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Whom do you trust

Article

When the average person thinks about a "trust fund," he envisions Paris Hilton or some filthy-rich kid from college days who wouldn't recognize a hard day's work if it bit him.

When the average person thinks about a "trust fund," he envisions Paris Hilton or some filthy-rich kid from college days who wouldn't recognize a hard day's work if it bit him.

What trusts can do

Certainly that sort of largesse is one role for a trust, but the entity has many broader uses and sometimes is helpful for health professionals in their life planning.

The concept of the trust is not well understood by the public. The trust is a creation of law that is meant to act as a substitute or surrogate "person," and as such deal with money or property in a way that an individual might not be inclined or able to do.

We, as professional people, and in our roles as parent, sibling, child or spouse, should know more than we do about trusts. The device can act as an extremely useful tool and can have more of a place in our ordinary lives than we may think.

One of the common misconceptions about trusts is that they amount to nothing more than a big pile of money which is deposited in a financial institution for perpetual tapping by some wealthy kid who can't hold down a job. While trusts certainly are used for that purpose from time to time, most are established for purposes having nothing to do with lazy rich people.

To determine whether a trust might be helpful for any particular individual, including a veterinarian, it is important to have some idea what the device actually is.

First, a trust is not a stash of money at all. Rather, it is a legal entity or statutory institution. It is a legal "person," with rights, obligations and the ability to sue others. In many cases, it must pay its own taxes, possibly including estimated taxes.

Division of property

Conceptually, trusts are pretty simple. The trust itself is a legal document that splits property into two sets of rights. Property held under a trust document is divided between the legal ownership (held by the trustee) and the beneficial ownership, which is vested in the beneficiaries.

To establish a trust, a document is drawn up that establishes the terms, and at least three people are named.

There is the person who establishes the trust institution (the "settler"), at least one "trustee" and beneficiaries for whom the trust property is held, invested and managed by the trustee.

While the trustee is sometimes paid for his or her work in managing the trust (the fiduciary fee), the person who acts as trustee is not ordinarily also named as a beneficiary.

So, if these trust entities aren't just for rich folks, how else would the average person, including a veterinarian, benefit from the use of such a structure?

There are a number of ways in which this legal entity can make the management of money or property for the benefit of another easier and more practical.

Practical benefits

One of the most valuable uses of the trust structure is in establishing funds for use of an elderly parent.

When age and infirmity make it difficult for an older person to manage their finances, a trust allows safe and orderly tending to their financial needs without fully relinquishing the funds to another person.

Many families experience a good deal of angst and intra-family resentment when one child is selected to open a joint bank account with an older parent (with the intention of using the money for the parent's benefit). One sister will think that the selected brother is ripping off money while Dad is too old to realize it. Another brother may think that the bank account represents favoritism. All around, this can be a bad idea when dealing with significant sums.

With a trust, the trustee's behavior is always open to scrutiny by the beneficiary and the trust document expressly prohibits the trustee from using the funds for himself or herself (except possibly to pay the fiduciary or management fee). So it is easy to see how trusts provide transparency and a legally enforceable obligation for the money handler to be fair and act responsibly.

There is one thing trusts shouldn't be counted on to do, however.

At one time, families used to place all of an elderly person's money in trust "so that the nursing home can't get it," in the event that the elder became institutionalized.

For a number of reasons beyond the scope of this article, such a strategy is rarely effective any longer for shielding an elder's assets from Medicare.

Nonetheless, a trust can be useful in providing for the ancillary needs of an older person while in a nursing home (clothes, special meals and so on).

A trust also could be set up to care for the needs of the domiciliary spouse, especially if the institutionalized spouse had been the household money manager prior to entering the nursing home.

Another valuable use of trusts is to provide for the care and maintenance of a disabled or incapacitated minor or adult child. Funding such an entity makes a provision for future care of such a relative, and it can be funded for a period extending beyond the death or disability of the parents. This may be far preferable to just hoping that one of the siblings will take over after the parents are gone.

Of interest to DVMs

There is a laundry list of additional uses for trusts, but I mustn't neglect the one which is nearest and dearest to the hearts of veterinarians.

We all probably have heard about the will of the late Leona Helmsley, heiress to the Helmsley New York real-estate fortune.

While she disinherited several close relatives, she provided a multi-million-dollar fund for the care of her little lap dog (reputed to be an obnoxious monster).

In fact, the practice of leaving money by will to pets is increasing in popularity. Funds left for pets often are in the form of an inter vivos (established in lifetime of settler) or a testamentary (established by will) trust.

Interestingly, I just read a legal journal which mentioned that in March of 2007, yet another state, North Dakota, passed legislation that provides in part:

"A trust may be created to provide for the care of an animal alive during the settler's lifetime.

"The trust terminates upon the death of the animal. ..."

Most pet trusts in North Dakota probably don't pay their trustees the six-figure-per-year fiduciary fee that Leona Helmsley's trust will pay.

Christopher J. Allen

Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He may be contacted at (607) 754-1510 or info@veterinarylaw.com

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