When it comes to estate planning and how their money will be used by future generations, it seems clear many baby boomers won’t go out with a whimper. Attorneys and bankers throughout Kentucky report an uptick of people setting up legal trusts that provide financial advantages and protection for their assets and the beneficiaries.
Often as a substitute for a traditional will, the trusts boomers are setting up today can ensure that wealth built gradually over decades or generations isn’t frittered away in months or lost to a legal dispute or failed marriage.
“I think it (the number of trusts) is increasing and in large part because of demographics, the so-called baby boomer generation. They’re thinking about getting older and updating their estate plans, retirement and estate planning,” said Richard M. Wehrle, an attorney whose practice is devoted to estate planning and trust work for Stites & Harbison, which has 10 offices in five states, including four locations in Kentucky.
“Probably the vast majority of what we’re seeing (in new trusts) is being created by that generation,” said Jim Elliott, director of wealth management for Kentucky Bank, which is headquartered in Paris and has 17 locations in the state.
“What we are seeing is a lot of growth in trusts to make sure that dollars that the baby boom generation accumulated is able to trickle down and that’s more than a trillion dollars nationally,” said Barry Hickey, executive vice president and trust manager for Lexington-based Central Bank, which has 37 offices around the state. “They want to make sure their kids are taken care of and, more importantly, their grandkids. People want to make sure that they can direct and dictate how and when their assets are passed on to children or charities and that’s really the key (for boomers).”
Longer life expectancies are growing the living trust category today, said Jeffrey J. Keil, vice president and senior trust officer for WesBanco Trust & Investment Services, which manages $3.6 billion in 6,000 trust accounts. With living trusts, clients provide for themselves should they become incapacitated; they see to financial, household, medical and other needs.
“Everybody thinks trusts are a good idea,” said attorney Turney Berry of Wyatt, Tarrant & Combs, which has offices in Louisville, Lexington, Tennessee and Indiana.
“I think every wealthy person – no matter how you define that – is making a strong use of trusts, and more and more middle-class people are as well. It’s kind of like the Subzero refrigerator; if you can afford it, why not take advantage of it,” said Berry, reached by phone from Wilmington, Del., where he was speaking at the Delaware Trust Conference.
Berry’s reputation as an authority on trusts and estate planning extends well beyond the commonwealth – when a Lane Report writer contacted the American Bar Association in Washington, D.C., to seek an expert on trusts, the ABA suggested Berry.
Although Berry references trusts in the same breath as a very high-end kitchen appliance, he and other attorneys make it clear that creating a trust isn’t just for multimillionaires anymore, and the cost may be only slightly more than having an attorney draw up a will.
At least $500,000 in assets
The attorneys said fees to create a trust vary greatly depending on the complexity, which usually increases in direct correlation to its dollar value.
A simple trust might involve as little as $1,500 in fees and provide long-term tax advantages that could offset that cost, Louisville estate planning attorney James C. Worthington said.
In his 35 years of practice, 80 percent of which is estate planning, Henry “Tip” Richmond, with the Lexington office of Dickinson-Wright, said clients typically have at least $500,000 in assets before they consider creating a trust.
At some point the benefits of a trust are outweighed by costs, which can include investment management, tax preparation, a trustee’s administrative fee and often the expense of a professional entity such as a bank hired to fulfill the tasks. A recent provision of Kentucky law allows beneficiaries to go to court to terminate trusts with assets of less than $100,000, Richmond said.
“I would agree there is a growing use of trusts and growing existence of trustees, and growing interest in using banks as trustees rather than individuals,” he said.
“The use of trusts seem to be increasing as people are becoming more aware that they are not just for individuals of ultra-high net worth,” Keil said. “Trusts have many financial planning benefits, offering professional investment management at competitive fees with additional services that may not be available at other investment advisory firms.”
Everyone’s estate is significant to them, said Terri Stallard, a member with Lexington-based McBrayer McGinnis Leslie and Kirkland whose practice specialty is estate and trust planning.
“It is important to be cognizant that this what someone built up their whole life,” she said.
She agreed, though, that $500,000 is probably a minimum asset level for a trust that will have a professional corporate trustee.
“The trustee’s job is very daunting,” Stallard said.
There is a legal obligation to carry out the intentions of the grantor of the trust and maximize the benefits to recipients. It can involve complex financial and interpersonal skills. She advises whenever possible for family trusts that all the parties involved are fully educated on the intentions and processes at the outset.
Privacy a prime asset of trusts
Despite their deep expertise about how trusts work, the Kentucky attorneys have only anecdotal information about an increase in trust usage. There are no official numbers because of one important element of a trust: privacy.
While most wills at some point must be filed in court and become public record, most trusts do not.
“First of all, it’s a private arrangement that is not subject to probate (legal transfer of an estate’s property in court). It does help to save some probate costs potentially,” said Donald Asfahl, president of Hilliard Lyons Trust Co. in Louisville, a subsidiary of the Hilliard Lyons financial services firm. “I think the privacy side is the big thing.”
The largest Kentucky-based firm in its category with $9.5 billion in accounts, Hilliard Lyons Trust has experienced “tremendous growth” the past five years, Asfahl said. Total account values grew an average 13.8 percent per year, reflecting both increasing numbers of accounts and growth of their assets under Hilliard Lyons management.
The most common trusts in Kentucky – the revocable or “living trust” – don’t routinely become a court document that anyone curious about the size of an estate and how it was distributed may examine.
“It would be hard to put a number on them. There’s no reliable source for that because revocable trusts don’t have to register for a tax ID number,” said Worthington, who is former chair of the probate and trust law section of the Kentucky Bar Association.
“When I set up a revocable trust, I don’t have to tell anybody,” Wehrle said. “It’s private, so there is no database for trusts.”
Assets put into trust do not go into an estate’s probate inventory, which is a significant strategy for some clients who do not want the curious to know what assets their family has or where they are, Stallard said.
The less common irrevocable trust can’t be modified by its grantor. Once it’s in final form, the attorneys explained, the grantor transfers all control to the trustee, whose basic existence is knowable but not much more.
“That creates a new ‘person,’ a new taxpayer,” said Dennis Repenning, a Covington attorney who worked for the IRS for five years, including a year as an estate and gift tax attorney. The IRS assigns a number to the trustee, which might be an entity such as a bank, and it becomes a U.S. taxpayer whose financial information isn’t disclosed, he said.
A shield from liability and predators
Repenning agreed that people who create trusts usually want to protect their assets from creditors and from liability in the event of a lawsuit.
“Some types of business activity are more prone to risk and potential lawsuits,” Repenning said. “Folks in those businesses should think about creating a trust.”
Asfahl said trusts shield assets from “predators and creditors. If it’s tied up properly in a trust, it’s not subject to lawsuits and garnishments.” However, they do not create a license to run up a huge debt and dodge repayment, he said.
“It can be a great asset-protection vehicle so that you can preserve and protect a person’s inheritance,” said Wehrle. “A typical ‘will substitute’ trust that’s revocable does not give any asset protection for the person who set up the trust. My creditors can get to what I can get to in a revocable trust.”
Another form often referred to as a marital trust is set up to ensure that a spouse’s needs are taken care of after one dies. Others are set up to cover the costs of someone who is disabled and can’t care for himself. Still other trusts will skip a generation and make grandchildren rather than children the beneficiaries so that future college costs, for example, can be covered.
Kentucky Bank’s Elliott mentioned that some people opt to create a so-called “spendthrift trust,” which is designed specifically to control the spending of a beneficiary who might not make wise financial decisions.
“You can set it up where you can take out 5 percent on an annual basis or (more) for education, buying a residence, health (problems) – those kind of things can be spelled out,” said Asfahl, who also is an attorney. “You can spell out whatever you want and … rather than give their children everything after they’re gone, they might say maybe (I’ll give them) a third (of the assets) at 35, a third at 40, a third at 45 – something like that.”
While some trusts are designed to guarantee that a spouse is cared for, trusts also can play an important role if marriages fall apart.
“The law in Kentucky – and in most places in one form or another – is that what you have inherited you get back if you get a divorce,” Berry said. “If it’s in a trust, it’s a lot easier to sort out.”
Trusts traditionally were considered a good way to avoid or reduce estate taxes. But that has become less important today because estate tax exemptions have increased substantially in recent years, said Stallard, who worked for the IRS early in her career.
That exemption was $600,000 and the top estate tax rate was 60 percent in 1990, she said. Most small businesses and even a decent life insurance policy could trigger estate taxes then.
Berry said the exemption is now $5.49 million per person, which means that a couple can pass on nearly $11 million without estate tax, and the top rate is now 40 percent. The exemption increases to $5.6 million per person next year, according to the IRS.
Those exemptions pertain to estates settled with a traditional will.
Trust creation a legal function
In Kentucky only a lawyer can create a trust for another person because the whole process involves providing legal advice, which is the sole domain of attorneys.
Bankers can provide information about trusts and serve as trustees and administrators. Creating the trust must be done by an attorney but not an attorney who is a bank employee, Hickey said.
An individual may write his or her own trust, perhaps using online resources such as legalzoom.com, Berry said, but not for anyone else.
Avoiding probate court is an advantage of trusts, though probating a will in Kentucky usually is not as onerous as elsewhere in the country, said the attorneys and bankers.
“In Kentucky it’s fairly straightforward and streamlined, and the costs are not exorbitant,” Repenning said.
“You’re seeing more and more interest in avoiding probate even though its relatively easy in Kentucky compared to other states,” Worthington said. “There’s been a lot of national press that talks about it being a good thing to avoid.
“A trust can be more convenient to the family,” he said. “If, for example, you have a brokerage account, when somebody passes all you change is the trustee (name); you don’t have to close (and reopen) the account.” And in some cases the appreciation of assets in a trust can avoid estate tax.
“Oftentimes a trust is a good way for folks to organize their assets,” Berry said. “That saves their heirs or their executors a lot of time and thus saves them a lot of money” indirectly.
He recalled one client – a professor of finance – who left behind 69 separate accounts, a situation that “takes a year to clean up,” Berry said.
The attorneys and bankers interviewed said the growing use of trusts in Kentucky is not beyond their ability to meet the demand for their services at this point. Several said their firms and companies have steadily added personnel in recent years.
However, Berry said information in Steve Leimberg’s Estate Planning Newsletter last month indicates there might be a shortage of trust specialists coming.
“The trust industry has been experiencing a significant issue in recent years. This issue is not in the area
of tax planning or compliance, but in the area of talent acquisition. There simply are not enough millennials choosing to enter the wealth-management field,” according to an article in the newsletter.
“While there are many interested in the investment and financial planning areas, the number of individuals choosing to enter the specialized field of trust planning and administration is significantly smaller. Nowhere is this talent gap felt more acutely than in the area of trust administration and management, where many baby boomers with lifetime careers as trust officers are set to retire,” the newsletter said.
Some of the Many Forms of Trusts
A trust can be created during a person’s lifetime and survive the person’s death. A trust can also be created by a will and formed after death. Assets put into the trust belong to the trust itself, not the trustee, and remain subject to the rules and instructions of the trust contract. While there are a number of different types of trusts, the basic types are revocable and irrevocable.
Revocable Trusts can be changed or revoked entirely during the lifetime of the trustmaker. In these “living trusts,” the trustmaker transfers the title of property to a trust, serves as the initial trustee, and may remove the property from the trust during his or her lifetime.
Irrevocable Trusts cannot be modified or revoked after its creation. Once an asset is transferred to an irrevocable trust, no one, including the trustmaker, can take it out of the trust. It may only go toward fulfilling the trust’s intended goal.
Asset Protection Trusts protect and insulate assets from creditor attack. These are normally irrevocable for a term of years, with the trustmaker not a current beneficiary but structured so that the undistributed assets return to the trustmaker upon termination.
Charitable Trusts benefit a particular charity or the public in general. Typically they are as part of an estate plan to lower or avoid imposition of estate and gift tax.
Constructive Trusts are implied trusts established by a court that determines, even though there was never a formal declaration of a trust, that there was an intention on the part of the property owner that assets be used for a particular purpose or go to a particular person.
Special Needs Trusts are set up for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits.
Spendthrift Trusts do not allow the beneficiary to sell or pledge away interests in the assets. They are protected from the beneficiaries’ creditors.
Generation By-Pass Trusts allow one spouse to leave assets to the other and limit federal estate tax on the death of the second spouse.
Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected]