Reasons to Establish a Trust
Setting up a trust involves careful planning. Your trust is a legal arrangement that formalizes where assets will be held for the benefit of one or more other people. If you reach a point where you can’t take care of your own finances, having a trust allows you to be cared for as you would like to be. Putting a plan in place will also help minimize estate and other taxes, avoid probate, and transfer assets to your heirs. So, once you decide on creating a trust, how it is controlled?
Naming a Trustee & Understanding Their Responsibilities
Part of establishing a trust involves naming a trustee. You should be confident in the person that you appoint as they have a major responsibility. Often it is a child, but sometimes it is another person or a professional or corporate trustee.
Here is a short description of the duties your trustee will have:
- Fiduciary Responsibility: As a trustee, they have a ‘‘fiduciary’’ role with respect to the beneficiaries of the trust, including both the current beneficiaries and any future beneficiaries that are named later to receive trust assets. This means the trustee has to know what they are doing, since they will be tasked with handling assets, money, investments, record keeping and tax issues.
- The Terms: Knowing the terms of the trust is key. The trustee uses the trust as a map and they must follow its directions as they are laid out, whether about when and how to distribute income and principal or what reports they need to make to beneficiaries. A good trustee will study the documents and know what is in them.
- Investments: Any investments made are the responsibility of the trustee, and they must consider the interests of both current and future beneficiaries. In addition to balancing the interests of the various beneficiaries, they must consider future financial needs. This part is not an exact science, so most trustees will get some investment help from a professional.
- Distributions: The trustee must take into account a lot of variables before distributing funds from a trust. If the trust roadmap dictates exactly when and how much to distribute, it is a fairly simple process. If it doesn’t provide explicit instructions, the trustee must decide whether or not to make distributions to a beneficiary by evaluating current needs, future needs, and other sources of income. The size of the trust also comes into play and a trustee must sometimes say “no” to dispersing funds. Sometimes, there is a need to set limits on the use of the trust assets. A good Trustee will be fair and precise in making these decisions.
- Trust Accounting: Generally, the trustee must give an account of all income to, distributions from, and expenditures by the trust to the beneficiaries on a quarterly or annual basis. Again, if this is not the trustee’s strong suit, they may employ professionals to help with accounting.
- Trust Taxes: Depending on the type of trust, the trustee will have to file annual income tax returns and may have to pay taxes. In many cases, the trust will act as a pass through with the income being taxed to the beneficiary. Taxes are not a simple matter, and for the most part will require some additional help. A good trustee will know their limitations in this area.
- Delegation of Assets: While the trustee cannot delegate their responsibility to anyone else, they can delegate all of the functions above, whether it be hiring financial advisors to make investments, accountants to handle taxes and bookkeeping, or lawyers to advise them on questions of interpretation.
- Trustee Fees: Trustees are entitled to reasonable fees for their services. Family members often do not accept fees, though that can depend on the work involved in a particular case, the relationship of the family member, and whether the family member trustee has been chosen due to his or her professional expertise. Mostly, there will be fees for your trustee’s work as a cost of business.
Estate Planning Attorneys Serving Clients in Omaha
If questions come up when you are considering using a trust, it is time to make an appointment with your attorney. At Carlson & Burnett, we have a team of attorneys who specialize in Estate Planning and Medicaid/Long-Term care planning. We subscribe to the belief that “What’s in the family should stay in the family!”