Fast fact. James Smithson created the Smithsonian Institute through a bequest found in his last will and testament. I'm Drew Thomas, and you're listening to Bank Chats.
So today on the episode, we're going to have a general discussion about trusts. And we are pleased to welcome David Finui, the President & CEO of AmeriServ Trust and Financial Services Company. Hi, Dave, thank you for joining us today. Thank you. So, we are here today to talk about trust. And I think that a lot of people really have a difficult time fully comprehending what trust means, and what a trust company really does. So, I know we're gonna get a little bit, we're not going to get too deep today into everything. But let me let me just, you know, see if you can, if you wanted to go ahead and give me just a generic idea of what, what a trust company really does what it's there for.
It is the management, it's the management of somebody's financial lives, actually. What we do is actually manage money for people. We manage money for three types of people; those that don't want to do it themselves, those that shouldn't do it themselves, and those that absolutely can't do it themselves. Those that don't want to do it themselves, the best examples that I can give for, these are people that are building their wealth. They're, they're, they're busy in their own careers, they may own a company, they may be working for somebody as an executive, whatever that is, and they are busy with their own jobs, okay. So, they really don't have the time to manage their own money or invest their own money. And we can take care of that for them as part of their financial planning, and they're part of their estate planning. Where we run into really what a trust department or trust company does is when we manage that money for people that shouldn't do it themselves or can't do it themselves. If they shouldn't do it themselves, for instance, mom and dad have some money, they pass away, they want to leave it to their children, but they know their children can't manage their own money. They might be spendthrifts, they, if they, if they come into a pile of money, what they'll do is they will spend it down immediately, and then they'll be out of money. Okay, so they leave that money to us in a trust company or trust department. And what we do is we can control their financial lives a little bit that we can make sure that that money is preserved for them and for their best interests and for their best use.
Now, now, do you make that decision? Or does the person who opens the trust and the, the, for example, the parent, does the parent make the decision on how the money is, is managed or spent? Or, is that something that you would then do is as a, as an expert?
Well, what happens is that whenever the parents let’s use, keep with that example, if the parents set up a trust and, we'll tell you what a trust is in a second. But if they set up a trust, say under their will, they can leave specific provisions within that trust that can direct us, okay. Normally, we're allowed, for instance, to make distributions for what is known as health, education, maintenance and support of that individual. But the parents can leave some, some specific directions. For instance, yes, we're allowed to spend money for a house, we're allowed to help them with a business, we're allowed to be a little more liberal or a little more restrictive. And they established that within the trust document, okay. Okay. Third category are those people that absolutely cannot do it for themselves. Two examples, one would be very, very young children, they just don't have the legal capacity, in essence, to manage that money themselves. Or, if they, if somebody becomes incapacitated, in some level, and they are adjudicated incompetent by a court of law, and we can establish a guardianship for those people, and we manage 100% of their lives. And those are under the rules of engagement by law as to what we are allowed to do with a guardianship and not allowed to do with a guardianship.
So, when we talk about trusts, and before we get into too much detail, can you talk a little bit about what a trust is.
A trust is a legal arrangement. It can be verbal, but normally it's put on paper. It's easier to manage that way because there's no ambiguity about it. But it is an arrangement that involves actually three different parties. One is known as the grantor, and the grantor is, is the originator of the trust. That's the person that is drawing up the trust and they want something to happen with that agreement. Okay. A trust then takes control of the assets of that individual that they want to put into the trust, and those assets are then managed by the second party, which is the trustee. You have to name who that is going to be, and, and that trustee then manages those assets for the benefit of the beneficiaries. So, there's those three parties, the grantor, the trustee, and then the beneficiaries. Okay. Okay. What are the duties basically, of that trustee? The duties are the trustee must manage the assets for the benefit of the beneficiaries in their best interests. And where we get into a little bit of ambiguity, is what happens if there are multiple beneficiaries?
Sure, yeah. Because everybody has, you know, maybe a different goal or different needs.
That's exactly right. Some, some beneficiaries might be, look, I need income. That's what I need, I need that right now. Other beneficiaries at that same trust, might say, look, I'm not concerned with what happens right now, I need growth for the future. I want to preserve this money; I need it for some time in the future. So, it becomes a very tricky situation in which the trustee must manage for the benefit of all of the trustees. And that's under law, that it has to do that. So, it's a fiduciary relationship.
And I'd like to take a moment to talk about that term, because I don't think a lot of people know what a fiduciary relationship is. Can you explain what a fiduciary is?
Well, that's, that's really what it comes down to is a fiduciary must act in the best interest of the beneficiaries. In a non-fiduciary investment management relationship, normally, what happens is the financial advisor can act and recommend things that are simply suitable for the person. So, there's a difference between the suitability rules and the best interest rules. Okay. One of the things I do want to make a distinction of here, though, too, is the trustee does not have to be a trust company, or a trust department, what we call corporate trustees, it can be individuals, and you can name an individual as the trustee of your trust, okay. However, under law, those trustees still must act in the best interest of the beneficiaries. And in Pennsylvania, in particular, and most states are very, very similar, where we op-, we, we operate under the Uniform Trust Code. Pennsylvania has the Decedents, Estates and Fiduciaries Code, specifically for Pennsylvania, that operates under the Pennsylvania Uniform Trust Code. And it doesn't distinguish between corporate trustees or individual trustees. It is trustees, so who polices that? The Commonwealth of Pennsylvania, like I said, you know, is, has a regulation that all trustees must follow. The problem is whether they know that or not. And who would regulate that on an individual trustee? Normally, what happens is the beneficiaries are the ones that bring action against the trustee, because the trustee has done something that they view is incorrect. So, what will happen is they'll petition the court and sue the trustee for breach of trust. And one of the, it's sort of a tangent at this point, but one of the hardest things for a trustee to do is to interpret the need for discretionary distributions from the trust. A lot of times the trust, trustee is given full discretion in making distributions. And I'd mentioned earlier, health, education, maintenance and support. Well, let's use a quick example. So, we have a sum of money for a child, and we're allowed to make those distributions for his education, his or her education. So, the first thing is, is where to go to college. Okay, so somebody gets accepted to Harvard, but their trust is only $100,000. You know, is this something that's in the best interest of that child? Well, they have to understand we're not going to be able to pay from the trust the full part of that education for them, because that's much more expensive than that. Sure. Okay. Now, if we're looking at a much larger trust, that becomes a little bit of an easier decision. I use another example, what happens, you know, they need a computer for school? Well, that's a very legitimate thing right now. Now, do they need a computer that has full gaming capabilities, you know, too, for their college education? Well, if we have a very large trust, maybe that's not such a big deal. We have a much smaller trust, and we have to be concerned about preserving for that child for their entire four years or six years, whatever their education is going to take, then we must be a little bit more conservative about something like that. So, those are just two examples.
Now, now I think those are fantastic examples. And one of the things that you, I think we were kind of getting into and we might have gotten a little deviated was, there are different, there are different ways to classify trusts and different ways that those basically types of trusts that are out there. And I'm sure that they have different rules as to how they, how they are managed.
And again, just from a very high level, we really look at trust, maybe coming into again, three types. One is a revocable living trust, the grantor sets up the trust for their financial planning, for their estate planning purposes, while they're alive, that's why it's called a living trust. Okay, and revocable, meaning that that grantor can amend the trust or revoke the trust at any time. They don't need permission; they can just do it. So, those are very, very flexible, there's not a lot of tax advantages for anything like that, you're really looking for the investment management of the trustee, you're looking for the expertise and health of the trustee. But it's really a very open document that they can, they can keep control of as long as they're alive. Okay, the second type of trust, though, would be an irrevocable trust. This is where a grantor wants to actually put money into a trust and give it away, take it out of their estate, give it to somebody else, beneficiaries, but still not give it outright to the beneficiaries, they still want some control over those funds, they still want, you know, the trustee to be able to preserve those funds for the beneficiaries. But they actually do put it into an irrevocable trust. That trust, just by its name, cannot be revoked, and cannot be amended. There's always, you know, exceptions to that, because it can be revoked or amended by the court. And there are certain ways that it can be revoked, but generally speaking, they have made a completed gift, and they've taken the money out of their estate, and they've placed it into an irrevocable trust for the beneficiaries, and that's gone. And then the third type that we talk about a good bit is a testamentary trust. Testamentary just means testament is under will. So, they place a trust under will to take care of their children or take care of the whatever beneficiaries they want to take care of, when they die. That trust does not come into effect and has no assets until the person passes away. It's under their will. Okay, and those trusts are irrevocable once they're established, once the person passes away, trust is established for the benefit of the beneficiaries. And the trustee manages and preserves the assets for the benefit of those beneficiaries as we talked about earlier under a fiduciary capacity.
Okay. So, and you kind of mentioned a will, so is that, is that really what a will is as a testamentary trust in in all situations or is a will something different?
A will is something different. A will, a will is just how you want to distribute your assets after your death. It does not have to contain a trust. For instance, husband and wife situation, I can have what we call I love you wills where I simply say that everything goes to my wife, okay, okay? And she gets it outright, doesn't have to be in a trust. However, if my wife is a spendthrift, then we can use the opposite example, if the wife is the business owner or the main and the husband is a spendthrift, it can work both ways. But what happens is then that trust can be established and the money can be placed into a trust instead of giving it to the surviving spouse outright. Okay. Those are just quick examples. Okay.
It sounds like there are a number of advantages really to having a trust versus something as simple as a will. So, what, do you want to talk about maybe some of the advantages of why trusts are created and why people tend to use them?
Yeah. Several reasons why, why trust. The first reason or first advantage of the trust is it does give the trustee control of those assets for the benefit of the beneficiaries, like we talked about earlier. So, the beneficiaries don't receive the money outright. And there, like I said, there's, there's a lot of reasons for that. But then we get into the technical reasons for trust, for instance, where to minimize estate taxes. And when I talk about estate taxes, I want to talk about both state taxes and Pennsylvania inheritance taxes. There's a difference between the two. But one of the only ways to avoid estate taxes or in a particular Pennsylvania inheritance tax is to give the money away now, you take it out of your estate, and you give it to somebody else's estate and you, you make an, a completed gift to that person right now. You can either do that in cash, or you can utilize a trust, like I had mentioned earlier an irrevocable trust, which means the grantor now can't take the money back, can't revoke the trust, can't do anything to get that money back. But they can still control that money for the benefit of the beneficiaries through the trust, and through the trustee. So, it takes it out of their estate, and puts it in someone else's estate. Okay, so that estate taxes and inheritance taxes are avoided in that particular situation. The other one is and, and we talked about this is to shield the beneficiaries from their creditors. If you hand over a sum of money to your child, and that child has debts, that becomes their asset, and it becomes subject for those creditors to take that money, in essence, to pay the child's debt. Okay. By utilizing a trust, even though the money has been given to that child for the, for their benefit, they can have a spendthrift provision within the trust, that's said, only the money that we distribute, becomes that child's asset directly for the creditors benefit. They can keep it in the trust, and if it's not distributed, the creditors cannot come back and get that money for them. Okay, so it can shield that. It can preserve assets for children, until they're grown, until they can, they can take control of it themselves. Now we've seen trusts where they, they shield money from their children, up until their 60s and 70s. But in most cases, what happens is that look, the child is 15 years old, something happens, the trust is established, and what we want to do is we want to preserve that money for them until they can take care of it themselves. And we determine what age that is normally 21, 25, somewhere in that area, and you say, okay, at that point in time, the trust ends, and the money goes to them. Because normally by that time they've been educated. And sooner or later, they have to stand on their own two feet.
Right. Either, either by school or by life, they've been educated exactly right.
A lot of times what will happen is, say that we must distribute the income of the trust, we can hold the principle under a discretionary authority. Okay, other times, the whole thing is discretionary. And just thinking through this a little bit, another way that a lot of trusts are structured, is that they give out portions of the trust at different times in that beneficiary's life. For instance, at 21, we'll give a third of the trust to them, okay, and a 25, will give half of the remaining trust and 30, they get 100% of everything. And what happens is, is somewhat of a teaching experience, because if they get it at 21, and they blow it, they get their second distribution, they should have a little bit of an education and say, okay, I gotta be more careful this time around. Sure. And, and we've actually seen that work very well, very well.
And I would suspect, and I could be completely wrong here, but I would suspect that there are situations where someone has earned their money and built their wealth, you know themselves from the ground up, and has an appreciation for all of the work and effort that it took to accumulate that wealth. And they are followed by certain family members that have never had that experience of having to work as hard or overcome the same challenges that the person who earned the wealth in the, to begin with had. And so, they don't have as much of an appreciation of how quickly that money can, can disappear.
There is an old saying in, in the industry is that the first generation makes the wealth, builds the wealth, the second generation enjoys it, and the third generation wastes it. And we've seen some very ingenious trust structures, in essence to bypass that inevitability. So, it is used, trusts are used for that purpose so that it stays preserved for future generations for a long period of time.
Yeah, that makes a lot of sense to me. What would some other, what would be some other advantages of trusts?
One of the advantages that we would want to get into with, especially establishing, say, a revocable living trust. Why, why would somebody do that even for themselves naming themselves the grantor is actually their own beneficiary until something happens to them. So, the grantor establishes the trust, the trustee manages the trust for them, but the grantor is also the beneficiary. And what happens is then, the trust document can say that the trustee has discretion to make distributions should the grantor become incapable or incapacitated to make those distributions or to direct those distributions for themselves. So, it somewhat bypasses the need for a court to come in and declare somebody incompetent. A court declaration of incompetence or through guardianship is a very, very messy situation. A lot of family members fighting over all of that type of thing as well. And the revocable living trust can bypass that situation as well. The second thing gets into a specific type of trust that we would like to go into maybe in a future presentation is the special needs trust. This has become one of the biggest growing areas of trust that I've witnessed in my career. And what a special needs trust does is that the money in that special needs trust should the person be incapable, and also receiving government benefits, for instance, Medicaid, or Supplemental Security Income. If they have too much money in their name, or if they have too high of an income in their name, and those, those limits are very, very small, then they are not eligible for those government benefits. They're called needs-based benefits. But the special needs trust can be established, that takes the money out of their assets, for those purposes, but they still have the right to use the money or the ability to use that money for their benefit, to keep them going. So, that's another, and normally, like I said, that is somebody that's incapable of handling their own assets, they, they have some type of special need.
Okay, now, we've talked a lot about money, literal, you know, money changing hands, but can trust also be used, I would assume, for things like property? If you have a, you know, a family estate, or something, a house, a place that, you know, you can, you can pass that along through a trust as well, correct? It's not just cash?
No, any, any asset at all can be placed into a trust. You know, that just reminds me a little bit, some of the things that are happening now, that we didn't worry about in the, in the, in the past, and not too distant past are such things as digital assets. You know, your phone, for instance, right now has, has a wealth of information on it about you personally, that is a digital asset. And, and there are specific provisions now in trusts and in wills, giving the executor and the trustee the right to access those digital assets. So, so that's one thing, that's just a little bit of a sideline. But yes, real estate, property, can be placed in trust, any, anything along those lines. And the trustee is responsible for preserving those assets in accordance with the trust document. And one thing they do want to be very, very careful of, though, and I do want to mention that placing a house in a trust, and it is a personal residence trust, there are specific provisions that can be used with that. But people do have to be careful with that, because their personal residence is considered an exempt asset for Medicaid, whenever we were talking about that earlier. So, I can only have so many assets in my name, and still be eligible for medical assistance. Okay, if I placed the house in a trust, that becomes a non-exempt asset now, which means that it is counted in that person's assets when applying for medical assistance. And you have to be very, very careful about doing that. It depends on the specific situations and the financial condition of the people setting up that trust. If they are extremely wealthy, and they are looking to transfer that house with, you know, outside of the tax base, and we talked about that earlier, yes, that you can place it into a trust. But if, if you're like most of us, and you don't have those huge assets, then we want to be concerned with that and we really need, and we'll mention this here, all of this advice, we are not attorneys, this is not legal advice. This is not accounting advice, please, that is something that you really want to check with your attorney on to make sure you're establishing that correctly and for the right purposes.
You had mentioned earlier that you're obligated to work in the, in the best interest of the beneficiary. Right, and that in some, in some cases that those interests are different if there are multiple beneficiaries listed. So, have you ever encountered a situation, I know you can't get into details about specific you clients or customers, but have you ever encountered a situation where someone was just being vindictive? And just decided they wanted to give you 95% to one child and 5% to another. And how do you handle something like that? When, because you can't just ignore the rule, right? Or what the intent was. But, but, or can you?
Well, that is interesting, that does bring up a specific example. And I obviously can't say names, but it was a trust under will that I was reviewing for workability. And the gentleman that drew up the trust, or the gentleman, the will was for, extremely wealthy, and had five children and had disowned one of them. Okay, so the, the, the will was really set up and trust for setup for the remaining four children. And they did give $1 to the disown child, basically, just to say, I didn't forget about you, but this is what you get. But there was a provision within the, in the trust under will, that said that the children, his living issue, could remove the trustee or change trustees, if they had 100% vote, and did not specifically say that that, the disown child did not have a vote. And so, you know, the four could have said, Yeah, we want to change trustees, but the one that was left out could have ruined the whole plan. Yeah, when that was pointed out to the attorney, they did say that cut and paste, copy and paste is a bad thing sometimes. And that's it. Yes. The other situation is that, as I mentioned earlier, I've been involved in a situation where one child needed income and wanted the trust to be invested solely for income, because it said, we could distribute the income or must distribute the income to them. The other child was like, I don't want income right now, I want this to be preserved for my children later on, and I want it to grow. And so, there were two competing beneficiaries there. And simply becomes a matter of the trustee having to balance those, those needs, and to invest it accordingly, to make sure that both of them are, are treated as fairly as possible.
And I think this goes back to what you were saying earlier that, you know, it's nice to have an objective party, and not a family member, not one of the beneficiaries making those decisions on behalf of the others.
You know, one other thing, I'm gonna mention this Drew, just as we were discussing this, because we were saying about maybe the advantages of a corporate trustee, as opposed to an individual. But I do want to mention, you know, for the people listening in on this, one of the ways to handle both situations is to name co-trustees. You name, and, the corporate trustee, for instance, that manages the investments that handles the discretionary distributions, that type of thing, but you also have a co-trustee, that's a friend or a relative that has some special knowledge about the family needs. And that's always advantageous to the corporate trustee in trying to determine if the distributions are reasonable or not.
That makes sense. Okay.
That makes sense. Those situations do occur.
So, I, again, we're trying to, we're trying to keep this very high level, and I really appreciate I think we've covered a lot of, a lot of ground. And I think we've, we've given people a really solid preview as to some of the other things that we might want to talk about on this, on this, on this podcast, you know, as we as we progress through but the one other question that I had before I let you go today is, is there a, a limit, in terms of how many assets you have, how much income you have? What you have available to you, you know, before a trust becomes a benefit to you? Is there, is there a, is there a level that you just generally don't, don't get into trusts? Or is there, is it something that almost anybody might benefit from in some way?
As a corporate trustee? Yes, we do have limits as to how much money, how much in assets you must have before a trust can be established within a Trust Company. But remember, we're also talking about individual trustees and that other type of thing. So, that, you know, there's no real specific limit. On a realistic level, if you do not have a lot of assets, or, you know, if you have very small assets that are passing along, or if they're all going to one place and you don't mind them going out right to that individual, then, then there's no need for a trust. Let me put it this way. I had a situation years ago where a number of companies were going through the area, and they were selling the benefits of trusts. And they come with a pre-made package of trust documents that are fill in the blank, and you, and you, the, the biggest thing that they were trying to do was say that trusts are not subject to probate and probate expenses. When it really comes down to it, probate is not a very big expense in comparison to other expenses of dying. And they were selling these to people as a package. And I had an individual come to me, and they came to me and said, I need to borrow $2,500. And I said, okay, well, first of all, it's the wrong area, but what do you need the money for? And he said, well, I'm buying the living trust from the trust company that was setting these up. And I really said, well, first of all, if you have to borrow the $2,500, for the trust, you probably don't need a trust. And that's really what it comes down to. Okay.
And I think that it is important to know that, that, like you said that there are companies, and I'm air quoting, there are companies out there that will sort of try to lead you down a path that is maybe not in your best interest. And it's important to know that who you're dealing with is reputable and working again in your best interest and not in theirs.
That's extremely well said.
All right. I thank you very much for your time today, David, I welcome you back anytime to talk more in depth about some of the subjects we briefly touched on today. It's, it's truly been a very beneficial and educational experience. So, thank you.
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with a goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to bank chats, is not intended and should not be understood or interpreted to be financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. Thank you for listening. Before you go, we'd like to thank our guest, David Finui, President & CEO of AmeriServ Trust and Financial Services Company, for joining us today. While we hope that this podcast provided some good information about the general workings of a trust company, we plan to delve deeper into some of the particulars of trust products and services in the future. If you have questions or would like additional information, we invite you to visit our website at ameriserv.com/bankchats or leave us a comment. We look forward to hearing your thoughts about the show. AmeriServ Presents: Bank Chats is produced by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. Production assistance from Jeffrey Matevish. If you haven't had an opportunity to listen to our previous episodes, we invite you to check those out either by visiting ameriserv.com/bankchats, or by finding the podcast on your favorite podcast service. Don't forget to like, follow, or subscribe to be sure you never miss an episode. And sharing the podcast with your friends and neighbors is always appreciated. For now. I'm Drew Thomas, so long.