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Small Bites Podcast: Trusts

September 29, 2023
Small Bites Podcast: Trusts

In this episode of season two, hosts Dr. Kathy Gosser and Rebecca McDade, J.D., discuss the differences between two wealth management tools: trusts and wills. Kathy and Becca emphasize the advantages of trusts (such as privacy and immediate effectiveness). Details of the differences between revocable and irrevocable trusts are also discussed.

Dr. Kathy Gosser, YUM! Assistant Professor of Franchise Management and Director of the Yum! Center for Global Franchise Excellence

Rebecca McDade, JD – Attorney


(NOTE: This is an automated transcription and not intended to be used as a substitution for listening to the podcast recording. Simply click on the player above and receive the full benefit of the conversation.)

So welcome to Small Bites of Business Insights, talking wealth planning. We are going to talk about trust, and this is estate planning’s basics part two, because there’s so much to estate planning. There’s just so much there. So welcome back, Becca. Glad you’re here with us. Thank you. So let’s talk about trust.

First of all, what is a trust versus a will? Ah, so a trust is a living document as opposed to a will. So when I create a will, it does not become effective until my death. A trust becomes effective immediately upon execution, even though. It’s still dealing with the disposition of my assets after my death.

So a trust has a lot of advantages to a will because it’s considered a living legal entity upon creation. Oh, okay. So if I were to get a living trust right now, what would that actually mean? First of all, how would I go about doing that? So whether we call it a living trust or a revocable trust or grantor trust.

They all sort of mean the same thing, and it’s a document that I am creating for the purpose of distributing my assets upon my death. So just like when we were talking about a will, a trust is going to say who gets my assets, how, and when. The primary difference between the will and the revocable trust, or primary differences Other than the fact that it’s a living document now is that a revocable trust is private.

A will is not. So with the will, we talked about it having to go through a probate process. With a revocable trust, if I title assets in the name of the trust during my lifetime, I don’t have a probate process with revocable trust. The probate process is a court proceeding, which means it’s a matter of public record.

The revocable trust means that I can keep all of my stuff private. And I don’t know about you, but I’m all into privacy. Oh, 100%, which explains why people will put their home into the trust. Absolutely. And their assets into the trust, and then that remains private. And so if I want to give my business to my children.

Nobody knows that I’m giving my business to my children. Nobody knows what my business is worth if I do everything through a revocable trust, as opposed to a will. Oh, that makes so much sense. And so even if you have a number of people you’re leaving money to, they don’t know who gets what. That is true.

Um, you can set it up so that even if you have multiple beneficiaries named under the revocable trust, each beneficiary won’t know what the other beneficiary is getting. Same is not true with a will. I like that part. And you asked how you would set it up. So with a revocable trust, you can use legal zoom.

Like we were talking about with a will. I’m going to say that a revocable trust though is more complex than a will. And so you’re probably going to want. And the state planning attorney to help you, even though you could use legal zoom for a revocable trust. Like they have that option. I’m just going to say, if you’re going this route, you’d be better off hiring an estate planning attorney to do this.

And that is quite the specialization because I understand the laws are constantly changing. They are constantly changing. We’re big into acronyms. We’re also big into making things super complex. And so, how we manipulate the law is always changing, and because how we manipulate the law changes, how Congress responds to our manipulation of law changes a lot too, so we are constantly in flux.

And then tax laws change constantly. So, you know, you hear congressmen arguing over income taxes and estate taxes and capital gains taxes almost every single year and all of those taxes. affect estate planning and revocable trust. Oh gosh, for sure. So when you do a trust, is there any tax implication at all?

Or is it the same if you had a will or a trust? So generally the tax implications are going to be the same. Um, with the state tax planning, you can do the same estate tax planning with a will, as you would with a trust. And from an income tax perspective, you’re going to pay income taxes, whether you’re going through a probate estate or you’re going through a revocable trust.

So there are no tax differences with a revocable trust and an estate. There are some tax differences between a revocable trust and an irrevocable trust. Oh, talk about that. Okay, so a revocable trust, um, is one that you can change whenever you want. So I might draft it today and I change my mind. I, I want to disinherit my daughter.

Um, and so I amend my revocable trust. I can do that anytime I want. It becomes irrevocable upon my desk, but I can also create an irrevocable trust during my lifetime and why I would create an irrevocable trust. And that’s one that cannot be changed. Um, why I might create one during my lifetime is because I might want to gift to my kids.

During my lifetime, for instance, I might want to give a portion of the business to my son and my daughter, but I don’t want them to get it outright. I want somebody else to manage those assets on their behalf. And that’s really what an irrevocable trust is doing. I’m naming a trustee. Who’s going to manage the trust for the benefit of my two children, and that trustee will decide how to invest the assets that are held in the trust and when distributions and under what circumstances distribution should be made to my children.

So I’m getting assets to my kids, but not giving them control over those assets. That makes sense. And that may be an age related thing or something else. Absolutely. Absolutely. More often than not, we’re seeing families leave assets in trust for their kids, for their kids lifetimes. Oh. Instead of allowing them to withdraw at certain ages.

But it can be age related. Oh, so with a trust, you could actually say this is how much they get per year. So you could state that versus all at once. So with a trust, and in this case we’re talking irrevocable trust, um, let me give you an example. So the trust might provide that the trustee has the right to distribute all of the income each year, that’s generated each year to the child, and also could distribute.

Distribute principal to the child for his or her health, education and maintenance. So that would be in the trustee’s discretion, um, as to whether or not principal should be distributed to the child. But in my example, income would automatically go to the child. The nice thing about whether it’s a revocable trust or an irrevocable trust.

Is that you who the person creating the trust can put in whatever provisions you want carrots and sticks So for instance, if you want a child to go to college You can require in order for them to get a distribution from the trust. They have to Graduate from a four year college or they have to graduate from a vocational college You can put in sticks that say, if you don’t do X, Y, and Z, then distribute, you will no longer get distributions from the trust.

Oh my gosh. You can trust however you want. So they, you can control from the grave. Absolutely. You can. That’s what this allows you. Oh my gosh. That makes a lot of sense. May you also think about irrevocable trust? Say if you’ve lost your spouse and you just want to make sure you protect your children from the future, you might choose to do something like that too.

Yes. Transferring more of your assets into an irrevocable trust during your lifetime. Not only would protect them from their creditors or from a divorcing spouse, um, getting those assets out of your estate to your children also protects your assets from your creditors and from any subsequent divorcing spouse.

Absolutely. I, I see this as a creditor protection sort of vehicle sometimes. Oh, I can see that too. And I still go back to that controlling because there are people who do love to control and a carrot and a stick is such a good analogy. There are a lot of people that will control down to the very minutiae of planning when they want to control from the grave.

So tell us, you mentioned a trustee a couple of times. What is a trustee? So the trustee is again, somebody that you would name under the terms of either the revocable trust or the irrevocable trust. And they control the management or the administration of the trust. So they’re controlling the investments.

Do I buy or sell investments? What am I investing in? They control distributions. So in the example that I gave a little bit earlier, they’re deciding, should I make a discretionary distribution of principal to a child who comes to me and says, Hey, I want to buy a house in the Riviera or I want to buy a Jag.

Um, because I want to tool around in it. The trustee is making those decisions. There are parameters that you can set under the terms of the trust that guide the trustee. But generally speaking, the trustee is the person who’s going to make those decisions. The trustee is also the person who’s responsible for filing annual income tax returns for the trust.

And for providing the beneficiaries with annual accountings of what’s been going on in the trust over the course of each calendar year. So a trustee sounds like a real professional here, probably not a family member. So no, it can be a family member. It can be a family member. It can be a friend or it can be like we were talking with the executor, of those.

Uh huh.

It’s really, again, down, and I feel like this is going to be a repetitive theme in these podcasts, is it comes down to complexity. If I have a smaller estate, And all of my assets will just be going outright to my wife or to my kids, then I might want to name a family member or a friend, but if I’m going to have assets that are going to my children held in further trust, and I need somebody who’s going to manage those assets for a longer period of time.

Then I might not want a family member. I might want a friend who’s a professional, or I might want a bank to act as trustee. But you know, the best part is an estate planning attorney can help you with that decision. Absolutely, they can. Yeah, they’ll understand the complexity of your estate and they’ll know if it’s something that’s going to require a real professional.

That is true. And they can also help you put parameters around what they can charge. So, a bank will have a set fee schedule, but given the nature of your assets, your estate planning attorney could suggest to you if you should put in a cap or a range that the trustee can charge as a trustee fee. Mm hmm.

Because that sounds like work, too. So I, I can see why trustees should be paid. Absolutely. It’s not. It’s not easy again. Just like with the executor. It’s not really an honor to be named as a trustee. It’s a lot of work. And if the family members are difficult, it’s even more work. So I think that happens a lot.

Yeah, I can. I can definitely see that. Well, gosh, you’ve given us a It’s a lot to think about with trust, Becca, thank you. And be sure to listen to our next session where we’re going to talk about all the things you may not think about with your estate power of attorney for property, healthcare, et cetera.