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Trust: A Different Type of Defense


Some of you have listened to me talk about offense and defense of the capital markets for almost three decades. Today we are going to discuss defense of a different source. Rather than talking about protecting what we earn from the markets we are going to talk about protecting all of your assets both inside and outside of the stock and bond markets. Your home, other real estate, your collectibles, your entire estate needs to be protected with a Revocable Living Trust (RLT).

In 1991 I read a book authored by Henry Abts III. This book has lead to almost 30,000 RLT’s being created throughout this wonderful country of ours. With the help of nearly 400 attorneys and as many independent advisers, a very complete, two-inch thick document will protect you no matter what state you inherit any real estate from or no matter what scenario that life throws your way. The Estate Planning Source has roughly 20 different types of trusts, and they are just one of three Law groups with which we work.

Here are five reasons you should consider an RLT and 5 of the most common mistakes people make while creating an RLT with the wrong firm.

  1. Without a Trust, your estate would pass through a process referred to as probate. Probate is a public process and is handled differently in each state, but it is both time-consuming and costly, and an RLT eliminates probate; therefore your estate will pass to the next generation privately, more efficiently and with less cost.

  2. With a Trust, you can preserve assets for heirs and your favorite charities. We have reliable trust strategies for nonprofits and other charitable causes. We can also help you maximize your lifetime gift tax exclusion. Holding life insurance inside of an Irrevocable Trust can reduce your total net worth and therefore minimize taxable assets at death giving more to your loved ones.

  3. Reduce a married couple's estate by using a “credit shelter” or “bypass” or “A/B Trust” after the first spouse passes away and create an additional family trust which protects the integrity of the deceased person's assets.

  4. You will gain control of how and when your assets are distributed over time. In life, some kids grow up, and some never do. If you have a child who has not taken a more responsible path in life, you can protect the other heirs from that type of personality. You can also help grandchildren with college funding and designate certain assets for certain goals. You can sprinkle income over time with a spendthrift clause so that your hard earned assets are not “burned through” in just a few years. There are even unique trusts now created to manage your IRA or 401(k) assets in a specific manner separate to all other assets. This is a very valuable tool from a tax planning perspective as IRA’s and 401(k)’s are heavily taxed from an income perspective.

  5. You can keep your assets in your family. If there is a concern that a surviving spouse might remarry, you can create a qualified terminable interest property (QTIP) Trust inside of your RLT, and this will assure that the assets designated towards the beneficiaries identified by the grantor will have some protection with the remainder of the assets held in this trust. If there are children from multiple marriages, this trust can also be used for clarification and protection of grantors wishes.

The benefits of an RLT are clear. However, there are also many pitfalls. Here are five mistakes many people have made for many different reasons while creating or implementing and RLT.

  1. The fiduciary of your trust is the person you select to carry out your wishes and desires and is called the Trustee. Picking the wrong Trustee for the wrong reasons can create a court scenario. The idea of creating an RLT is to avoid probate courts to begin with. Serving as a Trustee can be a time commitment and seem like a burden so sometimes picking the oldest child or even picking a child might be the wrong choice. Picking multiple children to not offend someone’s feelings or ego is also a risk. Making a black and white situation a grey area is not wise. Select someone after you have discussed your estate and made a game plan with how you want your estate distributed. Then select the right personality and then talk to that person about your goals and if that person is up for the task, you have your Trustee.

  2. Do not forget about the little things. Those small tangible personal property items can have emotional strings attached to them. Wonderful memories of a piece of artwork or a piece of jewelry purchased on a trip that occurred with one child might mean more to that child then another sibling after one passes. Have a list of personal items listed that you want to go to a certain child. Alternatively, in writing, list a process for selecting items and taking turns until all personal items are dispersed.

  3. Do not forget about digital items such as the extensive music collection you accumulated through your phone or airline miles you have accumulated that can be transferred to someone. Unless you discuss or write down these types of things, outside of the family trustee may not think of these type of items.

  4. Ignoring family discord. Making a plan and knowing there is some family disagreement and not acknowledging that situation is not going to fix it. In fact, it will more than likely only make it worse. Speak to your children about these things before you pass. Communicate your perspective and your desire to put those differences aside for purposes of family unity and for purposes of smoothly settling one's estate. If you have a spendthrift clause created for one child who is less responsible and you don’t have one for a more responsible child, explain that in front of both children and at the same time. Having a family meeting in person is better than the kids taking each other to court and contesting your RLT. If you cannot get yourself to have the difficult conversation then write a letter to each child and give a copy of each letter to each of the kids so everything is open and transparent. If you have the conversation with one child, have it with all of them. If you can have those conversations all together as one family, that is clearly the best way to handle a difficult situation.

  5. The largest and most common mistake (and most costly) with RLT’s is not creating it but rather implementing it. The “funding” of the trust or the titling of your assets will determine if your trust works. If you buy a trust kit online or buy the software and create the trust but do not put certain assets in the trust, the trust is not worth the paper it is written on or the software it is created with.

Certain assets should NOT have the trust listed as the beneficiary. IRA’s and 401(k)’s have tax benefits by listing a spouse or a child as a beneficiary. An RLT listed beneficiary may create an expensive lump sum distribution giving half of the assets to Uncle Sam. Life insurance does not need to list a trust as a primary beneficiary but as mentioned earlier, sometimes putting a life insurance policy under the ownership of an Irrevocable Life Insurance Trust (ILIT) is a wonderful strategy to reduce death tax expenses.

If you are a do it yourself (DIY) personality, then make sure you dot your I’s and cross your T’s and fund your assets into your trust. Your home needs to have a quitclaim deed recorded at the local county office. Many times, but not a guarantee, if you look at your property tax bill and after your name, it shows TEE or Te or te, this refers to the fact that your property was indeed funded into your trust. Not all court employees are created equal. We have also seen properties funded at the courthouse, but the “TEE” or “Te” or “te” was not listed behind the client's name on their property tax bill. It is simply a clue.

In closing, funding your house or other real estate into your trust is the most costly common mistake. We have multiple Trust companies that we have worked with for over 20 years, a trust software program we have experience with that dates back to 1994 and a reasonable attorney who will create a trust and fund it for about $1,200 bucks as a deeply discounted price for our clients. This defense which protects your assets from “Big Brother” is critical to being a good Stewart of the gifts you have received. To be a good provider for your family, you likely need this defense.

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Advisory services offered through Prosperity Financial Group, Inc. Lily Wealth Management is a DBA of Prosperity Financial Group, Inc. Prosperity Financial Group, Inc. is a Registered Investment Adviser. This website is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Prosperity Financial Group, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Prosperity Financial Group, Inc. unless a client service agreement is in place. Additional disclaimers here: lilywealthmanagement.com/disclaimers