Want to control the future? Use a trust.
Trusts were first used in ancient Rome, but the common use of trusts dates back to 12th century England by knights who traveled far from home to fight in the Crusades. These noblemen left their lands in trust with a relative or friend to manage while they were away. Over the centuries since, trusts have been used to protect, manage and preserve assets and wealth, and/or to achieve a particular set of goals.
Any circumstances that require decisions regarding business or land or other assets that cannot be made by the owner of that property, for whatever reason, necessitate the creation of a trust and the appointment of a trustee to be the decision-maker when the owner cannot.
One can use a trust to manage the present while you, the grantor, are absent. One can also use a trust to control the future. A revocable living trust vests the power to manage assets while the grantor is alive. That power can also be revoked at any time by the grantor. An irrevocable trust is a permanent granting of the power to manage an asset, which can also be a testamentary trust created at one’s death. Once given, the trustee can only be replaced in accordance with the terms of the trust, which should define the succession process. The grantor has no say in this, even if he or she is still alive. The trustee, for all intents and purposes, is the owner of the asset, but is governed by the terms of the trust.
Assets placed in a trust are not controlled by a person’s will but by the terms of the trust. Consider some examples of planning beyond the horizon, with provisions stipulated past the end of one’s life:
- Mrs. Smith wanted to be certain that her grandson, who has been married numerous times, could not squander the family assets, so she left his inheritance in trust, giving him the income from the trust, but preserving the principal for his children or other heirs.
- Mr. Jones established a trust that distributed assets in stages to all of his grandchildren at specific ages, at age 30 and 35 and 40, when he assumed and hoped they would manage the assets prudently.
- Miss Bennett’s testamentary trust provided the availability of interest free loans from the trust to her great-grandchildren for college expenses equal to $25,000 per year, adjusted for inflation.
- Colonel Mustard created a charitable trust that managed a family foundation. All of his children would be offered an opportunity to help manage the foundation for a stipulated annual compensation that would be paid by the trust.
The trust you create can control anything that you can articulate. As long as the terms and conditions are legal, they can be stipulated. The issue will be finding the right person or persons to serve as the trustee(s) for your trust. Usually it’s a family member, perhaps a friend, who sometimes declines to receive compensation. Managing a trust can be time-consuming, and the provision of a reasonable compensation for the trustee is warranted. Alternatively, a corporate trustee can be designated, which, although usually more costly, assures prudent management of the assets and strict adherence to the exact terms of the trust.
The tax ramifications of various trust provisions are also complicated, and one should consider that future changes in the tax code could affect the intentions of a carefully designed trust. We thus suggest you call your advisors at Baldwin to discuss how a trust might benefit you and your heirs. We will assist you in planning over the horizon.
The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results. We recommend that you compare our statement with the statement that you receive from your custodian. A list of our Proxy voting procedures is available upon request. A current copy of our ADV Part 2A & Privacy Policy is available upon request or at www.baldwinmgt.com/disclosure.
Richard K. May, Managing Director (RKM), Business Development
Richard founded his financial advisory firm in 1980, which was one of the early fee-only advisors in the industry. He received his B.A. from Princeton University and his M.B.A. from the University of Michigan.
In 2007, Richard founded the West Chester LLC, a private equity company that promoted and funded business start-ups and public projects in the Borough of West Chester. In 2011, he co-founded the Uptown! Entertainment Alliance and the Uptown! Bravo Theatre, LLC. Together they purchased and rehabilitated the National Guard Armory, and then opened the Uptown! Knauer Performing Arts Center in 2016. Richard also serves on the board of Chester County OIC and is currently working on starting a live performance venue in Kennett Square, PA for 2025.