During last month’s webinar, The Legacy Minded Estate Plan, you learned the steps needed to create your estate plan. But there is more to ensuring your estate plan is set up correctly than just having the proper documents in place.
You’ve worked hard your entire life to ensure that you have the means to enjoy and live your retirement. But your goal is not just to fund your retirement. Your goal is to provide for your children, your grandchildren, even your great grandchildren. Your goal is to create a legacy that will last for generations to come.
What is to guarantee the legacy you have worked so hard to create will be there for your great grandchildren? Or even your grandchildren and children for that matter?
One of the vehicles that can help guarantee your legacy will live on is a trust. Trusts can provide legal protection for your assets and ensure those assets are distributed to your beneficiaries according to your wishes in the most fiscally responsible way. Knowing what type of trust is right for you is the basis for The Legacy Minded Trust.
During this presentation, Laura Ruleman – one of our Relationship Managers – and Kevin Taylor, ATFA – one of our Tax and Financial Strategists – walk you through the basics of trusts including:
- Why you need a trust and how they work
- The different types of trusts
- How to put a trust in place
Transcript (edited for clarity)
Laura Ruleman: Hello and thank you for joining today’s webinar, The Legacy Minded Trust. My name’s Laura Ruleman and I’m one of the Client Relationship Managers at TSP Family Office. I’m joined today by Kevin Taylor, an Accredited Trust Financial Advisor. Good morning, Kevin.
Kevin Taylor: Good morning, Laura.
Ruleman: Thank you for joining us today. Can you tell us what an Accredited Trust Financial Advisor is?
Taylor: An Accredited Trust Financial Advisor certification is one that is granted only after the most stringent educational and experiential requirements have been met. Quite often that certification is held by those who are experienced as a fiduciary in the upper levels of the high-net-worth trust and wealth management business, so I’m honored to have those letters after my name.
Ruleman: We’re glad you can join us. Before we get started, I want to remind everyone listening that TSP Family Office is not a law firm and that Kevin Taylor is not a licensed attorney. We do not give legal advice, and we’re only offering the contents of this webinar as an educational resource for our clients. Understand that the information we share today does not take into account anyone’s specific situation, and therefore the information within this webinar is not to be construed or relied upon as advice either tax, legal, or financial.
Let’s get started, Kevin. During last month’s webinar, you spoke with Kami Elhert, and you discussed Legacy Minded Estate Planning: the first steps in getting estate planning started. Those initial documents are important to get into place, as you discussed, but what is also important is to ensure that your legacy is going to last for generations to come.
Today Kevin will share some additional important knowledge as far as setting up a legacy-minded trust for you and your family. Kevin, we’re going to discuss several different types of trust today. Can you start by giving us just a brief history of trusts?
Taylor: The idea of a trust as we know it today has been around quite a while. To give you a very high-level background, the American legal system is based off of the English Common Law System. The English Common Law system is based off of Roman law. So the concept of trust really goes back to the first instances in Rome and Greece. That’s where we see the concept start to form and be, “I Person A give Trustee B land, in many cases, to hold for the benefit of C.” That’s really the nucleus of where we started and, a thousand or two years later, here we are today with some of the most finite and very advanced trust documents and theories of trust law that have been very well tested in the courts.
Ruleman: I know that one of the purposes of trusts is to provide legal protection for your assets. Can you share more about how they work, since there’s more to it than just that, who qualifies, and who should consider establishing a trust?
Taylor: Asset protection is one of the biggest things that we like to see with the trust. There are plenty of other benefits, but asset protection is huge.
To go through today’s conversation, Laura, let’s set up a hypothetical. That way, our viewers can see how trusts work from a practical standpoint. I’m going to be the grantor today, Laura, the person with the money who wants to benefit you with that money. But I don’t want to give it to you directly. Most of you know Tom Gibson. I know you do, Laura, so we’re going to use Tom today as our hypothetical trustee. I’m going to give money to Tom pursuant to a trust agreement, and he’s going to take that trust agreement and use that document as “the rules for the road,” if you will, to distribute money to you for your benefit. We have a beautiful office here in Vero Beach, but sometimes we can’t agree about the thermostat. So our hypothetical situation today is you, Laura, and Kami had a disagreement on where the thermostat should be. You said 71, Kami said 68. You wound up in court. Unfortunately for you, Kami won and has a good-sized judgment against you as well as an injunction saying, “Laura, leave the thermostat alone.” That’ll give us a good lens through which to view the asset protection that you talked about.
But before we hop into the asset protection, we have a lot of folks who say, “I’m not rich, I don’t need a trust. They’re expensive. I can’t afford it. Do I really have enough assets to have a trust? Those are for people who are going to be on the couch and not work.” That is a common misconception, and I understand why it’s out there. But I’ve got my TSP Family Office pen here and it’s a very nice pen. I can put this pen into a trust if I want to, with Tom as the trustee for your benefit. Does this make financial sense? Maybe not. But if it’s important to me, it doesn’t matter if it makes financial sense or not, as long as I can afford it. That’s really the premise behind a trust. It’s a highly customizable estate planning vehicle. Just about anything you want to accomplish you can do, up to and including, again, putting this pen into a trust.
Ruleman: I do have a question here to address before we move on. “I have a great relationship with my attorney. He’s not a trust attorney. Can I use him to set up my trust?” Great question.
Taylor: That is a wonderful question. The fact of the matter is, sure, just like you could go to an orthopedic doctor for a heart surgery. But the problem with that is you’re probably not going to get an orthopedic doctor to perform heart surgery. In most cases, you’re probably not going to be able to get a non-trust attorney to set up a very advanced or very complex trust.
We’ll hop to that a little bit later, but the short answer is, it depends. It may be that your attorney has specialized in estate planning in law school. That might be a good fit. He may practice real estate or that may be a large part of his practice. Or maybe they do litigation. But if they’ve got significant experience in trust and estates, that’s really going to be the driver behind whether or not you want that particular attorney to set up the trust and whether or not he’ll even undertake the engagement.
Ruleman: Thank you. So let’s start with two types of trust that I’ve heard several times, and I’m sure some of our listeners have before as well: a revocable and an irrevocable trust. Can you share more about the pros and cons to each and how they function?
Taylor: With regard to the revocable and the irrevocable, there are a few key points I want you to keep in mind, Laura.
With respect to revocable, I want you to keep flexibility front of mind. Revocable is going to give you a massive amount of flexibility in moving assets into and out of the trust. You can reform the trust; you can change your beneficiaries. You could do away with the trust if you want to, but you have to pay the piper for that. That flexibility does come at a cost. The cost for that flexibility is you don’t have asset protection to speak of. It will get you around probate, just as any trust will. For the most part, if you’ve got assets in a trust, they will move seamlessly around probate. So, again, good things.
The other thing we have to keep in mind, especially with what’s going on in Washington today, and it’s something that we watch very closely here at Tax Savings Professionals, is where the unified credit is going. Now we can talk about that individually with some of our viewers and we have, but estate tax is a big-ticket item right now for this administration. And if you have assets in revocable trust, those assets are going to be part of your taxable estate. That’s one of the drawbacks to having a revocable trust. But again, that flexibility, depending on the situation, is hard to match.
Let’s go to the other side of the fence and talk about the irrevocable trust. I want you to keep the word rigid in mind with an irrevocable trust. With a revocable, we’ve got flexibility. With an irrevocable, we’ve got more rigidity. But again, there are tradeoffs here. We have benefits from that rigidity. The main benefit is that the assets are out of your estate. Any assets that you have in an irrevocable trust, those assets are out of your estate so that future growth that occurs there is going to be outside of your taxable estate at the time of your demise.
The other side of it is, because these assets are outside of your estate and you have no incidence of ownership to speak of, you do get asset protection and you don’t have to worry as much about predators. That’s a great thing to have. And again, just like the revocable, assets in a trust are going to move you around probate, and that’s what we want. We want to see your estate not in probate. We want to see your assets structured in a way that it moves seamlessly to your heirs.
Ruleman: Can you remind our listeners just what probate is? I know it’s a term we throw out a lot, but what exactly does it entail?
Taylor: Around our office, Laura, as you know, probate is a very bad word. We think probate is not where we want to see our clients for a number of different reasons, but it really comes down to three main reasons. Probate is expensive. It’s time-consuming. It’s extremely public. We don’t like those aspects of probate.
Mechanically, if you have a will and you pass away, in that will, you’re going to nominate an executor or a personal representative. When you pass away, that person is going to take your will down to the clerk, stand before the clerk, and is probably going to have to swear, “Madam Clerk, my name is Kevin Taylor. I’m the personal representative for John Doe. I swear and affirm that this is, to the best of my knowledge, a true and accurate copy of John Doe’s last will and testament.” Once that is done, and keep in mind that there are going to be different formalities depending on state and jurisdiction, the clerk is going to issue something called letters of administration. Letters of administration basically mean, I as John Doe’s personal representative, have this letter of administration that grants me court authority to act on behalf of decedent John Doe as if I were John Doe. You can carry on paying expenses, settling affairs, disposing of assets, retitling to family members, collecting money that you may be owed.
So, effectively, probate is a method to carry on the business of the decedent and wind it down, much like you would an LLC. Initially, you might hear some people talk about probate being to prove the will. That’s part of the process. Obviously, when you stand there before the clerk, that may or may not be the end-all-be-all to “This is the last will and testament of John Doe.” There may be a will contest, but we’ll get to that at some point in future. Probate is just proving the will and the judicial process by which you transfer assets and carry on the business of the deceased.
If you don’t have a will, your state is likely going to have statutes of intestacy. In effect, that is the state providing a will for you, by statute. That’s going to be a little bit more involved and a little bit more of a murky process. We don’t like that at all, especially with the complexity that our clients have in their lives. And I’ll go back to the point about publicity. Laura, you and I don’t walk up, up and down the street and say, “We have this, we have that. We owe money to so-and-so. We have this in our bank account.” It’s just not how we operate, and I don’t think any of our clients do that either. That’s why we really don’t like probate. It’s just too public.
Ruleman: Thank you. You mentioned wills. Let’s talk about trusts under will. Can you share more about that, where you see it, the purpose of it?
Taylor: In last month’s webinar, I talked about some of the various estate planning documents. The will. I think everybody will agree that the will is the cornerstone of good estate planning. Everybody needs a will. Right? But where does the trust under will come into being? What does that have to do with anything? How does that work? What does that look like?
Let’s say that we’ve got a will. A will can be very simplistic. It can be as simple as “I John Doe give and bequeath my TSP Family Office pen to Laura at the time of my demise. I make no provision for anybody else in my will.” That’s simple. But when you have a trust under will, you’re taking that will that has all that language in it – maybe your burial wishes, and those types of things are going to be found in the will – and you’re inserting trust language into it. The easiest way to explain this is if you had a standalone trust outside of a will, you’re basically going to take that language and just insert it into the will when you’re drafting. It’s not that easy, but that’s the best way to explain it.
This is going to create a situation whereby when you pass away, the personal representative is going to go down to the clerk, swear, get the letters of administration, and then as the assets go through probate, instead of going out-right to you, Laura, they’re going to go into trust for you under that will. If you had a will without that trust language, it might just go to you directly, you might get a check or you might just get the pen. But with the trust under will, you’re going to get that pen in trust, subject to restriction.
Nine out of 10 times we see that be an irrevocable trust and that trust under will comes to life and gives you asset protection. It keeps that asset outside of the estate and all those other good things that we like about an irrevocable trust. But with the trust under will, we have to keep in mind that a will is not of any value until somebody dies. That will can be changed, it can be revoked. No matter what, it can be switched up. So it has no force and effect until somebody dies, very much unlike a standalone irrevocable trust. That’s one of the drawbacks we see to a trust under will, but we like them because they’re a good catch-all, especially if you have a beneficiary who may be laboring under some type of physical ailment.
Ruleman: That’s great. Thanks, Kevin. Let’s shift gears just a little bit. As Kevin and I both know, and I’m sure many of you do know, the financial world loves acronyms. So we’ve got a few trusts that we want to review today. The first one is an ILIT, I-L-I-T, an irrevocable life insurance trust. Kevin, can you share how this is used and how life insurance plays into the trust?
Taylor: An irrevocable life insurance trust really came about because of an estate tax issue. That’s my understanding of where that came from. Let’s go back to our understanding of revocable and irrevocable and break it down.
Irrevocable. That tells us that the assets are outside of our estate. Life insurance trust. That tells us it’s got something to do with life insurance. Right? So it’s fairly self-explanatory. But that one acronym, Laura, is one of the most powerful estate planning tools that we have. We’re irrevocable, so we’ve got asset protection. The assets are outside of our estate. Good things happening.
But why did the financial industry and the legal industry come up with the irrevocable life insurance trust? Let’s go back to estate planning in general for a moment and talk about estate tax. Right now, the unified credit is about $23,700,000 dollars for a married couple. Let’s say that we have an estate in front of us and it is that of a married couple and is valued at approximately $50 million and $48 million of that valuation is a closely held business. Our married couple also has $2 million in cash that makes up the remainder of the $50 million dollar valuation. So we’re looking at a $50 million valuation, $2 million in cash, $23.7 million in unified credit (which is our get-out-of-tax-free card from the government).
We’re going to say that, as of today, we’ve got a little north of $26 million of this estate that could be taxed at upwards of 40%, some states upwards of 50%. So, for this example, let’s say we have about $13 million worth of tax liability. Let us also presume that the husband and wife’s unified credit is fully intact. Common calamity, they both die at the same time. Somebody has nine months to file an estate tax return and figure out where they’re going to get $13 million to pay the estate tax liability because you’ve got nine months to file and pay or come up with a really good plan that the IRS understands and agrees with to pay that liability. Since we only have $2 million in liquid assets, Laura, where are we going to get the other $11 million? The business may have $3 or $4 million that it uses to operate. What happens if we take the cash from the business that it’s using to operate and pay that toward the estate tax liability? The business becomes strapped, can’t operate efficiently, valuation drops, business may fail. The other side of this is that maybe we leverage the business. Maybe we have to make a deal with a lender that we wouldn’t otherwise make to pay that $13 million. Maybe we have to, worst case, fire sale the business.
In some businesses, from day one, you’re not expecting a sale. A plane goes down and the next day you have to figure out how to sell this business that was intended to be passed through the family for generations. You’re looking at a fire sale. You may not get the $48 million valuation. You may be lucky to get $15 million, but the valuation is the valuation. The IRS has already valued it at $48 million, that’s where it came in. The fact that you sold it for less than that is your problem. That’s really where the irrevocable life insurance trust comes into being and really shines.
A lot of you have heard us talk about the need for certain components to your overall picture. That protection component is very important because you don’t know the circumstances of your death. You don’t know if your business has liquidity or maybe you’ve invested a lot of it into goods that you’re going to sell. That protection component can provide liquidity when you most need it after an unexpected event. When you marry the life insurance into the trust, you have the life insurance policy outside of your estate. Again, you’ve got the creditor protection. Anything that goes into that or happens in that trust is not in your taxable estate. We like that.
The good thing about life insurance is it will give you that protective piece in the trust outside of your estate to provide liquidity when you need it. Now, here’s the caveat to it. We can’t just go down to the grocery store and get a life insurance policy. There’s a few more nuances to it than that. Right? You generally have to be able to qualify for it, and you have to be able to afford whatever you want to get in terms of policy value.
In this instance, let’s say that we can afford $13 million or the premium on $13 million. And let’s say that we, from a health standpoint, qualify for that. We put the policy in trust that terminates at the end of a measuring life. When I pass away, the policy matures, and the check comes to the trustee. Now, obviously, it’s not this cheap to get $13 million worth of coverage, but you’ve heard me talk about the annual exclusion amount, right, Laura?
Ruleman: Yes.
Taylor: It’s about $15,000 a year per person. A married couple with one child can each give that child $15,000, so a total of $30,000 a year. And that doesn’t diminish their unified credit. Now let’s say that the $13 million worth of insurance could be bought for a premium of $30,000. We know that’s unrealistic, but for the purpose of our example today, we’re going to use that annual exclusion amount. Put that $30,000 into the trust, it’s out of our estate. That is used to pay the premium on the life insurance. If mom and dad go down on a plane tragically, the business is not going to be strapped for cash and the estate is not going to be strapped for cash because the life insurance policy is going to mature, and the estate taxes can be paid. That’s the benefit of it.
Now there’s the other side of the coin. It may be in the interest of the beneficiary – and the trustee will determine this – to not pay the estate tax and let the estate be insolvent. Maybe there’s some litigation raging that’s going to destroy the business. Maybe that trustee has the authority to keep that $13 million in that trust, knowing that if they paid it out to pay the estate tax liability, it may go up in smoke in a year anyway. So you have a lot of flexibility and an extreme amount of protection. We love ILIT trusts and they’re one of our favorite tools.
Ruleman: I can see why. Let’s talk charity. I know we have quite a few clients who are very charitably inclined. So we have a CRUT and a CLAT. Again, acronyms for charitable remainder uni-trust and charitable lead annuity trust. Can you share – maybe start with the CRUT – what these are used for and why might our clients want to check into these.
Taylor: Laura, the good news is they’re both charitable. I think we could both agree on that. So let’s break them down. We’ll talk a little bit about the CRUT and then we’ll talk a little bit about the CLAT, and I think they’ll come into clear view for us once we take that approach.
With the charitable remainder uni-trust – don’t worry about the uni-trust part now, let’s talk about the charitable remainder part of it –we know we’ve got a trust. It’s going to be irrevocable, but it’s a charitable remainder trust. “What is this used for?” you may ask. Let’s say that you have somebody who’s an executive at a large company. They have a huge block of stock in X company. Let’s say that the stock was granted to them, and they have a basis of $1 a share on all their stock. Massive amount of stock. Let’s say that stock now is worth $2,000 a share. That’s a $1,999 gain. Huge gain. Right? What are we going to do about that?
Now let’s assume the person retires – he is the last person in his peer group and knows the new leadership but doesn’t have the confidence in that leadership that he had in himself and his peer group. He says, “Maybe I should diversify out and get a little bit of Y and A and C and B and F company stock.” Right? The problem is that when you start selling that low basis stock, you’re going to have to bite the apple while paying the taxes. Now let’s say that you’ve held it for longer than 12 months so it’s a long-term capital gain. Well, that’s better than it could be. At least it’s not a short-term gain and subject to ordinary income tax rates, but you still have a big tax bill. we could be looking at millions of dollars’ worth of gain that we have to do something with. For this instance, let’s say we have $10 million worth of gain.
There are two routes that we can take. Sell it all today, diversify, and your market value is going to go– after you pay the taxes – for the sake of rounding, to around $8 million. So you go from $10 million to $8 million, but you’re diversified, it makes you feel better. You’ve got A, B, C, D, E, F, G different types of stock. You don’t just have stock in Company X anymore. That can work. Obviously, if there’s significant market risk to X, that’s a route to go.
On the other side of that coin, what if we employ a charitable remainder uni-trust? How does that work?
Let’s say that we put that $10 million or that block of stock has a $10 million gain associated with it. Let’s say that we put it into a charitable remainder uni-trust. Now we can diversify it within that charitable remainder uni-trust and not deplete that market value – that’s the best way to think about it – because there’s no taxes on it. But here’s where the value of the charitable remainder uni-trust comes into being. You get a payment every month or every year and, on a certain day, that market value is multiplied by a percentage, that’s the uni-trust amount.
That’s the benefit to a uni-trust. Every year it gets revalued on a certain date against a percentage and that payment goes out to the person who put the money into the trust. The grantor – again, that’s the person with the money who put the money into the trust – is benefiting from the CRUT today.
Now, you may ask, “Well, what’s the remainder part about, Kevin?” At a certain point in time, either a term of years or at the end of somebody’s life, there’s going to be money, we hope, remaining in that trust after years of payments to the person that granted the trust. Where does that money go? That money’s going to go to a qualified charity, 501(c)(3).
A CRUT is usually married with a private family foundation. That gives you the option to have that charitable remainder, Laura, so that your family can be involved in your philanthropic efforts. They know your values. They know the organizations that were close to your heart. The organizations you held close might be close to your descendant’s hearts too, maybe it’s a different organization, but it still helps your family maintain control of that money and ensure that your assets are used in accordance with your wishes to benefit charity.
Let’s hop to the other side of the fence and talk about a charitable lead annuity trust. Again, I don’t want to focus on the annuity trust part yet, just like we lopped off the uni-trust part on the CRUT. The charitable lead is very much like a CRUT. There’s going to be a charity involved, there’s going to be somebody granting some low basis stock we’ll say. You can diversify within that CLAT, and then the payment is going to come out to charity this time. The payment is not going to come out to the person that put the low basis stock in there, it comes out to charity. That’s the lead part of it, the charitable lead. Then the remainder is going to go out to a trust, an estate, the person that put the money in there. It can go down one generation if properly structured. The remainder is just switched on the CRUT and the CLAT. That’s the big thing you need to keep in mind.
Obviously, there are a lot of nuances with these, but that’s the general idea, and that’s the difference between the charitable remainder uni-trust and the charitable lead annuity trust. We like both. They tend to work very well, but they are situation specific.
One of the things you have to keep in mind specifically with a charitable remainder uni-trust – and this is something we’ve answered quite a few questions about recently – is that if you put capital gains in the trust, the payments are going to be categorized as capital gains. We’re putting a $10 million capital gain in in our example, we’re diversifying. We’re going to operate by the terms of the CRUT. Everything’s going to be fine. When that payment comes out every year to us, it’s going to be taxed as a capital gain. That sounds good. Right? However, we don’t know what’s going to happen in Washington. We may see capital gains rates go from today’s rates to 30%, 40%, or maybe even higher. We have to be very cognizant of what we are doing, especially right now, when using a CRUT. There are still good benefits to using a CRUT, but that’s one of the things that we keep in mind.
Ruleman: Thanks, Kevin. Two more terms I’d like to discuss are spendthrift and special needs, both of which I know are important in your eyes when looking at trusts.
Taylor: I know you’ve heard me say this, Laura, and a lot of our clients have too. You can have clauses and language within a trust, but you can also have a trust that’s called a spendthrift trust or special needs trust, or there can be an area of trust that’s a spendthrift trust. One of the confusing parts about trust law is that it can appear convoluted to a lot of people because the same document can be several different things. It can be a special needs trust. It can be a spendthrift trust. It can be irrevocable. It can be a complex, it can be a simple trust. You can hear all these things and still be talking about the same several pieces of paper signed on the same date by the same person. It just depends on the context of the conversation.
For our purposes today, let’s start out talking about spendthrift and special needs as a body of standalone trusts and then as a body of language within any other type of trust. To start off, let’s talk about a special needs trust. If you have a family member or a beneficiary that either is or you anticipate may be laboring under some type of physical ailment, say, and may need government assistance or might qualify for government assistance at some point, the government might require a spend down if the beneficiary had money in their own hands.
A special needs trust bridges that gap and keeps that spend down from being a necessity. If we have a special needs trust, there’s a pot of money in that trust that’s not going to be subject to a government spend down because, again, a special needs irrevocable trust beneficiary doesn’t have control. There’s no incidence of ownership, so the government can’t require a spend down on it if it’s properly drafted.
So, what is that money really going to be used for? Let’s say that insurance won’t provide a particular implement that an ailing beneficiary may need. Well, thank goodness we have that special needs trust that can step in and buy that implement, no matter what it may be. It may be a specialized walking implement; it may be a motorized bed. Whatever it is, that special needs trust can do it because that pot of money, if you will, is protected.
Now let’s hop over to a standalone spendthrift trust. Recall in our example, Laura, that I gave the money to Tom for your benefit. I was the grantor, Tom was the trustee, and you’re the beneficiary. You and Kami, unfortunately, had a very nasty piece of litigation and she won. That’s why we’re all freezing to death and the thermostat is on 68° now. But, in addition, she also received a good-sized judgment against you. But never fear. The trust I granted for you that Tom’s holding is a spendthrift trust. Essentially what that means is Kami is going to have a tough time going to Tom through court and saying, “Your honor, we need to access the money in this trust.” First thing the court’s going to look at is a spendthrift clause within that spendthrift trust and say, “I don’t see how you can do it. Good luck. Take a hike.” That’s the ideal outcome. Right?
Ruleman: Right.
Taylor: So that money is still there. Tom can use it to buy you a new couch. Tom can use it to pay your grocery bill. That’s the benefit of the spendthrift trust. But what really gives the teeth is how this language is used.
Let’s switch back to special needs and then we’ll get to the benefit of a spendthrift clause. In a special needs trust and a spendthrift trust, it’s the language in them that make them that type of trust. And that’s going to be the special needs clause and language, or the special needs language and then the spendthrift clause and spendthrift language. You could take any trust and put special needs language in it.
We like to see special needs language in the trusts that our clients set up for one particular reason. These trusts may last generations and very well can. It’s entirely reasonable to think that a trust could last generations. You don’t have a crystal ball, you don’t know if you’re going to have some future beneficiary that labors under a physical ailment and might qualify for government assistance, and this money may need to be there to backstop them and provide implements that they wouldn’t otherwise be able to get that makes their life easier. That’s why we like to see that spendthrift language in just about any type of trust that we see our clients set up.
Now let’s go back to the spendthrift language, the spendthrift clause. You may also hear me call it the anti-alienation clause. Really, what it does is give the teeth to any trust. It gives a trustee the ability to look at an assailant – in this example, it would be Kami coming to try and get your trust money – and smile and say, “Take a hike.” You may have to do that in court from time to time, but that’s the point behind a spendthrift clause. You don’t own that money. It’s not yours.
But, let’s say, Laura, that you went to law school and you’re a really sharp student. You’re in your third year and you’ve had trust and wills and estates and you said, “You know what? I think I’ve figured out how to outfox Kevin. I’ve looked at this trust, there’s no spendthrift clause in it. I saw a commercial the other day. I’m going to get with those people. I’ve got $10 million in that trust, but they’ll give me a check for $2 million. I don’t have to keep asking Tom to buy me a couch or pay my grocery bill.” You are probably going to have a higher rate of success doing that if there’s no spendthrift clause in there. It protects a beneficiary from themselves; it keeps them from being able to pledge their interest in a trust at a blackjack table or sell their interest in a trust or have their interest attached by creditors.
Now let’s talk about that same trust with the spendthrift trust in place. You go down to that company that you see on television and give your speech that, “I’m in my third year in law school and I’ve got a trust here. I’m fairly confident it’s got $10 million in it. I’ll take two so let’s make a deal.” They’re going to look at the trust and see that spendthrift clause. There won’t be anything they can reasonably do. Same as if you were at the casino and you tried to – and I don’t know any casinos that would do this, but for the example – lay the trust document down on the table. Or maybe it’s a friendly poker game. That spendthrift clause, whether they figure it out on the table or later, because of that spendthrift clause, it’s not going to work because you don’t have any ownership. That clause, that’s the teeth. The spendthrift clause, the anti-alienation clause, that’s your teeth right there.
Every time I read a trust for a client, Laura, I immediately look for that spendthrift clause. That’s what I want to see. Some we see with one or two sentences. They may work but might not work. Some we see are a paragraph, paragraph and a half. It depends which one of those is more effective based on which state’s laws govern the trust.
So those are the really two big pieces of language that we love to see in documents because, since we don’t have a crystal ball when we’re setting this stuff up, we like to know that every bit of insurance that we can put in there is available for use. We hope it’s not needed but thank God it’s there.
Ruleman: That’s a great piece of information there, Kevin. I think one of the biggest takeaways from this conversation is that trusts are customizable. There are so many pieces, and we’ve only touched the surface of what is able to be done within a trust.
Kevin, can you just give us a few practical steps? I’m sure that someone’s here listening and thinking, “I think I need to get this setup.” What is the first few practical steps in setting up a trust?
Taylor: Well, the best way to explain how you should go about it is to talk about our philosophy. There’s a couple of different ways to go about this, and some folks may historically open up the Yellow Pages, find an attorney, go down, set up a trust, pay the money, sign the documents. Low and behold, you now have a trust. Happy day.
With our clients and the complexity that we see in their lives in just their care for their family and their intent to build a legacy, we like to take a more holistic approach. Our view is that if you have a good estate planner, a good CPA, and a good estate and trust attorney around one table who have knowledge of all the facts and can look at every situation and every movement with a holistic point of view, that’s the ideal situation. We want to think about our client with one mind, and we want to pool the information that we have about the client. So that’s our philosophy.
The good thing with TSP is you have two of those already. The piece that we have to find is a very good estate and trust attorney in your area, licensed in your state. Then we’ll sit down and have that conversation, start that pool of knowledge and that collaboration. But the best way to start? Please give us a call. We’re glad to have a chat with you. We’ll set it up. And, Laura, you know this. I’ve cleared my schedule before for clients that needed assistance immediately, and that’s something that we do for you. We are your family office. We’re here to work with you to make sure that things turn out as you want them to. That’s the best start, just give us a call.
Ruleman: Thanks, Kevin. A few questions have come in. “Last month you said if I needed to set up my will quickly, I could use LegalZoom. If I need to set up a trust quickly, can I also use LegalZoom to set that up and then revise it once I’m able and have more time?”
Taylor: That’s a really good point that somebody brings up. If you’re in a super hurry – you’re going out of town, you don’t have time to get with an attorney, you don’t know one – you could probably go to one of these sites and check the boxes and get the documents. But here’s something you have to keep in mind with setting up a trust. Setting up a trust is not as easy as setting up a will. Setting up a will, you can write that down on a napkin. And there are all manner of wills. You can write a will in your own hand, on a piece of paper, and sign it and notarize it if you can get it done. Or you can give a will verbally in the presence of witnesses. Not the best type of wills, but it’s better than nothing.
Usually, with our clients, we see what we call a self-proving well. It’s been drafted, well thought out, witnessed by third-party witnesses, notarized, and obviously signed by the client. But that’s a self-proving will we like to see. You can get those fairly easily. The main thing to remember is to click the boxes, print out the will, you sign it, you get it notarized. That’s pretty good.
With a trust, it’s a little bit more involved. And I say that to say this, you can set up a trust all day long, and we see this frequently and it’s unfortunate. A large number of documents that come across my desk are not signed, or they’re signed but there are no assets titled into them, you’ve got an empty shell. That’s what you’ve got to think about with setting up a trust. But here’s the thing that I would caution you about. If you set up a trust off of one of these sites and you fund it, do you really have the expertise that a trust attorney licensed in your state would use to make sure that’s the right thing for you? You can make some real mistakes.
I’ll say it again. This is not a do-it-yourself proposition. This is absolutely not a do-it-yourself proposition. An example that I use quite frequently with many of our clients is, would you allow a heart doctor to fix a tooth? Would you allow a dentist to do heart surgery? Probably not because neither of those practitioners would do it. They know better, they know their line of work.
That’s something that you have to keep in mind with estate planning. This is really complex stuff. And if it’s done right, it can do great things. If it’s done wrong, if you set up a trust and you fund it incorrectly, it may not do what you want it to do, or it may cause a lot of headaches having to retitle assets, going to court, and getting the trust wound down or decanted. These things need to be done by professionals, so we strongly encourage you to give us a call. Good point.
Ruleman: Absolutely. So the last question is, “If I want my trust to be a multi-generational trust, how do I specify who will be the executor going forward after I pass away?”
Taylor: Laura, I thank the person that wrote that. An executor or a personal representative is usually going to be the fiduciary under a will that acts on behalf of John Doe, the decedent. And with a trust, it’s going to be a trustee. Those two get mixed up quite frequently, and that’s okay, but it’s actually a fiduciary that’s going to hold the assets. That’s going to be Tom in our hypothetical example. Tom is that trustee.
But let’s say that Tom says, “I’ve had all I can put up with. I’m retiring. I’m going to sit at the beach. It’s just too beautiful down here today. I’m done working. It’s over.” Laura, you’re going to have to get another trustee. But never fear as Tom says, “I know John Doe down the road. I’m going to exercise the successor provision under the trust. I’m going to nominate John Doe as a successor trustee. You good with that?” Yeah, sure. I’m good with that. I know John, he’s an honest guy. I really like John. That’ll work fine.
There are really two types of trustees that we talk about frequently, Laura. We talk about individual trustees, which Tom would be in this case. Then we have corporate trustees, which might be big box Bank A. They’ve got billions in market capital. They’re just this gargantuan bank that sits on the corner of the intersection. That would be a typical corporate trustee. They are going to be very rigid, very process-oriented, very removed in many cases from you, and knowing your exact needs. Whereas with Tom, that individual trustee, you’ve got a little bit different relationship with him.
On the corporate side, that successor language is going to act very much the same. And in most trusts, the successor language will cover individuals and corporate successors, but it may give parameters. If it’s a corporate trustee, maybe they must have $100 million in market capital. If it’s an individual trustee, maybe they must not have any felony or driving under the influence convictions. That trust successorship language is usually going to define who can be the trustee, how a trustee can resign, and who can take over. It goes from person to person and, while this is an oversimplification, it’s simply a game of leapfrog. It goes from one person to the other.
And I can tell you this, one of the trusts that I managed has been in force since the late 1800s and is still going as far as I know. It started at one bank and then as mergers and acquisitions happened and occurred through the years, it wound up at the bank that I was with. So trustee successorship is very effective, and that’s a very good question. That’s something that a lot of folks need to think about. But with a personal, it’s going to be a little bit more involved. And we always say, make sure you have somebody groomed up to be a trustee at all times.
Ruleman: That’s great. Thanks, Kevin.
Estate planning, as we know, is such a vital part of leaving a legacy for our families. You’ve been able to answer some of our questions and I’m sure more will develop with time. As always, if you have questions about estate planning or trusts, reach out to us at (772) 257-7888. Thank you for joining us.
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