What if I cannot manage my retirement corpus in retirement due to ill health or disability? Who can help my spouse with the retirement corpus after my demise? These are tough but essential questions to consider. In a previous article, we discussed some simple situations where a spouse, trusted relative or SEBI-registered fee-only advisor can help.
A living trust is necessary if we want professional assistance in the case of incapacitation or better control over how the assets are handled in our lifetime and beyond. In this article, we discuss the features of such a trust.
High-net-worth individuals, instead of wills, usually prefer these. Unlike wills, living trusts are private, cannot be contested and don’t need a court probate. They have enough salient features even for a normal net-worth individual to use.
How does a living trust work? Your assets are placed into a trust. You will be the trust manager (trustee) and beneficiary (along with your spouse). Your spouse or a trusted relative can be a co-trustee.
You can stipulate that the co-trustee should act as per the advice of a SEBI Registered fee-only advisor (you can decide who this advisor will be along with some alternates). Or, if you prefer, a professional trust manager, aka charted trust and estate planner (they can be individuals or a corporate entity), can be named as a co-trustee.
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If you become incapacitated, the co-trustees will take over (in the order you stipulate). If you recover, you take back control. If you die, the trust will continue to benefit your spouse. You can also designate “who gets what” with your assets.
Although it sounds like a good idea, you must transfer your assets to the trust. You will retain full control of the assets and can cancel the trust anytime. However, transferring assets to another entity (though it is for your benefit and even bears your name) may not appeal to all.
We understand there is no tax incidence on creating the trust when assets are transferred to the trust. The income from the trust will be taxed in the hands of the beneficiary. There could be other costs, such as stamp duty. It is better to consult a chartered accountant before deciding.
A living trust seems like a good solution if you have plenty of assets and expect your children to quarrel over them or doubt if they would care for you when you lose independence due to age or sickness. You decide who gets what and inform your children about your decision. Once part of a living trust, it cannot be contested.
It is also a good solution if your spouse cannot manage assets independently or if you have a special child. Instead of giving power of attorney to a relative, a living trust is more robust. You can stipulate that the co-trustees should consult a fee-only advisor or appoint a chartered wealth manager as the co-trustee.
At the time of writing, the notion of a living trust in retirement planning is not common among those who moved up the social ladder from a middle-class background. However, it is an option worthy of exploration.