Benefits of Trusts Shouldn’t Be Overlooked

A lot of estate-planning attorneys think everyone who walks through their doors should have a trust. The actor Philip Seymour Hoffman, who died in February 2014 and left a $34 million estate to his children and their mother by will, didn’t think he needed one.

They’re both wrong, and the truth lies somewhere in between. A will should suffice for many of us. But there are also many people who could benefit from a trust, but don’t have one because they’re either uninformed or misinformed about them.

Will vs. trust

The most common trust is a “revocable living trust,” a legal document created by you (the grantor) during your lifetime that spells out exactly what your desires are with regard to your assets, your dependents and your heirs (the beneficiaries). It names a trustee (like an executor of a will) to carry out those instructions.

So what’s the difference — and the benefit — over a will? When you die with (or without) a will, a court process known as probate begins by which your estate is sorted out and administered. Probate can be time-consuming and costly. With a trust, that’s all bypassed, and your trustee can immediately begin carrying out your trust’s instructions (the same goes if you’re mentally or physically incapacitated). Other benefits include those two adjectives: “revocable” and “living.” It’s “revocable” because the trust can be changed by the grantor anytime he or she wants as long as he or she is competent; it’s “living” because once funded with assets, a trust can start working during a person’s life. There’s another potentially huge benefit to a trust: Probate is a public process, meaning every detail is available to anyone wishing to review court records. A trust is private.

Fortunately, some familiar assets — such as life insurance policies, retirement accounts and annuities with designated beneficiaries, as well as jointly owned assets with rights of survivorship — are exempt from probate. So in determining if a trust is right for you, you must weigh the legal costs of creating a trust, which can easily be thousands of dollars, versus the potential costs and other downsides of probate, and consider assets you own that aren’t exempt from probate in your state.

Many kinds of trusts

This has been a very basic introduction to trusts. There are many kinds of trusts that convey very different benefits to those that use them.

• Bypass and generation-skipping trusts help wealthy people minimize estate taxes.
• Special needs trusts provide financial support to a person who is disabled or otherwise unable to support himself or herself.
• Spendthrift trusts distribute inheritance to an heir in your chosen method rather than in a lump sum.
• Life insurance trusts help high-net-worth individuals strategically manage their insurance policies for payment, tax and beneficiary purposes.
• Charitable remainder trusts do much the same for an individual’s charitable giving.
• A Qualified Terminable Interest Property Trust ensures your estate goes to your chosen beneficiaries and not your spouse’s next spouse, for instance.

‘Trust fund kids’

According to court documents, Hoffman didn’t want his three children to become “trust fund kids” and ignored both his lawyer’s and accountant’s advice to create a trust rather than relying on a will. He had perhaps admirable intentions, if by “trust fund kids” he meant lazy and spoiled. Unfortunately his impulse was an unconsidered and uninvestigated one. It’s now up to his longtime girlfriend and mother of his children to make all the decisions about their inheritance, and the estate will pay dearly in taxes.

With a trust, Hoffman could have saved his loved ones so heavy a tax burden; shielded his children from their mother’s misfortunes should she ever develop debt, spending or health problems; and finally, even protected his children from themselves by dictating precisely when and how much money they would receive. Distributions from the trust could have been predicated upon the children attaining specific ages; getting a college degree; earning an income and becoming self-sufficient; doing charitable work — any number of hoped-for proofs against becoming the proverbial spoiled, unambitious trust-fund kid.

Hoffman got his wish. And in doing so, a large portion of his estate will be squandered in taxes, money that could have been directed to specific uses by him. Moreover, and ironically, his children probably will still inherit substantial amounts of money one day. And without a trust, they’ll get it in one lump sum without any restrictions on how they’ll “earn” it — conditions he could have set that might have helped mold his children into the kind of adults who would have made him proud. “Instantaneously rich kids” may well be a fate worse than “trust fund kids.”

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.