Everyone should have a will to ensure their assets are distributed as they see fit after they die. But many older adults are bombarded with the advice that it could be a good idea to set up a living trust.
Unlike a will, which becomes effective when you die, a living trust manages your assets while you are alive and after you die. Instead of having your property and investments distributed upon death, the trust parcels out assets to your heirs on a continuing basis. Unlike wills, trusts can operate for decades after you die, and there are continuing costs to manage it.
"The average person doesn't understand it, but they think it's the right thing to do," says Seymour Goldberg, a Woodbury-based lawyer, CPA and author of "Can You Trust Your Trust?" (American Bar Association Publishing, $25). "But nobody tells people the downside of trusts. It costs a bundle to run."
Goldberg says for most people with estates worth $1 million or less, a living trust may be unnecessary. (Goldberg says his firm will generally not set up trusts unless the estate is worth more than $5 million.)
The cost of running a trust depends on the amount of assets to be managed, and who is doing the managing. In New York, financial institutions generally charge 1.5 percent of the assets to manage the trust, Goldberg says. But there may be other continuing costs for accounting fees, investment fees and annual reports to the beneficiaries. "The average person has no knowledge of that cost base," Goldberg says.
You can save some money by naming a family member to manage the trust after you die, but that is fraught with peril. The trustee is legally liable to ensure the trust is run correctly and could be sued by beneficiaries who are unhappy with the results. "There's a real hangman's noose around trustees who are lay people in the state of New York," Goldberg says.
And beware of the one-size-fits all trusts offered at free-meal seminars. Goldberg says these trusts are often boilerplate documents loaded with high fees and commissions. But they are legal documents and may be binding if you sign them. Undoing these trusts generally involves hiring a lawyer at great cost.
Goldberg tells of a case where a man bought an inappropriate trust at one of these free-meal seminars. "He ended up signing up for a trust that cost about $50,000 a year to run, and there was no need for it," Goldberg says, "just because he went for a free breakfast."