Trust in trusts, but verify the documents with attorneys you trust

Dear Mr. Berko: Mom and I have assets worth about $1.5 million, and we are thinking of having a trust for several reasons: in case we get sick and can’t manage our money, to save taxes and to make sure our assets are distributed according to our desires when we die.

Dear Mr. Berko: Mom and I have assets worth about $1.5 million, and we are thinking of having a trust for several reasons: in case we get sick and can’t manage our money, to save taxes and to make sure our assets are distributed according to our desires when we die.

Can you tell us the difference between two trusts: revocable and irrevocable? Can you tell us just what a trust is? And can you tell us if we should have a revocable trust or one that is not revocable? We are thinking of doing this ourselves without lawyers, whom we learned to distrust.

E.T.

Harrisburg

Dear E.T.: You’ve asked me what seem to be simple questions. And, while I know the answers, I’m not comfortable responding without consulting an attorney and having my comments viewed by an attorney. Trusts, wills, contracts, etc., plus all that other legal slough and swamp mud, is the provenance of lawyers.

Knowing that if my response was not 100 percent complete I’d get dozens of legal nastygrams, I decided to ask my daughter, who’s an attorney, and my son-in-law, who’s a judge. Both have reviewed my comments. So now I will respond in simple, shirt-sleeve English rather than con you with lawyer jive that gives them an excuse to charge you $250 to $500 an hour.

• A trust is like an empty box that you and your wife fill with things such as insurance policies, real estate, certificates of deposit, stocks and other assets. The filled box or trust is given a legal name, such as the John and Mary Smith Trust. And the trust holds the title to its assets in the name of the John and Mary Smith Trust, subject to your written agreement about how the assets are to be used. This agreement tells us who established the trust (John and Mary), names all the assets in the trust (stocks, real estate, etc.) and names the beneficiaries (family members, friends, charities, etc.) who are to receive the proceeds when you pass.

The trust also denotes a “trustee,” someone you have confidence in who can manage the trust’s assets in case John and/or Mary lack the capability to make decisions. That’s a trust, pure and simple, and it doesn’t have to be any more complicated. However, according to my daughter, the complexity of a trust is in direct proportion to two factors: one, the size of the lawyer’s staff, and two, the amount of money the lawyer wants to charge you.

• A revocable trust is basically an agreement that can be changed or terminated during John or Mary’s lifetime. It permits John and Mary to make all the decisions about the division, employment and use of the assets held in the trust. Of course, if John and Mary are unable to manage the trust’s assets, the named person or persons whom you trust (trustee) will manage the assets on your behalf. The trustee will manage the assets subject to the terms established by John and Mary, which are spelled out word for word in the trust.

In most states, a revocable trust, because it’s a private agreement and not a public record, does not disclose who receives the assets when John and Mary pass. I don’t know where you got this bee in your bonnet, but a trust does not reduce your income tax liabilities.

• An irrevocable trust cannot be undone. In simple language, the terms upon which John and Mary established the trust cannot be changed, amplified or canceled by John or Mary. It’s as final as breaking an egg or ringing a bell. There are always exceptions, but I’d have to charge you $500 an hour to enumerate them. The (taxable) income earned by the trust’s assets is distributed to John and Mary or other named beneficiaries, and they must pay taxes on those proceeds. And if income is retained by the trust, the trust must pay the taxes, not the beneficiary.

The same rules apply to the revocable trust. However, when assets are transferred to an irrevocable trust, John and Mary may have to pay gift taxes. So my son-in-law, the judge, says, “The transfer should be structured to qualify for the annual and lifetime gift tax exclusion.”

Oftentimes, an irrevocable trust will purchase a life insurance policy, which is used to create liquidity for John and Mary’s estate without adding to their taxable assets. The trust becomes the beneficiary of the life policy, while John and Mary’s family members are named as beneficiaries of the trust.

That’s it, plain and simple. However, as Ronald Reagan once said, “Trust, but verify.” See an attorney, and don’t do this yourself. There’s too much money at risk, and if you make a mistake it can be costly.

And if you have an attorney prepare the document, be sure to ask what the costs will be prior to the document preparation. In fact, the costs for the same trusts can vary among attorneys by a substantial amount and by how much the attorney thinks you can afford. I’d advise you to visit with several attorneys and get some ballpark numbers.

  • Malcolm Berko responds to letters he receives; send questions to Berko, c/o Central Penn Business Journal, P.O. Box 1416, Boca Raton, Fla. 33429. He answers questions by mail or in his column for free. If readers want in-depth analyses, they may be asked to become clients.

    ©Copley News Service

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