of means retain a say in how they are used. “You may have a child with special circumstances, a second marriage, or social goals for example, and a trust would allow you to manage your assets if you are ever incapable of managing your affairs,” said Ostberg.
Privacy, all three financial planners interviewed agree, is a strong component in creating a trust.
“Anybody can go over to the courthouse and look at the will and anybody can place a claim in probate court. A will is only your intensions to the probate court,” said Gero.
Ostberg said that people can craft a trust with their lawyer, financial planner and a designated trustee to carry out specific wishes for disbursement of assets, some of which may be seen as punitive, such as requiring an heir to marry within a certain religion.
Trusts can also allow parents to steer assets to various children, particularly when they are the products of different marriages.
The trustee needs to be someone you trust. “There are all kinds of answers to that question and it is often the most difficult question to answer,” said Gero.
He said you can also be your own trustee and have a “successor trustee,” who can move up to being a “co-trustee” or take over should your health fail, or after your death.
Gero said those who cannot identify a trusted family member can have an attorney, an accountant, or a professional act as trustee.
However, in this case you would pay for the maintenance of the trust, whereas family members usually do it for free. You may also designate a trustee, Gero said, who will agree to oversee the trust and receive a percentage of your assets when you die.
Many people do not have a clear idea of the value of their assets and estate, or how their heirs will be affected by taxes.
With professional help, you may find you can better care for your family and interests through a trust — and you don’t have to be among the superrich to benefit.