Trusts That Misfire

There are fine benefits - but also some tricks - that crop up in trusts. Affluence and the shape of the tax laws have combined over the last 10 years to make trusts about the most popular device in long-range personal financial planning. In any meeting you have with financial advisers, you'll find that trusts won't stay out of the conversation for long. There's no doubt that the trust can be a workable and often rewarding idea; because it helps reduce taxes it has some goldplated allurements. But you don't hear so often of some of the perils involved; they're rarely publicized.

Some people, because of hasty advice and over-eagerness to save taxes, put money in trust but foolishly insist on keeping too much control over the property. They may, for instance, want freedom to reshuffle the trust portfolio as they see fit. The result can easily be trouble with the Treasury and loss of possible tax savings. Others are so anxious to garner the tax savings that they make binding trust arrangements - and later discover that they urgently need to use the property they've parted with. Still others create airtight tax-saving trusts for children, but fail to think of some possible non-tax results.

A father who, for example, sets up a school education trust for his child in some situations will learn that to get advantage of having trust income taxed to the child, the income must be paid to the child's bank account. This is fine - unless the child, later on, starts to spend the money carelessly. If the father then instructs the trustee to pay him the earnings - as "agent" for the child - the father may find himself taxed on the income.

To avoid complications when setting up a trust for a child, a father may learn that he must permit the trustee to turn over the trust principal, or at least the accumulated income, to the child - at age 18. This may be far from the father's idea of what is best ft)r his family.

Life insurance trusts also can misfire. Here the husband puts his life policy in irrevocable trust. His wife gets income from the trust as needed after his death, and the remainder - upon her death - goes to the children. Thus the policy payoff is taken out of both the husband's and his wife's taxable estate - providing, in many cases, a substantial saving. But in practice there may be hitches. The husband often discovers that he must pay heavy gift taxes. And ways around this can cause the trust property to be taxed in the wife's estate, after all. Here especially, there's the danger that the husband will later regret putting his money resources beyond his own reach.

A trust, of course, has great tax-saving potential. This, indeed, is allurement that is hard to bypass. But before you go ahead with a trust, check some of the alternate possibilities. For example, if a child is involved, at least look into the idea of establishing a "custodian account." In any case, get the advantage of top advice on trusts - the kind that comes from the estate planning department of a leading bank or trust company, or from a highly qualified estate solicitor.


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When A Bank Watches Your Nest Egg

If you're setting up a trust - for the children's education, say, or your wife's support in later years - you might look into the common trust funds run by banks and trust companies. What you get, in effect, is something close to a mutual fund: You name the bank trustee, and the bank, in turn, mixes your funds with other private accounts for investment in a single portfolio of securities.

The trend is for the common trust funds to pick up bigger accounts than in the past, with some customers who formerly would have started individual portfolio accounts. The range today for the common fund is mostly £10,000 to £50,000, but some people go up to £100,000 and more. One... see: When A Bank Watches Your Nest Egg