Ep # 96: When Trusts May Make Sense (and Don't) In Your Estate Plan

Benjamin Haas | Mar 28, 2023

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Benjamin Haas 00:02

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! And, we're back! How we doing today, Adam?

Adam Werner 00:31

Good, how about you?

Benjamin Haas 00:32

I feel like a 6 out of 10. Like I admitted to you earlier today, sleep is definitely feeling like it's at a premium right now. With that as kind of the baseline, I feel like if I had gotten a good night's sleep, I'm in a good mood. Maybe I'd be like a seven or eight, but six.

Adam Werner 00:53

Wow. For those listening. If you don't hear that part, then we clearly cut it out because we're just not good or this podcast ends up being unusable. But let's assume it's all gonna work out great and by the end of it, then we're going to make sure you go from like a six to at least an eight.

Benjamin Haas 01:13

But yeah, nothing gets me more energized than my conversations with you around trusts so let's just do it.

Adam Werner 01:23

Wow. Yeah, so pivot into the topic. Today, we're going to talk about trusts and I think more specifically through the lens of a lot of recent client conversations. We live primarily in the pre-retiree or the retiree space so working with older individuals that are seeing their own parents, they're inheriting money, the parents are passing away and they're saying, well, mom and dad had a trust. Do I need a trust? Should I be doing these things? I think just kind of sorting through what even is that? What is a trust? What does it do and what are the situations where it may apply and where it may not?

Benjamin Haas 02:06

Yeah, and I think I'll just add to that. I think we're at least seeing in our little small sphere here, like there has been a change and maybe it's a little bit generational, where prior, maybe people just they never really talked about their finances, it was a very private thing. Like we're hearing friends are talking about these things. They're sharing strategies, ideas, and things they're reading or things they're hearing. So, it's a lot more common for us to hear the starting sentence, hey, I was talking to my friend and they have a trust, should I? Like, is that something I should be doing? If you want the nitty gritty on how we think and feel about trusts, Episode 21. I'll throw that out there. We did go through some of the nuts and bolts and I like the idea today. I'll toss it back to you, what are those situations that we're hearing or what are those questions that we're hearing? And then we'll do our best to just answer. Yeah, maybe it's worth exploring in that situation or maybe it's not.

Adam Werner 03:03

Yeah, so then we won't necessarily get into the nitty gritty on like, what are trusts? How do they work, that kind of thing. But there are many different types. They're all slightly different. So again, Episode 21, as you said, maybe have some of those details. But we can always talk through those individually, too. What I wanted to say here to start and I'm thinking back to the podcast we recently recorded on life insurance: For God's sake, get insurance. I think with trusts, it used to be extremely common for people to be and I'll use air quotes, sold a living trust. That was like, maybe not necessarily a door to door but that was certainly kind of where things started. Like insurance, it was something that was being sold to a lot of people and they ended up with them. Maybe the clients that we’re kind of talking to or the prospects that we’re talking to that say, well, mom and dad had this, yes, they may have. But they may have been sold that by whoever an attorney, somebody who wanted to sell a document, and maybe it wasn't even appropriate for them at that point. I don't know, doesn't matter. It was just one of the thoughts that came into mind that it's very possible that like many things in the past, with it being sold to somebody and not somebody actually seeking it out. It may be more prevalent in the past than maybe it is moving forward for the more common situations that we may see here moving forward.

Benjamin Haas 04:31

Well, maybe let's just share quickly on why that was and why that is. This just goes back to timing of things and I know we have a couple of notes on this. Like if a trust is really just an entity, I want people to think about this as a box that can hold something. Think about one of the reasons why they would have been more prevalent and why they may have been sold or talked about as a strategy. It was really just based on taxes. We can go back just 20 years. Maybe that sounds like a long period of time but it's really probably not. You were only allowed to pass away with a million dollars before any dollar above and beyond that in your estate was going to be taxed by the federal government. Well, that law has changed several times since then. But it's all the way up to close to 13 million per person today, nearly 26 million for married couples[1]. So, the whole idea of, I need to put this money into a trust so that the government doesn't tax it. That's not where we are today.

Adam Werner 05:28

Right and that's it.

Benjamin Haas 05:30

For most people I should clarify. For the you's and me's of the world.

Adam Werner 05:37

Yeah, you think back 20 years and I'm one of those where you go Oh, well, 20 years ago, that was, you know, 1990? No, it was 2003 was 20 years ago, by the way. Modern Era. Yeah, the estate exemption was $1 million and while again, a million dollars is a lot of money. It's not hard, even thinking back 20 years, you add up some investment accounts, you add up retirement accounts, a house. Any other properties, you can quickly get above that. So yeah, that certainly could have played more of a role then, now that that estate exemption is 13 million or 26 million for a couple, it doesn't seem as critical. The one caveat there being, the current exemptions being as high as they are, are set to sunset starting in 2026. Meaning they were temporary increases as part of some tax changes that happened over the last few years. We don't know what's going to happen so there's a chance that that continues on. That Congress will pass and kick that can down the road or maybe there is some reduction, as of right now, if nothing happens, it's going to revert back to I think like five or five and a half million per person, which is still clearly much higher than the 1 million. I don't think necessarily changes the calculus but it's just another thing to throw out there that these rules, like anything else the IRS touches is constantly changing.

Benjamin Haas 06:02

Yeah, and let's just take this one step further and it's going to tie into another point that I know we wanted to make. Maybe I'm not making it at the right time but I'm going to truly avoid that, just to say, I'm going to create a trust because maybe my estate is more than five and a half million, and I want to get ahead of that curve. There are certain assets when we talk about just creating a trust isn't necessarily the be all end all. You have to fund that trust; you have to essentially retitle certain assets. So, I want to be clear that maybe outside of a home, a lot of the people that we work with, how did they build their wealth, they built it saving into a retirement account. And to put that into a trust to say, Alright, I'm going to forego this as an asset of mine and therefore put it into a trust, you're changing the ownership on that. That's as if you took all that money out of that retirement account, by the way, probably had to pay income taxes, just to now put it into a trust and therefore have it out of your estate to maybe try to avoid that taxation. So, it's important for us to discuss what assets really are we looking to put into a trust or have titled as now trust assets.

Adam Werner 08:13

Yeah, and this is absolutely one of those circumstances where the one size fits all or just the blanket comment, I can do all these things within a trust that I'm just going to put everything in there, it really does depend on the situation, what type of investments do you have? What type of accounts do you have? What makes sense to actually put in the trust. So then thinking about the retirement accounts, if it's not retitling the account or essentially taking all that money out of an IRA, for example, paying the taxes and now great, it's in the trust, but what maybe that didn't necessarily accomplish what you wanted to accomplish. Sometimes the solution is well, then just name your trust as the beneficiary of your IRA, that's kind of a way to maybe get the best of both worlds. However, even with that, there are caveats. There are special circumstances where it still may not accomplish what you want to accomplish. In our experience, when you are naming a beneficiary of a retirement account more often than not, unless there are very special situations that warrant it, it makes sense to try to name an actual human, an actual person as that beneficiary because there are very different rules for retirement accounts than there are with any other type of investment or property when it comes to the taxation side of things. So, there's a way to maybe use a trust with an IRA but even then, it can still have some moving pieces that you want to be aware of in your situation.

Benjamin Haas 09:41

Yeah, so I think it still just goes back to like purpose and intent. If taxes may have been the focus or intent 20 years ago, and we would say it's going to be far less the case right now just based on those exclusions, then we'd have to think about what is the purpose of a trust and I would say that goes into the situations where people are asking more about, I want to maintain control, or I maybe want to protect somebody else from this money. I think that's when we get those types of questions and maybe you want to go through one of those scenarios with me or something like that, that's where our ears may perk up a little bit more to go, Yeah, then let's consider the pros and cons of this control.

Adam Werner 10:27

So control being I think, may be the number one reason at this point to use the trust because you can essentially dictate a lot of the what ifs in the future, like today, you can make a lot of those decisions while you're living, that once you pass, if someone just inherits an account or inherits your money, and it's theirs, and it's in their name, they are free to do whatever they would like with that money. In a trust, you can list very specific instructions, you can restrict when people have access to money. You can restrict what they use it for. If you have minor children, then certainly you would want to have provisions built in where someone turns 18. Legally, they're an adult, but I have an 18-year-old, I wouldn't trust her to inherit a large sum of money and actually be responsible with that. I wouldn't have been responsible at 18. I know that for certain. So, there are ways to build in those stipulations to still have control when you're not around. I think you said it, sometimes that is protecting somebody from maybe using it inappropriately or just being tempted to just spend it. Minor children are one of those things, if there are special needs, there are very, very specific rules that if they are receiving government benefits, if they inherited money, that may disqualify them for those benefits. So, there are very specific trusts that can be built to avoid kind of those unintended consequences in that situation.

Benjamin Haas 12:14

Yeah, I think you said that so well. So that my takeaway there is and I had this conversation with somebody, it was probably just a week or two ago with this whole idea of should I do this, I want to do this because I'm hearing it'll make my estate easier to settle. My comment back to her was, yeah, but I know what you shared about your children and they are adults and responsible and going to be very good about this stuff. In some cases, the legalese and everything that we need to be put in place for that trust, it really wouldn't be serving the purpose of protecting the children from something because that's not who they are. They're fiscally responsible. They're adults, they're ready to inherit this so I think, if the need for control isn't there, then again, what's the purpose of having a trust in that case? Rhetorical question.

Adam Werner 13:07

I was going to say, Is that an actual question?

Benjamin Haas 13:09

You don't need it. In that case, you didn't need it. I will share, the other thought I have on control and I think we're seeing a lot more of this. It's just blended families. So, it's very hard with those beneficiary designations on an account, to say, all right, I want to leave this to my spouse but then once that becomes my spouse's, they're going to put their own beneficiary designation on that account and what you want doesn't matter anymore. You're not here. So that's maybe where a trust would say, I want these assets to go into trust. I want it to care for my spouse for as long as they're living but when they pass away, I've already dictated that money's coming back to say, my two children instead of his or her two children.

Adam Werner 13:55

Yeah, that’s one. That is, I think going to be the more common scenario moving forward, just in the world that we live in, to essentially protect and provide for those that you want to provide for with again, kind of building in those what if scenarios and avoiding those unintended consequences. Where in the past, if you didn't do that, you could theoretically disinherit your own children in that situation, which more often than not, is not the intended outcome. So, I was going to say one of the other reasons I think people gravitate towards trust is the privacy aspect. I don't I think everyone has their own kind of feelings on that side of things, the privacy. In my mind, it really depends on the situation but sometimes it may just not be worth it because there are hurdles, there are costs that go along with establishing a trust, changing ownership, all of those things. Maybe it's not worth it but there is a distinct difference between, if you didn't have a trust and you passed away and assets flowed through your will, that is a probate double process. So, it's going to go through that very public process. Anyone can contest a Will they can view that is public record, where a trust does not go through that process. The trust is its own entity, as you said earlier, you dictate all of these different parameters and it all stays encapsulated within that trust. You have to name a trustee once you're gone, someone who's going to actually take care of the financial side of things and help administer those rules. But it does keep it out of the public record, it does keep things private.

Benjamin Haas 15:43

Yeah, that's a really good point and as you're saying that, I'm thinking back to the last point that I would have wanted to make, the ease of management. I know we do have a situation where somebody has accumulated a good deal of wealth, but did so really in the way that I think Investment Management used to work. You used to go to this company, then this company, and then this company, and you had mutual funds held with each company, and all of a sudden, you've got 12 different accounts that are all now, the move was, well, let's put them all into a revocable trust. That way, when I want to change potentially beneficiaries in my will on who's going to inherit this, I only need to make one update in my trust document instead of going to 12 different firms and having to update of beneficiary designation. That's just ease of financial management. I don't know that that's as common anymore today, either. We accumulate wealth in different ways, brokerage accounts and custodians are now a thing. That's how we operate but I think that's maybe one of those other questions. If somebody comes to us and says, I just really want to get everything in order for my kids. I want it to be easy to settle my estate, should I have a trust? We probably talked about the other ways that you kind of make it easy on them. A trust may not be the solution to that.

Adam Werner 17:07

I think that's a good point. I think there certainly are other alternatives or there's other ways to try to simplify without adding maybe some complexity to your situation by having a trust. But again, I think it all comes down to the situation. Part of it is preference in thinking of like the privacy aspect. Some people that may have a much higher weight on than others. So yeah, I think it really does become situational. But that's something we can certainly talk through if you have questions or there's just, you're just not sure is a trust for me. Then let's explore that.

Benjamin Haas 17:45

What about real estate?

Adam Werner 17:47

What about it? Well, when we're thinking about assets, sometimes we get that question. I think we had it this morning. Do we take this home out of our ownership and put it into some sort of trust so that it's not an asset that maybe can be clawed away with long-term care or anything else like that? Yeah. So there, I think, again, I think it comes down to the intent. What is the purpose, if there is a chance that it's a while we see it a lot here with like family, family land, right farmland that people want to keep in the family. Specifically, we had a recent conversation where I want this piece of property to stay in the family but I don't want it to be the burden of my children for the upkeep, all the maintenance, and all the expense that come along with that. So, there it may make sense to have a trust, have other funding in the trust, that can essentially self-fund all of that stuff. It doesn't put it on the heirs, especially when there are multiple family members that may or may not see eye to eye kind of takes that potential friction out of the equation. That is another area I will share too. If there are second properties and maybe more specifically, if you own property out of state in addition to wherever you live, there are specific rules when it comes to probating your will. Meaning if you own separate properties, different states, and you don't have a trust, oftentimes, there is a secondary process that you have to go through in that other state to essentially settle somebody's estate. If it's in a trust, you can bypass that. So again, doesn't necessarily fit everybody's situation but that could make the case for a trust. A little bit more. I don't want to say urgent, but it could be more fitting depending on the situation. What do you think about real estate Ben?

Benjamin Haas 19:53

I'm just going to say you did a really good job with that. But I do think that is way more situational. So like, yeah, property being situational, ease of management was one of them, control is probably the biggest. Then again, there I believe are more far and few between where taxes really come into play. But those are really the four things we will look at. We're not going to talk about charitable trusts today. Maybe that needs to be a different podcast. I'm not sure if we ever did it but I think we hit on a lot of the different questions that we get and maybe we answered some of the misconceptions on when a trust should be in play.

Adam Werner 20:37

Yeah, it's not a one size fits all type of idea.

Benjamin Haas 20:44

Final disclaimer, we are not estate planning attorneys, of course. But yeah, if you have questions on this type of stuff. I think when you're making big estate decisions like this, it's important to think about how that matches up financially with your own life, your own needs. Then of course, try to find the efficiencies and teamwork with an estate attorney.

Adam Werner 21:06

Yep, perfectly said.

Benjamin Haas 21:10

Thanks for all your help today.

Adam Werner 21:11

All right, likewise. See ya.

Benjamin Haas 21:29

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

[1] https://www.foley.com/en/insights/publications/2023/02/increased-gift-estate-tax-exemption-amounts-2023#:~:text=For%202023%2C%20the%20gift%20and,tax%20exemption%20available%20at%20death.

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Ep # 96: When Trusts May Make Sense (and Don't) In Your Estate Plan