Financial Resource Center

Money Management


Protect Your Assets With a Trust Agreement

by Judy Dahl / November 28th, 2005

Are you confident that your money and other assets would be distributed according to your wishes if you no longer could manage it yourself? Or that your minor or special-needs children would have enough money to live on after your death? Or, if you have a family business, how would its assets pass to a successor? A financial trust agreement may be just the tool you need. A trust is a legal agreement that allows you (the trustor) to transfer property and assets for the benefit of someone else (the beneficiaries). Beneficiaries can be individuals, businesses, or charitable organizations. You place your assets under control of a trustee, an individual or organization that manages and distributes the assets as set out in a trust document specifying your wishes. A trust can give you:
  • Control--by protecting your beneficiaries from fraud or mismanagement of your assets, especially in case of your disability or death.
  • Continuity--by continuing to manage your assets appropriately if you encounter a life-changing event.
  • Privacy--by keeping your affairs out of the public record. A will becomes a public record when it's filed with a probate court upon your death, so if you use just a will for estate planning, anyone can access it.
  • Tax advantages--by distributing your assets in a way that minimizes your tax burden, or that of your beneficiaries.
    Trust agreements can be great tools, but they're complex; it's important to understand how they work and how to get started.
There are many types of trusts, each designed to accomplish specific goals. Trust agreements can be great tools, but they're complex, so it's important to understand how they work and how to get started.

How trusts work

To establish a trust, the trustor develops a trust agreement, usually with the help of an attorney. This legal contract specifies the property the trust covers; names the trustee(s); and includes instructions for holding and investing the property, and for disbursing the property and any related income. A trust can govern the management of diverse assets--money, real estate, an insurance policy, a business, or stocks--during the trustor's lifetime or after his or her death or disability. Once a trust agreement is activated, the trustor no longer owns the assets; they're the property of the trust. The trust is a separate entity. The trustee has a fiduciary responsibility, which means that the individual or organization is legally obligated to act impartially, in the best interest of all beneficiaries, and may not seek personal benefit from trust transactions. It's important to select a trustee with sufficient knowledge and experience to manage the trust skillfully. For example, if the trust includes a stock portfolio, the trustee must know how to invest the stocks appropriately. Trustees also must keep complete records of trust activity, and file tax returns and make tax payments for the trust.
A trust can govern the management of diverse assets during the trustor's lifetime or after his or her death or disability.
Trustors can select individuals, such as family members, as trustees. In some cases they can act as their own trustees. However, because the responsibilities are complex, many select an organization with trust services representatives specially trained to administer trusts. Check with your credit union; it may work with a business partner such as a credit union service organization (CUSO) that can act as your trustee--and credit unions/CUSOs generally offer better deals than banks. Many banks won't service trusts with asset values less than $1 million, while the credit union/CUSO minimum is often $100,000. And banks often centralize their trust services departments, giving you an 800 number to call with questions, while credit unions/CUSOs usually offer local representation--you can walk into the credit union and talk to a trust officer face-to-face. And if your credit union does not offer trust services, staff will want to know of your interest. The annual fee for trust servicing is usually around 1% to 1.25% of the assets in the trust, according to Joseph Lipscomb, CFP, trust relationship officer at Navy Federal Financial Group/MEMBERS Trust Company in Virginia Beach, Va.
It's critical to select the right trust for your purpose, and to structure the trust agreement properly.
"This includes record-keeping, managing investments, bill-paying, completing the reporting and tax returns, and meeting document-filing requirements," he says. "It's a pretty good deal--we think it's complicated to do that on your own." Most corporate trustees, such as financial institutions, do have a minimum annual fee, usually $1,000 or more. "So if you have a $50,000 trust and you're paying $1,200 in service fees each year, it's actually more like 2.5% of the asset value," notes Lipscomb. "It may not make sense economically to have the funds in trust." He says most trust agreements include a provision specifying that if the assets covered by the trust fall below a minimum value, usually around $25,000 to $50,000, they'll automatically be paid out and the trust dissolved. "There are often more important reasons than your income or net worth to have a trust, but in general--unless circumstances dictate that the funds should be in trust--it's better just to pay out amounts under $50,000," says Lipscomb. However, if you're reluctant to leave money outright to an irresponsible child, or if you want to preserve government benefits for a special-needs child, for example, a trust may still make sense, even if the total asset value is smaller. And, says Lipscomb, "If you use an individual as your trustee instead of a corporate trustee, the individual may not charge administration fees. Then the amount in the trust doesn't matter."
Once a trust agreement is activated, the trustor no longer owns the assets; they're the property of the trust.
Lipscomb says many trustors act as their own trustees during their lifetime and appoint a successor trustee, such as their credit union's CUSO, to take over if they die or become unable to manage their affairs. "Some people have a corporate trustee, and a co-trustee that's a family member or friend. This can be a good thing because the individual adds that personal touch--they understand the trustor's wishes," he says. It's critical to select the right type of trust for your purpose, and to structure the trust agreement properly. That's why Lipscomb recommends all trustors work with an attorney specializing in trusts. "The laws change frequently, so you really need to work with an attorney that's specialized and very experienced in this area," he says. "The language in the trust document must be very specific as to what the trust is allowed to do."
Perhaps most important, you must have a way to fund your trust.

Getting started

When deciding whether a trust is right for you, Lipscomb recommends talking to people who have situations similar to yours. "Also, local attorneys specializing in the area often offer seminars, or your credit union may be able to advise you," he says. "Navy Federal Credit Union doesn't provide legal advice, but we do educate members on available options, and help do the necessary legwork. "An attorney would advise them on best trust type and the specific language that fits their situation," he adds. "The credit union/CUSO gets members ready to sit with the attorney so they're educated and understand their options. Then they'll spend less time with the attorney and pay lower legal fees." Before meeting with a trust services representative, you should prepare an inventory of your financial assets, including the assets' value and ownership. Bring this to the meeting, along with any wills, living wills, power of attorneys, other trust documents, deeds, bank statements, brokerage statements, and life insurance policies. "We have a work sheet we give our clients to record this information--the attorney would charge to get it on paper," says Lipscomb.

Fund your trust

Perhaps most important, you must have a way to fund your trust. "You can make gifts to the trust in your lifetime to fund it," suggests Lipscomb. "Or life insurance is a great way to do it--the trust is the beneficiary of the trustor's life insurance policy. You either have to fund it while you're living, or leave money to it in your will. "We've seen cases where people draw up the trust document, but don't have the means to fund it, so the trust doesn't control anything," he continues. "A person may have an estate, but if they don't earmark funds for the trust, the trust doesn't control the estate. The will controls it, and the funds go through probate. The kids wonder why the trust isn't controlling anything."