ShareThis Page

Make a trust last for heirs

| 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.”

TribLIVE commenting policy

You are solely responsible for your comments and by using you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.