Everyone needs a will, but, increasingly, estate planners say people also could benefit from setting up a trust while they are alive. That step would help assure that their assets are distributed more quickly, their bills paid promptly and continuously and personal information about property and other assets be kept out of the public eye.
Trusts have often been thought of as vehicles for wealthy people to dispose of their businesses, art work and other high-value items. But estate planners like Gerard F. Joyce Jr. of Fiduciary Trust Company International, the private wealth division of Franklin Templeton Investments, say certain types of trusts can be useful for those who are not ultrawealthy.
One of those is a revocable trust, which can be changed in a person’s lifetime. “It is the workhorse of modern estate planning,” said Mr. Joyce, who is also a lawyer. “A properly funded revocable trust can avoid the need for a public probate court proceeding after death that can take time and keep money from being immediately available.”
And “a trust makes sure that bills are paid during the person’s lifetime even when the person is incapacitated,” he said.
The number of people who may lack the capacity to control their own affairs is growing because people are living longer and the number of individuals who have dementia or Alzheimer’s is rising, added Stacy K. Mullaney, chief fiduciary officer of Fiduciary Trust Company, a Boston-based wealth management company that shares a similar name but is an independent entity.
“We are seeing more situations where people need this assistance,” said Ms. Mullaney. Currently, 5.5 million Americans are estimated to have Alzheimer’s, and the disease is the fifth-leading cause of death for adults aged 65 and over, according to the Centers for Disease Control.
How does a will differ from a revocable trust?
A will is a public document, and the probate process requires disclosure of assets, bank and other financial accounts and beneficiaries. Under a revocable trust, such information is usually not made public.
Is there income tax liability for the revocable trust?
Tax returns for a revocable trust must be filed annually to the Internal Revenue Service. The fund’s assets, at the owner’s death, are subject to any applicable estate tax.
Can any lawyer set up such a trust?
It should be an attorney specializing in trust and estates.
What assets are in a revocable trust?
It can be a house or property, or bank and investment accounts.
Does a revocable trust end when the owner dies?
Not always. Trusts can last after the original owner’s lifetime usually for 90 years, but there are state variations.
Does a trust always have to stay in the state where it was established?
No, it can be moved to a different state, and people sometimes do this to take advantage of more favorable laws in other states. Delaware and New Hampshire, for example, have laws that allow easier changes in trust provisions and exempts trusts from state income tax.
Do people set up trusts to protect assets from others?
Irrevocable trusts can protect assets against claims in divorce. Revocable trusts can be set up for a wide variety of purposes, including to assure the long-term care of someone who is disabled.
When is a professional manager a better choice as a co-trustee than a family member or friend?
That’s a personal choice, but professionals are licensed and have long-term experience in investing and managing wealth across generations. There are also federal reporting requirements and sometimes state, although that differs state to state.
Is there a minimum to become a Fiduciary Trust Company client?
Yes. We have a $5 million floor, but some companies offer trust services for people with fewer assets.
“If assets that have been titled in one name are retitled in the name of the trust, the bills keep being paid without interruption in the person’s lifetime,” said Ms. Mullaney, who is also a lawyer.
And that can apply to any situation where financial support is given to family members, she added.
“Many grandparents, for example, pay for the college education of their grandchildren, but an incapacity can interrupt that. A trust would make sure that the tuition is paid.”
Unlike an irrevocable trust, where assets are dispersed with a greater permanency, a revocable trust can be altered during the holder’s lifetime if he or she decides to handle their assets differently. If a person’s financial situation changes, or realizes he or she has simply made a mistake, the individual can close the trust and void the arrangement.
The trust “really does almost everything a will does, but it is more of a private document, and it is not subject to outsider review or approval,” Mr. Joyce said. A will, he noted, can need approval from a court, and changes typically involve additional court scrutiny. Each state has its own laws and rules.
There can be catches to trusts, however. The trust is controlled by the person who sets it up, and often the person will choose one or more co-trustees to help manage the trust. That choice is where things can get tricky.
Choosing a trustee is not just about someone you trust. Knowing how to invest is a key skill for a trustee, estate planners agree.
“Probably the most important decision in picking a trustee is the ability to invest over the long term,” Mr. Joyce said. “It’s common to have a surviving spouse or a child, but it needs to be someone with the time and inclination to do that well.”
While irrevocable trusts are often used for tax planning, Ms. Mullaney said, “revocable trusts are really about life planning.”