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Foreign.
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What is up? And welcome back to the fourth episode of the Practical Planner podcast. I am your host, Thomas Koppelman, co founder of Allstreet Wealth. And I am joined today again, as usual, by Ann Rhodes, chief legal officer of wealth.com and thanks for joining me.
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It's good to be on Thomas.
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I know. I'm excited to be back.
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Yes. And of course, we love talking about estate planning and how, you know, financial advisors are seeing estate planning on the ground. So, again, if you have anything that you're seeing, questions, feel free to send them to us.
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B
Yeah. And I think we've put out a bunch of good episodes so far, but I'm really excited to start to get a little bit past the intro stuff. And today's episode, we're really going to get into. Intro, revocable trust. And I think this is kind of an area where a lot of financial planners get confused. Right. Like, we all hear about wills, we all hear about trust, but then we start to just get confused about the difference between the two. So I think, like, really the best place for us to start is you just kind of walking us through what a revocable trust is. Difference between a revocable and an irrevocable trust. Because I think everybody just hears trust and they just think trust. But they. We don't segment the two out.
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Absolutely. So first things first, you have to know that trusts really are. They act like they're vehicles, but at the heart of them, they're just an agreement between people about what to do with a set of assets, like, stuff. And so they can be incredibly flexible and you can be very creative with them. And there are estate planners out there who have, like, invented new forms of trust, you know, and, like, are selling them out there like products. And so that's the reason why it's because they can pretty much say anything you want them to say. But the main difference here that we'll talk about, you know, is revocable and irrevocable. We have a. An episode that will be devoted specifically to irrevocable trust. And some.
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Probably a bunch of episodes, honestly. A bunch of. Because there's so many types.
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Exactly. But because revocable and. And irrevocable sounds so familiar, we thought in this episode we'd at least level set and be like, all right, what are these terms and what do they mean? Revocable is often the same term as a living trust. They're used interchangeably, but they basically mean a trust while the person who signed the trust is alive. They Retain the power. They still have the power after signing it to change their minds and say, I want to completely revoke the trust, so do away with it. Take the piece of paper and basically rip it up. Or I just want to make changes around it. It can be as small as, like, who I want as my trustee. I just want to swap in a name that's different. So that's what revocable trust is. It's a trust that. That even though you've signed it and it's. It already owns assets, somebody retains the power to just do away with it. Be like, nope, all the assets go back into my own name or whoever else's. So that's the key there to know irrevocable. It's kind of in the term of it, which is it becomes much harder to change at that point in time. You have somehow formed an entity that owns something, and somebody has a right in it today, and they have the ability to be upset if you take away that trust.
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Yeah.
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So irrevocable trust. Just think so hard to change. So changeable. But be very careful about why there's.
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That nuance, I feel like, from all the estate planners I talked to, like, you know, 10, 20, 30 years ago, like, you couldn't really change them at all. Now there's, like, some. Certain ways on some types you can change them, but, like, for this podcast purpose, just assume you pretty much cannot change those. I think what could be helpful for financial planners to hear is really the. The difference in the benefits, like, just overall. Right. Because I think everybody, when I talk to clients, the whole thought is like, ooh, a trust. Like, I'm kind of scared to move anything into that, because does that mean I never get that again? And in certain cases, that is, you know, kind of true. And what we're talking about in today's episode. Not really true.
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Exactly. So in the revocable trust world, the living trust world, think of that as just, it's okay. I mean, it's a little bit of extra paperwork. If you start putting things in there, Right. You're going to have to, like, change the title, go to the bank, and be like, this is no longer in the name of the client, but in the name of the trust. Like, it's annoying, but it's still changeable. So if your client was like, I don't want my trust anymore, for whatever reason, they don't even need to have a reason. Right. It can still. Everything can come back into their own.
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And to tease it, we're going to do an episode on all of that, because we know that advisors get very confused about, is it the beneficiary, do I title in the trust? What do I do after this trust is set up? So do not worry. We will tackle that head on for you guys.
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Exactly. We'll get or sharpen our pencils and be like, all right, let's do exercises for the names of this trust.
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Exactly.
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Before we get there. So for the irrevocable trust, this is where before you start putting assets into that trust, just, you need to understand, and your client needs to understand why you're doing it. Because once you've done it, like we said, it becomes so much harder and somebody out there has the right to complain all of a sudden that you want to do away with the trust. So a typical example, so that we're not just kind of all in the weeds all the time, but. Or rather talking at too high of a level. Let's say, for example, the most basic kind of trust is a gifting trust for, like a child. So your client has enough assets to start thinking, hey, instead of just funding a 529 account, I want a gifting trust so that I can pay or help my child pay for, you know, their wedding or the down payment on a home. And I want to start saving into this piggy bank. Well, if your client is like, oops, I gifted away too much to this child, or I don't get along with this child anymore, like, I want to, you know, rip up the paper and. And do away with the trust. The child has a right to complain because they have a vested interest. They have an interest that the law will protect. And so that trust can't just be ripped up anymore.
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That makes sense. I think before. I think it'll be a really good way to end this episode, is walk through a lot of the reasons why we would start to consider having a revocable trust for our clients. But I think before we go there, just to kind of hit on the difference between the two as well, I think there's a little bit of confusion from advisors, from the clients we work with on that. The revocable trust, which is probably the most common, I think people think, one, it adds privacy. Two, it can help with estate taxes, and it can't. Right. Like, I understand that it can't, but those are the things that people start to get confused about is when the revocable trust side, it's more about control, avoiding probate, you know, dictating where things go to a little bit more control. Than maybe the will would, but not as much about the privacy and about tax benefits. Right.
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So here's what I would say, actually, Thomas. I think that revocable trusts can do that. It's just that they do that at death. So let me. Let me explain why. So the privacy aspect is that when you have a revocable trust, if you stick an asset inside of it, let's say, you know, this happened actually to one of my clients. And I won't say too much more, but let's just say they lived here in San Francisco in a very tourist, attractive home. And so tourists were always, like, looking up who lives in this house on the public record. And so when my client acquired this house, he was like, I just don't want my name associated with it while I'm alive. Right? While this house is mine. And so the privacy aspect of his revocable trust could not be achieved, because when you title something, it has to be like the name of your client as trustee of name of the trust. And that name of the client is still there because they're the trustee. So what he had to do was a specific privacy trust where he, like, I think, had an attorney basically become the trustee because it was a fully trusted person and who owned the house, you know, and then the. The trust name was like something completely different. It's called a real estate privacy trust. And so he couldn't use his own revocable trust because you want to keep control of your own assets. You're, like, still living your life and, you know, spending down, you know, going vacation, doing whatever with your stuff. And so he could not use his revocable trust to achieve privacy during his life. However, it does achieve privacy at death, meaning you just said it avoids probate, which I totally agree. So what it does is a revocable trust at the moment when you pass away, if you pass away without the revocable trust, it's just a will, or actually no documentation whatsoever. There's a court process that takes place called probate. And that court process, as all court processes are, has public, you know, public aspects to it. So people can look up your will, look up your stuff. And so this is where the privacy of the revocable trust kicks in. Instead of having a will that will be posted on some court docket, instead you have a revocable trust, and all your stuff will be distributed through the revocable trust. So the media can't, like, look up this deceased person's name and find out where their stuff is going and be Able to say, oh, look, you know, they disinherited, you know, this child or whatever. That's the privacy that's achieved at death.
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Yeah.
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And then in terms of the tax planning. Yeah, in terms of the tax planning, what's interesting there is you can actually achieve some tax planning, but you have to have what's called a sub trust, which is actually an irrevocable trust built within your revocable trust. It gets. It's like nested dolls. It gets really complicated. But just know, revocable trust, you can actually do some tax planning with it. And we'll go over it in a later episode where we talk about these irrevocable trusts.
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Yeah, yeah, I think that makes a lot of sense. I think we were viewing that in two different ways, and you totally. That makes a lot of. That makes complete sense. I think the other side of it too, is a lot of times if you talk to estate planning attorneys, a lot of the. Some of the value of using irrevocable trust is actually more on, like, the protection for them of like, hey, I move stuff out of my name now. So if anybody comes after me, those aren't really the same assets that they can come after. You know, what do you think about that? Does that make sense?
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Yeah, no, that makes a lot of sense. So it's something. It's a feature about trust that's called asset protection. Yep. And asset protection is just who is the beneficiary, and we should go over that term very soon. But somebody is able to, like, enjoy the assets that are placed in the trust. Typically for a revocable trust, it's you, yourself, because you're still alive and you just want to stick assets into the trust so that you avoid probate. Right. And so you're still the beneficiary. You get to enjoy all the assets. But then you can also have beneficiaries who are somebody else. So in that first example with the gift trust, remember, it was a client setting something up for their child to pay for their wedding. Well, the client put an asset into the trust so that the child could be the beneficiary and enjoy the assets. The client is like, you, child, you know, go ahead. And it's not mine anymore. So asset protection, and why this concept of the beneficiary is so important is some states are really cool with asset protection. And they're like, yeah, if, you know, the beneficiary gets sued because they had a hit and run accident or divorce or all sorts of reasons why people want to Come after their assets, the beneficiaries, by sticking the assets into a trust, those are not touchable by those creditors anymore. Where it gets, and most states, to be honest, if it was a trust that clients set up for the child, by and large, they're okay with asset protection for the trust. Where it gets trickier though is you yourself are setting up a trust for yourself. It's like one big circle, right. And you're like, oh my gosh, I'm about to get so sued by somebody I know this is about to happen to me. I just lost, you know, a judgment or something. Then you set up this trust for yourself. The courts and the laws of your state may just not be very friendly to that because it's like, hey, like it's you setting up a trust for yourself.
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Yeah.
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So depending on the state asset protection and depending on who's setting up for whom, the laws of the state will change.
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Okay, that makes a lot of sense. So anything else that we need to hit on between the difference between revocable and irrevocable trusts?
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I mean, we'll have an episode about this with specific irrevocable trusts that we'll go over. So just now, bottom line, just know revocable trust, living trust, same thing. And they tend to be succession documents, meaning what happens upon death.
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So like a whale on steroids.
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A will on steroids, I love that. Yes. And then irrevocable is like, okay, like a different world, harder to change, very goal oriented.
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Yeah. Okay, that makes a lot of sense. Let's kind of walk through some of the common use cases we see for revocable trust. Right. Because even, you know, we're using wealth.com we have clients going in, they're going to go and they're going to pick a will or a trust. Right. Like you're an estate planning attorney. When you're talking to people, what are those considerations when you're like that? The will's probably not good enough for it.
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Yes. So here are some typical considerations. Number one is, does your client already have a trust? Because if they already come to you with a trust, then setting them up with a will may just not make sense. They may already have put some of their assets into to the trust. It is paperwork to have to take them back out. Like just leave the trust in place and like fix it. Right. Basically update the trust but live with the trust structure. Number two is, does your client live in a state where probate is really not great, not a great experience? I don't want to Besmirch, you know, the legal profession and particularly, you know, very hardworking judges. And so let's just say some states, like the one where I live and where, you know, like Florida are just known for, like, probate just takes a while, and it can be complex, and they might require a lot of documentation, and you may need to just hire a lawyer to get you through the process. You know, here in California, like, a typical probate is like, 18 months. And during that time, like, your beneficiaries, who could be children, et cetera, like, just have no full control over the assets yet. And so it just, it's. It's not a great experience. And so for those clients, you just want to direct them to a trust no matter how much they own. Like, here, here in California, everybody should have a trust is the. The baseline. And then you might want to think about a client who, like, has special, like, privacy needs. So again, going back to the privacy at death, like, if you have a celebrity, for example, or just somebody who's like, I just don't want people knowing my business. You, you know, like, maybe there are, like, out of wedlock children or whatever else, and they're just like, yeah, I'd rather just like, keep things quiet. I don't want my will up on some court docket. Put them into a trust.
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Yeah.
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Then there are issues that are related to assets that are tricky. So again, avoiding probate, like, think about a client who owns real estate in their own name, but it's outside of their home state. So you could have a client who's like, you know, I live in. Again, I'll take California because this is where I live, but I have a rental unit in, like, Georgia, Massachusetts, wherever it may be, or summer home, something like that. Well, by dying without a trust that owns the home, the executor is going to have to open probate not only in their home state, but in all the other states where they own property. And so all of a sudden you're just like, I'm setting up my executor to do, like, a lot of homework. Yeah. So have a trust, put those real estate, you know, properties right in there and just like, you know, avoid that. That ancillary probate experience.
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Yeah. Those.
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Any other ones that have come up for you?
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Yeah, I think me personally, which I'm actually curious to hear your thought about two other ones that I think about. One is when you have young kids under 18, I think it makes a lot of sense because of life insurance proceeds. Like, I think you Know, maybe some people skip that because what are likely to both parents passing away. But I think that is a possibility. The other one I think for is with business owners a lot of times more control around the business with the trust or you know, we talked in the last one about incapacitation versus passing away. So those are the two that would come to my mind first and I.
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Would love to hear your thoughts on both for sure. So I love that you mentioned the business. Right. You're a business owner and we have a lot of people who are their own, their own businesses who are listening to us. And so yes, if you have, you know, if anything were to happen to you and you know that your business partners or you know, your succession plan depends on your business continuing to run smoothly. And it can be, you know, like something happening to you can be as, as small as like you're traveling out of the country and you like a big decision needs to be made and somebody needs to notorize something on your behalf. And when you're out of the country, there's no like US notary, you know that that necessitates having a trust so that somebody at home can keep the business going. Yeah. With the younger beneficiaries, particularly if they inherit large amounts of assets, this is where you can take your revocable trust or actually even wills and set up continuing irrevocable trusts. And we'll talk about that kind of like control gifting, like controlling the inheritance.
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Could you solve that in an easier way? The revocable trust? Like you could do those options, but is it easier to say life insurance goes revocable trust? Revocable trust has rules of kids at X age get X amount moving forward.
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Yeah. Getting into the life insurance side of the world, there's a lot of planning that can be done with life insurance. And so oftentimes you'll hear, oh, you know, everybody should just have an irrevocable life insurance trust and eyelet.
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Yeah. I think it's easy to assume that for high net worth people. But like think about the family that they make $250,000 a year, you know, they are just getting a million or $2 million.
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Yeah.
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Earned policy for 20 years. Not. Not on the permanent life insurance side.
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Yes. So for those folks, you know, if something were to happen, you're thinking, you know, I do want somebody who's controlling these assets for my kids. Right. I just think they're too young or it's too much money even regardless of how old they are. And so for those Types of situations, do not name the child outright on the insurance policy. Right. Like the form that Prudential or whoever is giving to you. But instead name your trust or name your estate plan as the contingent beneficiary. Exactly, exactly. There are some ways to control like too much money going to too young of a child under state laws. Like all the states have their different structures. They're called UTMA accounts, usually for, you know, Uniform Transfers to Minors Act. It's exactly what it sounds like, transfers to minors. But those tend to end at like 18, 21, like very young. And so people don't like to rely on those. And instead a trust is much better.
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Exactly. I mean, think of the family, that same situation, three kids, you pass away and a couple million dollars of life insurance goes. And then they turn 18 and they each get, you know, $700,000 plus investment growth. You're like, I don't know about you, but most people probably at 18 aren't going to be making the best decisions with that kind of money where exactly utilizing trust or, you know, having the trustee decide, like, hey, I want you to at starting at 25, you know, give out 10 a year and the only way to accelerate it maybe is down payment for a house or a wedding or, you know, some of those types of stipulations.
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A
Exactly. Kind of taking a step back, one of the things that I wanted to mention is there are also like, we keep talking about trusts and how awesome they are, but I wanted to mention a couple of like common myths about things that you apparently can't do with wills, but you actually can. And so this is like the myth aspect of it. And sometimes wills can be really good still. So I just wanted to put that out there because I think, you know, we do tend to focus on the trust aspects. So one of the things that's common, commonly misunderstood, is that you can't do control planning with a will. And what I mean by that is like, for example, if you have the younger beneficiaries or you have a spouse who this is a blended family situation. You are afraid that if you pass away first, your spouse could disinherit your own kids upon her death. So you kind of want some sort of structure around your spouse's inheritance to be able to make sure your ultimate beneficiaries get, you know, what you want them to get. So all of those kind of controlling control issues that can be achieved through a will, you just need something called a testamentary trust built into your will. So I just wanted to mention that because that's a common misunderstanding that like the only thing you can do with a will is just like give money outright to people.
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Yeah. And so really all that means. Right. Is like it's a trust that just gets enacted once you pass away.
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Yeah, exactly. So then your will basically says, hey, with these assets, I'm building a trust from the will that continues on. So then the second thing is that you can't do tax planning with a will, which is actually not right. You can do some tax planning, but it just has to happen at death. That's the only problem. Right.
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You can't utilize the exemption, the larger exemption.
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Right, exactly.
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Any of that.
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Exactly, exactly. But you can still do like kind of Holly or Hail Mary planning with it. So you can still form like a bypass trust under a will. And so I've had clients, for example, who were in. Not me personally, but my firm. Right. In Washington state where Washington's probate system is like not bad. And so actually we did do a lot of will planning even though the client had a lot of money, so. So you can still get away with doing some of that with a will.
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Yeah, I think that makes a lot of sense. I think real quick, in the last one you were talking about, you know, inside of the will having a testamentary trust.
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Yes.
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Is that something that can be done on wealth.com inside of the will? I think that's good for people to know too. I think when we hear about estate planning tools, we think it's super basic and they're just going to be like, you know, the documents and you don't get much customization. But I think it is good for people to know like that is a built in ability.
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Yes. So@wealth.com we have testamentary trusts. If you have a will based plan or a trust based plan, we are completely agnostic as to what's better for you during your life. Right. You could just prefer a will or a revocable trust does not matter to us. But we allow you to be able to do some of that control and tax planning at death.
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Nice. Okay, cool. Anything else that we need to add? I feel like this has been an awesome episode.
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No, I mean some of the terms that may be a little bit unfamiliar to you will keep digging a little bit deeper. So if like beneficiary, trustee, like some of those are still like percolating in your head and you're like, can you just tell me what that is? That's coming up in next episode. So I encourage you to keep listening.
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B
Yeah, perfect. Well, thanks for the time, Anne, and everybody. Thank you for listening.