Wealth Management: To Trust or Not to Trust

If you read any of the “retirement” type publications (basically those aimed at seniors like me), you likely have seen the terms “living trust”, “revocable trust”, “grantor trust”, etc. These terms are pretty much interchangeable and refer to the same type of entity. These are heavily touted as estate planning tools primarily to help individuals shield their estates from probate costs. Ok, so what exactly is this entity, you might ask? That is the precise question we hope to briefly explore. Further, and perhaps more importantly, should everyone have a living trust as part of their life and estate planning? We’ll also delve into that issue.

First, let’s start with the basics. In so doing, our discussion here will be limited in scope to the living trust. There are MANY other type trusts. However, the extent and specifics of other types could fill volumes of pages—way too far into the weeds for now.

DEFINITION OF A LIVING TRUST

A living trust is a legal entity that allows for a person or persons to place assets into the name of the trust, with said assets to be managed for the purposes outlined in the TRUST AGREEMENT. The trust agreement is a legal document that (1) outlines the purposes of the trust, (2) governs how the contributed assets are to be managed, and (3) specifies how the trust assets are to be used or expended. The trust agreement also identifies the trustee(s) and successor trustee(s).

REASONS FOR CREATION OF A LIVING TRUST

Such trusts can be set up for a number of reasons. Typically those reasons fall into the following general categories:

1. Avoidance of probate costs at death-trust agreements can be effectively drafted such that, at the death of the grantors (the persons establishing the trust), the trust assets held can pass to the beneficiaries named in the trust agreement OUTSIDE the probate estate of the grantors.
2. This can greatly simply and reduce the costs related to the final affairs of the grantors. Life planning-living trusts typically transfer the burden of managing trust assets to the trustees. The grantors can specify in the trust agreement what is expected of the trustee—while the grantors are still alive and after they have passed. Such management directives, for example, could include (a) paying the bills/expenses of the grantors, (b) overseeing the preparation and payment of the grantors income taxes, (c) maintenance of any homes or real estate owned by trust, etc.
3. Estate planning-a living trust can be a useful tool in planning for how the grantors’ assets are to be used or distributed after the grantors are deceased. The trust agreement can address special family situations. Among the more typical might be (a) provisions for a handicapped family member, (b) provisions for a minor child or (c) special provisions for children of a first marriage if the grantors are from multiple marriages.

SELECTION OF A TRUSTEE AND SUCCESSOR TRUSTEE

If it is decided that a living trust fits the needs of the grantors, one of the major issues becomes the selection of the trustee and the successor trustee. Typically, if the grantors are capable, they name themselves as initial trustees. This makes sense in many cases. They have probably managed their own affairs for years. They can certainly continue as their own trustees.

Ah, but what if one or both trustees are unable to handle their affairs? This is where the naming of the successor trustee becomes critical. At some stage, the grantors/initial trustees may want an entity or person to step in and take over. This becomes the job of the successor trustee. The successor trustee is the person or entity the grantors designate in the trust agreement to manage the trust in a later phase.

In choosing a successor trustee (or any trustee), the grantors should consider some of the following factors:

1. Continuity/stability-these should weigh heavily in any decision related to the choice of a trustee. The trust’s term may extend over many years and beyond the lives of the grantors. If an individual is chosen, consideration should be given to the health and potential lifespan of that person. It is important that any trustee is around and can capably serve in that capacity for many years.
2. Investment and other specialized skills-a trustee must be capable of investing the trust assets productively and prudently. Trustees should have the skills to (a) make investment decisions within a planned investment strategy, (b) account for the trust’s cash and investment activity, (c) address tax issues, and (d) conscientiously follow the instructions provided in the trust agreement. A non-professional trustee may have limited experience in knowing what is required to fulfill the trustee’s duties. Additionally, an individual may lack the investment, accounting, and tax skills needed to insure issue-free administration. Further, a non-professional trustee may not have the time needed to manage the assets and attend to the needs of the grantors properly.
3. Objectivity-the trustee may be called upon to make careful decisions in the best interests of the grantors. A professional trustee can make decisions objectively and can avoid being influenced by persons with a stake in the trust or by emotions of others involved.
4. Individual trustee vs professional trustee-depending on the complexity of the situation, the family dynamic, the needs of the grantors, and the make up of the trust assets, consideration may want to be given to the designation of a professional (like First Merchants) to serve as trustee or successor trustee. In a successor trustee role, the professional can assume responsibility for the management of the trust at such time as the initial trustees deem appropriate. There may be fees associated with the engagement of a professional. However a professional trustee can provide a high degree of efficient administration and such engagement can be well worth the costs.

SHOULD EVERYONE ESTABLISH A LIVING TRUST?

The simple answer to this question is no. Living trusts are useful tools. Family situations exist that warrant consideration of such a trust. However, the establishment of a living trust comes at a price. The trust agreement, as stated earlier, is a legal document. It must be drafted by an attorney. Drafting such agreement, depending on complexity, can run from $1,000 to more than $10,000.

Before one jumps into trust mode, there are also other items to consider. If probate avoidance is the primary concern, potential grantors should critically review the value and composition of their assets. Not all assets would normally be considered part of a person probate estate. For instance, IRAs, other retirement plans, and life insurance typically have beneficiary designations which bypass the probate estate. Also, assets held in joint ownership with rights of survivorship and those with transfer on death designations normally avoid the probate process. After grantors “strip away” these type asset holdings, the grantors may find that the probate assets of their estate occupy a reasonably small value. If this is the case, most states have what is referred to as a small estate statute. In short, depending on your state of residence, if the value of your total probate estate assets are below a set threshold, no probate estate administration is required to be opened.

IF ON THE FENCE, ASK!

The folks at First Merchants would be happy to review and “talk through” with you the specifics of your situation. Our goal is always to provide accurate information and help people meet their needs.

Neal Barnum
Regional Manager, Wealth Management

First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.