For many people, particularly the elderly, the prospect of managing their finances can be worrisome.
Widows, for instance, often find they have inherited sizable and complicated investment portfolios. They know little about handling these portfolios, because they were managed by their husbands. Sometimes, grown children who have to take care of their parents do not have the time or expertise to manage their mother's or father's large assets.
For cases like these, a good long-range solution might be a revocable living trust. As the name implies, it is an arrangement that provides income to the older person while a banker, money manager, or lawyer handles the assets on a day-to-day basis. The revocable part indicates that if the elderly person or the children decide they don't like the arangement or want to appoint a new trustee, they can do so at any time.
The first step in setting up a living trust is to find a lawyer or bank trust officer who has plenty of experience with these trusts. Sometimes, people who have asked their lawyers about living trusts have gotten negative reviews on them. The problem may be that living trusts are fairly complicated and some lawyers may not want to bother with them, says Sheila Terry, a financial planner in the White Plains, N.Y., office of Paine, Webber, Jackson & Curtis. Drawing up one of these trusts takes more knowledge of estates and trusts than the simple wills most lawyers can do.
''We happen to think living trusts are very good,'' she said. ''But a lawyer must be a specialist in estates and trusts.'' If you do not know a lawyer who can set up a trust, a bank trust officer or financial planner should have the names of several to choose from.
Although the primary purpose of a living trust is to guarantee an income to the older person while he is alive, the trust can remain in effect after death. That way, the distribution of income from the person's estate is done privately, instead of through a will, which is a public document, available to anyone who wants to go to a courthouse to look it up. Not having to go through probate should also speed up the estate settlement process.
This is another reason for having an experienced lawyer draw up the trust agreement; the person must be familiar with applicable state and federal estate tax laws. An estate that goes to heirs through a trust may be taxed differently from one that passes by way of a will. The lawyer should also be aware of any legal questions that may come up if the trustee is in one state and the older person lives in another.
Although a lawyer is useful in setting up the trusts, they are usually managed by nondeposit trust companies or bank trust departments. Depending on where you live, the minimum estate that one of these institutions will manage ranges from $100,000 to $250,000. Some are even higher. Some banks, however, have arrangements to pool trusts so that they are only managing one investment pool, while distributing the income to several clients.
The use of a living trust is not limited to older people. They can also be helpful for someone who has inherited a great deal of money and doesn't know what to do with it. A trustee can handle the windfall until the heir decides on any major investments or purchases. Or the trustee can manage it for the rest of the person's life, providing him with the monthly income. And, like an older person, if the heir doesn't like the trustee's financial performance, he can find someone else.
Fees for managing a living trust reflect the size of the assets being handled. Expect to pay about 1 percent of the trust's assets, with a minimum fee of $2,000 or $3,000.
There is another kind of trust, one that goes by the similar name of irrevocablem trust. In this case, a parent is making an outright gift. This has advantages when it comes time to pay estate taxes, but its major drawback is the lack of a ''change your mind'' feature. In almost all cases, once the irrevocable trust agreement is signed, that's it. If it is your estate that is going into the trust, you will have to decide if letting your heirs pay lower taxes is worth the price of losing control of your money. Last year's tax law, which permits increasingly sizable estates to be passed on free of federal taxes , makes irrevocable trusts even less attractive.
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