If you’re like many chiropractors, you may have never thought much about establishing trusts. Trusts are often mistakenly viewed as a financial tool only for the very wealthy. But in the years ahead, trusts are likely to become more widely used, as wealth continues to be created for more Americans, both by investments and through successful business ventures.
In the next 25 years, it is estimated that $20 trillion in assets could be transferred from one generation to the next. At the same time, the laws governing trusts are changing in ways that recognize shifts in demographic trends and take advantage of proven investment strategies. Let’s take a look at these changes and what they might mean for you now or in the future.
Meeting More Needs
Personal assets have long been passed within families through the use of trusts. Today, trusts are becoming a valuable financial planning tool for a greater number of people in a wider variety of circumstances.
In the past, the most likely trust grantor might have been a business owner who wanted to protect his or her wealth and provide a safety net for a spouse and children. A bank employee might be named as trust officer, and the investment plan would generally be conservative, relying mainly on fixed-income investments and some blue-chip stocks.
Today, however, there is no typical trust grantor. Today’s grantor could be an entrepreneur who made an instant fortune on an Internet venture or an employee of a successful company whose stock options created significant personal wealth. People might need to protect the interests of children from a previous marriage, provide for elderly parents or establish a long-term financial support plan for a child with a disability.
The trust industry has already begun to respond to changing client needs. It is likely that trusts will continue to become more flexible to accommodate changing family circumstances over time: more up-to-date in terms of investment choices and options; geographically portable in recognition of today’s mobile family; and longer-lasting, to accommodate longer life spans and multigenerational planning.
The most visible sign of change has been the state-by-state adoption of a law that brings out-of-date trust practices in line with accepted investment principles of today. More than 30 states have adopted the Uniform Prudent Investor Act, a law that encompasses broad legislative changes.
Under the act, trust assets can be managed as a “prudent investor” would manage a portfolio. Trusts typically have been governed by what is called “prudent man” principles. States have maintained lists of investments considered appropriate for trusts. Approved investments generally have been conservative choices, such as U.S. Treasury bills, bonds or other fixed-income investments. Trustees have had to manage assets within these limits and could be called to account for any single investment that performed poorly.
In contrast, the “prudent investor” designation allows trustees to invest according to accepted investment practices that have proven successful over the long term. A trustee is allowed to create a diversified portfolio that is customized for each trust’s beneficiaries, balances risk and return and takes into account the effect of taxes and inflation over time. The test of prudence is applied in terms of the overall soundness of a trustee’s investment strategy, not on an investment-by-investment basis.
This change opens trusts to a broader array of investments, which could result in higher returns and less risk. For a generation of investors used to managing their own investments in 401(k)s and IRAs, these more flexible trusts should become more attractive financial tools.
Also under the act, the authority of managing trust assets can be delegated to a professional. It used to be that the person named by a family member to oversee a trust had to assume this responsibility whether or not he or she felt capable. This responsibility could be quite a burden, especially for someone with little financial expertise or interest. The job could be turned over to a professional only if the grantor specifically allowed it.
This new law allows a designated trustee to delegate investment decisions to skilled investment professionals. The professional might be an individual money manager at a brokerage firm or a mutual fund company. In response, financial services firms are beginning to broaden and customize their trust services and offer more sophisticated asset management.
In today’s investing climate, with its ever-widening array of investment vehicles and fast-moving markets, the ability to delegate responsibility is valuable, particularly in the case of large portfolios that require considerable sophistication for day-to-day management. For smaller trusts, investing through mutual funds rather than individual securities can be a more cost-effective way to manage assets.
Trusts can be an important part of an estate plan. Talk with your financial consultant about how you can transfer your assets to the people you choose, under the circumstances you want, and using the investment strategies that make you feel most comfortable.