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Understanding Trust Basics helps build a better Financial Plan

R Green 2014
Ramona Green, CTFA
Vice President, Trust Officer
[email protected]
(585) 419-0670 x50616

Whether you're seeking to manage your own assets, control how your assets are distributed after your death or planning for incapacity, trusts can help you to accomplish your goals. Their power is in their versatility—many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn't hard. 

What is a trust?

A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities such as bonds, in your trust. Or, if you want to create a pool of cash that is accessible to pay estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy. 

When you create and fund a trust, you are known as the grantor. The grantor specifies who will benefit from the trust. This person or entity is known as the beneficiary. Beneficiaries are typically your family and loved ones but can be anyone, even a charity. Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after your death. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose, you can name yourself, another person, or an institution such as a bank to be the trustee. You can even name more than one trustee. 

Why create a trust? 

Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to: 

  • Plan for families with special needs 
  • Protect assets from potential creditors 
  • Avoid the expense and delay of probating your Will
  • Control and direct distributions (very helpful in cases where there are minors or spendthrifts) 
  • Manage assets with a built in team of advisors
  • Set up a fund for support in the event of your incapacity
  • Plan for tax savings - such as the ability to shift part of your income tax burden to beneficiaries in lower tax brackets and also Medicaid planning 

The type of trust used, and the mechanics of its creation will differ depending on what you are trying to accomplish. In fact, you may need more than one type of trust to accomplish all of your goals. Although trusts have many advantages, it’s also important to be aware of additional aspects associated with trusts:

  • Set up and maintenance fees such as, trustee fees, professional fees, and filing fees that must be paid
  • Depending on the type of trust you choose, you may give up some control over the assets in the trust
  • Maintaining the trust and complying with recording and notice requirements can take up considerable time 
  • Unfavorable tax consequences - Due to compressed marginal tax brackets, trust funds are taxed at a much higher rate than assets not owned by a trust 

You should discuss the pros and cons of setting up a trust with your attorney and financial advisor if you are considering a trust. 

The duties of the trustee 

The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. The duties of a trustee are not to be taken lightly, such duties include, protecting and investing the trust assets for the benefit of the beneficiaries, keeping complete and accurate records, exercising reasonable care and skill when managing the trust, prudently investing the trust assets, and avoiding mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can't merely delegate responsibilities to someone else. 

Although many of the trustee's duties are established by state law, others are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you create the trust. 

CNB Can Help 

If you have any questions or would like guidance, please feel free to schedule an appointment at (585) 394-4260.

Source: ©2019 Broadridge Investor Communication Solutions, Inc. This material provided by Ramona Green.

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