Oran Hall Setting up a trust for a child
QUESTION: I would like to set up a trust. What do I need to do so? Where is the best place to get one done? What are some of the pros and cons of setting up a trust for your child?
– Cas
FINANCIAL ADVISER: A trust is created when one party, the settlor, transfers assets, such as money, real estate, stock, business interests, or personal possessions, to another party, the trustee, who then holds legal title to them, with instructions about how they are to be used for the benefit of a named or identified person, group, or organisation called the beneficiary.
A trust may continue in existence for an unlimited time unless the terms provide otherwise and is useful when assets must be managed on behalf of a child and in other situations, such as for a family member who suffers from disability or mental incapacity or lacks financial-management skills, lacks discipline, or needs protection against other people.
Before setting up a trust, you should determine why you want to do so. For example, you may want to provide for a loved one with special needs or to provide for the living expenses and education of your child. The trust departments of banks and law firms and some attorneys-at-law offer the service of setting up trusts.
You should also consider who you want to be the trustee to hold title to the assets of the trust and to manage them. The trustee can be a person or more than one person, but there are also corporate trustees, such as some banks and law firms through their trust departments. Some attorneys-at-law also offer the service, but in cases that are not complicated, there are individuals who can play that role competently. You as the grantor may also be a trustee.
Whether individuals charge for their services depends on the arrangements made. Corporate trustees do charge, but the risk that they may die before the beneficiary – as is possible if the trustee is an individual – does not arise, and they are able to draw on the skills of several people in the organisation. When selecting individuals to be trustees, look for trustworthy people who are competent and have the expertise and time to carry out the various functions, such as record-keeping, reporting, managing and distributing trust assets, and the ongoing administration of the trust. Other major costs include setting up the trust and transferring assets into it.
Consider also whether you want to set up a living trust, which takes effect in your lifetime, or a testamentary trust, which is established through your will and becomes effective after the will has been through the probate process. In the case of the living trust, also called an inter vivos trust, you can play a meaningful role, particularly as a trustee,
You should also decide if you want the trust to be a revocable trust or an irrevocable trust. A revocable trust is quite flexible and would allow you to add or remove assets from it as well as to change the trustees and the beneficiaries. The irrevocable trust, on the other hand, does not generally allow the grantor to make changes to it.
It is very important to know exactly what you want so that the trust agreement can be complete and accurate, and you should note that the assets you transfer to the trust legally become trust assets and are, thus, no longer yours.
Apart from a testamentary trust, trusts, by bypassing the probate process, which is necessary for a will to take full effect, eliminate a serious cost. Additionally, benefits come into the hands of the beneficiaries quite quickly. An additional benefit is that although assets are taxed at the point at which they are placed into the trust, there is potential for their market values to increase thereafter, thus resulting in more dollars being preserved in it. Trusts also allow for privacy, unlike wills, which are public records and can thus be accessed by the public.
Although beneficiaries and assets may be added to a revocable trust, thereby being an advantage to somebody who becomes a beneficiary after the trust has been established, it is possible for a beneficiary to be removed or for changes in the allocation of trust assets to the beneficiaries to affect some beneficiaries adversely. Additionally, adding more beneficiaries could cause the share of the other beneficiaries to be less than before.
Key to the beneficiaries deriving optimal benefit from a trust is the trustee exercising prudence, responsibility, and good faith in the exercise of that critical function, which is of relevance to all beneficiaries regardless of age, but more so for children, who tend to be the most vulnerable.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com