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Mason City (641)423-1600 Change Location

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Mason City Change Location

2601 4th Street SW
Mason City, IA 50401

Tel.(641)423-1600

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What You Need to Know About Trust & Investments

Learn how a trust can benefit you See what common investment terms you should know

"How can a trust help me?"

Wouldn’t it be wonderful if you could look into the future and see things you planned unfolding just as you wished? As we all know, life doesn’t’ work that way, but there are tools to help ensure that your wishes are carried out whether you’re directly overseeing them or not.

One of the most common, and effective, of these tools is a trust. By definition, a trust is an arrangement in which someone’s property or money is legally held or managed by someone else or by an organization (such as a bank) for a set period of time.

But to many, trusts seem convoluted and only for the wealthiest of us. How do you know if a trust is right for you? Are they as complicated as they seem? Before getting started, we must first understand the basic concept of a trust and we must also lose the misconception that only the highly affluent need them.


The Basic Components of a Trust

All trusts have the same basic components:

  • Grantor or Settlor – The person creating the trust.
  • Trustee – A person or entity that agrees to hold the property or money in the trust for the benefit of someone else (the beneficiary).
  • Principal or Trust Fund – The actual property or money that is being held by the trustee.
  • Beneficiary – The person that benefits from the trust.

Other than the way they are created, the major distinguishing feature is the reason, or the purpose, for which they are created – and there are many. Establishing a trust can help you effectively grow assets, reduce your tax liability, protect and manage your property, and avoid the lengthy and costly process surrounding probate in some states.


Types of Trusts
There are basically two types of trusts, a living trust and a testamentary trust.


Living Trusts
A living trust is a written legal document created while the grantor is still living. The document spells out who will act as “trustee” and contains all the detail and directions for the trustee to follow on behalf of the beneficiaries.

There are many reasons one might select a living trust, such as wanting to save on taxes, caring for an aging parent, or protecting assets from lawsuits and creditors. One of the biggest reasons though, is to avoid probate. This type of trust helps to avoid the lengthy and possibly costly process of having to go through the courts after the grantor’s death.


Revocable Living Trust
If the grantor sets up a living trust and requires the ability to alter that trust at any time, then it is set up as a revocable trust. The trust can then be revoked, altered and amended any time after the trust becomes effective. In addition, a revocable living trust helps ensure that the assets are always used for the grantor’s benefit, even if he/she becomes physically or mentally incapacitated. It would provide uninterrupted investment management at that time, as well as after the grantor’s death.

The revocable trust is ideal for those wanting to help their beneficiaries avoid probate and reduce estate taxes, as well as blended families; ensuring children from a previous marriage aren’t left out of estate benefits.

Having the control to alter the trust can be a big advantage, but also means the grantor is technically still the owner, and therefore still responsible for filing a trust income tax return. One downfall of this type of trust is the amount of time and money it may take to properly create it – it typically is more than the cost of creating a will.


Irrevocable Living Trust
An irrevocable trust cannot be revoked and the assets in the trust fund no longer belong to the grantor once the agreement goes into effect. It’s essentially the same as gifting the property or cash. However, since the grantor no longer owns the property, he or she is no longer responsible for paying taxes on it. The disadvantage: the assets are no longer the grantor’s property.

Many people use an irrevocable trust as a part of their estate tax planning. It is often created to avoid or reduce federal estate taxes upon their death. Keep in mind though, when transferring property to an irrevocable trust, the federal government treats this transfer as a gift and therefore the federal gift tax will apply. However, the beneficiary won’t have to pay estate taxes and essentially avoids paying tax if the property appreciates. A life insurance policy is often put in an irrevocable living trust as well, but only if the benefit is large enough to be subject to federal estate tax.

These trusts may also be set up to satisfy a property settlement as part of a divorce decree when the couple has minor children. The courts sometimes require the property to be placed in an irrevocable trust in order to preserve assets for the children. They can also be drawn up for elderly people looking to avoid the high cost of a nursing home.


Testamentary Trusts
A Testamentary Trust, is a document set up under a Last Will and Testament and goes into effect only after the grantor dies. This type of trust is amendable while the grantor is living, but by nature becomes an irrevocable trust once it’s effective.

Some of the benefits of this type of trust include the ability to protect assets against creditors and misuse, or to reduce the federal estate taxes a spouse might owe upon the death of the first spouse. As with other trusts, there are many possible tax benefits.

It’s important to understand that it is difficult to avoid probate with this type of trust, as it is part of a will; and as part of a will, it may also cost a grantor more time and money to establish and alter.


Keep in Mind

If moving forward with a trust, keep in mind that trusts are formed under state law, so rules and regulations surrounding them may vary greatly from state to state. And remember, trusts do not replace a will.

There are many different trusts out there and as is true with all your estate plans, be sure to seek a trusted estate plan advisor for assistance. You just might benefit from setting one up. How nice would it be to give yourself the peace of mind the protection of a trust can provide?


10 investment terms you should know

Understanding investment vocabulary is critical to understanding and making decisions about your long-term financial health. Here are 10 key terms you should know:

1. Risk Appetite
This is amount of financial risk you are willing to accept in pursuit of your goals. Risk appetite will vary depending on your individual values, age, life experiences, and financial circumstances, and it plays a large part in shaping your investment journey.

2. Asset Allocation
Asset allocation is how you divide the money you’re investing into different asset categories, such as cash, bonds and stocks (the three major asset categories). Your individual asset allocation will vary depending on the timeframe you have to invest in and your risk appetite.

3. Re-balancing
Imagine you have your asset allocation all planned and you want 20% of your portfolio in bonds. Due to price and market fluctuations, over time your 20% may creep up – or down – and no longer match your risk appetite. Re-balancing is an important process that “re-sets” your allocation to its correct proportion for you.

4. Bonds, Stocks and Mutual Funds
Federal, state, and local governments, and corporations, raise capital by selling bonds. So when you purchase bonds you are in essence loaning money to these institutions for a given period of time, and will receive a set amount of interest on your money in return. Bonds are generally less volatile than some other investments, but produce a more modest return.

Buying stock means you are buying equity or a share of ownership in a corporation, and the value of the stock is generally tied to the assets and performance of the corporation. Stocks can be volatile, but some argue they offer the greatest potential for growth.

One of the most popular investment options is the mutual fund; so popular there are virtually thousands of them to choose from. A mutual fund allows investors to pool their money together to invest in securities (or holdings) such as stocks, bonds, and various other assets. Many mutual funds are affordable, diverse, and have professional management.

5. Prospectus
A prospectus is a legal document that provides detailed information about an investment. For example, every mutual fund provides a prospectus with information covering risks, past performance, expenses, a list of holdings, and much more. At first glance, the sheer volume of information can be intimidating, but may seem more manageable if you decide what it is you want to learn and start there. (TIP: Check out expenses!)

6. Expense Ratio
This refers to the fees you pay fund managers. Calculated as a percentage of your investment, it is paid to help cover all costs associated with managing the fund. Depending on the source and type of fund, an expense ratio can range from 0.2% to 2%. So keep in mind, the higher the percentage, the less you take home.

7. Index Funds
A popular type of mutual fund, Index Funds are investments in the stocks and bonds of companies in a specific Index, such as the S&P 500 (Standard & Poor’s 500), which is an Index that tracks 500 of the largest publicly traded companies in order to measure overall market performance. For investors, Index Funds mean lower fees because you don’t have to pay a fund manager; the Index itself serves as a parameter.  However, make sure you fully understand Indexes before investing and, remember, you will have less control over the holdings in each portfolio than you would if you were choosing individual companies.

8. Diversification
In order to lessen risk, investors will diversify a portfolio by purchasing a mix of different types of stocks, bonds, or mutual funds so your entire nest egg isn’t wiped out if one investment fails. There is obviously no guarantee your portfolio won’t be hurt if the market drops, but diversification can help balance the return, protecting against total loss. Diversification works hand in hand with asset allocation and re-balancing to spread risk according to your risk appetite.

9. Target-date Fund
Also known as “target date retirement funds” or “lifecycle funds”, these funds are often mutual funds intended to be a long-term investment for those with a set or planned retirement date. Here’s how it works: you select a projected retirement date, such as 2024. Your investments this year will start out with more aggressive products (i.e. higher risk – higher return) and change over time, becoming more conservative the closer you come to your retirement date. They are often available through 401k plans and are low maintenance. Beware though, they can be difficult to analyze and some would argue, are a generic investment – one that doesn’t take the needs of each unique individual into consideration.

10. Price-to-earnings (P/E) Ratio
A popular metric for stock evaluation, this ratio looks at the relationship of a company’s stock prices compared to its earnings and is used to gauge whether your stock is overvalued or not.  Most sources agree that an average P/E generally falls between 10 and 17, anything lower could mean a company is undervalued or its potential overlooked. A higher P/E ratio might mean the possibility of future growth.

Whether intimately involved with your investments, or just thinking about entering the market, knowing and understanding these key investment terms (and seeking professional advice) will make you a safer, smarter investor.

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