RPF0260-Intro_to_Trusts
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00:00:30.740 | Our financial planning shows this month are focused on the topic of estate planning.
00:00:37.240 | And today I want to give you a useful introduction to the world of trusts.
00:00:43.240 | A lot of mystery and mystique that surround that word, a lot of misunderstandings.
00:00:47.740 | And today I'm going to give you just a broad overview that I hope will help you to understand
00:00:53.740 | what financial planners and attorneys and other people mean when they use the word trust.
00:01:00.740 | Welcome to the Radical Personal Finance Podcast.
00:01:18.740 | My name is Joshua Sheets and I'm your host.
00:01:20.740 | Thank you for being with me today.
00:01:22.740 | Yes, indeed, the exciting world of estate planning and trust planning.
00:01:26.740 | If you've ever talked to anybody, usually an estate planning attorney,
00:01:31.740 | you probably quickly were maybe a little bit intimidated by this word.
00:01:36.740 | We've heard of trust fund kids, trust fund babies.
00:01:39.740 | Today, let's make it a little simple and explain how and why you can use the tool of a trust in your plans.
00:01:49.740 | I guess we all are familiar with the term of a trust fund kid,
00:01:52.740 | but what does it mean other than this person is financially independent?
00:01:55.740 | Well, today I want to give you some meaning.
00:01:58.740 | And there's a lot of depth that we could go to when it comes to trust planning, a lot of depth.
00:02:03.740 | We could talk about the irrevocable life insurance trust.
00:02:06.740 | We could talk about the 2503B trust or the Q-tip trust or the QDT trust or the dynasty trust or the 2503C trust
00:02:16.740 | or the favorite one I like to use when I'm supposed to be sounding fancy.
00:02:21.740 | Let's talk about the defective grantor trust or the tainted grantor trust, which would be another term for it.
00:02:28.740 | Or we could talk about crummy powers.
00:02:30.740 | And there's all of these funny words that have specific and important meaning to those of us in the estate planning business
00:02:37.740 | but often are impenetrable for perhaps you, the layperson audience.
00:02:44.740 | So, today, don't worry. We're not going to talk about any of those cool things.
00:02:46.740 | We're just going to talk about trusts, what they are, how you can use them, and give you just a simple mental picture of what a trust is.
00:02:55.740 | We'll talk about simple trusts versus complex trusts.
00:02:58.740 | We'll talk about living trusts versus testamentary trusts.
00:03:02.740 | We'll talk about revocable trusts versus irrevocable trusts and give a little bit of meat to the bones in today's show.
00:03:09.740 | Before we do that, let me quickly mention our sponsors of today's show.
00:03:14.740 | The sponsor of the day, number one today, is Paladin Registry.
00:03:19.740 | Paladin Registry is a financial advisor registry service.
00:03:24.740 | And the reason I brought Paladin on the show is because one of the most often asked questions that I receive is, "Joshua, how do I find a good financial advisor?"
00:03:32.740 | And it's not a simple answer.
00:03:34.740 | And I've tried to find a financial advisor referral network or a financial advisor company or a financial advisor firm that I could recommend to you.
00:03:42.740 | The problem is it's very difficult for me to be able to recommend a financial advisor firm or any one specific financial advisor because the amount of number of inquiries that I could pass along to a financial advisor would probably be beyond the capacity of anybody but a medium or large firm's ability to handle.
00:04:02.740 | And so I couldn't just recommend my friend Joe or my friend Laura, the great financial advisors.
00:04:09.740 | I needed something a little bit better.
00:04:11.740 | And the best I've been able to find so far has been Paladin Registry.
00:04:14.740 | Paladin was started by a man named Jack Waymire who was a former financial advisor specifically with the goal of solving this problem.
00:04:22.740 | And what he wanted to do was have a registry service of financial advisors.
00:04:26.740 | But he wanted all of these advisors to be carefully vetted and proven and qualified.
00:04:34.740 | So the way you get into the Paladin Registry, there are some hoops to jump through.
00:04:38.740 | You can't just buy your way in.
00:04:40.740 | For full details on that system, I would ask you to please listen to episode 248 of the show.
00:04:47.740 | Episode 248 is called "One Great Way to Start Your Search for a Financial Advisor Interview with Jack Waymire, Founder of the Paladin Registry."
00:04:54.740 | But that's a lengthy, in-depth discussion, about an hour and a half in length with Jack about Paladin and about the financial advisor world.
00:05:02.740 | And I think that's a good place to start.
00:05:04.740 | After you've listened to that show, please go to RadicalPersonalFinance.com/Paladin, P-A-L-A-D-I-N, RadicalPersonalFinance.com/Paladin.
00:05:16.740 | And that will forward you through to a landing page where you'll put your information in, your name and your number, your address.
00:05:25.740 | It will also ask you to tell how many potential assets you have for a financial advisor to help you with.
00:05:30.740 | And you'll put that information there.
00:05:32.740 | And then Jack and his team will take that and they'll respond to that with a number of recommended financial advisors as close to your area as they're able to provide them.
00:05:40.740 | And then they'll provide you with those advisors and you can go and interview those advisors and find out if any of them might be good to serve you.
00:05:48.740 | It's important that you put the information in there accurately so that they can find out where you are.
00:05:53.740 | And it's also important that you put in the information of assets accurately so that they can make sure that the advisor that they recommend will work with somebody who's in your financial situation.
00:06:02.740 | Now, from there, you're free to take it on your own.
00:06:04.740 | There's no – I'm not requiring you to use those financial advisors.
00:06:09.740 | I don't need you to do business with one of them for me to get paid.
00:06:12.740 | I just simply need you to go through that link and put your information in there and talk to the advisors.
00:06:17.740 | And this is my hope that this will be a good way for you to find somebody in your area who's competent and who's trustworthy and who can help you with your situation.
00:06:26.740 | So far, the feedback has been really good of those of you in the listening audience who have gone through this service.
00:06:32.740 | And I would ask if you have, by the way, please let me know your feedback.
00:06:35.740 | If you've gone through already and met with advisors, please let me know your feedback.
00:06:39.740 | Sponsor of the day number two is the YNAB, You Need a Budget, Y-N-A-B, the acronym for You Need a Budget, the YNAB budgeting software.
00:06:47.740 | This budgeting software is awesome.
00:06:49.740 | It is just flat-out awesome.
00:06:51.740 | It is the best budgeting software that I have ever found.
00:06:56.740 | For the full backstory of my experience with YNAB, listen to episode 246 of the show, an interview with Jesse Mecham, the founder.
00:07:03.740 | But this is the software that I use to manage my personal budget and also my business budget.
00:07:09.740 | At this point in time, I use no other accounting software other than YNAB.
00:07:13.740 | And so I have one budget for my business, one budget for my personal household, one bank account for my business, one bank account for my personal household.
00:07:21.740 | So this is a really, really useful tool.
00:07:24.740 | It's not the only tool.
00:07:25.740 | I'll be having somebody on in the coming days that has other options as well that some of you might like.
00:07:30.740 | But it's a really useful tool.
00:07:31.740 | What YNAB does better than anything else is it allows you to allocate the cash that you have in your bank account in a manner that is appropriate where you decide where it goes.
00:07:43.740 | It's awesome.
00:07:45.740 | If you're not using YNAB, you should be.
00:07:47.740 | Please use the download link at RadicalPersonalFinance.com/YNAB.
00:07:51.740 | It's important for you to use that link so I get credit for your download.
00:07:54.740 | There's a free 30-day trial right at that link right there, so RadicalPersonalFinance.com/YNAB.
00:08:00.740 | You can download the full software package free for 30 days, try it out, and see how you like it.
00:08:04.740 | If it's useful to you, keep it and pay for it.
00:08:06.740 | If it's not useful, don't worry about it.
00:08:08.740 | Just delete it off your system, no problem at all.
00:08:10.740 | But please use the download link at RadicalPersonalFinance.com/YNAB.
00:08:17.740 | Now let's dig into the world of trusts.
00:08:20.740 | There's a lot of confusion surrounding the world of trusts for a number of reasons.
00:08:24.740 | But a couple of important ones is that there are different types of trusts.
00:08:28.740 | And trusts can be very complex.
00:08:31.740 | And so often you will have heard about one type of trust and that trust may have certain attributes.
00:08:38.740 | But then you hear of something else and you think that those attributes transfer over.
00:08:42.740 | A common example that I hear would be that a trust does something for your tax planning.
00:08:48.740 | Well, the reality is is that many trusts, perhaps most, don't do anything for your tax planning.
00:08:54.740 | But you can use a trust for your tax planning, but it has to be a different type of trust.
00:08:59.740 | And we'll cover that during the context of today's show.
00:09:02.740 | But when you're doing estate tax planning, a revocable trust does nothing for your estate tax planning.
00:09:09.740 | But an irrevocable trust does a lot for your estate tax planning.
00:09:13.740 | So you might think you know a certain thing about trusts and it might be true.
00:09:19.740 | But then it might not be true for a different type of trust.
00:09:22.740 | The best example I can think of would be that to think of a trust as a form of company.
00:09:28.740 | Many of you are familiar with various types of company structure, company ownership.
00:09:33.740 | You could have a sole proprietorship.
00:09:35.740 | You could have a partnership.
00:09:36.740 | You could have an LLC.
00:09:38.740 | You could have an S corporation.
00:09:39.740 | You could have a C corporation.
00:09:40.740 | All of those are companies.
00:09:42.740 | And so you can run a company using any of those various entity types.
00:09:48.740 | But they all have different characteristics.
00:09:50.740 | So depending on what you're trying to accomplish, in some cases you might choose a sole proprietorship as your entity of choice.
00:09:57.740 | At the moment, radical personal finance is a simple sole proprietorship.
00:10:00.740 | There is no need for me to have or do anything different than what I'm doing at this point in time.
00:10:05.740 | However, that will soon change.
00:10:07.740 | And so you might see radical personal finance, LLC.
00:10:12.740 | And in that context, then there will be certain business attributes that I've chosen.
00:10:18.740 | For the reasons why I've chosen that type of entity.
00:10:22.740 | But it's all just on paper.
00:10:24.740 | It's all just – it's all made up by lawyers.
00:10:27.740 | Welcome to the way our world works.
00:10:30.740 | When you live in an orderly society where the rule of law prevails, these papers and what's written on them is very important.
00:10:39.740 | The same thing in trusts.
00:10:40.740 | So I don't think there's anything wrong about thinking of a trust in the same way that you think of a company.
00:10:46.740 | It's an artificial entity that's been created based upon some papers that people got together and drew up and signed.
00:10:54.740 | Now, there are laws.
00:10:55.740 | In the same way there are laws around how a company can be formed, there are laws around trusts.
00:10:59.740 | And so there are different types of trusts that are recognized by the government for certain purposes.
00:11:05.740 | And so your trust needs to conform to certain statutes and laws that have been enacted.
00:11:10.740 | But in order for a trust to exist, there are a few important elements that must be there.
00:11:15.740 | And let's talk through those.
00:11:17.740 | Obviously, there must first – there must be a document of some kind.
00:11:20.740 | All trusts are going to be driven by a document.
00:11:22.740 | That document can be simple or it can be complex.
00:11:25.740 | But there must be some structure or entity structure.
00:11:29.740 | Also, in order for a trust to exist, there must be trust property.
00:11:34.740 | This is called – in legal terms, it's called trust principle or often trust corpus, corpus being the Latin word that refers to the body, the property, the actual property that's within the trust.
00:11:44.740 | You can draw up – you can go online and you can download right online a trust document.
00:11:51.740 | You can print it out and plop it on your desk.
00:11:53.740 | But that trust does not exist unless there's actually some property that is owned by the trust.
00:12:00.740 | So in order to bring that trust into existence, you would have to retitle some property.
00:12:04.740 | You'd have to retitle a bank account and transfer that bank account from the name of Joshua Sheets to the name of Joshua – or revocable trust of Joshua Sheets.
00:12:13.740 | Or living trust of Joshua Sheets.
00:12:15.740 | You have to retitle that.
00:12:16.740 | So the trust must have some kind of property within it.
00:12:19.740 | There must also be, for a trust to exist, a grantor or trustor.
00:12:24.740 | So a grantor is the person who actually puts the property into the trust and thus dictates the terms of the trust.
00:12:34.740 | So it's the person with the property.
00:12:36.740 | It's their right to set up the trust and set the terms of how that trust works.
00:12:42.740 | If I'm a parent and I'm leaving assets – putting assets into a trust for the benefit of my kids, I'm the one who gets to decide when and under what circumstances those kids get the money.
00:12:53.740 | And there's actually pretty broad leeway as to how you could write the document.
00:13:00.740 | I could put in all kinds of interesting restrictions and rules.
00:13:04.740 | Now, in practical terms, there are certain things that I could write into that trust document that would invalidate it from certain types of tax treatment.
00:13:14.740 | That would be the most significant thing.
00:13:16.740 | So in order for me to qualify a trust for certain types of tax treatment, then I need to put certain legal things into the – into that document.
00:13:27.740 | And that's where the attorneys, depending on what they're trying to accomplish, will advise you on that process.
00:13:32.740 | A practical example just so that you understand would be the use of what are known as crummy powers.
00:13:38.740 | Crummy is a word – it's actually a name.
00:13:41.740 | It spells – it's spelled C-R-U-M-M-E-Y. But that actually comes from a tax court case where the point of the trust was to turn a gift of a future interest, a gift of an actual life insurance premium, into a gift of a present interest which would be eligible for the annual exclusion amounts.
00:14:05.740 | And I know I'm using – I thought I was going to keep this surface and I'm using all the lingo.
00:14:10.740 | But the point was that this was a way of transferring assets out of a person's estate.
00:14:17.740 | Usually you'll see these – although crummy provisions could be used in a variety of irrevocable trusts, which I'll define in a moment, usually this comes up in the case of a life insurance trust.
00:14:25.740 | What a crummy power actually means is that when the grantor puts the money into the trust, the beneficiaries of the trust must have the right to withdraw money from the trust.
00:14:38.740 | They have a temporary right of withdrawal, and that temporary right of withdrawal is either the lesser of the amount of the annual exclusion or it's the value of the gift that was transferred in.
00:14:49.740 | But if the right is not exercised, then the trustee can take that money and they can use it appropriately.
00:14:57.740 | So the example here is that the reason that power exists in the trust document, the reason why the trust document gives the beneficiary the right to withdraw the contribution out and spend it is so that the trust can qualify that transformation of the gift of future interest into a gift of present interest.
00:15:23.740 | Thus making it eligible for the annual exclusion, getting the assets out of the estate, and accumulating it within the context of an irrevocable life insurance trust.
00:15:31.740 | That opens up the potential for the beneficiary to get the money.
00:15:38.740 | But what happens in those circumstances is the trustee carefully explains to the beneficiary, and the grantor will explain to the beneficiary as well.
00:15:45.740 | Listen, you have this legal right. The trustee must send out a letter notifying them of their right of withdrawal and then properly certify that in order for the trust to be held valid.
00:15:56.740 | They'll say, listen, you have the right to invade this trust and take out this money, but it's very much to your best interest not to do that.
00:16:03.740 | That's basically how it works.
00:16:06.740 | So you might – you could put almost any right in there, but to get certain benefits under the established tax code and tax doctrines, you need to have certain provisions in there.
00:16:18.740 | So there must be – back to what constitutes a trust. There must be a grantor.
00:16:22.740 | And importantly, the grantor must be competent, meaning they must be legally competent.
00:16:30.740 | They must be of sound mind, able to make a transfer of their property into the trust.
00:16:35.740 | If the grantor is proven to be incompetent, that could result in the dissolution of the trust.
00:16:43.740 | So you've got to set these things up while you're competent or if you're working with somebody.
00:16:48.740 | This is a concern if you're helping your parents with their estate planning. They must be competent in order to establish the trust.
00:16:54.740 | Make sure you get this done on time.
00:16:58.740 | In order for a trust to exist, there must also be a trustee.
00:17:02.740 | And the trustee is the person to whom the property is transferred by the trustor or by the grantor.
00:17:09.740 | So the trustee is the one who receives the legal title to the property that's placed in the trust.
00:17:15.740 | And this is the person who manages the trust, who distributes the income from the trust according to the terms of the trust instrument.
00:17:22.740 | And the trustee is the person who actually holds legal title.
00:17:26.740 | Now, it is possible for the trustor and the trustee to be the same person.
00:17:32.740 | This would be what would happen if I set up the Joshua Sheets Living Trust.
00:17:36.740 | I would be the grantor, the trustor, the grantor, the person who puts the property into the trust.
00:17:41.740 | And then I would also establish myself as the trustee under the terms of that trust.
00:17:46.740 | That arrangement, if I were the trustee, would come with, again, certain tax implications.
00:17:52.740 | That arrangement would not involve any transfer of the property out of my taxable estate.
00:17:59.740 | That arrangement would not result in any kind of credit or protection.
00:18:03.740 | But there would be some benefits to that, and we're going to be talking about those in a few minutes when we get to living trusts versus wills.
00:18:10.740 | There must also, in order for the trust to exist, be a beneficiary.
00:18:14.740 | And the beneficiary is the party for whose benefit the trust is created and who will receive the direct and indirect benefit of the use of income from and/or the principle of the trust property.
00:18:28.740 | And so the beneficiary holds the equitable title, and everything that the trustee does with the trust must be for the benefit of the trustee based upon the terms that are outlined in the trust document.
00:18:42.740 | So those things all must exist in order for a trust to exist.
00:18:46.740 | Now, we can adjust the elements.
00:18:48.740 | They can be different people.
00:18:49.740 | They can be the same people.
00:18:50.740 | We can change all kinds of things, but those are the basic elements of a trust.
00:18:56.740 | There can be various types of trusts, and today's show will not delve into different types.
00:19:03.740 | In future financial planning shows, we will talk about them because financial planners need to know them.
00:19:07.740 | And in order to pass the CFP exam, you need to know specifically the types of trusts and their proper use and application.
00:19:13.740 | But they could be brought together in a few different ways, and a very useful way to think about them is as a simple trust versus a complex trust.
00:19:23.740 | So a simple trust is a trust that uses what we call the conduit principle for distributions of income and principle.
00:19:34.740 | So the concept here is that a simple trust just brings the income from the property right through to the beneficiaries.
00:19:43.740 | From the business world, the example here would be what we call flow-through entities in the business world.
00:19:50.740 | Your flow-through entities would be partnerships, sole proprietorships.
00:19:55.740 | These would be an S corporation, and then LLC, if it's taxed as an S corporation, would be a flow-through entity where the income is flowing right through the entity.
00:20:05.740 | And although we have a separate entity in terms of legal purposes, from a tax perspective, all of the income gets reported on your tax return.
00:20:12.740 | A simple trust is exactly the same.
00:20:14.740 | There's no separate tax return or no separate tax rate that is filed by a simple trust.
00:20:21.740 | The income is simply – the property is held within the trust, and the income simply flows right through to the beneficiary's tax return.
00:20:30.740 | And those beneficiaries report the income in the same way with whatever the character was that it has in the trust, and they pay the taxes on that income at their own marginal tax brackets, whatever they happen to be.
00:20:42.740 | The simple trust and the complex trust, the complex trust is taxed as a separate entity.
00:20:49.740 | And it's taxed as a separate entity if it meets two requirements.
00:20:55.740 | It must be irrevocable and the grantor didn't retain any control.
00:21:02.740 | So there's a little wrinkle where you can actually have an irrevocable trust where the grantor did retain control.
00:21:10.740 | We'll go through in a moment.
00:21:12.740 | But in order for a trust to be a complex trust, taxed as a separate entity, it must be irrevocable and the grantor didn't retain any control and/or if it's – if the income is accumulated – excuse me – and if the income is accumulated either because the trust document says that the income has to be accumulated or if the trustee has the discretion to accumulate income.
00:21:34.740 | The simple trust, if it earns income in any year, it's got to pass that income right through to the beneficiaries.
00:21:39.740 | But if in a complex trust, if the trustee has the right to accumulate the income in the trust, then it's going to be taxed as a separate entity.
00:21:47.740 | That can be tough and you got to be careful here.
00:21:51.740 | And the reason you have to be careful is the trust tax tables are extremely compressed.
00:21:59.740 | As an example, the top federal income tax rates – let's just go with simple income tax rates of 39.6 percent.
00:22:07.740 | If you were a single person, an individual taxpayer filing a tax return, you would have to earn $413,201 of income in order to get you into that top 39.6 percent tax bracket.
00:22:23.740 | Or if you were married, you'd have to earn $464,000 in 2015, $464,850 to get you into that top 39.6 percent tax bracket.
00:22:34.740 | But if you were a trust or an estate, you would only have to have income of $12,301 in order to move you into that top 39.6 percent bracket.
00:22:46.740 | So you've got to be careful with your taxation.
00:22:50.740 | Good planning is always required.
00:22:53.740 | Now, I want to just lay out a couple more words – a couple more terms for you and then we'll dig into the question of should I have a will or should I have a revocable living trust.
00:23:05.740 | And the terms that I want to lay out are revocable versus irrevocable.
00:23:11.740 | And if you've got a good grasp of the English language, it should be simple.
00:23:16.740 | A revocable trust is one in which the grantor has the ability to make changes in the trust document and to revoke the trust.
00:23:25.740 | An irrevocable trust is a trust in which once the grantor has given the property into the trust, that trust now stands on its own and is driven by the terms of the trust and the grantor has no ability to make any changes further in the trust.
00:23:40.740 | The reason why this distinction is important is because in a revocable trust, that type of entity will – the income and the assets are still going to be flowing through to the grantor and they're going to be taxed on that directly.
00:23:54.740 | And it's also going to be included in their estate.
00:23:58.740 | In an irrevocable trust, the money and the assets are going to be outside of their estate, which is the major reason why in estate planning we talk about an irrevocable trust.
00:24:07.740 | The reason that we want assets out of the estate is so that they do not incur the heavy estate tax that is going to be levied on those assets if they reach over a certain amount.
00:24:18.740 | Now, the amount in today's world used to be much smaller.
00:24:21.740 | The amount in today's world is pretty simple.
00:24:23.740 | It's a little over 5 million bucks for each person.
00:24:25.740 | I'm just going to use a good round $5 million number although – because the numbers change every year.
00:24:31.740 | The precise current number in 2015 is $5,430,000, and it's indexed each year to go up with inflation.
00:24:39.740 | So if you don't have more than $5 million of assets for you as an individual or $10 million of assets as a couple, in general, you're not going to – it's not going to be too difficult to avoid estate taxes.
00:24:50.740 | There were a few wrinkles in years past where individual states had some varying rates, but those wrinkles have been ironed out.
00:24:57.740 | This has been a place of major change.
00:24:59.740 | Even when I was a practicing financial advisor, it was a major question the first few years of what's happening with estate tax rates.
00:25:05.740 | There was a year in which the estate tax went away completely.
00:25:08.740 | Then it dropped down to a million bucks, and it's just been all over the – and they changed it all of a sudden last second.
00:25:13.740 | It's been all over the place, and it was a place of real insecurity of knowing what was going to happen.
00:25:19.740 | The estate tax used to be a major, major factor in many individuals' plans.
00:25:25.740 | As recently as 2001, the estate tax exclusion amount was $675,000.
00:25:33.740 | So in essence, the – any assets that you owned in 2001 that were more than $675,000, if you died, those assets would be taxed, and the top tax rate was about 55 percent.
00:25:47.740 | So this was a real headache in financial planning.
00:25:49.740 | You could – you had a simple $1 million life insurance policy.
00:25:53.740 | And that – the value of any life insurance policies that you own at the date of your death are included in your gross estate.
00:26:00.740 | So if you had a $1 million life insurance policy that you owned on your life and you died, well, the value of that policy is included in your estate.
00:26:09.740 | So it was a real headache that required a lot of planning.
00:26:12.740 | And today in 2015, it's gotten a little bit simpler and many fewer people are affected by this now that the exclusion amount is, again, up near 5.5 million bucks.
00:26:23.740 | When you're trying to avoid the estate tax, you've got to be very careful with the assets that you own at the date of death.
00:26:30.740 | And your goal is to own fewer assets at the date of death.
00:26:34.740 | Well, how do you still get some benefits from those assets without owning them?
00:26:38.740 | You transfer them into a trust.
00:26:40.740 | There are a variety of ways that you can do this and there are a variety of things that you could do.
00:26:43.740 | And, for example, if I were advising somebody and let's say that I was – I were working with a 50-year-old client and this client had done well in business.
00:26:53.740 | But they were sitting talking to me and they were saying, "Joshua, I've got some serious opportunities for this business to really, really grow.
00:27:00.740 | And I really think there's going to be some great growth and they've got some money and they're going to have some serious money."
00:27:06.740 | Well, you consider going ahead and transferring some of those shares out from personal ownership into a trust instrument of some kind where those shares, if they're going to go from, say, a value of a dollar a share to a value of $30 a share.
00:27:20.740 | You want that appreciation to happen outside of the person's estate.
00:27:23.740 | You want it to happen within the context of a trust so that when they die, they don't have to deal with the tax that's due on a $50 million estate when they could have artificially lowered the value of their estate down to a lower amount.
00:27:35.740 | So that's where you get into this revocable versus irrevocable.
00:27:37.740 | And the challenge is that in order to get the assets out of the estate, you've got to actually give the money away.
00:27:42.740 | It's got to be an irrevocable gift for you to actually get it out of the estate because if you can exercise any influence or pull it back or have any incidence of control in it, then it's still part of your estate because you still own it.
00:27:54.740 | So that's the question of revocable versus irrevocable.
00:27:57.740 | And there are major differences in the types of trusts and the purposes of the trusts.
00:28:01.740 | Hopefully, that's a useful overview.
00:28:05.740 | Let's go now into the concept of a living trust or a revocable living trust.
00:28:11.740 | This question often comes up when somebody first goes to see an attorney.
00:28:16.740 | They may go in expecting to spend a few hundred bucks on a simple will and then all of a sudden, the attorney starts talking to them about establishing a living trust.
00:28:24.740 | Often what has happened in this industry is some attorneys get into the business of using seminars as a way to sell their legal services.
00:28:33.740 | And so they go and they do a seminar and they talk about all of the fancy things about a living trust and how it's so wonderful and you can avoid probate and it's completely private and all these things and then say, "Well, come on in and I'll set you one up."
00:28:45.740 | And the difference in fees between preparing a simple will versus preparing a revocable living trust is dramatic.
00:28:54.740 | And so people often want to know, "Well, what should I do? What's the best thing to do?"
00:28:59.740 | Revocable living trusts are not a scam.
00:29:03.740 | They are a time-honored useful tool.
00:29:07.740 | They are expensive to establish and they come with some pros and some cons.
00:29:11.740 | And essentially, the way it's often said is that if you set up a will, then you are going to pay the expenses at the back end.
00:29:19.740 | And if you set up a trust, you can pay most of the expenses at the front end.
00:29:22.740 | The expenses can either be associated with the probate process and the settling of your estate on the back end or they can be associated with establishing and funding the trust on the front end.
00:29:32.740 | And that should result in a fairly low-cost transfer of assets at your death.
00:29:38.740 | There are other reasons, however, for which a trust could be very useful.
00:29:43.740 | Let's just talk about these in almost a bullet point fashion here because this is how they're usually presented.
00:29:50.740 | Number one, the biggest benefit of using a revocable living trust – and let me just explain the process.
00:29:58.740 | If you establish a revocable living trust, you establish a legal document that serves as a trust.
00:30:06.740 | This is a simple trust. The money flows through and you transfer all of your assets or most or some – whatever the appropriate assets are into that trust.
00:30:15.740 | And so you no longer hold title to the assets. Your trust now holds title to the assets.
00:30:21.740 | So your bank account is no longer the bank account of Joshua Sheets.
00:30:24.740 | Now, it's the bank account of the revocable living trust of Joshua Sheets' trustee.
00:30:30.740 | Your car is no longer the property of Joshua Sheets.
00:30:33.740 | Your car is now the property of the revocable living trust of Joshua Sheets. You get the point.
00:30:37.740 | The benefit is that when you die, if you've transferred all your assets into a trust, when you die, you don't actually own anything.
00:30:45.740 | The trust owns all the assets.
00:30:47.740 | And so once that property has been transferred into a revocable living trust, that property does not go through the probate process in the courts.
00:30:57.740 | Rather what happens is in a trust document, you establish the trustee and you establish somebody who's a successor trustee.
00:31:05.740 | And that successor trustee just simply takes over.
00:31:08.740 | So if I were establishing a revocable living trust for myself, I would make myself the trustee.
00:31:13.740 | As the trustee, I have full control and authority over the trust.
00:31:16.740 | I can go ahead and sign the checks on my bank account – excuse me, on my trust's bank account as the trustee of the Joshua Sheets revocable living trust.
00:31:25.740 | I can pay the insurance payments as the trustee for the car that is owned by the trust.
00:31:31.740 | And so in my documents, if the trustee becomes incapacitated or in this case dies, there's a successor trustee that can be appointed.
00:31:39.740 | That could be as simple as my wife. It could be a family member.
00:31:42.740 | It could be a professional trustee. It could be really anybody that is qualified.
00:31:47.740 | And that can be a pretty quick process, maybe just even a few weeks.
00:31:51.740 | And there's – at that point in time, the successor trustee doesn't have to pay any court fees.
00:31:56.740 | They don't have to necessarily even hire any lawyers.
00:31:59.740 | They just simply go on and dispose of the assets in the way that the trust document states.
00:32:04.740 | So that can be really, really useful especially if you have a complex situation where – probably the best example would be where you own property in multiple states.
00:32:17.740 | If you own property in multiple states, then your estate would need to be settled in multiple estates, which requires multiple probate proceedings, multiple costs.
00:32:26.740 | It requires more issues.
00:32:30.740 | But if your trust owns property in multiple states, then nothing needs to happen with that property ownership because the trust already owns it.
00:32:39.740 | And then you can avoid some of the automatic court supervision that happens in the settlement of an estate also.
00:32:48.740 | Now, the big benefit of having your assets owned within the context of a revocable living trust is privacy.
00:32:55.740 | When you have a last will and testament and you die, your last will and testament will be filed with the court as a public document.
00:33:02.740 | That's why today we can go back and we can read the wills of all kinds of famous people who have died.
00:33:08.740 | And that will might have in it if you're using – it might have in it various trust provisions that are being established at the date of death.
00:33:16.740 | However, if you've gone ahead and established a revocable living trust, that document is a private document.
00:33:22.740 | It's not published.
00:33:24.740 | And that means you can keep all your assets private.
00:33:29.740 | You can keep any dictates that you've made in the trust private.
00:33:33.740 | That stuff doesn't have to be disclosed, and that can be very useful.
00:33:37.740 | The privacy factor is a big deal for many, many families.
00:33:41.740 | Additionally, you should just note you can actually establish something that's called a simple pour-over will, which simply says that anything that you own at the date of your death that you didn't – that was owned personally by you, titled in your name, that just simply pours over and is placed into your living trust.
00:34:02.740 | Additionally, of course, you can title the trust as the beneficiary of various accounts that you may have.
00:34:09.740 | If you have a 401(k) that has a million dollars in it, if you wanted to, it wouldn't necessarily be the best thing to do.
00:34:15.740 | But if you wanted to, you could make your trust a beneficiary.
00:34:19.740 | The reason I say if you wanted to is because there are tax implications with 401(k)s, and you should look to see if you can stretch out the IRA and do an inherited stretch IRA or some things like that.
00:34:29.740 | But you could make the trust a beneficiary.
00:34:32.740 | And so you can get all your assets governed into one little document, and the successor trustee can take over.
00:34:37.740 | Another major benefit of using a revocable living trust is that if you become disabled, then your property can continue to be managed for you in the way that you've previously specified under the trust document.
00:34:55.740 | You could also accomplish this with a durable power of attorney, but sometimes it may be easier possibly to deal with – for the people that you're dealing with – to deal with a trustee than with a power of attorney.
00:35:08.740 | In essence, the trust can establish for you a greater and simpler continuity at the time of death.
00:35:16.740 | It can help you to not have to deal with the concept of lost or destroyed wills.
00:35:22.740 | It can keep the investment management intact.
00:35:26.740 | So if you've got investment managers who are managing your assets for you, then nothing has to change at the date of your death.
00:35:32.740 | Those can simply go through.
00:35:34.740 | There are some benefits.
00:35:35.740 | There are, however, some significant disadvantages of using a revocable trust.
00:35:41.740 | And the biggest one that most of my attorney friends say that happens is you have to go through and individually retitle all of your property into the name of the trust.
00:35:51.740 | And that's what many people don't do.
00:35:52.740 | Many people, believe it or not, will order very expensive documents drawn up, and they take them home, and they sit on their desk, and they never actually go through the titling of the property.
00:36:01.740 | So any property that you're going to title into the trust, you have to actually go through and do the retitling.
00:36:09.740 | Your investment account titles need to be changed.
00:36:13.740 | You may need to get a new deed for the house.
00:36:16.740 | You may need to just have to go through and get everything updated, and that's the biggest disadvantage of the situation.
00:36:26.740 | You also have to make sure you keep the trust current.
00:36:28.740 | If anything changes in your life, you get divorced, you have kids, and those things aren't there, you've got to make sure that you keep those things current.
00:36:37.740 | As I hope you can see, this is definitely very much an area where you should get some good legal advice.
00:36:42.740 | And my experience – I think there are scam artist attorneys out there just like there's bad financial advisors, there are bad insurance agents, there are bad accountants, and there are priests who molest kids.
00:36:56.740 | But most of the estate attorneys that I've worked with and become friends with, they really do the right – they do a really good – they do a good job.
00:37:06.740 | And so I would just encourage you, get good legal advice.
00:37:09.740 | And oftentimes, you may not even need somebody to help.
00:37:14.740 | The biggest value of good advice is somebody to take a quick overview and give you a broad-stroke opinion of the direction.
00:37:23.740 | The actual implementation could be accomplished in a variety of ways.
00:37:27.740 | But sometimes you don't know what you don't know, and that's where somebody who's a competent professional looking at your situation can make some recommendations for you that can really, really do well.
00:37:37.740 | And so when you're comparing with the most recent financial planning show where we talked about wills and powers of attorney and living wills, make sure that you're also including and factoring into your analysis the context of a trust, the simple one that's often referred to here, a vocable living trust.
00:37:56.740 | We'll talk more about more entities.
00:37:58.740 | We'll talk about different types of trusts.
00:38:00.740 | I'm not sure how deep to go.
00:38:02.740 | If I go into 2503B trust and 2503C trust, I probably will do it at some point because the financial planners in the audience need to know.
00:38:11.740 | But I'm trying to still build my audience, not put everybody to sleep.
00:38:15.740 | So at some point, I'll probably do it, but I don't expect it in the short term.
00:38:19.740 | We'll see.
00:38:20.740 | I'm just trying to give you some broad strokes to give generalized knowledge, and maybe we'll get to the specifics.
00:38:25.740 | If you're enjoying these shows, let me know.
00:38:27.740 | If you'd like more, if you have specific questions, I will do – I've collected a lot of estate questions from patrons of the show.
00:38:34.740 | So if you've got specific questions, let me know those questions, and I'll try to answer as many as I can in a forthcoming Q&A show about estates.
00:38:40.740 | And that's a more interesting way for me to answer estate questions sometimes as well.
00:38:47.740 | So I'd be happy to have your questions.
00:38:49.740 | Please go to the Patreon page.
00:38:51.740 | Those of you who are patrons, that's where you'll find the request for questions.
00:38:54.740 | Just go to RadicalPersonalFinance.com/patron, and you can find the link there for the question on November estate planning shows.
00:39:01.740 | So thank you all so much for listening.
00:39:02.740 | I appreciate your time and attention.
00:39:04.740 | I hope this content has been useful.
00:39:05.740 | If this content has been useful for you, could you do me a favor?
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00:39:31.740 | But just tell them, "Search the App Store, Radical Personal Finance."
00:39:34.740 | If the show content is useful to you, if I've helped you save money, if I've helped make you money, if you feel that this show has been financially valuable to you,
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00:39:44.740 | My goal is to help you and provide for you all the information and knowledge you need to create, to earn, to create, and to build long-term wealth for you and for your family.
00:39:56.740 | And I'd be honored if I've done anything in that direction.
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00:40:03.740 | So you can do that for as little as a buck a month.
00:40:06.740 | Hopefully, I'm saving or making you more than $10 a month.
00:40:08.740 | But hey, I appreciate all of you who do that.
00:40:10.740 | Or you can, you know, five bucks, 10 bucks, 20 bucks, however much I'm making, take 10% of that and send it over to me.
00:40:18.740 | I'm making you, excuse me, however much I'm making you, take 10% of that and send it over to me.
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00:40:23.740 | So go to radicalpersonalfinance.com/patron.
00:40:25.740 | You'll find the details of that.
00:40:27.740 | And I wish you adieu.
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00:41:07.740 | Don't go gently y'all.