Episode 9: Trusts: What Are They Good For?

Estate Planning Lawyer, Peter Klenk

Trusts: What Are They Good For?

Welcome to the Klenk Law Podcast, providing clarity to the many gray areas surrounding estate planning so you feel empowered to take action. Now, here’s your host, Peter Klenk.

Happy to talk to you today about taxes. Today’s focus subject is trusts and what are they good for? Who can use trusts? You probably hear about them, but you might not know very much. But what can they be used for? It’s a lot of different situations that come up.

Remember, you can always talk to your trusted estate professional to see how it fits or how it can help you. But here are some examples of things that come up often in my practice. The primary one is protecting an inheritance from divorce, lawsuits, or bankruptcies. How does that work?

Remember, what’s a trust? A trust is when somebody grants power to a trustee, a trusted person, to hold assets for a third person, the beneficiary. And if it’s done correctly, you, the grantor, or your parents, the grantor, transfer the assets to a trustee. That could be you if your parents name you or your kids if you name your kids.

Then at that point, you’ve created this entity, this living being in our system. It owns the things, not you, not the beneficiary, not the trustee, and they’re being held for the benefit of the beneficiary. So you have a grantor, trustee, and beneficiary.

If you die and you form a trust for your children, the trustee holds the assets for your children, and your children benefit from them. It could even be the trustee over them, but they don’t own them. So if they get divorced, it’s not marital property. It belongs to the trust. The trustee can use it to benefit them, but their creditors or spouses can’t get the assets.

So there you go, that’s the most common use of a trust. It’s usually set up when the person dies. It doesn’t affect them while they’re alive. It just is something that has really little downside. But there’s more.

What happens if you’re getting married? Or if you’re getting married and you want to segregate your assets very clearly as to what separate property? Well, a trust can be used to do that. You could do this with a revocable trust, one that you can revoke and take the assets back. It doesn’t help you with creditors, doesn’t help with taxes, but it does help identify assets very clearly. The things that are in the revocable trust can be identified as your separate property. And then should you ever get divorced, well, it’s very clear what is the separate property, right? It’s things that are in this trust. You can also do this with an irrevocable trust, but it’s more complicated, probably better to make sure that that’s a good fit for you in that specific situation.

If there is a divorce, a trust can be used to defuse the fight, so to speak. Often in the divorce, one of the things, especially if there’s a number of children, is a life insurance policy. It’s pretty common for somebody to say, “Well, I want you to take out life insurance so that if you die, the kids have enough money.” Well, if you come to an agreement about that, fantastic. Then, of course, the divorce is finalized, who owns the life insurance? The insured spouse, and then the spouse out there that doesn’t have any ownership starts to wonder, right? They’re concerned like, “Is that policy still there? Is it being paid? Has the beneficiary been changed from the kids?” And then you call up that spouse and they won’t talk to you? You know, what a pain? What do you do? Go back to court, drop thousands of dollars to make sure everything is still the way it’s supposed to be? Or do you wait until they die and find out if they really did keep things the way they were supposed to? Well, instead, form an irrevocable trust where both parents can be trustees and we both know the policies in place. You both know the beneficiaries still the trust, all the questions are answered. You don’t even need to speak to each other. Right? It diffuses that potential fight.

There are also trusts that are great things to take care of people who work with government benefits, special needs people, people with disabilities that are on government benefits. Setting up a trust while they’re alive or when you die that holds assets to make sure that they have the benefit of the trust, but they’re not disqualified from their needs. There needs to be some very precise language that the government puts together, but doing it that way can give them a lot better life than otherwise was still under benefits. And the government’s totally fine with that, guys.

Nobody wants a kid to be on just government benefits. So if you follow the rules, you can set things up. And the government is completely okay with that.

Another way trusts often use is to hold life insurance, typically life insurance, the subject of federal estate tax. The reason why you’re doing it is you have an estate large enough where you’re worried about paying that tax. So instead, you move the life insurance out so that when you die, the trust owns it by you. So there’s no tax, because the estate tax is only on what you own when you die. And the trust is what owns life insurance, it’s a great thing to move out into a trust because, well, you know, it only pays out when you die, you’re not going to miss it while you’re alive.

Whereas if you move out cash, your stocks or your house, you might miss those things for your life. But life insurance, you know, that’s okay.

There’s also planning you can do with charities, if you have a favorite charity that you spend a lot of time with and support, they’d be happy to walk you through those details to setting up a trust so that you have an annuity during your lifetime. But then the money goes to charity, or they get the money and then eventually what’s left goes to your children. There’s a variety of ways to handle these trusts, they differ depending on your specific needs and what you have. So there’s a lot of ways where you can look at that and decide.

There’s also what are called IRA trusts, these are trusts that are approved by the government, that when you go someday, if you have a child who’s too young, or perhaps just for any number of reasons should own a qualified plan, an IRA that you leave them, then you can set up this specific type of trust to hold him. So it’s all blessed by the government, it extends the IRA after death, the maximum amount of time that it can be sheltered or deferred before it has to be liquidated. It’s a good deal, especially when you have a minor child or a child with special needs, or a child who just really just isn’t done cooking yet, right shouldn’t be owning anything at that point. And you get to pick the trustee that manages it and takes care of it runs it just to is apart from your child so they don’t lose it.

And remember, all these trusts we’re talking about, they can be very specific and say assets are supposed to go very for very specific purposes, or they can be very broad, and I favorite broad in general, because after a while, the world will change. Who knows what’s really going on out there. If you are too narrow, the reality is, at some point, what sounded great to you is just not going to make sense anymore. And that’s when you need to move on and make changes, but can be very difficult if you made the rules so that they can’t be changed, or at least not very easily.

So trust, it also can be used to help people who are getting Alzheimer’s, like losing their memory or be taken advantage of. So a lot of elder fraud out there. You know, it’s terrible thing, but it’s a reality. And if somebody in your family or yourself maybe could become a victim of being ripped off by somebody over the phone, you just you believe what they said. And then now the money’s gone. A trust can help that your kids or somebody you trust can help run it. They’re the ones who send the checks out and pay the bills, you’re

You’re out of money. But now you know the person who wants to steal from you, it’s got to go through somebody else. And that can really give you a lot of protection that you might not otherwise have.

The same type of trust can be used to avoid probate if in your state where there’s an advantage to that, like your Florida or California. We don’t lose money in Pennsylvania, New Jersey, but if you really just don’t want your kids to have to deal with the local government, there is a revocable trust that is a good way to do that.

But it’s also a great tool if you have real estate in other states. Like, you know, some people have a place in New York and a place in Florida and a place in Wyoming. Not the end of the world, it’s just that each of those states jealously guards their right to transfer their real property. And you can’t just show up as the executor from New Jersey and Wyoming and start selling property. You have to be recognized by that state as having the authority.

So, if you have real estate in different states, you have to register the will again. Guys, not the end of the world, but it is irritating. So one of the ways is to put your assets and other states into a revocable trust to avoid that probate process.

Now, maybe you don’t really care about Pennsylvania or New Jersey, but you darn well want to avoid having your kids go through Florida probate. So those are just some things, guys. Trusts are very flexible structures. They can address a lot of different situations and protect people from other people and themselves. So, they are something that you should investigate with your estate planning professional.

If you’re in Pennsylvania or New Jersey, we’d be happy to talk to you and brainstorm a bit. Give us a ring. Until next time, when we talk a little bit more about death and taxes, this is Peter Klenk. You take care and be well.