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.
Life Insurance is not as mystical as it may seem. When you
strip away all of the riders you are left with one of four types of policies.
These policies are annual renewable term, whole life, universal, and variable
universal. These differ in cost and risk and it is important to know what you
are looking for.
Annual Renewable Term Insurance is pure insurance. It is a
pay as you go type of policy with costs increasing every year. This type of
policy is good for a young family, because it allows one to buy a larger policy
than a whole life when you have a greater need for coverage and you are still
healthy. This would cover such things as your mortgage and children’s education
in years where sufficient income is not available to pay for a whole life
policy.
Whole Life Insurance is permanent insurance. In other words
if you pay your premium you will always have coverage. This type of policy is
good for middle aged individuals who have a health issue or want to have burial
costs covered. Partners in business can buy whole life policies on each other.
After the death of one of the partners, the remaining partner would be able to
use this insurance to buy the remainder of the company from the deceased’s
estate. The premium on this type of insurance remains the same. A percentage of
this premium is put towards its cash value and the rest is put towards the
insurance itself. Over time the amount towards its cash value declines and the
cost for insurance increased. This is due to the well known fact that getting
older puts you at greater risk to shuffle off this mortal coil, kick the
bucket, or join the choir invisible. But even as you age the premium doesn’t
change.
Universal Life Insurance is a combination of cash value and
term insurance. This allows you to contribute at a minimum the cost of
insurance and additionally as much cash value as you want to with some coverage
limits. You can’t contribute more than a certain percentage of the policies
worth in cash value. This allows you to have a greater amount of term, and
later in life contribute to cash value as you are able to. Unlike a Whole Life
policy the premium is not guaranteed to stay the same. Just as with a Term
policy you are subject to any price hikes the
insurance company puts in place. This would be a great
policy for those who want to hedge their bet, get an affordable insurance
premium, and still be able to build cash value as their income increases.
Variable Universal Life Insurance is similar Universal except
that you are responsible for the investment of your cash value. You are given a
selection of pseudo mutual funds to invest in. These funds may be stock, bond,
or international funds allowing your cash value to participate in the returns
or losses of their respective markets. If you or your financial planner (for
example Charles T. Shearman CFP of Prospero Financial) is market savvy, this
may be the appropriate insurance policy for you.
These are the basis for all life insurance policies. Make
sure to carefully examine any policy you are thinking about purchasing. Riders
can substantially modify the look of the policy, but the underlying policy is
one of these four. Understanding what your policy can do for you or your estate
is very important, both when choosing, and when cashing it in.
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.