Planning for the future: trusts and escrows: your financial institution and lawyer can help you protect your assets for your heirs.
Dave Barrone, regional trust and estate planning consultant with McDonald Financial Group (a wholly owned subsidiary of KeyCorp.), finds a discussion about trusts for the average person, "causes their eyes to cloud over. They say, that's for my lawyer...." He has a presentation aimed at "demystifying trusts" and dispelling the myth that they are only for the wealthy and that they are "super sophisticated." The concept is fairly simple: a trust is a contract between three entities: the person giving up assets, the trustee who holds the assets according to the terms of the agreement and the person benefiting from the trust. The person who gives the as sets to the trust may be called: grantor, creator, donor, settlor or trustor. (Grantor will be used throughout this article.) A trustee may be a family member, business associate, a professional corporate trustee from a bank or trust company, or a combination of individuals and corporate trustees. Beneficiaries--sometimes called "heirs"--may be a spouse or children, grandchildren, nieces, nephews, or even charitable organizations. Barrone notes a grantor can also be trustee and beneficiary.
Douglas Blattmachr, president, CEO and co-founder of Alaska Trust Co., says there are a dozen trust types, all operating basically the same. An attorney helps the grantor prepare trust documents designating property placed in trust, who will benefit from the trust, and who will serve as trustee and administer the trust by making investments and disbursements. There are two levels of trusts: revocable, which can be revoked and changed, and irrevocable trusts, which cannot be changed except through courts. Trusts are either created during the grantor's lifetime (intervivos or living trusts) or under a will alter death (testamentary trusts).
"Alaska has the best trust rules in the country," declares Blattmachr. In 1997, the Alaska Trust Act repealed the Rule against Perpetuities, which prohibited trusts from lasting forever. Alaska was the first state to allow Self Settled Spendthrift Trusts to protect eligible benefits and assets from creditors. Other advantages under state law include the ability of couples to opt into a community property agreement, which offers tax advantages, a generous homestead exemption, the country's lowest life insurance premiums, and the best limited liability and limited partnership laws.
"Seventy percent of all people do not do any estate planning or have a will," says Lorie Hovanec, vice president, business development officer and senior trust administrator, Wells Fargo Alaska Trust Co., N.A. A former estate planning attorney, she says trusts may accomplish several goals: estate tax avoidance; charitable gifting and deductions; in a second marriage, provide income for the life of the second spouse, and upon the spouse's death, distribute the balance of the trust estate to the children of the first marriage; a Dynasty trust for future generations; protection from creditors; and special needs trusts for beneficiaries receiving Medicaid without affecting their eligibility. She emphasizes, "It is important to make sure that all assets are re-titled and transferred to the name of the trust. This is called funding the trust.
"Without proper funding, a probate may be necessary to transfer property left in the individual's name outside the trust."
Alaska Trust's Blattmachr notes a grantor who wishes to provide for minor or disabled children can have modest assets; a trust allows someone to manage assets for the child. McDonald Financial Group's Barrone says every family is unique in choosing the appropriate estate planning tools. The main questions are, "how much control do you want beyond the grave, how much do you want to pay for it and how much does your family need?"
Wells Fargo's Hovanec says, "For small to moderate sized estates (between $50,000 and $1.5 million--note currently estates valued less than $1.5 million net are not subject to estate tax), the cost of setting up a trust may be less than, or comparable to, the cost of a probate." She recommends people use the services of a lawyer knowledgeable in the area of estate planning to draw up the trust document, and to steer clear of using trust forms found in books and on the Internet.
McDonald Financial Group's Barrone gives an example using his own family. Barrone's father has between $80,000 and $100,000 in property. Barrone does not need the property; however, it could be used to educate Barrone's children, ages, 11, 18 and 20. "You don't want to give that type of money outright to kids at these ages. And while it is not cost effective to have a corporate trustee (for this size estate), Barrone has the skill and experience to hold the property as a trustee for his children. Alaska Trust's Blattmachr agrees, "If you really love your heirs, give it to them in a trust ... even a mature, responsible child could be vulnerable to risks like a car accident and (consequent) legal liability or cognitive impairment. Or the child could have an irresponsible partner or face a divorce." A trust protects otherwise vulnerable assets.
Living trusts let grantors benefit during their lifetime and then specify disposition upon death. FNBA Senior Trust Officer Bob Tannahill says living trusts afford continuity, protection from creditors, and privacy. Assets placed in trust do not pass through probate upon the grantor's death, allowing quicker and cheaper disposition. Also, unlike public probate, trusts maintain the privacy of assets. A trust affords greater protection than a Durable Power of Attorney by specifying all intended powers and providing a successor trustee in the event of the grantor's disability. Living trusts may help resolve conflicts between competing beneficiaries.
A trustee is a fiduciary, legally bound to act in the best interest of the beneficiaries. Alaska Trust's Blattmachr says, "While a trusted uncle or golf buddy may not charge administrative fees, they face a lot of liability as a trustee and may not have the time or experience to handle complex investment and accounting duties. A professional trustee costs no more than a friend who will have to hire professional brokers, accountants and investment managers because they don't have the time or experience to deal with the trust." Alaska adopted the Prudent Investor Rule. "Trustees not only have the duty to preserve assets, but also they must make them income-producing."
Wells Fargo's Hovanec observes, "A corporate trustee may be desirable when a person lacks the time or skills needed to manage property, make investments, prepare income tax returns, or maintain detailed financial records to make accountings to beneficiaries. Corporate trustees may serve alone or as co-trustee with a trusted family member." She adds, "The more complex and sophisticated the estate plan, or the more diversified the assets, the greater the benefit of using a corporate trustee."
Banks and credit unions like Wells Fargo, KeyBank, FNBA and Alaska USA Federal Credit Union's subsidiary Alaska USA Trust Co. offer trust administration and other investment and estate services. McDonald Financial Group is an investment banking brokerage and advisory services firm. Norm Parrott, assistant vice president, regional investment advisor for McDonald in Alaska, says the acquisition was based on KeyCorp's "One Key" concept, which provides clients one stop access for their financial solutions. KeyCorp and McDonald professionals work in teams when talking to clients so that they have benefit of individuals with expertise in a particular set vice. Says Parrott, "It's like the difference between seeing a medical general practitioner 10-15 years ago versus seeing specialists today." Parrott works closely with estate planners, attorneys, CPAs and other advisors. "It is more than just 'come on in and invest....' We custom-build portfolios."
FNBA's Tannahill says, "We follow the instructions in the trust document. If the trust has given (FNBA as trustee) investment discretion, then investment decisions are made by the bank's trust committee. Other banks may do this differently." Tannahill notes trusts set up for a child's education often specify parameters for disbursement such as grades. "We act as a parent or administrator with regard to (trusts for) educational purposes, such as room and board, computers or books."
Blattmachr helped to found Alaska Trust Co., the state's only independent trust company focused solely on trust administration, because he saw an opportunity to provide specialized services in Alaska. His brother was one of the estate planning attorneys who helped to modernize Alaska's trust laws. "This enhanced the state's financial set vice industry and diversified the economy. People from the Lower 48 try to set up trusts here because of the advantages available under state law."
Escrows are financial tools typically used in real estate transactions. At closing, the title company calculates the amount of money to be set aside for property taxes, hazard insurance, mortgage insurance, and any other assessments required in the loan agreement. A home buyer makes a monthly house payment that includes not only principal and interest, but also taxes, hazard insurance and sometimes mortgage insurance and other assessments. These funds are divided by 12 to determine monthly installments, segregated from the principal and interest and placed into a separate escrow account to be disbursed when taxes and insurance are due. Depending on the lender, the separated funds are referred to as "reserves" or "escrow," according to Land Title Co.'s Escrow Manager Karen Goentzel. She counsels borrowers to review the escrow analysis carefully to ensure that the appropriate amounts are being reserved for expenses.
An escrow account is usually administered by the lender's loan servicing department. Laurie Schroder, assistant vice president of First National Bank Alaska's loan servicing section/loan servicing division, explains that the amount collected at closing depends on when the expense is due. In Anchorage, property taxes are collected in June and August. "Calculations are based on the federal law-RESPA (Real Estate Settlement Procedure Act). The amount is analyzed annually and if there is a shortage or surplus, how it is to be handled." Schroder says both parties benefit from the escrow portion of loan servicing. The borrower/buyer has an easier time spreading expense payments over a year versus lump sum payments. The lender has security for the mortgage in that expenses are paid. Money collected is held in a FDIC insured account.
FNBA offers escrow services for owner-financed transactions involving installment payments, says Tari Flannery, senior escrow officer. The escrow department serves not as a lender, but as a non-interested third-party escrow agent for financial transactions outside the bank. FNBA receives, posts and disburses funds and/or property per the terms of sales agreements. The only real estate transactions this department handles are owner financed sales. A title company prepares instructions regarding the money to be collected, the terms and interest. FNBA holds the documents and the buyer is able to use the escrow as a credit reference. "Sales of land, a home, a motor vehicle, business assets and stock are the most common," says Flannery. She has noted an increased number of land sales in the Mat-Su Valley this year. "The escrow instructions describe the terms of the payment arrangement between the payer and the payee and direct First National regarding the de livery of the escrowed documents. First National keeps track of payments and disburses money according to the payee's instructions." Flannery explains that buyers and sellers typically enter such arrangements when either an individual or property may not qualify for financing.
FNBA's escrow department offers bookkeeping and collection service for transactions that do not require holding documents, such as collection on a promissory note, rental agreements and the sale of other personal property. FN BA offers repayment coupons, debit accounts, payment reminders, late charge assessments, and prepares year-end tax reporting forms. While "both payer and payee establish the terms of a collection account under an agreement ... (it) differs from an escrow in that no documents are held in these files." Flannery adds, "it is a unique field" and is mainly offered on the West Coast. Another unique escrow service by FNBA is a "closing escrow" for limited entry commercial fishing permits. The State of Alaska deposits the funds with FNBA until the permit is entered. Then the state notifies FNBA that it can release the funds to the seller.
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|Publication:||Alaska Business Monthly|
|Date:||Oct 1, 2004|
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