Some basic definitions to correct misconceptions about trusts

Confusion about trusts appears rampant for one very good reason -- trusts are not well understood. Trusts are both variable and flexible. although trusts fall into several broad cate achieve specific purposes and will usually be applicable only to that person or couple.

One reader, for example, is anxious to avoid probate and is thinking of a testamentary trust. These two thoughts are not compatible. A testamentary trust included in a will begins when the will is probated. Thus, avoiding probate is not compatible with a testamentary trust. One of the most common is a tax-saving testamentary trust to avoid a second estate tax on property left by a decedent to his or her surviving spouse.

A living, or inter vivos, trust will avoid probate and also permit a trustee to manage one's estate while living. In some states the trustor (person who contributes the assets) may manage the trust directly. At death the living trust details the distribution of assets.

A living trust can also be used in place of a power of attorney where a person desires continuing management as a hedge against incompetency. A trust may be invested with assets for use in caring for a person who is or may become imcompetent. In some states a power of attorney may no longer be valid if the person giving the power of attorney becomes incompetent. A power of attorney also ceases at death. A living trust succeeds in both cases.

One major advantage of a living trust is the ability of the trustor to monitor a trustee's performance. A trustor may invest a trust with all or most of his assets and turn over the management of the assets to a trustee. However, the appointment of the trustee can be revoked if the trustor doesn't approve of the management. Once the trustor dies, the trustee is fixed. Therefore, the trustor may wish to monitor the effectiveness of the trustee while he or she still lives.

Two costs are associated with trusts. First, there is the cost of setting up the trust agreement. Typically an attorney is needed, although some simple trusts may be established from prepared forms. Part of the cost of hiring an attorney to develop a trust either as part of a will or in some other form is the advice that accompanies the trust document. Knowing the limits of the trust and how it can be used is important and will usually be worth the cost.

Second, the trustee normally charges a fee for managing the trust, usually a fixed percentage of the assets under management. If you elect to manage your own living trust or if a friend or relative agrees to manage the trust, this cost can be avoided. Typically, fees may be 1/2 to 3/4 of 1 percent of the assets under management. a contigent trustee should be named to take over in case you become incompetent or at your death.

One of the easiest books to understand with a section on trusts is "don't Die Broke -- A Guide to Secure Retirement" by Melvin Jay Swartz (New York: E. P. Dutton).

Readers are invited to send questions to Moneywise, box 102, Mercer Island, Wash. 98040. Only questions covering topics of general interest can be answered here, and no question can be individually acknowledged. References to specific stocks, funds, or other investments in this column are intended for the general information of readers and not as an endorsement or recommendation by the The Christian Science Monitor.m

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