Make a trust last for heirs
By Pamela Yip
Published: Sunday, Feb. 24, 2013, 9:00 p.m.
The whole idea of setting up a trust is to provide for your loved ones after your death. But how do you ensure that the trust doesn't run out of money?
The keys, financial planners say, lie in setting up the right trust to accomplish your goals, being explicit in your directions about how the funds are distributed and ensuring that the trust's assets are invested prudently.
“Serious consideration needs to be given as to the purpose of the trust, which in turn can drive the duration of the trust,” said Norm Lofgren, an estate planning attorney at Looper Reed & McGraw PC in Dallas.
You need to ask: Are your heirs ready to manage the money? Would your child spend your hard-earned cash on a sports car or would he spend it responsibly?
Once you've settled on what you want the trust to do, you can take steps to ensure that it has enough money to carry out its purpose.
CONTROL THE BURN RATE: “The burn rate is essentially determined by what are called distribution standards in the trust,” said R. Hugh Magill, chief fiduciary officer at the Northern Trust Co. The distribution standards are the terms under which the trust's assets are to be distributed.
“If you wanted to have a trust grow more, you would narrow those distribution standards,” he said.
For example, you can designate that the money be used only for the education and health care of the beneficiary, not for “general support or lifestyle.”
INVEST PRUDENTLY: “This is similar, yet different, to the specter of retirement assets running dry before you die,” said Rick Salmeron, certified financial planner at the Salmeron Financial Network.
“Similar because beneficiaries don't want the pot to empty,” he said. “Different because the time frame involved can be much, much longer. Beneficiaries of trusts can be young children, so you're dealing with potentially multiple decades of time.”
Salmeron said people who want to generate more yield and income for a trust “may be tempted to buy long-term bonds, but that could prove disastrous when interest rates eventually start to rise. When rates rise, bond values will fall, so your principal would take a hit.”
Then there's inflation.
SPELL IT OUT: “The trust instructions need to be clear that preservation of capital is a primary concern,” said Michael Wald, senior counsel and estate planning attorney at Underwood Perkins PC in Dallas. “Once this is clearly stated, the trustee is under a fiduciary duty to manage the trust to achieve this goal.”
You could place limits on how much money in the trust can be taken out each year, he said.
“For example, financial planners say that a 4 percent burn rate over time will lead the trust to not be depleted,” Wald said. “That is, over a long period of time, the gains on the trust will keep pace with a 4 percent withdrawal rate. This rate or something lower can be written into the instructions of the trust.”
LEAVE WIGGLE ROOM: The trust's instructions need to be flexible “so that the trustee has some discretion, and they're not absolutely locked in,” said Samuel E. Long Jr., estate planning attorney at Shackelford Melton McKinley in Dallas.
“Because if you say, ‘The trustee shall distribute $25,000 a year,' if the investment earnings are poor, it may well run out of money before the time gets there.
“You don't know what the investment earnings are going to be of the assets in the trust. You don't know what it's going to cost to live; you don't know what the income tax rates are going to be at that time. You don't know what kind of other assets the beneficiary may have or (what kind of) income.”
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