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- [00:00]
A
Foreign.
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B
What'S up? And welcome back everyone to the third episode of the Practical Planner. I am your co host, Thomas Koppelman. I'm the co founder and lead financial planner at Allstreet wealth, as well as the head ofcommunity@wealth.com and I'm joined by my co host, Ann Rhodes. She's the chief legal officer@wealth.com and, and thanks for joining me again today.
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A
Yes, it's always a pleasure, Thomas, but I'm excited.
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B
Again, today's episode. I remember when I first started as a financial planner, really trying to figure out this whole estate planning piece, right? Like, you'll hear all these people talk about wills, you'll hear people talk about revocable trust, and you'll hear different viewpoints from everybody, right? Some people are like, everybody needs a revocable trust. And then some people are like, oh, there's no need. Everybody should just have a will. And there's people in the middle and they like, do you title it in there? Do you not? So I'm really excited to kind of hear your viewpoint here on the difference between a will and a trust and then start to get into use cases.
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A
Absolutely. So I, as I've been practicing in this field, it's always surprised me how much misunderstanding there is about what a revocable trust is versus any other type of trust and especially how it becomes a substitute for a will. So I'm actually, this is one of the episodes that excites me the most because I'm hoping to demystify some of those areas and to hopefully teach you something new that you hadn't heard of before. So let's jump into it.
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B
Let's do it.
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A
All right, so the first thing to know is that here we're going to be talking mostly about a revocable trust, also known as a living trust. So these words are commonly interchangeable. If you were to ask me truly, what is that adjective, revocable or living doing, I would say revocable, actually is more descriptive. What it says is you have a trust creator, you know, your client in this case, who wants to have an estate plan in place or some sort of, you know, objective being met by the trust. But what they do is they retain the power to revoke that trust. So it is put in place, right? The client's going to sign, maybe put some money into it. But anytime that the client has capacity is alive, that trust can be made done away with and there are no real legal repercussions from a tax or other perspective. And that's different from an irrevocable trust. And I'll mention this very quickly because one of the most common misunderstandings about trusts is only rich people need a trust. And inversely, if you are rich, you need to have a trust. So I want to unpack that. Right. And so the first thing is, you know, the revocable trust is really just a substitute for a will, and you could not have terribly much money. But if you live in a state like my. My home state of California here, and there are reasons, you know, outside of your own wealth, where you need to have a trust, then you need to put one in place, Right. And it needs to be a substitute to the will. Then there's also this common, I think, saying, you know, if you're wealthy, you need to have a trust. That's not necessarily true. If it's a revocable trust, you could pass away in Washington state, where probate is actually quite smooth, you know, quite easy, and you could have, you know, a lot of money, but as long as you didn't care to privatize what's in your will and, you know, you were. You were fine with having that structure, you could pass away with a will and having $100 million and it would be okay. Right. So there's actually, you know, this common misunderstanding that trust equals having a lot of money. And that's not necessarily true.
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B
Yeah. I think I would add two things here, like misconceptions I see not only from advisors, but regular people. And I just saw an estate planning attorney that I know that actually is with wealth now, and she said that she had an advisor send her a client and basically said that you need to get a will so you can avoid probate. And. Very funny. The advisor said that seems like something they should know. But I see it all over Twitter all the time. Like, people think that as soon as you get your estate planning a will done, that you avoid probate, which is not true. That's one of the big values of moving to a revocable trust. So I would say that's one big misconception. The other one is that as soon as people hear trust, they think of, you know, the way the. We saw in the movies that that girl has a trust fund. She got, you know, the white Mercedes for her birthday. And like, you know, when you have a trust, you just give up control. And that's the big downside. But that's only one type of trust, which there's tons inside of irrevocable trust. But a general revocable trust is not about giving up control. It's more actually about getting control and dictating where things go than anything.
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A
Right. So you have to think about trust as, you know, involving people at multiple levels or in multiple ways. Hats to me, a trust has three important roles, and then you can kind of like, you know, make extra, like, side characters around that. But the three main characters are going to be your trustor, which is your trust creator. We call it a trustor at wealth, but it can go for, you know, different names. So settler, grantor, it's the person who, who creates the trust. Second is the trustee. By and large, everybody calls them trustees. And so this is the person you trust to actually handle the money that you put inside of your trust. And then the third is the beneficiary. Right. And so the reason why I unpack this here, and the beneficiary is a person who receives the economic rights of that. That trust. When you talk about the girl with the white Mercedes, you're thinking actually of just one, one of those roles, which is the beneficiary.
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C
Right.
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A
This is the trust fund baby. That's the derogatory sort of term for it. But somebody else set up a trust, and that trust is, by the way, irrevocable. It was set up for controlling or for benefiting that. That individual, and then she's just getting checks and getting to, you know, spend it on whatever. So that's one very narrow focus, a narrow use of the trust. When we're talking about revocable trusts, it's important to know that initially, if that trust is just a substitute for will, it's the main vehicle for estate planning. The client who is the trustor, the trust creator actually is in all the other roles as well. And I think that's commonly misunderstood. Right. So the client creates the trust, gets to be the trustee initially of that trust, so they control all the assets and they get to be the beneficiary. So they still continue to enjoy the money that they've made and they've put into the trust. So there's actually the three roles can be divided between people, but it can also be the same person.
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Yep.
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And so initially in that revocable trust, it's like, you know, nothing's changed. Right. So if I make a revocable trust in California today and I put $20 into that trust, I can go and put spend the $20 on my coffee if I want to, because I'm trustee.
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B
And beneficiary, which is entirely different than an irrevocable trust. Right. You cannot play all those parts. Otherwise that's kind of, you know, gives up a lot of the benefit of what that trust is.
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Exactly. Irrevocable trusts are put together for more than just like what happens to my stuff at death. It's. It's actually very objective driven.
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C
Right.
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Is there a control issue? Is there a tax issue? And that will dictate. The objective, will dictate whether or not the same person can be in all three of those roles.
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And that's why we're gonna. We have a ton of episodes on different types of irrevocable trusts. I mean, that just. There's so much to go into there. But I think that is another misconception that I see from advisors is that they think that a revocable trust is going to have privacy or it's going to have estate tax benefits or, you know, any of the. The true big benefits we see from your revocable. Those are not what happens with a revocable living trust.
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A
Exactly. So let me tell you then, finally we're getting to the meat of it. What is the difference between having a will versus a revocable trust as your client's main planning vehicle? So the will is a document that I think is more commonly understood. It only kicks in, has legal effect upon that person's death. Whereas the revocable trust, and this is one very important difference, is actually like a legally effective document as soon as it's signed, and in most states, as soon as it has any money in it. So you need those two things, kind of like an intent to create it through the signature, and then like 20 bucks to start the trust. Okay. And so the main big difference here to note is incapacity. There is a moment in time where with a will, that will only takes effect once you've passed away. But for the trust, you can actually start putting things in it today, and your trustee could step in and help you manage those affairs. So this is especially important for, let's say, somebody who's more elderly, who has a child or somebody else in their life who's actively managing assets for them anyways, maybe consider having them put together a trust right away rather than a will. And then the second thing which we touched on last episode, Thomas, is the business owners, the people who, you know, if something were to happen to you, but you haven't passed away yet, you would still need somebody to step into your shoes and pick up the ball and keep running with it. So if you have that operating business, it might be Especially important for you to have a trust as opposed to will, because that way, you know, you're not just relying on a financial power attorney, which can be kind of clunky, but instead you can fund your business interests into your trust right away. And then if something happened to you, that successor, trustee, you know, your business partner, whoever, just picks up the ball and keeps going.
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B
So how do people do that? So, like, hey, I'm a business owner, I want to make sure I do that. What does that actually look like? I think, again, this is another thing advisors hear, but they don't actually understand. What are the steps to carry it out.
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A
Yeah, so I do want to make time to go back to the second point, because that's the one that most people hear about. But in terms of the business owners themselves, you know, needing that trust, that's a process called funding your trust, and which just is a fancy word for saying transfer the asset that gives you, you know, those powers into the trust. This will depend a lot on your business structure and the willingness of your business partners, the other owners, to let you do that.
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C
Right.
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And so if you have a very closely held business, you get along really well with your business partners. You just want to make sure that right is probably reciprocated.
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C
Right.
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So that if something happened to them, you would give them the same benefits as if something happened to you. What I mean is, think about your partnership agreement. Think about your operating agreement or bylaws. You know, should you put something in there that allows the transfer of your shares into a revocable trust? When I was in private practice, our LLC agreements by default had a provision saying that the owner of those shares had a choice to have it in their own name or in the name of a revocable trust. And we defined revocable trust to make sure it was really for estate planning purposes. And then you need to think about, you know, whether or not, if it's not, you know, such a close relationship and you can't really easily change the partnership agreement or whatever, you know, that contract is whether or not you can do a transfer on death certificate or some sort of like intermediary thing where if something happened to you immediately, those shares would go into your trust. So it's not today that you can put them in trust, but upon something happening, it would go into the trust.
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Perfect.
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So those are some tricks.
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B
Yeah, it's great info. We'll go back to your second point now.
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A
Okay, so second point is the one that I think most people hear about, which is a will is still going through a process upon that person's death called probate. And it is very particular to each state and each county what their probate procedures are like. Some states, some counties are, you know, pretty smooth in the administration. And this is where a judge, you know, has to oversee the appointment of that personal representative to take care of, you know, divvying up the assets. The judge is doing a final sign off on where the assets go. And there's this like whole kind of administrative procedure to it. So will still has to go through that process in the state where that person has passed away and any state where that person owns real property or significant personal property. So if you own a vacation home, let's say you live in, you know, Indiana, but you own a vacation home in Florida. Well, your executor would have to open probate not only in Indiana, but also in Florida. Right. So that, that will process or the, the probate process can be quite onerous, as you can imagine. So then there is the privatization of that process. Meaning instead of having a judge go through this pretty public, you know, proceeding in a court, if you trust somebody quite a bit in your life and you would have appointed them as executor anyways, think about having a trust as a way to privatize that process. So the trustee kind of takes on that responsibility and does it with your beneficiaries in a very private way. So that's what the trust allows you to do. It's to bypass the probate process. And from that, there is a ton of, you know, individual questions that you can think about, factors that go into how your clients think about this. The first thing is, is privacy really important to your client? Right. So if you die with a will, that will becomes part of the public record and can be found by journalists, by disgruntled, you know, potential children, a client, all sorts of things. And so if you ever wonder how do like journal know about these celebrity deaths and where their estates are going, it's probably because that celebrity did not have a trust and they should have had one. Right. The second thing is, and I hinted at this is ancillary probate, meaning you have like a main probate in your client's home state when they pass away. But then there are all these like offshoot probates because they ended up owning assets in other places. Right. And so to bypass the ancillary probate. So I'll give you a typical example here. I had a friend who was very lucky but like, you know, moved from state to state, you know, was in one state for masters, another state for the first job, then moved again because of, you know, income tax planning reasons to a third state. In every single state, she ended up purchasing property, you know, her apartment she lived in and then she ditched it and rented it out to somebody and kept moving. Right. That person needs a revocable trust and then putting this, those properties into the trust during life so that if something were to happen to her, that trustee doesn't have to then go and open probate in every single state across the nation.
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B
That's such a good example because that's so common today. Right. I mean, you just look at social media, everybody believes every house that they have should just automatically be turned into a rental. And all of a sudden, you know, you're switching jobs every three years and you got five rental properties in five states. Imagine who has to take care of that. Going through probate would just be a horrible situation.
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A
Right. And legally actually sticking that real property into an LLC may not be good enough for bypassing probates, but, but sticking it in a rev trust might be. And so that's kind of the tricky bit too. So just interposing an LLC between you and that real property may not be good enough. Just putting that out there.
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B
Yeah, that's a really good point.
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So, and then the third thing is kind of a catch all, which is you, your client has experienced a horrible probate themselves.
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Right.
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A parent, an uncle, somebody passed away without, you know, documents. And because of that experience, they're like, I never want to put my beneficiaries through that process. We had to hire attorneys that were very expensive. We had to pay huge probate fees. Some courts do probate fees as a percentage of the assets that pass through. Right. So like, it's like, you know, the more you have, the more in that case you should consider having a rev trust. And so I lumped that together in like avoiding legal costs and avoiding all the costs of probate in a third category.
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B
Yeah, I think that's really important. I think, you know, looking back, the thing that I always heard was, well, people didn't really get trust because they were too expensive. Right. I mean, I think it was even the same reason for just estate planning in general is like, I don't feel like it's likely there's not enough going on. I don't have enough money, so I'm just going to avoid this cost. But I think this is the perfect time to plug wealth.com like the reason why, you know, that changes is for us as advisors, we can help get our, this done for our clients at a reduced cost. And there's, you know, plenty of other providers too now that you can do that as well. But I think people way too often in finance and in life think about what's an upfront cost versus what's the total cost. Right. Like you might avoid paying a thousand or a couple thousand dollars for a trust now, but when your family has to then take money that you have to pay, you know, lawyers and probate fees and all this stuff, you might end up, not end up in a better situation by trying to avoid some cost in the front.
- [18:15]
A
Yeah, Thomas, I think this is a great segue into maybe talking about some misunderstandings also about wills and trusts, where wills and trusts can be quite similar actually. And so if you don't mind, you know, I'll just take the time to outline a couple of thoughts here.
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B
Yeah, take it away.
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A
So the first thing that I hear very commonly is because the trust is so private, it's impossible or it's an, it's. You can avoid having your beneficiaries fight against each other over your estate. And that's actually not true. So yes, the will, you know, is more, more part of the public record, et cetera. But there still is a probate process is just very short and truncated. If you pass away with a rev trust, so people will be notified of your, your death.
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C
Right.
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A
And so if you're worried about like beneficiaries, you know, coming out of the woodwork for this client, they still have ways to do that because the death will be notified to, to, I mean society, to government. And so the second thing is that beneficiaries have, and non beneficiaries can have a claim against your client's estate, whether it's a will or trust. They can fight over what happened about the validity of the document, whether it was signed the correct way. All of these things still can be issues. So just because your client is in this like, you know, more complex family situation where they anticipate some upset at beneficiaries, does not mean that alone is a reason to push them into a trust. The second thing is that if there are control type issues or tax planning type issues, that the only way you can address those is through a trust. That's actually not true. Wills can have trust built into them as well. And that's what are called testamentary trusts. Right. So think of it as the document, the legal document, living two lives or two parts of their lives. The first is your client's alive. Everything's great at that level. You have a will or trust that's just, you know, waiting to have legal effect. Basically, once that client has passed away, you can actually form sub trusts within those documents. And that's commonly misunderstood. Sub trusts are irrevocable trusts. So imagine you have a client who is in a blended family situation, prototypical. You know, they need to have a marital trust, because what happens is the marital trust allows the client to say, okay, if I pass away first, and I have my spouse from this, like, you know, my spouse and my spouse has survived me. So widow, a widower. I'm totally fine with my assets, you know, going to support my spouse during life. But if anything is left over once that person has passed away, I'm a little worried that something could happen where my spouse disinherits, like, my kids from a previous relationship or, you know, some sort of elder abuse thing happens, and then my spouse, like, goes crazy and, you know, names the housekeeper. It's like, the only beneficiary. Right. These things happen. And so that client who needs a marital trust would put the marital trust as a sub trust within either their will or their revocable trust. So either one of those will or trust can make further trusts.
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B
Good to know.
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A
I thought I would.
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B
No, that's. I mean, I actually know a bunch of advisors who only work with blended families, and that is a good thing for. For them to hopefully know. I would assume that would be something that they would know, having that be their specialty. But that's definitely a unique situation and something I don't think many advisors know about.
- [22:06]
A
Yeah. So that is the reason why we're having this podcast, making sure that, you know, we peel back the. The hood or on some of these common misconceptions, for sure.
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B
No, this has been great. Any additional info that we need to let you know, advisors know about when it relates to the difference between trusts and wills.
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A
I think one of the other things I want to say here, since you're giving me the opportunity, is that sometimes people think, as long as I have a revocable trust, I'm set. I don't need a will anymore. And then it just, like, comes as a shock when they hear, oh, no, no, no, you still have to sign a will. And it comes as a duo.
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C
All right.
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A
Your rev trust still needs to be accompanied by a will. Why is that?
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C
Right.
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A
Doesn't it feel like you're just, you know, costing extra money to your client and they should have just Gone with a will anyways. Yeah, no, that will, the companion will to a trust is often referred to as a pour over will. And you'll notice that the pour over will is so much shorter than like a standalone regular will. The reason for that is because the will just serves three more functions at that point. When you have the ref trust that just takes care of, you know, where everything goes. What the will ends up doing is one, naming the executor or personal representative who's going to appear before court to file, you know, your death certificate and whatever else. So it's a very truncated process and a very small role at that point for the executor, but you still need one second is that it pours any assets that you still have left in your name into your trust. And that mechanism is super important because I mean that transfer of assets you may not have accomplished during life or your client may not have accomplished. Right. It's a lot of homework. And so people might pass away not remembering that they had this small bank account somewhere. Right. And so it, it takes care of that. Importantly, there are certain assets that you can't physically like transfer into a trust until that person has passed away. So that's another reason to have a pour over will. Retirement accounts are a typical example. And then the third is that the nomination of guardians for the kids is still needs to be done through the will. And so for that reason, that will needs to exist. But it is a companion will called a pour over will. And very short.
- [24:32]
B
Gotcha. That makes sense. A lot of important things there. And I think this episode has been awesome. I think next week, make sure everybody comes back and tunes in. I think what we should really hit on is so you have a trust now, what? Right? What do we name in the trust? What do we not name in the trust? All of those different types of questions I always hear advisors asking. But thank you everybody for you have something else you want to add?
- [24:56]
A
I just want to say, you know, probably this episode has spurred on some like, questions, thinking anecdotes that you have. We'd love to hear from you. So if you have, you know, horror stories, horror stories, whatever it may be, you know, feel free to email them.
- [25:10]
B
Yeah, I think that's a great plug. We're going to try to do episodes where we're just answering questions from our audience. So yeah, anytime you guys have a question, thought, comment, just either DM us, email us, whatever and we'll make sure to answer them. But everybody, we appreciate you listening and tuning in. We will see you back next week. And please don't forget to rate and subscribe as we're a new podcast and we want to show up a little bit earlier on search.