You may think of a trust as something that only privileged East Coast families like…the Bushes make a part of their life. A trust is merely a legal arrangement in which one person puts away property or financial holdings or just plain cash for another. When that other reaches a certain age they may get access to all or some of the cash, property or financial holdings. Yes, true, it’s mainly a tax dodge for the superrich, but it needn’t be. Here’s a few little items about trusts that you should know before taking advantage of its many positive aspects.
What’s in a trust?
Almost anything. A trust can hold a piece of land or claims to a copyrighted work of art. (See Goodnight Moon article for an excellent lesson in how trusts can go horribly wrong.) Most trusts include liquid assets, bonds, stocks and/or deeds.
What if the assets in a trust are destroyed?
Providing stock in Lehman Brothers may have seemed like a great idea 19 years ago when you put it into a trust for your bouncing baby boy or girl to take hold of when they reached legal age. Of course, we all know how that young child would have ended up as a teenager looking to buy a sports car with all the money that came with cashing in Lehman Brothers stock. If property is destroyed before the beneficiary comes of age, the trust automatically ends. In some cases the beneficiary might want to try suing on grounds of negligence or, possibly, suing those guys at Lehman Brothers and George W. Bush for making it impossible for anything good to have come from holding Lehman Brother stock. It’s quite possible a lawsuit for negligence would win as long as your judge isn’t a Republican.
Most trusts should probably be discretionary. All this fancy legal term means is that the beneficiary benefits from the trust only as much as the trustee sees fit. A discretionary trust would mean alcoholic beneficiaries like young George W. Bush would only receive money from Daddy George if he gave up the spirits and cocaine.
The spendthrif trust means that any creditor of the beneficiary looking to use the trust to settle debts cannot legally receive any money that comes directly out the trust. As you might imagine, Big Business wins in the end as they can get their debt collected once the trust changes hands from the trustee to the beneficiary.
The trustee in a support trust pays the beneficiary a kind welfare for the superrich. The beneficiary may only receive money for things like education or paying rent or a mortgage or other means of support.
Setting up a trust for a young kid seems like a natural enough thing to celebrate and look forward to. When that young kids winds up behaving like Dubya and embarrassing the family, however, some trustees might wish they had the power to revoke the trust partially or in its entirety. Unless you specify that addition of power of revocation, you can forget about. The best route to take is remembering that even guys Ted Bundy, Adolf Hitler and Dick Cheney were adorable little toddlers at one point.
Sometimes it’s not the recipient of the trust that causes embarrassment, but the trustee. The beneficiary can file a motion to have the trustee replaced on charges of incompetence or ill-advised investing of the assets in the trust. You can’t get the trustee out of the picture merely because you want someone to take over with less strict rules for when you get your grubby little hands on your trust’s assets.