By Jeffrey J. Buonforte, CERTIFIED FINANCIAL PLANNER™
As part of the estate planning process, you may consider setting up a trust fund. A trust fund is a financial arrangement where a third-party, the trustee, holds money or other assets for your beneficiaries. If you’re thinking about setting up such a fund in New Jersey, here is important background.
Why set up a trust fund?
Trust funds are used when you want to leave money to minor children, other individuals, or charities, but you don’t want to distribute the funds in a lump sum. This allows the money to be kept safe, and even earn interest or grow while it is waiting for distribution. You can specify the conditions on how and when the money is disbursed, such as when a child turns 21 or decides to attend college. One advantage of a trust is that it is not subject to the same taxes as the rest of your estate. Another advantage is that trust funds don’t go through probate, the process by which assets are distributed via a will. You don’t have to be wealthy to set up a trust, but you should have enough money to make the time, effort and cost worthwhile.
What is a trustee? How does a trustee differ from an executor?
The person overseeing the trust fund is known as a trustee. A trustee is different from an executor
, who is the person overseeing the estate. An executor might be in charge of transferring assets to a trust account, to be subsequently managed by the trustee. An executor’s duties are shorter term, and typically are completed in about a year. A trustee’s duties can continue for a lifetime.
What does a trustee do?
A trustee’s duties include paying bills, investing money, filing taxes, managing and disbursing money. The trust is a binding legal contract so the trustee has a legal obligation to follow its instructions exactly as specified.
Who can be a trustee in New Jersey?
A family member or friend can serve as a trustee; so can an institution such as a bank or trust company. There are pros and cons to each choice.
A family member or friend usually has a better understanding of your wishes than an institution. They also may not charge you a fee. The downside of choosing a relative or friend is that they may lack experience. They also tend to get more involved in family conflicts if those arise. If you choose a relative or friend, make sure that you also name a successor in the event of death, incapacity or divorce. You can also name an institution as a successor.
An institution will charge a fee, but provides professional expertise in investments, tax preparation, management and accounting. Institutions usually provide longevity, and can manage a trust for decades or longer. The contact at the institution is an impartial third party and that can be a benefit when managing family affairs.
How much does it cost to hire a trustee?
Trustees are allowed to charge up to six percent of the income earned by the trust each year.1
If there are co-trustees, that amount is increased by one-fifth.
Tips for choosing a trustee
You want someone who is honest, who will make sound decisions, and who is highly responsible and organized. If you’re preparing for a future transfer of wealth
, and need to select a trustee, follow these tips, or if you would like to speak with someone about estate planning
*, contact me at 866-224-1379 or email me
- Make the choice a family affair. If your beneficiaries are old enough, involve them in the choice. After all, they will be the ones working with the trustee.
- Take into account the age and health of your trustee. You want a trustee that is likely to be around for a long time to manage your trust fund.
- Consider geographic proximity. It’s sometimes easier to manage a trust fund in the same general area as the beneficiaries.
- Consider co-trustees. If you don’t have the ideal trustee candidate among your relatives and friends, consider two candidates as co-trustees. This will encourage accountability to each other.
- Determine the value of the trust. If the trust is worth more than a few hundred thousand dollars, choose a professional. The trust is likely to be complicated, and could be a burden for a family member or friend to manage.
- Give wide latitude to the trustee. Anything you put in writing must be followed. Therefore, build flexibility into your instructions (e.g. don’t specify certain investments; the 8-track tape was once considered “a sure moneymaker”). Know that the economy and world continue to change.
- Consult a lawyer. The IRS prohibits spouses as co-trustees in some tax-saving trusts. Your lawyer can tell you if your trust fits these criteria.
- Pay attention to tax implications. Get an estate lawyer’s professional advice when you set up the trust. There are ways you can hold the assets so your trust isn’t overly taxed.
- Appoint a trust protector. This is someone who looks over the trust periodically to make sure it is being managed correctly.
- Include a procedure to remove a trustee. Give removal power to an outsider, such as your lawyer. That way, if beneficiaries are unhappy with how the trust is managed, they have some recourse. And it takes the argument out of the family into a professional realm.
*Securities are offered through Essex National Securities, LLC, member FINRA & SIPC. Insurance products are offered through Essex National Insurance Agency, Inc. Neither are affiliated with Lakeland Bank. Products are not guaranteed by the bank, not FDIC insured, not a deposit, not insured by any federal government agency, and may lose value including loss of principal.
1 Who gets paid what? Executor, Administrator, Trustee and Fiducairy Commissions in NJ, http://www.njelderlawestateplanning.com/2011/10/articles/probate-and-estate-administrat/who-gets-paid-what-executor-administrator-trustee-and-fiducairy-commissions-in-nj/