Trusts are an effective, but sometimes misunderstood, estate planning device. The uses of trusts vary—they can provide multiple benefits, including estate planning benefits, wealth perpetuation, and asset protection.
But what is a trust and how does it work?
A trust is, at its essence, a gift with strings attached. Two primary parties exist when a trust is set up: the trustee who holds the title to the trust property?and the beneficiary who receives the beneficial interest in that property. Between the two of them there is a legal binding agent, a glue, known as a fiduciary duty. A fiduciary duty is a legal responsibility to put the needs of another ahead of your own. This means the trustee has to always be looking out for the best interests of the beneficiary.
Trusts are typically set up by individuals, who are also known as donors. Both in the lifetime of the trust creator, and after death, the trust can take title to their property.
Next, you have a trustee who manages the property and a beneficiary who benefits from the property. Think of a house for a moment. If you had a house within a trust, the trustee holds the title for the house, but the person who’s living in it receives the benefit of living there. Trusts are often set up for people who are vulnerable. In this example, imagine the occupant of the house is in need of some form of assistance. They might need help paying bills. They might need help with the maintenance, getting heating oil, paying the utility bills, or any other tasks that are necessary to maintain the upkeep of the house. In this scenario, a trust is the perfect vehicle to take the title and property of the house and then direct the beneficial interest of the property to the beneficiary.
Where did this idea of a trust originate?
The history of trusts is somewhat murky, but there’s a great analogy. Think of a knight in the Middle Ages, who was heading off to join a crusade to the Holy Land.
He has his castle and lands, and he knows he’s going to go to a far-off land and will be gone from England for seven years. So the knight goes to Friar Tuck and says, “Friar Tuck, while I’m gone, I would like you to look after my castle. I would like you to look after my farmers who are raising the crops, whose crop yields benefit my castle. I want you to be in charge of—essentially—running things; I would like you to run my feudal kingdom while I am gone, directing the benefit to my princess and baby prince.”
Friar Tuck says, “Ok.” So Friar Tuck takes the title and inherits responsibility for the castle. He owns the property, in essence, while the knight is gone and he directs the beneficial interest to the beneficiary: the princess and the baby prince. The knight analogy is a good one, it’s a great way to think about what a trust is, how they work and why they can be useful.
How do these origins affect trusts today?
Trusts still have this idea of principal and income, which goes back to feudal lands. Think again about this castle, which is built on fertile farmland to provide crops for its residents.
The farmland is what’s called a trust principal. The crops that spring from it are regarded as trust income. The analogy works for modern financial instruments. Think of a stock certificate or any form of stock ownership today. If you own something like AT&T or another blue-chip stock, you own the stock share itself, which has value.
But what do stocks have instead of crop income? They have dividends.
Another example would be bonds, which also come with a principal—the amount that you will receive back when the bond matures. The income comes in the form of coupon payments coming off the bond.
What’s the first step if you want to set up a trust?
“Trust” is one of those words that seems to intimidate people. Don’t be intimidated. It all starts with a simple conversation. Somebody walks in, sits down, and starts out with a conversation. “What are your concerns? Your goals? What do you need? What do you think you need?” People often have misinformation or misconceptions about the estate planning process, such as what a trust is or what they can do to help themselves out.
When somebody comes in to talk about a trust, it usually helps to have a list of assets either in their head or on a piece of paper they bring it with them. They will know their family history and story. After that, it’s a question of how their ideas and ideals can be translated into the future, efficiently.
Does it take multiple conversations for people to really think about what they want?
Yes. Our department acts as a sounding board as people develop these ideas and plans, but we do not, in fact, create trusts. We administer the trusts as they go forward. Attorneys—capable trust and estate attorneys—will make up the actual instruments.
There will be a conversation, a brainstorming period, a discussion; some ideas that then get put on a piece of paper as an outline of what sounds right. After that, the instrument is drawn up, brought back to the bank, and put into operation.
So you don’t need to file it anywhere? It’s saved at the bank?
It depends upon the complexity of the situation. Estate planning, by and large, isn’t a fast process. It is better to be staged, deliberate, and thoughtful as you create these documents. If you do, you can incorporate the flexibility necessary for them to perpetuate.
To be candid, estate planning is not a process you probably want to do too many times in your life. But the good news is that banks see this process all the time.
When somebody says, “I need to set up a trust, I need to set up an estate plan. I have a complex financial problem and I don’t know what to?do about it.” Our department can walk them through a problem that they can’t quite get their head around. Because we have so much estate planning experience, our trust officers can take an opaque problem and offer a tangible solution.
Do you have to have a certain amount of money?
Generally speaking, trusts aren’t right for everybody. But say, for example, you have an animal in your life that you love.
In that type of situation there are pet trusts, which are allowed in Massachusetts. Let’s say you were so concerned about your dog that you wanted to make sure his care was of a certain standard. You wanted to make sure somebody gave him a couple of walks a day, that he had?his favorite squeak toy that he lived in a home where he was comfortable and was loved. That is something you could provide for in a trust.
People create a trust just for their dog or cat incase they passed away suddenly. The trustee might go out to where the dog now lives, three or four times a year. They will go out to the farm, speak to the nice lady the pet lives with now, check up on him, make sure he’d been to the vet, make sure he was happy, living a good life, and in circumstances that met your standards.
One misconception about trusts is that trustees are often in some ivory tower, but in fact they get out and get their hands dirty. They roll up their sleeves, visit properties, talk to people, and make plans. It’s a very hands-on business.