By Nathan Schnackenberg
Nathan Schnackenberg is Chief Operating Officer of Secured Alliance, Secured Futures, and Good Shepherd Fund.
There are many types of trusts out there, as well as a virtually unlimited ability to tailor the provisions of any third-party trust to the grantor’s (person setting up the trust) unique specifications. With all the names, titles, and legalese, it’s no wonder most of us get confused.
A trust is the legal document that governs how a third party (a trustee) is to own and administer certain assets on behalf of another individual. The trust document spells out the rules the trustee must follow in the administration of the assets held “in trust.” Failure to follow those rules can land a trustee in hot legal water, so it’s important that trustees be selected for their professionalism, knowledge, and sharp attention to detail.
Every trust is unique and has its own unique tax identification number issued by the Internal Revenue Service so banking and investment activities can be initiated by the trustee. Like people, trusts are often allowed to receive income (in the form of deposits, contributions, or investment returns) and pay expenses (such as phone bills, air and hotel costs, legal fees, and taxes), and trustees are responsible for keeping diligent records and reporting the financial activity of the trust to the beneficiary and/or his or her surrogates.
Trusts are often set up by a parent or grandparent as a vehicle to transfer wealth to family and relatives. The reasons for setting up a trust, as opposed to giving the inheritance to the individual directly, may include:
- A belief that the beneficiary of the windfall may not have the maturity, capacity, or good sense to manage the sudden influx
- A feeling that the beneficiary of the windfall may become the target of financial abuse (normally from friends or nefarious relatives) in the form of quid pro quo type “pay me to be your friend” scenarios
- The beneficiary relies on means-tested government benefits (such as SSI or Medicaid), and taking direct receipt of an inheritance would disqualify him or her from benefits eligibility
- The beneficiary is a minor (under the age of 18)
Beyond scenarios that center on what’s best for the beneficiary, there may be other reasons to set up a trust, such as:
- The estate may be large or complicated, and a professional is needed to properly oversee the marshaling of assets and take fiduciary responsibility for the investment activities
- To avoid lengthy or costly probate engagements, as may be the case with a contested will
- To potentially save on taxes
- To establish, before the grantor passes away, a team of fiduciaries who are knowledgeable and equipped with pertinent family or historical information that enables proper long-term administration, which may include opting for professional fiduciary services
Regardless of the reason, trusts can save a lot of time and money for everyone involved. Good Shepherd Fund, a California-based nonprofit organization that has been serving as trustee for thousands of clients across several decades, is happy to review a nomination to serve as trustee or successor trustee. Please find us at www.GSFCare.org for more information, or give us a call at 408-573-9606.