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- [00:00]
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Foreign.
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Hello, and welcome back to another episode of the Practical Planner podcast. I'm your co host, Thomas Koppelman, head of communityforwealth.com and co founder of AllStreet Wealth. And I'm here with my other co founder, Ann Rhodes, chief legal officer of wealth.com and I'm excited to be back here with you.
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Yes, me too, Thomas. It's always good to see you. And honestly, this is like my favorite, favorite part of my day.
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B
I was just gonna say that. I was gonna say really glad to be back. This is always such a fun thing and always great learning for me as well. And I think this should actually probably be one of our most popular podcasts. Just as I think this is a topic that relates to almost every financial advisor. I think, you know, as we go down and we go into some really complex irrevocable trust, there's some advisors who will be like, yeah, you know, maybe that's over the type of clients I work with. But on the revocable side, this pretty much applies to any advisor. Regardless of the clients they work with, there are going to be people who need to use these trusts. So I'm excited to dive into it. Let's just kind of start with, like, walk us through what a revocable trust is from the most basic form.
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A
So a revocable trust at its most basic is an agreement between certain roles. And actually the same people can hold the same roles, but certain roles to hold property and to do something with it. And so that's what a trust is. It's an agreement, it's a contract. But what the revocable part of it means is that you can change your mind. You can just tear up the contract and say, ah, you know, I don't, I don't want this anymore. And that's totally fine. Nobody has to agree with you. You don't have to go seek court approval. It's just like you changed your mind and you want to rip up the contract. So. So these revocable trusts are actually really great substitutes for a will, but without all of the things that sometimes come with wills, like expensive probate. Having a court oversee the disposition of the assets through a will, it privatizes all of that. And so that's the reason why the revocable trust is so often used as a substitute for a will. Because you can change your mind if you have a will. So why can't you change your mind if you have a trust? That's the basics of it.
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B
Okay, that makes sense to Me, let's kind of walk through what are the most common use cases or times that you want to start to consider having a revocable trust? Because I think this is where you know, people do get confused, is they're just like, ah, you know, I could use both. Is there something that's really pushing me? The other one, like, I get in California, right, Probates, this really long process, nobody wants to go through it, but, like, Indiana, I've never heard it being an issue. So it's kind of like, you know, is that something I really want to consider and go through or not?
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A
The bottom line is privacy, privacy, privacy. And privacy encompasses a lot of different things. So if you're thinking like, oh, you're Taylor Swift, right. And if you were to pass away, like, of course, like, these journalists would swarm. And, you know, if you ever wondered, like, how do journalists even find out what's in somebody's documents when they pass away? It's because probably they had a will. And so. So if you want to privatize what's going on in your estate, you know, to whom things will go, and you don't have to be a celebrity to, you know, want that, then you should have a trust. So I take a lot of issue with Taylor Swift's new song where she has her will being read at her funeral, because I'm like, ah, Tay Tay, you should have a trust. Although actually maybe Tay Tae knew exactly what she was doing and she was just like, sticking.
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B
Yeah. Hopefully as a billionaire, she has multiple different trusts set up, but you never know.
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A
You never know. So trusts are about privatizing. It's about putting more power into the hands of your family as opposed to a court. It's about, you know, you know, hiding things because you don't want the public to be able to just go up on a court docket and, like, download documents. And so that's. That's really the bottom line. And so an interesting sort of secondary reason you'd want a revocable trust. We talked about it as a will substitute, and that's where we focus, because for 95% of people, that's where you. The objective for using a revocable trust is as a substitute for a will. But for 5%, I would say there are actually some other types of revocable trusts out there. And so one of them that I wanted to mention, especially because you were mentioning, you know, before we got started recording that, you know, you're renovating a condo, et cetera, et cetera, is that it's a real estate privacy mechanism as well. So if you don't want to go all the way to having, like an llc. And especially because now with like the corporate Transparency act that's kicking in 20, 24, all of a sudden, like, the privacy, like, how private is it really with an LLC even? A lot of.
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B
Yeah, a lot of people not have thought about that. I was literally just meeting with a prospect, and they were like, very, very wealthy. And they're like, I'm gonna buy a new condo in New York City. Like, it's gonna be six plus million dollars. Like, people have told me to open up an LLC to put it in. Why would I do that? And with Corporate Transparency act, you're right. Like, that just seems like some extra work or even more expensive. If you live in a state like.
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A
California, we can definitely talk of LLCs. I'm not saying everybody should now start moving towards a realty or a real estate privacy trust. But if the only thing you care about is privacy, then actually the realty privacy trust is a really, really great alternative to an llc. So I'll give you an example. I had a client who wanted to purchase one of the painted ladies here in San Francisco. And so they are, you know, one of those, like, yellow, pink, like, green houses that are really beautiful and they're a terse attraction.
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B
The ones where you see in like a full house intro.
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A
Exactly, exactly. And so he purchased one of those. And of course, the tourists who are, like, savvy will, like, pull up the, you know, the county recorders, you know, records and public records to see who owns it. He was like, I really don't want that to happen to me. And so he stuck it in a realty trust. We were like, you know, do the basics. It's a revocable trust, but assign, you know, somebody you trust. So in this case, it was one of U.S. attorneys. So it was in the name of one of the attorneys as trustee of. And then he just put in the address, the street address, and that was the name of his trust. And so it was, you know, let's say Ann Rhodes, as trustee of the blah, blah, blah, you know, Steinert Street Trust. And that's it. Like, his name is nowhere in the title. Right. And so that can be a really good use for revocable trust as well.
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B
Yeah. Question for you there. I mean, just because I don't want to always just stay in the simple. And this is a question I think a lot of people would ask is like, okay, trustee is the lawyer. That sounds Good. What happens if lawyer leaves and switches firm, lawyer retires? Like, you know, what do you. What do you do in those situations? Just so as advisors we can prep clients for things like that happening.
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A
This is a great question, Thomas, because it gets into what happens if you want to change your mind about any feature of your trust. Right. And so we'll kind of go through that. So if you change your mind about your trustee, usually the trust itself has a pretty easy mechanism for you to just come in, file a piece of paperwork. It can just be one page long to say, I changed my mind. Now I have the power to do that, and so I'll appoint a new trustee. I'll just put it out there. Under most state laws, you have a position that's called the trust protector. And the trust protector can also make that decision under default state law. Like here in California, you can say, I've changed my mind, or, you know, I changed my mind. I'm going to go to my trust protector and have my trust protector make that decision. But to be honest, if it's a revocable trust and you're alive, you made the trust, you can just do it yourself. Why go higher or bother somebody else? And maybe they want to get a lawyer now to represent them. Like, just. Just change your mind, you know, under your power to amend and revoke the trust, the other thing that can happen, and this is actually the. The position we take@wealth.com is that your trust agreement. I mean, it's a contract. You can write into it a million different things. So one of the things that you can do is create a special role. And we call it the trustee appointer. So if any of you know, our customers and partners are on the call or listening to the podcast, you know, you can go and look at it in the documents. It's called the trustee appointer. And that's what it does. It's like, I changed my mind about the trustee. I'm going to swap in somebody else by filing some paperwork. That's.
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B
It makes sense.
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A
Yeah, so. So that is actually one of the easiest things to change your mind about with your trust, because there are like three, at least three different ways to go about it, but then there are things that are a little harder. Right. And so I wanted to talk a little bit about what's an amendment versus a restatement versus a revocation, because at this, these terms probably come up a little bit. You know, your clients are bringing in their documents. You're seeing, like, there, there's this declaration of Trust or trust agreement. Then there are all these other, like, little pieces of paper that have come in. What the heck are those things? I just want to go through them.
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B
So, okay, let's do it.
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Thomas, do you have a preferred order?
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B
Nope. I probably, like every other advisor, just mix up the words. And I don't even know if the right one I'm using is the right one. It really is. So I'm going to let you take it.
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A
Let's start with the kind of high level. There is a revocation versus something slightly less nuclear option than revocation, which would be the amendments and the Restatements. Okay, so revocation is that nuclear option. You had a trust, you created a trust. You have the power to change your mind completely and to just tear up that entire trust and say, I don't want it anymore. So think about revocation. Oftentimes can happen because somebody got married. So they used to have an individual revocable trust. They never put anything in it. It was just, you know, their will substitute. And they are just like, now I'm married, I want a joint revocable trust. And I'm just going to fully revoke this old trust that I had because now I have a spouse. So that can be, you know, a common thing. Or it could be the opposite. They got separated or divorced. Right. They used to have a joint revocable trust, and now they want to have their individual trust. So they might just, you know, tear up the old one and start a new. The thing to know about revoking is that if you did put any assets into that trust, it becomes a pain in the butt to have to undo all of that and either put it in the name of your new trust or in your own name again, because.
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B
You'Re basically just the same process as the first one. You have to go prove the name of the new trust or say, hey, I want to retitle in my own name. And I always prep all my clients like, hey, this is the worst part. Once we're through it, it's gonna be good. We're gonna chunk away at a quarter at a time or do bank accounts, that we're gonna do investment accounts. Then we're, you know, then you're into your house, etc, until we get done with it.
- [11:09]
A
Exactly. So I encourage our, our, all our listeners to go over to the long game, Thomas's other podcast where we addressed funding and, you know, that kind of homework that comes with it and some strategies around that. But anyway, so revocation is the nuclear option. But in certain Cases, it's the right option. So then there's, there's. If you change your mind about, you know, some of your trust, and it can be small, discrete things like changing your trustee, or it can be like, you know, I just want to gut the, the underlying agreement, but I want to keep the name of my trust, right? Because again, you don't want to be refunding every, you know, retitling everything. So if you just want to do anything but like in that range, so make a one little discrete change all the way up to just gutting the entire agreement. House renovation over here is the gut reno. Then you do what's called an amendment or restatement. And an amendment is slightly smaller, right? So think it can just be one to two pages. It's that like, small discrete change all the way to like the gut reno, which is the Restatement. Like for all intents and purposes, any other, you know, amendment, trust agreement is completely superseded, it goes away, and instead I've replaced it with this brand new document. Now, why would you want to do an amendment versus a restatement? Here I am just going to give you a practical point. The amendment exists because it's expensive to go to a lawyer. And back in the day with typewriters, it's even more expensive to type up the entire trust. Again, the amendment is supposed to be a shorter document that you pay less for because you just have a couple of discrete changes. You want to make the Restatement, that's where the lawyer has to pull up their form again, their new form, because there have been changes in law or whatever else, and then they have to go in and make all the changes manually. Again, it's because you have more changes. You want to have the Restatement because it's worthwhile for the lawyer to do it. The nice thing about a restatement, though, is that it introduces no conflicts in many ways. Because if you have all these little pieces of paper, like, honestly, I've seen clients with like fourth and fifth amendments to their trust agreements. You're just like, at this point, like, what if you lose the paperwork for like amendment two and three? You know what I mean? Like, you don't want all these pieces of paper floating around. And actually each amendment introduces the potential for a beneficiary to be upset about the amendment, right? So let's say you reduce their share, you reduce their gift, you change their gift to like a charitable gift or something. They can call into question whether or not you signed it correctly so that it's effective. Right. So, like, why introduce all of this? Like, you know, potential for. For confusion, potential for loss, you know, whatever it may be. And so instead, just do a restatement. So I will tell you, with automated systems like, you know, digital estate planning@wealth.com, we actually don't even bother with amendments anymore because we know that at the click of a button, you can actually do the whole restatement, get any of the form updates that we've done, and boom, It's. It's not because of a billable pressure that you can't do the restatement.
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B
So it sounds like a restatement is cleaner and probably the best strategy. It's just oftentimes avoided because of hourly fees and price points.
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A
Exactly.
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Which is something that we've talked about a lot, I think, overall, with. Well, it's kind of the same thing. You and I had a conversation about, like, contingent beneficiaries or things like that. You're like, well, that makes sense. Because people don't want to go back and pay a lawyer and update it if somebody has a primary beneficiary. But now, I mean, when you can just go make a change your plan, just have to go get it notarized, there's less of a need for things like that.
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A
Exactly, exactly. And you never know what happens to those amendments. I'll be honest. Like, that makes sense. Aretha Franklin passed away, and there was one will in a drawer and another under a pillow. You know, it's like you introduce the potential that that amendment could be lost.
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B
Yeah. Okay. Super good info on that. I think everybody needed to understand that. Let's go back to use cases. Right. So we started on the use cases. Privacy was number one. I feel like there are a lot of people maybe. I think in California, there's a lot more people who care about privacy. I mean, I'm thinking about me like, I got everything online. I'm posting everything about me, my business, et cetera. Maybe I don't care about privacy. So let's talk about the other use cases.
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A
There are cost benefits to having a trust. You know, maybe in the beginning it feels like it costs more to set up because attorneys might be able to charge more for a revocable trust. But to be honest, on the back end, you may have cost savings. So let me go through some of those. Some probate courts just attach a fee that's based on, you know, it's like a, um. It's like a percentage of the assets that they have to handle through the court system. So it can be, you know, it's like in the single digits usually, but different courts, you know, have different fee schedules. And so that's something that could be, you know, significant cost saving. Of course, on the cost part. You know, if you're in a state like Florida, where it can. You should just have an attorney walk you through probate. It's. It can be complicated. It can be. It costs a lot of time, too. Then you're paying attorneys fees, right, that maybe would be reduced if you just had a trust. And then there are cost savings because you have a client or you yourself own. Own real estate in your own name in a state other than when. Where you live. So let's take you, Thomas, as an example. I'm just gonna, you know, maybe you actually do fall in this. I don't know. Let's say you live in Indiana, but you happen to have, like a vacation home in Florida or something like that. Well, when you pass away with a will or without an estate plan at all, your executor, your personal representative, will have to open up probate not only in your home state, Indiana, and like, all the costs that come with that, but on top of that, Florida as well. Because Florida, you know, every state in the nation is like this. They consider real estate to be special, a special asset within their own borders and any significant personal property. So think about, like, you know, expensive artwork or, you know, cars or something, all of that. They say you need to open up probate in our state to make sure that goes in the right places because, you know, those are important assets to us. And so to avoid that, you should then, Thomas, in your case, take the title of your Florida property and put it in the name of your trust. So that way you avoid the ancillary probate in Florida.
- [18:01]
B
Yeah, I think that's a really great use case. I don't know if that one's talked about enough or even thought through. I think one pointer you've given me on this is like, let's say I'm adding a lot of clients this year. I'm telling people, hey, go get your estate planning done. Have the conversation with the estate planning attorney. Let's make sure you're getting your trust set up or using wealth.com, whatever, if you're buying a house soon and. Or, you know, before your trust is going to be done, getting that second, you know, deed in the name of the trust. So once it's there, you can put it in. I think it was a really good pointer that you've Given to me that might be helpful for other advisors.
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A
Yeah, absolutely.
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B
Cool. What other use cases are there? I think this is something where everybody just throws out there. Like if you're a business owner, you need a revocable trust. And then 90% of people don't even know why. They just know that that's like the line they've been told.
- [18:49]
A
Yes. So the last piece is incapacity planning. So one of the nice things about a trust as opposed to a will is that it takes effect, like legal effect. Right. As you form it. So during your life you have the full benefit of this, you know, vehicle that can hold assets for you and that can, you know, tell people how your succession, you know, how you're thinking about who controls the assets and where they go. A will only kicks in once you've passed away. Right. And so if you're a business owner or you have, you know, some sort of asset or beneficiaries where you really worry about what happens. If you haven't passed away yet, but you're just not around to sign your own name to decisions, then it is really important for you to have a trust and put those assets into your trust during your life if your business will allow it so that you have somebody who can pick up the ball and continue operating your business for you. If something happens, you can also do that through a financial power of attorney. So I don't want to say, hey, you're screwed if you don't have a trust and you have a business. But the thing about financial powers of attorney is they're a little clunky and it's not, you know, most third parties, like banks etc at this point understand that like, yes, a trustee can control assets for a trust, you know, but some banks actually give people a lot of grief with their powers of attorney. And so you are opening up yourself to the potential of the bank refusing your financial power of attorney. We've seen that. I just spoke to a somebody who is in Florida and says that, you know, some of the major banks are starting to refuse if you have two agents on a financial power of attorney and things like that. So it's just, you know, trusts are a little cleaner.
- [20:40]
B
Makes sense. Okay, cool. Any other use cases that you can think through or can think of? Like I think for me, one other one and we were talking about before here is still like, you know, I always hear the make sure you have a trust because life insurance proceeds cannot be paid to minor children. And I know you have some interesting thoughts on that.
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A
I want to talk about misconceptions about a revocable trust. The revocable trust is that point in time where it was formed with the power to revoke, right? So that's in contrast to an irrevocable trust which you can form from the get go. You're alive still and it's irrevocable. Your beneficiaries have already rights within that trust. But what's commonly misunderstood is a revocable trust lives its own life in some ways. And I'm getting to your question, I promise. But what's important to understand is you can have a revocable trust that then turns into an irrevocable trust because you've passed away, right? It itself has, you know, a rhythm to that trust. So while you're alive, you have the power to revoke. It's an, it's a revocable trust. The moment you pass away as the person who made the trust, oftentimes it should turn into an irrevocable trust. And there's actually a brief window in time, six months to two years, where it's an administrative trust. It may not even be spelled out in your documents. It's just kind of understood by practitioners and the courts that there's an administrative period where things are happening and then potentially you have irrevocable trust that continue and that are actually named in your documents. So in your case, you know, the example you gave me, that would be a trust for children, a trust for descendants where you're saying, hey, they're going to be so young if they get like a million dollar death benefit. I don't want my 6 year old to be in charge of a million dollars. And so my revocable trust has formed underneath it a trust for my child so that a trustee can step in and help them manage and eventually maybe when they turn 35, they can have the money that's left.
- [22:48]
B
So this comment, this thought that we hear is true, but like it's the half truth, right? Like it's, it's because it creates this subtrust that then helps pay this out in the way that you want, right? So you'll be able to have the rules inside of there of hey, at 18, I want my children each to get 5% a year for 10 years till it's gone or I don't want anything until they're 30 or you know, whatever. Those rules that you care about are.
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A
Exactly like a revocable trust by itself doesn't do the things that you just described. You have to have an Irrevocable trust built into that document. And actually, that's also part of the reason why you never heard me say earlier that it has asset protection features. A revocable trust in and of itself does nothing for asset protection. Think about it, right? If you are in a hit and run and somebody's got a big judgment against you and they're coming after your assets, you know, this is your creditor, and you have a power to revoke the trust. Why wouldn't the judge just be like, dude, revoke the trust? And you can. And now all of a sudden, your creditor can get everything right? So revocable trust does nothing for asset protection. And that's true of any state, by the way. I think you need an irrevocable trust to do that. And then the second thing you didn't hear me say is tax planning in and of itself. A revocable trust does no income tax, no estate tax planning for you. Right. Because a revocable trust, again, the IRS would come to you and be like, you can just revoke this trust. You are fully in control of this thing. And so any assets that are, you know, owned by the revocable trust, like, nope, you're. You're on the hook for them, you know, and that's actually called a grantor trust. A revocable trust is a grantor trust because the IRS looks to you as the owner of that trust to pay the taxes on its assets.
- [24:32]
B
Super good info. Okay, what else, if any, do we need to know about revacool trust?
- [24:38]
A
Well, they are so flexible. Again, you can draft them pretty much like a million different ways that you can do some really interesting planning with them. But through sub trusts and things like that, and so wills and revocable trusts both have the opportunity, give you the opportunity to do tax planning, control planning, all of that stuff, asset protection, it's.
- [25:03]
B
Just taking it another step in that planning. It's not just the document itself. It's that you need different sub trusts or other tools to accomplish that.
- [25:11]
A
Exactly. So don't think that just because you did a revocable trust that boom, all these features are dropped in. You have to then make sure that you've told the drafter that that's what you want.
- [25:24]
B
Love it. Okay, cool. I feel like we hit on this topic really well. I mean, I feel like I know this better than when I stepped in. Anything else you want to make sure we add before we wrap up?
- [25:34]
A
No, I mean, this is a longer episode because we really do think a lot of this needs to be unpacked. I welcome your questions. Honestly, I'm sure that you've all had to, you know, see a revocable trust in action at some point in time, even if it's funding, even if it's helping your client get set up. And so I welcome your questions about what it is that you saw in that process.
- [25:53]
B
Okay, perfect. And we have done early episodes on, like, Difference between a Will and a Trust. So I think, you know, if you feel like you want a little bit more education on this, go back to that episode. As you know, you can. We can kind of recap and talk about some of the similar ideas. But. And thanks for joining me today. As always, such a good episode. I think advisors are going to walk away and know more and this might be an episode they want to re listen to a few times. I think there's a lot of good gems that you threw in there. So thanks for joining me and everybody. Thank you for listening. Please remember to rate and subscribe and we will see you back for the next episode.