Wills, trusts, powers of attorney, healthcare documents. Where do you begin? Today, we’re going to talk about estate planning: What it can do for you and why a trust might be the most powerful estate-planning tool you haven’t even considered yet.
Andrew Busa: Hello, this is Andrew Busa, and I’m a financial planner here at Adviser Investments. We’re here with another The Adviser You Can Talk To Podcast. Today, I’m joined by two colleagues. First, Dina Milne…
Dina Milne: Hi, Andrew.
Andrew Busa: She’s an account executive and works directly with clients in a relationship capacity at Adviser Investments. I’m also joined by Patrick Carlson.
Patrick Carlson: Hi, Andrew.
Andrew Busa: He’s the vice president of wealth services here at Adviser Investments. He has also practiced law as an estate-planning attorney and prepares tax returns and tax plans for our clients. We’ll be looking forward to getting his experience here in this podcast.
Today it’s all about estate planning and specifically trust planning. We’re going to frame this podcast around real stories so that you, as the listener, will hopefully be able to relate to them and take some information to apply to your own life.
Dina Milne: Andrew, we’ve received so many questions over the years from clients asking whether they need a trust or not and when they should think about setting one up. Really, that’s what prompted this podcast.
Andrew Busa: That’s great. We love doing podcasts that are prompted from client stories and, Patrick, with your hands on estate-planning experience I think we’ll be able to get some interesting perspective from you.
Patrick Carlson: The legal side of it, the financial side of it… Those meshing together is one of the things that really helps to serve clients well, and you can’t make a legal decision without considering the financial—and vice versa.
Andrew Busa: We’re going to try to keep this podcast to the big picture. Our objective today is really two-fold: First, we want to give you a basic understanding of what trusts are and how they work and also in what kinds of situations a trust might be beneficial to you. One quick bit of housekeeping here from Patrick. I know you’d like to throw this out there.
Patrick Carlson: We’re just going to be really general and kind of high level today. Anytime you’re making a significant legal decision about whether to do a trust or what type of estate plan is right for you, you definitely need to speak with a qualified attorney. The laws on this vary greatly state to state and based on your own circumstances. Definitely do not take legal advice from a podcast, a chat room or something you read online. Really talk to somebody to make sure it is going to work for you.
Andrew Busa: As part of our financial planning process, we will work with your estate-planning attorney to make sure that your financial plan is coordinated with your estate plan and if you don’t have an attorney we can certainly help you find one.
Let’s dive right in. In estate planning, the word trust brings to mind a lot of different things and one common misconception that I know we hear a lot from clients is that trusts are only for the super-wealthy. It really turns out not to be the case. I think first we need to just take a step back. Let’s define what trusts are and what they’re actually designed to do.
Patrick Carlson: Andrew, that’s a great point. I’ve heard that from so many clients over the years: “I don’t have the giant house on the lake and a giant yacht and an airplane, so I don’t need a trust.” Really nothing could be further from the truth. I like to think of a trust as simply an instruction manual. All you’re doing is basically dictating how you want things to happen. A lot of trusts will say, “Hey, for the rest of my life, here’s how I want my money managed and spent.”
Trusts also cover what you want to have happen after your death. That’s really all that they’re doing. Now, the document you get from your lawyer is going to be really thick and have lots of other things in it as well, but at its most fundamental level, that’s what’s happening.
Patrick Carlson: There’s really three players involved here: There’s the trust maker. Sometimes you’ll hear this called a grantor or a trustor a settlor. They all mean the same thing. That’s just you. That’s the person who makes the trust. There’s the trustee. That’s the person who’s managing the trust. During your life, that’s usually you.
For most of our clients here at Adviser Investments, we have those clients as trustees and then they often will pass that along to a child later. Then there are the beneficiaries. these are the people who received the benefits of the trust.
Andrew Busa: That doesn’t sound so bad, and I really like the way that you put it. A trust is like an instruction manual and framing it that way makes it sound not as scary. Another concept that we hear from clients is that if they make a will, their estate plan is done—they don’t need to do anymore work. We’ve seen that not to be the case, as well. We’re going to get into when wills might not accomplish quite as much as trusts can.
Dina Milne: Right I want to add something else. Just having a trust in place is not enough. You want to make sure that you follow instructions and we’ll dive into that a little deeper throughout the podcast, but keep that in mind, as well.
Andrew Busa: We’ve defined what trusts are to give us this foundation to move on. Let’s tackle some specific client profiles so that you, as the listener, might think, “This looks like me and I can relate to this.” That’s our goal: To give you some stories to listen to and learn from.
Here’s the first one that we’ll talk about. Dina, we just worked with a couple of interesting cases. Both of these clients were young couples. They were accumulating wealth. Talk to this one a little bit.
Dina Milne: It’s funny. We actually worked with two young couples at the same time. They were both in very similar situations. Both of them were in the process of having their second child, so growing families. They were upgrading homes and moving into their second homes. Both parents on both sides are professionals. They work full time and both couples went in for an estate planning review and each one of them came out with a different outcome.
One of the young couples decided to go with setting up a trust. It’s a bigger expense up front, having the trust documents set up and having that all put into place. But they had a bit of a longer view and thought it was an appropriate decision for them. They travel a lot, too; so they were worried about the well-being of their children should anything happen to them.
The other couple opted to go with a will-based plan. This would basically say that should anything happen to the parents, this would set up a testamentary trust.
Andrew Busa: And that’s a phrase there—testamentary trust. Patrick, help out the listeners.
Patrick Carlson: Testamentary trust is just a trust that is formed as part of someone’s will. Basically, the court will create that trust upon your death through the probate process. As Dina mentioned, they’re a little bit cheaper now because wills are less expensive to set up today. But you do have to go through that probate process at the end of your life in order to get the trust set up.
Dina Milne: That’s correct, and I think if they move as well.
Patrick Carlson: Yes, the trust that we were talking about earlier and the ones you’ll frequently hear talked about are really living trusts. You’ll hear these called revocable living trusts or just living trusts. Those are ones you set up during your life. They’re a lot easier to move from state to state.
A testamentary trust can sometimes be trapped or really challenging to move to a new state based on where you died. We’re in a geographically mobile society, so we don’t know where we’re going to live—let alone where our children are going to live years or decades from now.
Andrew Busa: Dina, you teed up these two couples: The one with a trust-based plan and the other one went with the will-based plan. If we fast forward 20 years, this is a young couple so now let’s pretend that they’ve continued to accumulate wealth. Their financial situation has become more complex.
Patrick, I wonder if you can talk about how things might change, where their estate needs might change at that point.
Patrick Carlson: Of course. I mean these are clients that did a great job for their family by coming in and doing a plan when they had young children. But as Andrew mentioned, time will pass. Our children will grow up, and things are going to change in our lives, in their lives.
Things could change: It may be that a child will have some kind of special need in the future that wasn’t apparent earlier in their life. Maybe they have an injury. We also just don’t know how a three or four-year old is going to approach money. By the time they’re 23 or 24 we probably have a much better idea of their sensibilities with regard to budgeting and managing investments and making decisions.
All of those things can factor into the ways that we might want to change our estate plan as we go. That’s one of the things I would recommend here. We fast forward 20 years, but really this family should probably be looking at it every three to four or five years at the most, while their children are young. Because one of the other parts you want to look at in that plan is the guardianship nominations. Who is going to help raise those children if you’re not there to do it? That could change almost every year potentially, depending on the needs of your children.
Dina Milne: I think what I tend to see with my clients is usually they do a review every five years unless something happens.
Patrick Carlson: Yes, five years is a good interval for most clients.
Andrew Busa: There’s a few takeaways that we can take from this client profile here. When you’re young, your life isn’t too complicated yet. But as you get older, your financial life evolves: You get married. You have kids. You buy a home. Estate planning becomes a very important part of your financial plan. It’s fine to start with a will-based plan as Dina mentioned, but as things get complicated maybe you grow into a situation where you should start to consider a trust for what you need for your estate plan.
As we mentioned in this story, reviewing your estate plan is also important every five years or so or when a life event happens—when you have a child, for example. That’s a great time to dust that off and look at it. That’s really what we’d say there.
The next profile we want to tackle, Dina, we see this one a lot. This is someone who is unmarried, they have a lot of assets, and this brings to mind some different estate-planning questions.
Dina Milne: Yes, we see this a lot. This could be somebody who was single—never married, a widow, a divorcee; and it’s somebody who has accumulated quite a bit in assets and they usually have specific instructions on how they want their assets dispersed should anything happen to them. They might want to give to charity. They might have a small family. They might want to give to sisters, brothers, nieces, nephews. They really want to have a lot of control on how these assets are dispersed.
One option, and I know Patrick will go into this, is to set up a TOD, or a transfer on death. Basically, this allows you to just directly designate on an account, a regular brokerage account, where the assets are going. The trust gives you a little bit more extra control on how that’s distributed and how that works.
Patrick Carlson: Great point, Dina. Transfer on deaths are frequently used as a substitute for a little bit more robust planning. For the right clients, they can work really well. The downsides of them though, and one of the reasons why I often didn’t recommend them as wholeheartedly, was because they really don’t let us do this, “What if” kind of planning. Say you want to leave those assets to your niece. What if your niece doesn’t need the money or doesn’t want the money—or, heaven forbid, your niece doesn’t outlive you and she predeceases you?
The trust lets us have a lot more of the planning to take those things into account than a transfer on death, which basically just pays it outright to that person. That’s one of the reasons I often liked trusts. Again, transfer on death is easier to set up.
For clients with simpler needs, it’s a very cost effective and easy solution to implement. You really have to just pick what’s right for you and your situation.
Dina Milne: For sure, and it reminds me of a story. I think this was a very valuable lesson to a lot of people. One of our clients had, I think, eight beneficiaries—eight or nine beneficiaries. They were her kids. She set up the account as a TOD and then she passed away. As a TOD, the assets go directly to the beneficiaries as you just mentioned.
All of a sudden, there were these expenses—like burial expenses, there were some owing fees to the place where she was living, there were some medical outstanding fees that had to be paid. Fortunately, she had a small life insurance policy that was set aside for that, so that was able to cover those expenses. Just be careful if you are setting up a TOD account. Make sure that you do take into account that there will be some expenses when you’re no longer here.
Andrew Busa: What if there wasn’t life insurance? Let’s explore that possibility.
Dina Milne: With this particular situation that would have been a huge problem. A few of these siblings were actually not very close and two of them live outside of the U.S., so it would have been a big problem trying to figure out how to pay these fees because theoretically you would think everybody give back a little bit of what they received to help cover these fees, otherwise one or two of the beneficiaries are on the hook to pay these outstanding balances.
Andrew Busa: The key takeaway: TOD’s can be appropriate in simple situations, but when life gets more complex it’s best to think about a trust. Just to bring it back to what Patrick said at the beginning, they’re instruction manuals. That’s really all they boil down to. They don’t have to be so scary or complicated as sometimes they’re made out to be.
Let’s tackle this next profile. Again, this is a very common one and I think another one that is intimidating for a lot of people because it can seem like there’s a lot to tackle here. This is a his and hers profile, a second marriage or something like this. Dina, talk about this one.
Dina Milne: You just said it. These are people that are a couple that’s getting married at an older age. They might have been widowed or divorced. We’re talking about people in their sixties or seventies. We’re seeing a lot more of this. Of course, each spouse comes into the marriage probably with adult children and with wealth. There is this desire from each individual to want to protect the assets for their children, but they also want to look after their new spouse should anything happen to them. Patrick, I know I’ve heard you refer to them as the “his, hers and ours” planning. Tell us a little bit more about that.
Patrick Carlson: Absolutely. What you’ll frequently see in this situation is, just because it’s a second or maybe even third or later marriage, it doesn’t mean that there’s just purely separate assets. That’s where this, “his, hers and ours” planning comes in.
The husband is able to keep his assets separate, usually in a trust that’s under his control. The wife keeps her separate assets in a trust that’s under her control and then they have the things that they’re accumulating together because if they get married in their 50s they could still be married conceivably for decades. Potentially, the things they accumulate together are in a joint trust that they both control and then upon the death of the first to die spouse, usually that joint trust ends: It splits up and then the assets can go their respective ways.
A really great tool to implement here is a prenuptial agreement, or prenup. If you have a prenup, these are a great tool to make sure that the terms of that prenup are actually fulfilled in a way that works for everybody in the family.
Andrew Busa: Yes, I think you said so many good things there. When I first started studying financial planning and eventually got into having to study estate planning, this is where I saw the power of what estate planning can really do in certain situations for these second, third marriages. This is where a well written, well drafted estate plan can really shine, and help simplify someone’s financial life.
There’s a lot there. As a listener, if you think this one looks like you, definitely reach out to us. I know that this can seem complicated but definitely give your portfolio team a call. We can help you out with that.
Andrew Busa: In terms of this next profile, again, it’s common. All the ones we’re trying to tackle today have been pretty frequent, but this is a person, they’re a pre-retiree, they mainly have tax deferred assets.
Dina Milne: Yeah, I mean this is, like you said, a very common one. But it is a tough one for a couple of reasons. One of them is because we tend to always reach our maximum contributions for our 401ks. We’re inclined to put money into IRAs if we’re able to. There’s a tax benefit for doing that. We are geared towards putting that focus on building our wealth that way, and we sometimes forget to also build up our taxable savings, so what we see a lot is people that are nearing retirement and they’ve placed 90% of their assets in retirement accounts and very little in non-retirement accounts.
Patrick Carlson: You know Dina, this one of the things that I think is really interesting that happens. If we talk to clients five or 10 years before they get into retirement, we have that opportunity to chat with them about whether making some Roth contributions or Roth conversions, maybe beginning to save some money in a taxable account, could really help lessen the impact of having so much of their assets in that tax-deferred account.
Dina Milne: Absolutely. While we enjoy that tax deferral while we’re working, once we’re retired and we have to start making withdrawals and taking money out, we’re basically paying taxes on ordinary income when this money comes out of the tax-deferred accounts. What if there is an emergency and you need to take a distribution to pay for a large expense? You want to make sure that you have other non-IRA, non-tax deferred money saved up as well.
Andrew Busa: As part of the financial planning conversations that we have with clients, we do bring this up pretty often to say, “Hey, we want to build you this tax diversity where you have money in not only your IRA and your 401(k) but also money in a taxable account, money in a Roth account if you are eligible to do that.” Making sure that you can pull from various sources in your retirement really is a powerful thing that we talk about with clients.
Dina Milne: The nice thing about retirement accounts is that you are able to direct beneficiary. You can choose primary and contingent. You can add a whole bunch of people as beneficiaries. It’s very straight forward. If retirement accounts are going to a spouse, there’s the added advantage that they just roll over into their own account. If they’re going to somebody who’s not a spouse, then they become inherited accounts and there are certain rules that apply there.
Now, what we see with quite a few of our clients is they do want to have some control over the assets and so they designate a trust as a beneficiary to an IRA account. I’ve recently learned that if the trust is not written properly, this can be a very messy situation.
Andrew Busa: We saw this recently, right?
Dina Milne: We did.
Patrick Carlson: Dina when it comes down to the control piece, it isn’t even just for control that clients may want to use a trust or some tool to put some guard rails around these assets. Sometimes, it’s for the protection of the beneficiaries because these things are not … We all hope that we never have to file for bankruptcy. We hope our children never have to file. But these inherited IRAs, inherited retirement assets, are not automatically protected under bankruptcy law.
Dina Milne: Right.
Patrick Carlson: They may be protected under your state, but people move around. Just because they’re living in a state that protects it now, we don’t know where they’re going to be living in the future.
Dina Milne: I think that the key is that you need to make sure that if you are setting up a trust as a beneficiary of a retirement, a qualified retirement account. You want to make sure that it is a properly drafted trust. We recently saw a situation where it was not. It was just a general trust and it ended up in a very heavy tax implication to one of our clients, one of the beneficiaries. You want to be very careful with that.
Patrick Carlson: That’s an excellent point because I think sometimes it’s confusing to some clients. Since you’re listening today it won’t be confusing to you anymore. Think about your estate plan as sort of the collection of all of the different documents that really are designed to work together to achieve what you want. You can think of it as this large instruction manual that’s dictating everything.
Within that there’s different chapters or pieces. This might be one area where if you have a lot of retirement assets, a lot of tax-deferred assets or even a lot of Roth assets, you may have an extra trust in there. You may hear this called an IRA trust, a retirement trust or something like that.
What that really is designed to do is make sure that the tax rules that Dina’s client ran afoul of, that the trust won’t do those things because it’s carefully drafted to make sure it qualifies for all of the IRS regulations and the special treatment that these inherited IRAs can have.
Andrew Busa: A call out here for you, Patrick, is that we review client’s estate plans now. If you’re someone who’s listening and you’re thinking, “I’m not sure if my estate plan is set up correctly.” Reach out to us. We can help you.
Patrick Carlson: Absolutely. As part of the financial planning process, we can take a look at that and model some projections so you can get a feel for how things are going to flow once your plan becomes effective.
Andrew Busa: In terms of this pre-retiree, they had mainly tax-deferred assets. What about someone who is a pre-retiree? They have a lot of real estate. How does that change the estate-planning conversation?
Patrick Carlson: In my experience, a lot of real estate is typically an area where I found trusts to be a little bit more helpful. Real estate is your classic probate asset and probate is something we’re often trying to avoid—just because the cost, the publicity, the amount of time it takes. Especially people who own real estate in more than one state. It’s really important. There’s also some special trusts, like a qualified personal residence trust, that can sometimes be helpful for people who have particularly valuable real estate and who are subject to the estate tax.
Andrew Busa: Today we’ve talked about a few different profiles and I’ll briefly list them here. We talked about the young couple who’s accumulating wealth. We talked about someone who is unmarried, but they have a lot of assets. We talked about this “his and hers” profile, the idea of second and third marriages. We also just mentioned the person with a pre-retiree, mainly tax-deferred assets or maybe a lot in real estate. Are there any other times, before we wrap up here, where we should think about trust planning for a client?
Patrick Carlson: The only things that come to mind that are somewhat common are people who have a lot of life insurance. There are some times that having a trust as part of that can be helpful. Anybody who has special needs or who has people in their life that are important to them that are suffering with addiction or other issues, when a trust can be really helpful to put some protection for that money that you’re leaving behind.
People who have charitable-planning goals. That’s another big one that we sometimes run across, as well. That’s not just trust. There are so many different charitable options. You really need to talk to somebody before you make a choice on that. Then anybody who is a non-U.S. citizen who happens to be living in the United States. There’s some really unique rules that deal with non-citizens. That’s another use case where you really have to plan effectively.
Andrew Busa: We’ve talked about a lot here. If I’m a listener and I think I might need to do some trust planning or estate planning, what should I do next?
Dina Milne: I think the first thing you need to do is sit down and get a financial plan. It’s going to help you organize your thinking around your finances and get a better understanding of what your goals are. It’s just a good starting point. There’s not one solution that’s suitable for all: Each situation is unique and I think it’s important for you to understand your unique situation before you go ahead and put a plan in place.
Patrick Carlson: Great point. The only other thing I would add to that is for those of you who already have a plan, or for those of you who implement a plan in the coming months, don’t just stick it in a drawer and forget about it. Take a look at it again every three to five years—or anytime there’s a big change in your life.
Patrick Carlson: If you experience a big windfall, an inheritance, something like that, you definitely need to have it looked at to make sure that it matches your new situation.
Andrew Busa: Great stuff, Dina and Patrick. This is Andrew Busa, Dina Milne and Patrick Carlson from Adviser Investments. Thank you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe, review our show, and you can also check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome and if you have any questions or topics you’d like us to explore, please email us at firstname.lastname@example.org.