Setting up a trust

Oran A. Hall, Personal Financial Adviser

QUESTION: I am 43 and was recently educated on trust funds during a conversation with my peers at a function. Since then, my interest has been growing and I am seriously thinking about starting one.

I have a few assets, including my residence, properties, and cash. I have two children, ages 21 and 15, but I also have a family that I don't think would treat my children well if, God forbid, anything should happen to me.

I have a will and am seriously thinking about getting a trust fund started. I want to leave my assets and money to my children and a charity and would appreciate very much if you could educate me further.

How do I get a trust fund started?

Who would be my primary adviser?

What kind of trust fund would you recommend?

Would I still earn interest on the money I have as investment if I started a trust fund?

Could I still have an executor for my trust fund?

Please advise me on any other valuable information that you think I need to know.

- Sandy

PFA: As an estate-planning tool used to control the distribution of assets, a trust may be used to supplement or replace a will, as well as to help manage property during one's lifetime.

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.

The terms of the trust are laid out in the trust agreement.

a legal relationship

The trust is essentially a legal relationship between the trustee and the settlor, who must be of the age of majority, not be legally restricted, or mentally incompetent.

The trustee may be a financial institution or individual, including the settlor, in which case it is advisable to name a successor trustee in the event of the incapacity or death of the trustee. The trustee is usually paid, but may be sued if the interests of the beneficiaries are compromised.

The trustee may be given full discretionary powers to act on behalf of the beneficiaries, including distributing the income and capital of the trust to any particular beneficiary. But in other cases, the trust deed may be very specific about the powers of the trustees.

Income beneficiaries receive interest and dividend income earned by the assets of the trust. The trust document may, however, give the trustee the power to allow the income beneficiaries to encroach on the capital of the trust.

Capital beneficiaries are entitled to the capital of the trust. This may become available to them only after the death of the income beneficiaries, or for certain specified purposes, such as education.

A living, or inter vivos, trust comes into effect while the donor is still alive, and because the trust assets are excluded from the will, the lengthy probate process may be unnecessary. There are two types: revocable and irrevocable.

The revocable trust allows the settlor to change the terms of the trust, the trustee, and trust property, for example, during his or her lifetime.

It often acts as a supplement to a will or as a way to name a person or institution to manage the grantor's affairs in the event of incapacity.

Assets in an irrevocable trust cannot be removed; neither can changes be made by the settlor. This type of trust is generally used by persons with large estates to reduce estate taxes and avoid probate.

A major drawback of living trusts is the risk of losing control over trust assets and income. Others are setting up, legal, accounting, asset transfer, and ongoing administration costs, tax reporting, and record-keeping.

testamentary trust

A testamentary trust comes into effect after assets have been transferred to the trust according to the will of the deceased upon completion of the probate process.

Trusts can be very complicated and are best set up with the advice and assistance of experienced trust attorneys or trustee corporations, which are often financial institutions.

Trusts are not suitable for everybody but are useful when assets must be managed on behalf of a child or spouse who suffers from disability or mental incapacity, or lacks financial-management skills, lacks discipline, or who needs protection against other persons.

They may also be used to control shares of a corporation which are put in them, to keep the arrangement between the grantor and beneficiaries confidential, and to protect assets from creditors in some circumstances.

Whatever your decision, you need a trustee for the minor.

Oran A. Hall is principal author of "The Handbook of Personal Financial Planning". For free money management advice, email: finviser.jm@gmail.com.