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- [00:00]
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Foreign.
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What's up? And welcome back, everyone, to the second ever episode of the Practical Planner. I am your co host, Thomas Koppelman, co founder and financial planner at Allstreet wealth. And I'm joined with my other co host, Ann Rhodes, the chief legal officer@wealth.com and thanks for joining me. I'm excited to get back into episode two today.
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A
Thank you so much, Thomas. It's always such a pleasure to find myself across this sort of virtual coffee with you to talk about estate planning.
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Definitely. So everybody that did not listen to last week, I would definitely recommend that you go back. The goal of this podcast is we're really, like, bringing you up to speed from the basics all the way to a lot of the complex. So last week was really about what estate planning is, what the importance of it is, and we got into the foundational documents a little bit, but today we're going to dive more into those foundational documents, what they mean, why they're important, and kind of some issues or mistakes that we see around them. So, Ann, let's just kind of start off like with, you know, what's the first foundational document you think of when you think of estate planning?
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Well, it has to be the will or the trust, right? That is what I think most people think of as the main vehicle for their estate plan. But before we dive into that, it's important to note that estate planning really is a package of documents. It's a suite of legal documents so that you can address, as we spoke about last week, not only death, but also incapacity or unavailability of that client. And this can be, you know, as simple as having to travel outside of the country and not being able to, you know, notarize or sign something where they need to have a financial transaction being done. And so I really think of estate planning as a. As a whole suite of these documents. So to kind of go into each of these a little bit more deeply. And here I also want to pause and make a note. So as I say the names of these legal documents, you may think, holy cows, I've never even heard of this document, or I know it by another name. What is going on? So to level set, I want to explain. Different states have different preferred names for some of the documents that do exactly the same thing. Right? And then to make matters worse in this area and why we are having a podcast about estate planning is because even attorneys sometimes have different preferred names for different documents. So a typical example of this will be the living trust versus the Revocable trust. And then also throw in the fact that some people refer to something as a will versus a living will. So this episode really is about kind of untangling some of these terms and level settings so that going forward, we have kind of one set of names for the exact same document. But in your particular state or for your particular client, you may have to know it by a different name.
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And I think that's important, especially with, like, now US Advisors. Most of us are working with people not just in our state, but all over the country, being virtual. And you might have the weird situation where you're talking about estate planning and, hey, you need to go make sure you get this done. They're like, I brought this up to my attorney, and that wasn't the name of it. It's like, that's okay. It means the same thing. You don't have to have it perfect. But if they're coming back with different names, that's why.
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Exactly. And so first things first, a living trust is a very common name for a revocable trust. And revocable trust just means it's. I mean, a trust, so an agreement between two people about what to do with a certain set of assets. But it's made while the creator of the trust is alive, and the creator of the trust has the full power to change the trust and. And including completely revoking it, meaning just making it go away by signing another piece of paper. So living trust, revocable trust, those are interchangeable oftentimes. Then there is the will, the last will and testament. By and large, you know, that's entered into, like, pop culture, you know, living consciousness. And so most people understand it's a document that takes effect upon your death and that, you know, names your executor, who's going to be in charge of your money, and also how to dispose of that money. Importantly, it also names guardians. And if your client has minor children or children who need that help, then there is something called the living will. And I wanted to bring it up immediately after the will because it sounds so similar. Just add the word living in front of it. But it's actually quite a different document. And it goes hand in hand with something that's called a health care power of attorney. So what these two documents are, are decisions that your client wants to make regarding who should be in charge of their health care decisions in case something happens to them, how to perhaps even dispose of their remains, you know, donate organs, and also what those instructions should be. The important thing to realize about these medical documents is that they really come in two parts. And in most states they're actually very clearly made into two parts. But in some states, the two parts are actually combined into one document. That would be called the advance health care directive. So think of this as a formula. Advance healthcare directive equals power of attorney plus living will. And so it just depends on the state's preference here. So the healthcare power of attorney is the part that actually names the person, the agent who will make decisions on healthcare. And the living will is basically, I think of it as everything else. So your guidelines, your wishes about, you know, end of life sustaining treatment, artificial nutrition and hydration and even organ donation, as I said before. And so that's, you know, that third document type. And then the fourth document is, I think of it as a stopgap, you know, kind of Hail Mary. If you can't do something with a trust, then, you know, try to do it under a financial power of attorney. So, so that's the last one. It can be known as a durable power of attorney, a general power of attorney. Usually all of the states have different preferred forms for this, just as with the advanced healthcare directive. So going forward in this podcast, these kind of four foundational documents I will refer to as a revocable trust, as a will, as an advanced healthcare directive, and as a financial power of attorney.
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B
Perfect. I think that before we go into difference between trust and a will, and I think that's super important. I think that, you know, when I have conversations with people, I'm sure advisors have the same thing. You know, maybe younger people hear this and they're like, ah, you know, I'm fine. I don't really need to get those done. But I think it's an important conversation to have. And I think maybe the best place for this to go is, you know, what happens when people don't have these documents done. What are some of the issues that you see come about?
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Yeah, absolutely. I mean, it really depends on that person's situation. So maybe here I'll use a couple of anecdotes. So the first thing to know is if you pass away without any, like, will trust, an estate plan, you, your estate, the assets that you own at your death will pass by intestacy laws. It's a fancy word, intestacy for you passed away without an estate plan.
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Yep.
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And these intestacy laws are not the most commonly, you know, revised laws. Some of them may be decades old. Some of them may be from the 1950s where the makeup of an American family is very different than what it is today. Right. Think of like your prototypical nuclear family. Mom, dad, kids. Right. Maybe you still have parents who are alive, maybe you have siblings, but there's this waterfall that basically a legislature from a long time ago potentially decided that this is by and large what most Americans want. But you hear in that statement, by and large, what most Americans want may not apply to you. And specifically, you know, even if you're okay with like most of your assets going to your spouse, otherwise your kids, otherwise your parents.
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Right.
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Which is usually that flow, you may still want to make a couple of like smaller gifts to people. And those gifts are definitely not going to be reflected in there.
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So.
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So I think of, you know, particularly personal objects tend to hold a lot of sentimental value or maybe a one time cash gift to charity. You've basically lost the opportunity to make those gifts. And I always come back to like this one example of a woman who drove me around D.C. and I told her my job and she said, you know, I just wish my mom had left a note somewhere saying to whom her fur coat should go to because I have three sisters. And it turned out my brother's wife took the coat when my mom was in the hospital. Right. And you're just like, you know, that's, that's a lost opportunity. This woman who passed away didn't have a lot of assets, but there was something, an object of real sentimental value to her children and they ended up fighting over that. Right?
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Yeah.
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The other thing that can happen, and this is more for your sort of high net worth clients, those who have taxable estates, is that you've just lost the ability, like your client has lost the ability to do any tax planning at death. And all of a sudden, you know, the state government or the federal government is starting to see cents on the dollar, but they, they want to pass to their beneficiaries. So why lose that opportunity as well? Right?
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So yeah, I think the other one that comes to my head is with business owners and financial power of attorney. And you know, I, to be honest, I've never had this issue come about with any of my business owners, but I've always heard the stories of like business owner is in a different country. They're not able to work, some financial decision needs to be made or needs to be signed or notarized or whatever, and business is basically stuck because they've never done the estate planning documents to give anybody else the ability to carry out that action.
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Yes. I'm so glad you brought that up because I just had a conversation with a financial planner who has, you know, a business owner as a client and was wondering, you know, where the heck do I start, right? Like they had a very, the business owner had a very basic agreement in place, partnership agreement with his preferred partner. And all of a sudden they're bringing on new partners and he's finally starting to realize, like things can go wrong and that not alone, not, not just, you know, incapacity of your partner or death, but even like people leaving, right? And like taking your business ideas with them. And so oftentimes, you know, in these situations, it's actually, it's quite interesting. Like what I always say is, what would you need for your business to continue operating and importantly for your loved ones, what sorts of rights do you want them to have in that continuing business? Right? And so this can be things like, you know, I mean, typical example, maybe the spouse of the client is not at all involved in the day to day of the business. And that spouse should never be, you know, the person running the business. Right? Like they can't just step into the shoes.
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Yeah, right.
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But maybe you want that spouse to continue having, you know, the economic rights, right? The dividends, the distributions, the sale proceeds from, from that business. Right? And then it's about talking to that spouse or that loved one and saying, you know, do you prefer having a long term relationship with my business if it continues on, or do you want to be cashed out at the point of time of my death and go forth and live your best life? And if that's a cashing out, then all of a sudden you have to think about like rights of first refusal and like, who's gonna buy those shares to cash out? Your spouse? Or is it some sort of like big payout that comes from the liquidity in the business? I mean, there are all these situations.
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Or insurance.
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Yeah, yeah, yeah, exactly.
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I think that's a really good example here and I think it's one that isn't thought about. And maybe this isn't perfect estate plan conversation here to have, but I think this is an issue I see with tons of business owners, right? Like you have idea, you go to, you know, whatever.com and you get your operating agreement, if you even get one, you start your business and you never rethink about that issue that exists, right? Like my business just went through this this year. We got a new operating agreement, we changed ownership rights. Like all of these things happened. I think this is, you know, for your business, for your estate planning, once you do it that doesn't mean it's set in stone. Right. You need to be revisiting these things. As life changes happens, your business grows, you bring on partners, you have different wishes. Like those are all really important times to not just keep the status quo, but update to reflect what's going on.
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Right. Thomas, this is where you and I are always on the same wavelength. I was actually going to put you in the hot seat and say, Thomas, do you have a succession plan? And to our listeners, right, we're not just talking about your clients business planning, but do you, you know, as an owner of your business, your book of business, have a succession plan? And so just as you address this with your own cl, think about yourself as well.
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That's funny. We just went through it this year. I just went to go get it notarized this last Friday. And you know, we have a buy sell agreement, but we don't have it funded with insurance yet because we were like, okay, let's get two years, let's actually get a somewhat decent valuation to understand what that would be. So trying to definitely practice what I preach and working on getting a new estate plan and now that reflects changes. Yes. Gotta do what we're telling our clients that they need to do, that's for sure.
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Yeah. Well, Thomas, hopefully you'll keep us updated on how that's going. I feel like this shouldn't have been virtual coffee, it should have been like virtual champagne. To even get that notarized is. Is an important step. So congratulations.
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Definitely. Okay, is there anything else that we need to add on the different foundational documents before we kind of walk in or like go into difference between will and a trust?
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I mean, I will just say, you know, oftentimes people bring all sorts of interesting kind of agreements or separate instruments that kind of round out an estate planning package. So I just want to quickly mention these because you are likely to see these when a client shows up with like, you know, the 50, 60, 70 pages for you to look at.
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Yeah.
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And so quickly, sometimes the nomination of guardianship for the client's children is in a separate document and it's, you know, for most states it's in the will. But I just wanted to mention that oftentimes, and this is what happens@wealth.com, if it's that separate nomination, it's probably because the guardian had like super specific wishes that they wanted. Either the judge who would be making that guardianship decision or their family members. If they anticipate the family members to fight over who gets the kid to Understand why they picked the people they did. So I just wanted to mention that number two is probably actually the document you will see the most often. It is called a certificate or certification of trust. If your client has that revocable trust, they might not know the difference. The certification of trust is like a cover sheet for the actual trust. And it's used to do things like bring it in front of a bank to say, hey, my trust exists, I am the trustee and I want to put my bank account into my trust instead of my own name, right? And so you'll, the client will bring that certification of trust to the bank to prove the existence and various important facts about their trust. It is often mistaken for the trust itself that it is actually just the COVID sheet so that the actual trust and all of the like very private details are not revealed to that bank or to you, the financial advisor, if the client doesn't want to do that. And so when you ask your client, hey, bring me your trust, you may just see this like two or three page document and be like, this seems very short for a trust and it's actually just a certificate.
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So yeah, that's really good info. I think the one thing that I guess I really want to add here is I think it's super common, especially for younger people to come in and say like, I don't have my estate planning done and I don't really care to get it done because I don't have a lot of assets. And I think this is something as financial advisors we really need to facilitate a conversation that at the most basic form, the estate planning isn't actually about assets, right? Like most of the will is about, you know, what we just talked about earlier, making the decisions while you're alive, making decisions after you pass away, and they're important ones, right? Making medical financial decisions, where your kids go, what happens to your pets, all of that is the most important because even pre trust, you dictate from beneficiaries where most of the money is going. Like that's not at the most basic form why it becomes important. And so when you talk to these young clients, you have to be like, hey, well what happened? What do you want to happen to your kids? Like this. Like, well, you might not get that decision then if you don't do it right. Or what if you're out of the country and a financial issue happens, what do you want to do then? Like, you know, I'm not a big fan of the scare tactics, but sometimes you have to be like, well if this happened, this is what would happen to you. Is that what you want to get people to actually feel and see that importance?
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Right. So here's a tidbit that maybe you can take back to your practice, which is clients, in my experience, are always shocked when you remind them what happens to your parents things if they were to pass away. Do you want to have, you know, do you want to encourage them to leave an estate plan so that you're not left with a mess on your hands as their child, number one, is looking up a generation. Number two is actually looking down a generation and telling your clients who have adult children, the ones who are going off to college and who are still so financially dependent on their parents, to say, hey, congratulations, you know, so and so is going to whatever school out of state. But what happens, you know, does your child have a financial power of attorney and an advanced healthcare directive at a minimum? Do you know, client that if something happened to your child and you were still paying tuition during that time, you don't. You cannot even see their grades unless you have a financial power of attorney over your child. Right. And so those are the, the insights that I think clients sometimes are reluctant to do the estate planning for themselves because they think they'll be immortal. But then they realize they need to protect their own interests, you know, either as a beneficiary or as a decision maker for the generations around them. So if you have a client in that sandwich generation, think about, you know, broaching estate planning actually through those routes rather than, you know, directly at them.
- [19:04]
B
Yeah, those are really great examples. I was just listening to a podcast last week that brought up that same idea with like, your college age kids, right. They're now 18, and you actually need these rights to be able to make the financial or medical decisions for them. And that's not something that I feel like anybody would think about. But if you're like, hey, do you remember going to college? Do you remember people going to the hospital for drinking or X, Y and Z happening? They're probably like, yeah, I did be like, well, hey, let's make sure. If that does happen, we don't want to think that it does, but if it does, that we're prepared to be able to step in and make the right decisions just by doing this basic, you know, part of estate planning.
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Exactly. I know you say you don't like fear mongering as a tactic for estate planning, but let me tell you, those college kids are scary.
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100%. 100%. Okay, any last closing thoughts that you have before we wrap up this episode.
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I'll just tease the next episode, which is, I know one of the common questions that comes up is what's the difference between a last will and testament and a rev trust? And truly, why do some of my clients need one versus the other? And so we'll talk about that. And yeah, that's really it.
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Yeah, I'm excited for that one. I think that's going to be one of the most positive, popular ones. So, everybody, thank you for listening.