OceanFirst Financial : Ten Questions About Trusts

May 22, 2024

Once upon a time, few Americans had access to, or even knew about, financial tools like 401(k)s, college savings plans, and reverse mortgages. Today, many families turn to these products without a second thought. The same might be said for trusts. Often associated with the vast wealth of families like the Kennedys and the Rockefellers, trusts are finding a place in more Americans' estate plans, no matter what the size of their assets. We are always pleased to have the opportunity to explain a subject that is, for too many people, shrouded in mystery.

Here are some of the more frequently asked questions.

1. How much will I save in taxes with a trust?

Trusts are not primarily about saving taxes, although they will always be designed with taxes in mind. Many ordinary trusts provide no income tax savings at all, with the conspicuous exception of irrevocable charitable trusts. For the largest estates, trusts can be used to reduce the cost of future estate and/or inheritance taxes. Although that is a good goal, the preservation and management of an inheritance for a beneficiary is normally the most important consideration.

2. What sort of investment return will a trust deliver?

No simple generalizations are possible about investment returns from trusts, because trusts may invest in anything. The fact that assets are being managed through a trust tells one nothing about the assets themselves. In the typical case, a trust will contain a diversified portfolio of stocks, bonds, and mutual funds. An asset allocation plan will be developed for the trust, consistent with the purposes of the trust.

3. Then what is the purpose of the trust?

A trust provides for family financial protection. It creates a structure for delivering financial resources to multiple beneficiaries over a span of time, sometimes generations. Current beneficiaries receive the trust income, and others receive the trust principal in the future, when the trust terminates. Many trusts also authorize the distribution of principal to current beneficiaries in some circumstances. See the checklist below for samples of specific trust purposes.

4. How is the income from a trust determined?

Traditionally, trust income consisted of interest and dividends. Capital gains and losses were charged to principal. However, in this century there has been a trend toward looking at total return from an investment portfolio. The short answer these days to this question is: exactly in the way that the grantor wants the income to be determined. Some grantors have provided for "unitrust" income interests. For example, a trust could pay the income beneficiary 4% of its value, determined each year. Some have been satisfied with the traditional definitions of income. Still others have given their trustees the flexibility to make adjustments each year between the income and principal of a trust. Many states have enacted laws in recent years encouraging this latter approach.

5. How is a trust different from other investment accounts?

A trust has an independent legal existence that makes it durable. It can survive the incapacity or death of its creator. The trustees continue to manage the trust according to its stated purposes, stepping into the shoes of the person who created the trust.

6. What is a living trust? I've seen lots of advertisements about them.

Living trusts are so named to distinguish them from testamentary trusts, which are created with a will and take effect after death. A living trust goes into operation during life. Usually, such trusts are revocable and created for the benefit of the grantor. Living trusts are popular for three key reasons:

• Sound asset management. The trustee will provide professional supervision of the portfolio, consistent with the grantor's vision.

• Protection in the event of incapacity. Trust management continues even if the grantor becomes unavailable for any reason, such as major health problems.

• Probate avoidance. Estate settlement is necessarily a public process, and it can be a lengthy one. Living trusts normally avoid probate completely, creating a zone of financial privacy. They continue to function, providing financial resources to beneficiaries, while the estate settlement process continues.

7. Will a trust protect assets from creditors?

As a general rule, one cannot use a trust to shield assets from one's own past or future creditors (although a few states are experimenting with changing these laws as to future creditors). One can, however, use a trust to protect assets from the claims of beneficiaries' creditors. The traditional example is the wayward son-in-law. A concerned parent might designate a daughter and grandchildren as beneficiaries, to avoid giving the son-in-law a chance to squander the fortune. But the roles could easily be reversed to, for example, protect a son's inheritance from divorce claims.

8. Can I change my mind after I create a trust?

That depends upon what sort of trust we're talking about. A charitable trust is normally irrevocable and can't be modified. A trust in a will can be changed simply by amending the will. Usually, this question arises about revocable living trusts, and in that case, the answer is yes-you remain in full command. You can change the beneficiaries, add assets, withdraw the assets, even terminate the trust should you decide that it is not right for you and your family.

9. Whom should I choose as my trustee?

Choose us. We have the financial strength, the investment capability, and the experience that you need to make implementing your trust plan a success. You want a trustee who will be fair and impartial, and more important, you want the beneficiaries to recognize and respect that impartiality. That's us. Your trustee needs to manage your trust all year long, not be away on vacation or dealing with other pressing business. Again, that's us.

How can I learn more about trusts?

Make an appointment to meet with one of our trust professionals at your earliest convenience. We hope that this brief summary has stimulated your thinking and triggered at least ten more questions about how trust planning might benefit you and your family. One of our officers would be pleased to meet with you to discuss your situation and assemble the information that you need to move ahead with a trust of your own.

Checklist of possible trust purposes

• No single trust can do everything, but for almost any imaginable need, there is a matched trust solution. How many of these objectives do you have?
• Continuous financial management in the event of incapacity
• Professional investment management
• Financial support for a special needs person
• Financial privacy
• Probate avoidance
• Lifetime financial protection for a surviving spouse
• Asset management for inheritances
• Creditor protection for heirs
• Inheritance for children from an earlier marriage
• Lifetime protection for a disabled child
• Future legacy for charity
• Current income for charity, keeping assets in the family at lower cost
• Protection from current and future estate taxes

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