A trust is an agreement that you have with yourself that sets out the instructions for how your money will be managed both during your lifetime and after your passing. In many cases, individuals will benefit from having a trust, but not everyone needs to have one. However, the more you know about trusts, how they work and what their benefits are, the easier it is to understand if you need one or not. The following are common misconceptions about trusts.
1. Trusts are only for the rich.
Often times when you hear about a case in the news where a trust is involved it is typically about a wealthy family. Even though most wealthy families have trusts in their estate planning, they constitute a minority of trust customers. Most of my clients are not multimillionaires and most of them do not consider themselves “rich”.
2. A trust is expensive.
There is an expense in establishing a trust and it does cost more than starting a typical investment account because trust documents must be drafted by a lawyer. A trust costs more because it does more.
3. A trust is for saving taxes.
Some trusts, like marital trusts and charitable trusts do save taxes; however, that is an extra benefit as these trusts are not established for that reason. A marital trust is established to provide the surviving spouse with a lifetime of financial protection. A charitable trust is established for philanthropic objectives. A revocable living trust, which is the most common, does not have any tax advantages in and of itself. Its main objectives are to provide investment supervision, financial management upon incapacity and the potential to avoid probate.
4. A trust “ties up” your assets.
The restrictions imposed by a trust are potentially for asset protection which helps to understand that it is an advantage, not a disadvantage. For example, an inheritance trust can be established to sustain trust assets for financial protection and limit access by the beneficiaries’ creditors. However, creating a revocable living trust for yourself allows you to modify or even cancel the trust altogether.
5. Funding a trust must be done using stocks, bonds or other investment securities.
Even though investment portfolios are typical trust assets, any kind of property including real estate and shares of companies can be held in trust. Terms of a trust typically do not become a matter of public record, unlike the terms of a will.
6. A trust is a conservative investment with the possibility of low returns.
There was a time when trustees were opposed to taking risks with trust assets, which ended up leading to conservative investments. However, in more recent years, laws governing investments of trust assets have changed in most states. Today, typically the calculation is determined by the total portfolio return, not on each individual asset in the trust.
7. My trustee can be anyone.
There are few legal restrictions on who can be your trustee, but there is a difference between who can be your trustee and who should be your trustee. Optimally your trustee should be experienced and have strength and knowledge with financial investments. It is also a good idea that your trustee be unprejudiced in administering the trust.