Fiscal Fitness

Estate planning is something that everyone should do, not just the very wealthy. Without a plan in place, you’re leaving your estate and your legacy in the hands of the courts. Plus, if you have a large estate and a lot of assets, much of what you hope to leave to loved ones could be wiped out by federal and state estate taxes.

One way to protect all those assets and to ensure you can take care of your family after you’re gone is with a trust. This is a document that not only protects your estate from the taxman but also creates a set of rules that dictate how that money is to be managed, who can receive the funds, how the money can be spent, and other restrictions on who can access it and under what conditions. A trust puts all your assets under the control of the legal entity of the trust, and it is all managed by a trustee.

The trust serves as the rules for the money and how it’s to be spent. What can the beneficiary do with the money? Can he or she spend the principal of the investment or only the income of it? Are there taxes to be paid and who is responsible for ensuring they’re paid? Is one of the assets a family home? Are there certain conditions that must be met to allow the beneficiary to remain in the house? These are just some of the questions that a trustee answers in managing the trust and estate.

The trustee’s role is to manage all the assets placed in that trust and to manage those assets for the benefit of the beneficiaries. A trustee is usually a person, but it can also be an entity, such as a bank or a company.

The trustee works with the beneficiaries but also on behalf of the trust to carry out the wishes of the grantor. For example, if you were to create a trust for a child or grandchild, the trustee is there to disburse the funds and fulfill the requirements as you have stipulated.

The trustee also manages the finances, disburses any money to the beneficiary, pays taxes, records expenses and income, and oversees any physical assets owned by the trust.

For the most part, setting up a trust is fairly straightforward. There are some common aspects to most trusts, but some of those particulars can vary greatly depending on the grantor and his or her wishes. Maybe a grandchild can receive disbursements from the trust until they turn 50. Or the money is only to be used to pay for higher education, including graduate school. Or funds can be disbursed only as long as the beneficiaries abstain from using drugs, as a local resident once specified.

Sometimes funds are given out as an allowance, other times major expenses have to be discussed between the trustee and the beneficiary. For example, a beneficiary may say there is a medical expense, so the trustee will ask to see the related information and get it approved. Or a beneficiary may say, “My 2004 Ford Focus has broken down, and I want to buy a Corvette Stingray.” The trustee might say that wasn’t the intent of the grantor.

This is where it’s important for the trustee to understand the trust document and why it’s important to take excellent notes when the trust is first being set up. After all, the trustee may change as he or she retires or a new trustee is appointed within a bank (in the case of a corporate trustee).

Anyone is free to make any kind of trust, along with specific conditions. It depends on a person’s desires and whether the conditions are actually legal. For example, you could set up a trust that a person has to attend college to receive funds, but they could get the money for as many years as they’re in college (even until they’re 50). Or the beneficiary has to be married by age 22 or age 26. Or the money is protected from divorce and the other partner can’t claim any in a divorce settlement

In other cases, a trust may be what is called a “special needs trust,” which is set up to care for a family member with special needs. Sometimes such a trust fully funds the person’s life, although special needs trusts usually only supplement a person’s government income. In this case, the trustee needs to understand the nuances of the language that would not get the beneficiary removed from government assistance.

Trusts can help avoid estate taxes

One of the biggest benefits of using trusts is to avoid estate taxes. A person could have a very large estate, and the estate taxes could take a big chunk out of those assets once their beneficiaries inherit their portions.

A trust can be used to provide funds for multiple generations through time. At October Mountain Financial Advisors, there are trusts that were created several generations ago that provide income and/or principal to be used for specific purposes, like education or medical care. And because there’s enough money in the estate, those trusts can serve many generations beyond the first beneficiaries.

Imagine a scenario in which a grandparent establishes a trust designed to support their children’s children, and forward in time, including their great-grandchildren and even their great-great-grandchildren.

This is very smart estate planning indeed because it minimizes the exposure of the estate to federal and state taxes. It also enables a family to provide for future generations, even long after they’re gone. Some of them can be open in their use — maybe not for buying a new Corvette but for making general purchases within reason. Still, others can pay for a few years or for a specific purpose, such as for education or for health care. And if those trusts are managed well and have been invested well, they can provide a benefit to multiple generations.

Many trusts are discretionary, so the trustee has the opportunity to weigh in on whatever requests have been made and will decide whether a spending choice is a wise one. Others are automatic, and the funds are disbursed automatically in a specific amount or on a specific date.

Similarly, these trusts can avoid the problem of dumping huge sums of money on young people. The grantor is able to have some control even after they’ve passed. There is still an inheritance, but the beneficiary isn’t just handed a lump sum of money without anyone to provide guidance and care.

Trusts also can include more than just money. Anything can be placed in a trust to be enjoyed by the beneficiary.

For example, commercial or residential real estate, art, furniture, jewels, cars and so on. So a family home could be placed in a trust, and the recipients allowed (or required) to live there. Or a trust could contain a commercial real estate portfolio, and the money earned from it would be part of the funds that are disbursed. Or liquid assets such as stocks, bonds and mutual funds. Or even a life insurance policy in which the benefits are paid out upon the policyholder’s death.

If you’re interested in creating your own trust to protect your estate and to provide for future generations, you’ll want to talk to an attorney about protecting your legacy. But if you’re interested in talking to someone to manage your trust, October Mountain can help.

Call and set a meeting today with your neighborhood investment advisers at October Mountain Financial Advisors, located in their headquarters right next door to Lee Bank on West Park Street in Lee. Visit and take a look at the firm’s third-quarter newsletter.

This article is for educational purposes only. St. Germain Investments does not offer tax or legal advice. You should speak with a tax or estate planning attorney prior to making any decisions.