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Trust Decisions

I am often asked the question, what do I need to consider when daftng a trust. Below I have listed the top 3 items I think are important when creating a trust.

First you need to consider the beneficiaries. What are their ages and their spending habits? Are they a minor or an adult? They will have very different needs and you will have different decisions to make for different situations.  For a minor, you need to provide your spouse or the minor directly with income as well as a way to pay for college.  If some of them have been to college and others have not you need to determine when to make distributions from the trust and how long you keep the money in, and trust.

Next you have to determine how many distributions you make from the trust. I suggest to clients that they make more than one but not more than three. The reasoning behind this is that two gives them a second chance and handling the money.  However if they have not learned their lesson by the time they receive the third distribution they probably are a lost cause.

The final main decision are the trustees. While corporate trustees such as banks provide for a knowledgeable trustee, you don't know who you're going to get when your trust actually comes into existence.   A private trustee, although less expensive, may not know what to do.

These are the main decisions you need to make.   Although there are many more decisions that have to be made.  You should consult with an attorney before drafting any trust documents.

Different Types of Trusts

When establishing your estate plan, trusts can serve as a way to put your intent into the estate plan even after your death. The trust is funded from the estate. In an estate, property passes by ownership first where jointly owned assets are passed to the joint owner, contracts with a named beneficiary are second (i.e. IRAs, Insurance Policies), and lastly only what is left over flows through your will. Many people establish elaborate trusts only to have them unfunded at their death because they have everything titled jointly with their spouse.

Testamentary Trusts 

The most common trust is a Testamentary Trust. This trust is drafted as a part of your will and is funded at the time of your death. This is the next step up from having only a simple will. While this is a perfectly acceptable form of trust, this lacks several of the advantages which Living Trusts provide.

 Living Trusts or Inter-Vivos Trusts

These are the next step in the sophistication of your estate plan. This form of trust can be funded during your lifetime or upon your death. A living trust can be the beneficiary to contractual assets. In addition, the will would divide your assets into two baskets; personal property and invest property.  This means that all of the personal property are disposed of through the will and the remainder are investment assets which are transferred into the trust.

 Irrevocable Insurance Trusts

These are drafted in addition to or in place of the two other trusts. This trust is named the owner and beneficiary of your insurance policies. Since they are irrevocable they are not included in your estate at your death.  A neat trick is to make it the owner of a term policy. That way if you later decide that you don’t want the trust, if you are insurable, then you simply don’t fund the policy and it defaults thus rendering your trust irrelevant.

 Items of Note

With any of these trusts the terms are open to your intent. Regarding distribution, you can distribute income and principle as you see fit.  You will probably want to make the terms of all your trusts similar if not identical. Children with special needs require specific care to be drafted within the trust so as not to disrupt their disability services.

 

This is an oversimplification of the trust law and you should consult your attorney before establishing your estate plan.

Buy Smart

    I have always had medical professionals as clients. One thing this has taught me is that being smart enough to pass med school doesn’t necessarily translate into financial intelligence. Doctors, as well as any professionals who have a steadily increasing salary at the start of their careers, can often make purchases that hurt their cash flow down the road once their income plateaus. This makes it all the more important to develop an emergency or “slush” fund early in your career no matter what your occupation. Then later in life, once your rainy day money has grown, the finer things are less of a strain on your bank account. The two main purchases that can set an individual up for financial distress are expensive cars and big houses. Making the right buys can lead to a life of comfort, if done correctly.

 

Fancy Cars 

 

When individuals jump up into the six figure income bracket one of the first things they want to do is buy an expensive new car. What they fail to realize is that when they drive their so called “investment” off the lot, it loses thousands in value immediately. Their new car will then continue to lose value until the wheels fall off. But Chuck, “How am I supposed to show off my financial superiority while I’m on the go?” It’s  simple. Buy used. Say you think you would look nice in a Mercedes-Benz SLK350. You’ve worked hard to bring in the money and its time to reward yourself. A new SLK350 costs over $55,000. A used last year model costs $36,000. Paying an extra nineteen grand for that “new car” smell seems quite ridiculous. Any other investment that declined in value by 35% its first year would make you furious. Even for individuals with more modest tastes, a Honda Civic loses four thousand in its first year off the lot which is still a 20% decrease. Do yourself a favor and let someone else be the sucker who has to unload their bad investment in a year’s time.

 

Living Large 

 

The other mistake many make is purchasing a house that is too big early in their careers. If your job is putting fat stacks in your slacks the worst thing you can do is tie yourself down to a house that will pull cash out of your pocket for the next fifteen to thirty years. We at Prospero Financial always push to develop a solid emergency account before purchasing an expensive home. Buying a less expensive home allows you to build that emergency fund faster.  You will then be able to make a larger down payment on your next home. This will give you more equity to build on. You will need 20% equity in the property in order to avoid private mortgage insurance and decrease your mortgage payment.

 As unpredictable as the housing market is, you want to make sure that your house and property are sellable when the time comes. Choosing your neighborhood wisely can make a huge difference in the future. Picking the right house in that neighborhood can be just as important. The most expensive house in a neighborhood will be the hardest to sell. When prices in housing go up your palace might increase in value, but a home is worth nothing if there’s no one to buy it. The cheapest house in the neighborhood can be just as tough. Look for a home that is in the upper middle price range for the neighborhood you are moving into and you will have made a safe choice if you ever need to liquidate the property. Lastly, when  it comes time to sell a house, you need to leave yourself at least six months time to keep from leaving money on the table. Selling a home can be profitable, as long as you make smart decisions along the way.

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Paterno

I was reading in a blog the other day about some estate planning Paterno had done that looked like he was trying to avoid prosecution on any law suits. Nothing could be farther from the truth in that these were done for estate planning reasons. See the crux of it is a Qualified Personal Residence Trust (QPRT). We have done those for clients over the years to preserve their assets and reduce them from estate taxes. They are good vehicle for that as opposed to keeping them from being attached in the case of a lawsuit. They are for keeping a property in the family by gifting it away while still holding a hold on the assets for some fixed term. This is a legitimate technique as he has the right of all Americans to not pay more then their fair share of taxes. This would be no different than people having their parents gift assets to them in order to qualify for Medicare. They do this without a second thought while still taking advantage of the system and the other taxpayers indirectly. Why is this different? It is still a legitimate technique to get out of paying more than once fair share in preserve the asset base. This is all that Paterno was trying to do when he went about using us in estate planning technique that is basic in nature for wealthy individuals. Since it was not done in contemplation of the lawsuit as indicated in the Times article but well in advance of that and really provides limited protection from the lawsuit sensationalism of this information not only was erroneous but was inflammatory.