When one is in the business of selling cars, just to pick an easy example, one may take it for granted that everyone knows what to do with a car, why they need one, and the advantages that a car offers over alternative means of transportation. These are just the sort of assumptions that we cannot make as we offer our investment and wealth management services to affluent individuals and families, especially our trust services. Trusts are, for many people, simply quite mysterious. We'd like to change that--the more that people know about trusts, how they work and what their benefits are, the happier we are. Here are seven common misconceptions that people have about trusts. There is a kernel of truth behind many of these myths, but it's important to understand the larger reality.
1. Trusts are just for the very rich.
When one hears a news item with a trust angle, it's often the case that a wealthy family is involved. The Kennedy trusts and the Rockefeller trusts are common knowledge. But trusts are not just for tycoons anymore. Although most very rich families do employ trusts in their wealth management, these families constitute a minority of trust customers. Most of our clients are not multimillionaires, and most don't think of themselves as "rich." They do have some significant investment assets that need careful management--proceeds from the sale of a business, perhaps, or a lump sum retirement distribution, or an inheritance. Or an investment portfolio painstakingly accumulated through a successful career.
2. Trusts are expensive.
True, there is an expense in establishing a trust; it does cost more than starting an ordinary investment account. The trust documents must be drafted by a lawyer, who will charge a fee for supervision of the creation process. But a trust costs more because it does more. Once the trust is up and running, the annual fees for our trust services are competitive with those of investment advisors and with mutual funds. To learn the specifics, please ask for a copy of our fee schedule.
3. Trusts are for saving taxes.
Some trusts do save taxes. A marital trust, for example, will defer federal estate taxes until the death of a surviving spouse. Charitable trusts generate income and transfer tax savings.
But tax savings is not what these trusts are for, that's just an extra benefit. A marital trust provides lifetime financial protection to a surviving spouse. A charitable trust implements philanthropic objectives. The most common sort of trust, the revocable living trust, does not have tax advantages at all. Instead, it provides for professional investment supervision, financial management upon incapacity, and the potential for probate avoidance.
4. Assets get "tied up" in a trust.
Another term for "tied up" might be "asset protection." Stated that way, the restrictions imposed by a trust might be seen as a benefit, not a detriment. For example, an inheritance trust might be designed to limit access by the beneficiaries' creditors, preserving trust assets for longer-term financial protection.
If you create a revocable living trust for yourself, on the other hand, nothing will be "tied up." You will be free to amend the trust, change trustees or cancel the arrangement altogether. In fact, one purpose of having a living trust is to have more control, to have the choice of delegating investment duties as needed.
5. Trusts must be funded with publicly traded stocks, bonds or other investment securities
Although investment portfolios are likely the lion's share of trust assets overall, trusts may own any sort of property, including real estate and shares of closely held companies. Shortly after Steve Jobs' death last year, for example, it was revealed that he and his wife had transferred all of their California real estate interests to trusts in the year that Steve had his liver transplant. Those trusts may be the foundation of his estate planning. Or they may not be, and we may never know. That's because, unlike the terms of a will, the terms of a trust do not normally become a matter of public record.
6. Trusts are invested conservatively, with low return potential.
At one time, trustees tended to be very risk averse with trust assets, which did lead in many cases to very conservative investment policies. In recent years, however, the laws governing the investment of trust assets (the "prudent investor" rules) have been reformed in most states. In most cases "prudence" is determined today on a total portfolio return basis, not on the riskiness of each individual asset held in the trust.
7. Anybody can be my trustee.
There are few legal limits as to who can be a trustee, but the better question is who should be your trustee. Your trustee needs to have financial strength as well as professional investment capabilities. Experience is important--look for someone, or a financial organization such as us, who has handled all types of trusts in every kind of market for diverse sorts of families. You'll also want a trustee who can be fair and impartial in administering the trust, one whose judgment all the beneficiaries will be able to accept.
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