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Marc A. Hebert's Money Sense: Knowing misconceptions about trusts can help with planning

September 22. 2017 6:32PM

Do we need a trust? This is one of the most common questions people have when they start to discuss their estate planning needs. In its basic form, a trust is a legal vehicle for managing financial assets for the benefit of yourself and/or someone else. The property owner (called the grantor or settler) transfers legal ownership to a person or institution (called the trustee) to manage that property for the benefit of another (called the beneficiary). It sounds simple, and it can be, but it can also be very complex.

Given this, there are some misconceptions about trusts, which can lead to trusts being unused or misused. Here are just a few.

Misconception one: Most trusts have saving on estate taxes as an objective.

Whether they do or not really depends on the type of trust and the size of the estate. Whether a trust will affect estate taxes also is based on the tax law in effect at the time the grantor dies.

Besides estate taxes, trusts also can save on income taxes. One example is the charitable remainder trusts (CRT). These function by having the donor put assets in the trust that qualify for an income tax deduction. By doing so, it also removes assets from the donor's estate and thus can save estate taxes. The CRT pays out regular income to the donor, and then upon the donor's death, the assets pass to the charity.

Misconception two: My estate is too small to worry about having a trust.

This is the time to take a reality check on the size of your estate, adding together your assets, retirement plans, life insurance and the value of your home. Your estate might be larger than you realize. No matter the estate size, trusts can be used to manage assets and control their distributions in a private way, as they avoid the public exposure of probate court.

As an example of controlling assets, if something happened to you, do you really want your 20-year-old child to have control of your estate? Perhaps you have children from another marriage whom you would like to benefit. Trusts could even benefit you. They can have provisions to manage your money should you become incapacitated and are no longer capable of doing so yourself.

Misconception three: By creating a trust you are giving up flexibility.

This isn't necessarily the case. Revocable trust provisions can remain under the control of the trust creator and be changed as he or she sees fit during the person's lifetime.

Misconception four: You should always name a friend or relative as trustee.

The job of a trustee is to manage and distribute trust assets according to the terms of the trust document. Not everyone is up to the task of being a trustee. Failing to administer the trust properly can be costly from an investment or tax standpoint. An older family trustee might die before the trust provisions have been carried out. Naming a successor trustee is wise just in case the first is unable or unwilling to serve.

It is often a prudent idea to have professional management for a trust, either as a co-trustee or the sole trustee. Just be sure to include provisions in the document to remove a professional trustee if that person isn't doing his or her job.

Misconception five: My trust protects me from creditors.

While some trusts are specifically designed to protect a grantor from creditors, not all do so. Asset protection can be very complicated and expensive, so if you need to have these protections, make sure to deal only with an expert in the area.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.

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