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Understanding Trusts

June 09, 1996|KATHY M. KRISTOF | Times Staff Writer

Trusts are proliferating today for a host of reasons, including the way the tax code is written, the costs and delays of probate, the aging of the population, and the long-running stock market boom, which has left more people with more money.

Who are typical trust consumers?

* Anyone who wants to organize their finances for heirs and wants to eliminate the need for probate.

* Remarrying couples who want to leave money to their children from first marriages while providing for their new partners.

* Well-paid executives who have made so much money on company stock options that they won't sell shares for fear of capital gains taxes.

* Retirees who have assets, such as homes and stock, but not enough income.

Every type of trust has a specific use. Used correctly, a trust can solve problems, save money and be well worth the hundreds of dollars you may pay to have it set up and administered.

Make sure the trust is set up in the proper legal manner by an attorney familiar with the legal and tax aspects of the type of trust you are using. Then make sure the trustee is someone who is honest and prudent, as well as a smart investor.

Popular Trusts and Their Uses

* The "Q-TIP," or qualified terminable interest property trust. This is popular with remarrying couples. A wife can set up such a trust so that if she dies first, her husband retains the income from the trust for his lifetime. When he dies, her children will inherit the body of the trust.

* The charitable remainder trust. What about the older couple who has accumulated $100,000 in company stock that pays only a slight dividend? If they sell the stock to invest for greater income, they'll lose a quarter of the proceeds to capital gains taxes. They can set up a trust to benefit their favorite charity and give the stock to the trust.

Instead of paying capital gains taxes, they'll get a charitable deduction for the full value of the stock (subject to some tax limits). The trust can sell the stock tax-free and invest the proceeds in high-income-producing bonds, and the couple can reap income from it for the rest of their lives. The obvious downside is that they've given away their $100,000, but there's a trust to take care of that too . . .

* The irrevocable life insurance trust. This one is held in high esteem by insurance agents, who get to stuff it with a policy on your life. But in the case of the above couple, they could use their tax savings and some of their proceeds from the charitable trust to buy a life insurance policy inside a life insurance trust for their kids. When they die, their kids get the money from the trust without paying estate taxes on it.

* The revocable living trust. These are popular with older people whose assets have gotten big enough to get complicated. It allows heirs to avoid probate and forces anyone setting up the trust correctly to account for all assets and title them to the trust. Traveling trust holders may hire a professional trustee, who handles dividend check cashing and bill paying while they are on the road. They also make it easy for family members to take care of affairs when the trust holder is ill.

What Can You Do With Trusts?

* You can stipulate whether a particular heir's inheritance is contingent on a particular act--i.e., Susie gets her $50,000 only if she completes college.

* Possibly most important, in the trust document you stipulate who will be the successor trustee--the person or company that takes on the role of managing your money after you're gone. This person or bank is like the executor of a simple will.

* You can say what the successor trustee can and can't do with your money, as well as whether (and how) heirs can go about ousting a successor trustee are unhappy with.

You have two choices for successor trustee: professionals and non-professionals.

It's certainly cheaper to go the non-professional route, choosing a trusted friend or relative to manage and distribute the assets to heirs, usually without charging a fee. But many people have more confidence in a bank, broker or lawyer, or don't want to bother a friend a relative with the work.

In any event, these are issues you ought to discuss with the attorney who draws up, or helps you review, your trust.


Neuberger & Berman has published a booklet that explains types of trusts and the pitfalls of not setting them up properly. To order a free copy of "Estate Planning Through Trusts," write to Neuberger & Berman Trust Co., 605 3rd Ave., New York, NY 10158.

Linda Stern of Reuters contributed to this article.

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