The debate in Congress over whether to reduce or eliminate the estate tax has prompted many Americans to consider how they can further protect the value of their estates. One way gaining popularity is to set up a trust.
Contrary to popular conception, trusts aren’t fraught with complexity. There are four major reasons why people – many of them ordinary folks and not just the fabulously wealthy – establish trusts. You and your spouse, if you’re married, should speak with an expert on trusts to determine if you should create one or more of them. Contrary to popular conception, trusts aren’t fraught with
complexity, nor are they useful only to the leisure class. A trust is simply a contract between a grantor – in this case, you – and a trustee. The trustee holds legal title to the trust property and follows the rules that you set down in the trust document that you and your lawyer draft.
Choosing an overseer
The trustee you select may be a financially astute and trustworthy relative or friend, or you could hire a professional. The pros in banks, trust companies, brokerage houses, mutual fund companies and law and accounting firms charge a wide range of fees, but most use a sliding scale.
For example, a bank might charge 1.5 percent of a trust’s assets up to $200,000, then 1 percent of the next $300,000 and so on. Most financial institutions won’t handle trusts of less than $100,000. Now for those four reasons for creating a trust:
The first, of course, is to preserve and protect your estate from the depredations of the Internal Revenue Service.
The second reason is to avoid probate, the often messy and very public affair by which a court tests and evaluates how your assets are passed on to your beneficiaries after your death.
In many Northeastern states, probate can be costly, slow and complex. Often, the process is “corrupt,” says John Langbein, a Yale University law professor and trust expert, meaning that the court fees are outrageous and your assets might not be distributed in a manner that you would have approved.
By establishing an intervivos trust – a trust that’s independent of a will – you can avoid the publicity and clamor of probate because everything is settled out of court.
The third reason for a trust is that you want a prudent, expert third party – but not your spouse, children or other beneficiaries – to manage the assets in your estate after your demise.The fourth is anticipation of incapacity, such as Alzheimer’s.