Planning Points: Trust funds not just for the wealthy

As the Baby Boom generation matures, the trust vehicle is being utilized more and more to house the trillions of dollars in assets expected to be passed down to the next generation. Many of those assets will be passed down in trust funds — more than in any other generation.

People often associate trust funds only with the wealthy. But a trust can be an effective financial tool for many people in many different circumstances.

A trust is a separate legal entity that holds property or assets of some kind for the benefit of a specific person, or group of people, known as the beneficiary. The person creating a trust is called the grantor, donor or settlor.

When a trust is established, an individual or corporate entity is designated to oversee or manage the assets in the trust. This individual or entity is called a trustee.

A trustee can be a professional with financial knowledge, a relative or friend, or a corporation. There are pluses and minuses to each type of trustee.

An individual trustee may provide a more personal touch but may die or move away. A corporate trustee may be less personal but provides experience, investment skills, permanence and impartiality.

More than one trustee can be named by the grantor if he or she wishes.

Two forms

There are typically two basic forms of trusts: after-death (or testamentary) and living (or inter vivos).

An after-death trust will come into existence, usually by virtue of a will, after a person's death. The assets to fund these trusts usually go through the probate process. In certain states, the trusts may be court-supervised even after the estate is closed.

An example of an after-death trust would be a mother leaving land to a trust benefiting a child in her will. The will establishes the trust to which the land is transferred, to be administered by a trustee until the child reaches a stated age, at which point the land is transferred to the child outright.

A living trust, on the other hand, is a trust made while the person establishing the trust is still alive. In this case, a mother could establish a trust for her child during her lifetime, designating herself as trustee and her child as beneficiary. As the beneficiary, her child does not own the property but can receive income derived from it.

Living trusts can be revocable or irrevocable.

The most popular type of trust is the revocable living trust, which allows the individual to make changes to the trust during his or her life. Revocable living trusts avoid the often lengthy probate process but, by themselves, don't provide shelter for assets from state or federal estate taxes.

When an irrevocable living trust is set up, ownership of the assets is turned over to the trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can the grantor make changes.

This type of trust often is used by individuals with large estates to reduce estate taxes and avoid probate. However, if the grantor names himself/herself as trustee or is entitled to trust income, the tax benefits generally would be lost.

Your wishes

Establishing a trust requires a document that specifies your wishes, lists beneficiaries, names a trustee or trustees to manage the assets and describes what the trustee or trustees may do.

For a living trust, you can name yourself as trustee, but if you do, you also should consider naming a successor trustee to take over if you should become disabled or when you die.

Once the document is completed, you must transfer the assets to the trust. Keep in mind that, in the case of certain assets, such as real estate, you may incur fees and transfer taxes.

Some states require you to file a trust document with the state. To find out about your state's laws regarding trusts, talk with a lawyer who specializes in estate planning.

Pete Alepra is managing director-financial adviser with RBC Wealth Management. Comments: (319) 368-7023; peter.alepra@rbc.com. Investment and insurance products offered through RBC are not insured by the FDIC or any federal agency, are not deposits or guaranteed by a bank and are subject to investment risks.