Report
212
Number
Jun 08 2010

Credit Union Implications of Living Trusts

An entire generation of Americans is beginning to retire in a new way. As defined benefit plans disappear, they are being replaced by defined contribution plans: 401(k)s, 403(b)s, and individual retirement accounts (IRAs). Credit union members are living off those nest eggs and planning to leave slices of the eggs to their heirs. The systematic collapse of the company pension, which shows no signs of stopping, means real changes in the way Americans retire— and in the way financial institutions can serve retirees.

Jinkook Lee
Senior Economist
RAND Corporation
Arie Kapteyn
Director
RAND Labor and Population
Jung-Seung Yang
Seoul National University
Christopher Sharon
Assistant Policy Analyst
RAND Corporation
Report Number 212

Executive Summary

An entire generation of Americans is beginning to retire in a new way. In 1980, 84% of workers at medium to large companies were eligible for a traditional defined benefit (DB) plan, a pension that acknowledged a workers long years of service and sought to provide a stable backdrop for the golden years. Even until the late 1990s, more than half of workers at medium to large companies could expect that pension. By 2008, just one-third of such workers had access to DB plans.

The systematic collapse of the company pension, which shows no signs of stopping, means real changes in the way Americans retire—and in the way financial institutions can serve retirees. For as DB plans disappear, they are being replaced by defined contribution (DC) plans: 401(k)s, 403(b)s, and individual retirement accounts (IRAs). Credit union members are living off those nest eggs and planning to leave slices of the eggs to their heirs.

What Is the Research About?

A trust, simply defined, is a legally recognized asset and property management tool. Trusts established before death are “living” trusts. Grantors create trusts and place assets within them; beneficiaries receive the assets as specified in the trust agreements. A trustee, which can be a person or an organization, is responsible for ensuring that the trusts written guidelines are followed and that the beneficiaries rights are protected.

Credit Union Implications of Living Trusts offers a quantitative look at trends in trust creation and detailed breakdowns of who is most likely to open trust accounts. As financial partners of choice for many of todays retiring workers, credit unions should take a hard look at offering trust services, which can keep valuable relationships and valuable assets at the credit union. Grantors and beneficiaries who are treated well by the credit union will be much more likely to keep their relationships intact. This report helps credit unions profile members who are most likely to use trust services.

The researchers use the RAND Corporations extensive Health and Retirement Study to track the financial behaviors of American consumers born through 1953. Retired or nearing retirement, this is the group that is most likely to need and use trust services.

What Are the Credit Union Implications?

Demand for trust services is here to stay. With the proportion of DC lump-sum retirements on the rise, member demand for trust services is also rising. Between 1992 and 2007 (the last year for which statistics are available), the percentage of workers holding a DC plan rose from 58% to 82%. And the researchers show that every 10% increase in the ownership of DC plans results in a 3.8% increase in the ownership of living trusts.

Credit unions that want to capitalize on these trends should:

  • Focus marketing on high-income and high-asset members older than 50. One in four households of older Americans at the top quintiles hold living trusts, and those trust holders allocate about 57% of their financial assets to living trusts.
  • Strongly consider the needs of women in establishing trusts. It is clear from this research that women are much more likely than men to establish living trusts.
  • Target members with significant assets in DC accounts, like IRAs. Workers with DC accounts are twice as likely to hold living trusts than those without.

Retirees, particularly the most well off, are changing the financial face of retirement. Credit unions should strongly consider offering competitive trust services—or risk getting left behind.