More Control, Less Taxes & More: Why & How to Establish A Trust

💡 Explore the invaluable impact that establishing a trust can have on your financial well-being. Learn more from Leisl L. Cording, CFP®, CDFA® about this crucial tool and how it can empower you, regardless of your financial status. 🎯

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Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Leisl Cording, senior vice president and financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now on to today's topic. It's surprising to learn that a significant number of adults don't even have a will in place that sets out how their assets are to be handed down. And even fewer have created a trust. But I understand the trust can offer some pretty big benefits regardless of how much or how little wealth you have. Absolutely. Wayne and trust are. So just to give you some background on a trust. They are legal documents that allow individuals to protect and control their assets. So that's really important. And contrary to popular belief, people think that, oh, trusts are really only for the ultra wealthy, but it can really benefit anybody that would like to efficiently manage assets after death or in the event that they become incapacitated. And this provides a way to take care of dependents or minors or children or even children that have special needs. So there's four main types of trust that people can consider. And they are you have a revocable trust or a living trust, an irrevocable trust, and then a testamentary trust, which is actually linked to your will. But revocable trust can be altered, whereas your revocable trust cannot. And of course, the living trusts are ones that are created during your lifetime, whereas the testamentary trusts are created after death based on your individual as well. So, again, linked to your will. But those are the four main type. You would indicated that irrevocable trusts cannot be changed. What if I set up an irrevocable trust when I'm 30 and now I'm 70 and I go, You know, that wasn't a good idea. I want to change something. I can't change something I did 40 years ago. That's right, Wayne. So when you create an irrevocable trust, it the provisions that you put into that trust are what the trustee. So the person that you appointed to oversee that trust, they have to abide by those provisions during the lifetime of the trust. So you even see trust that go back 100 years. And it would seem that money's been passed down from family member to family member. You can't change the trust now. There is if you have beneficiaries that are in an uproar about some old language and trust it possible they may go to court and there may be some additional changes that may be made in that way. But that's really the only way. I mean, typically you establish an irrevocable trust in the provisions, and usually they're pretty broad. So the trustee uses their discretion to distribute to beneficiaries. So it's up to the trustee based on what the beneficiary is requesting, whether or not they'd like to distribute funds out of the irrevocable trust. So I guess that word irrevocable means irrevocable. All right. So we're discussing trusts and wills today. So how is a trust different than a will? And why would someone want to create one? Well, there's certain benefits that a trust offer that a will does not. And I'll I'll talk about the three main ones. Number one, control. Number two, avoiding probate. And number three, helping to manage estate taxes. So we'll talk first about the control. And this goes back to the irrevocable example we were just talking about, where you have the flexibility and control over how you'd like assets distributed both during your lifetime and after you're no longer here. So in that irrevocable trust example, if you set out that trust for yourself and some other beneficiaries, you have full control over what happens to that money during your life and after. And then if you set out in your sorry a revocable trust, you have full control. You can also change that revocable trust and make amendments to it while you are alive. But here's the catch. As soon as you pass away, that revocable trust becomes irrevocable. But it's really setting up. It's that control that you have. And if you're really adamant about how the money that you've saved is spent while you're here, while you're while you're not here, then it might be something you would consider if you wanted to have that control. Well, it does seem like a huge benefit, and that alone seems like enough of a benefit for anyone to establish a trust. But what are some of the other benefits? Sure. So avoiding probate is the key benefit there. And that means that if you have something that's titled in the name of your revocable trust, for example, you have a sizable investment account. That account would be distributed to beneficiaries outside of probate. So anytime someone passes away, they have a will that will get admitted to probate. They the probate court wants to know what are all their assets. But you would not list any trusts on that, that docket listing their assets. So it makes it more private. Those are definitely valuable advantages. How about taxes? Do trusts provide any advantage? Is there? There's a couple of advantages and there is a disadvantage. But I'll talk about the advantages first, and you probably heard or have heard us talk about the Secure Act, and that was passed in December 2019. There was a more recent Secure Act 2.0 that was also passed and but what that did was it changed the way that non-South IRA beneficiaries receive retirement assets. So they have to pay that money out over ten years. Whereas if you name a trust as a beneficiary, you might be able to pass that retirement account over a longer period of time. So that's a benefit to some that maybe are in a higher income tax bracket, whereas they might not be later in life. So that's that's one benefit. That's one tactic that has been used as a downside to that to do in a trust is that the taxes rate is hit at a pretty high level pretty quickly. So you hit that high income tax rate after $14,000 in income. So that's a downside to having money linked up into a trust. And clarify the tax thing. Is that something if I set up a trust that I get taxed now, or is that when the money starts to get distributed down the road? It would. So the trust would itself have to pay the taxes. If you pass it out to a beneficiary, then that income that was created within the trust, it gets taxed at the beneficiaries tax rate. So it all depends. And that would be in an irrevocable in a revocable case, it's likely showing up on your your tax return under your own tax rate. So a little bit of a difference there. Important to know. And the other tax benefits. Yeah, well, there is one if you have significant wealth and so I heard you talking about Tom Brady. It's his birthday today. But if you think of someone like Tom Brady who has wealth that's over 13 million right now, the estate tax exemption is 12.92 million. So of Tom Brady's massive wealth, 12.92 million will not be taxed if he were to pass away. And that's if you create a trust, you're able to help to avoid some of those taxes above that number. If if you were to create a trust, I'm sure he's got a pretty extensive estate plan. So let's touch now on the potential disadvantages of establishing trust. What should people be aware of before deciding to establish one? Well, you want to make sure that trusts are established correctly. They are very complex legal documents, unlike the simplicity of a will you say, Oh, I want this money to go here and there in a will, but small errors in a trust can have an impact and on intended benefits for beneficiaries, for example. And so you always want to work with an attorney and a financial advisor when establishing a trust just to ensure that everything's done properly. You're thinking of all the different obstacles or challenges that may come about and establishing that trust to you. It does come with some upfront costs and ongoing maintenance and expenses for re titling things and other administrative tasks that come along with managing the trust. And I would say the one thing that we've seen in our while I've been working in this industry for many years is that sometimes people will create trusts and then they forget to put the their assets into the name of a trust. So when you create a trust, make sure you're titling whatever assets you're supposed to be titling into the name of that trust. Because otherwise it'll go by way of your will if you don't do that. So that's really important. That seems pretty obvious. Do people actually forget that? They do when it's. Yeah, it's surprising because you'll be working with a client that comes to you. Maybe they're a new client and you find out they have a trust and you say, okay, well why didn't you title your investments in the name of your trust? And it's just they weren't they didn't tell the attorney they had that investment account. Or so it you just want to be sure that you're checking every, you know, crossing every T and dollar and every eye when it comes to that. List, when it comes to listing your assets, how far down the value totem pole do you go? Would you list your rug? Would you list your wearing blender? I mean, I know that you probably put things like TVs and furniture and things like that, but I'm just wondering, is there a point at some point where, All right, that's that's nickel and dime stuff. I'm going to leave that out. Yeah. Typically those types of things are handled in your will and would be passed to a beneficiary through your will. You don't typically see that. But if it's a really expensive million dollar rug, then you might because that could be sold later for or for money to be put into the trust if that if that owner had died. So it really depends on on what it is. But something like a regular $50 rug from Amazon would probably pass by way of your. Well yeah I keep my million dollar rug rolled up in the basement. Is there a difference between how a will and a trust is executed? The person who has set up the will and or the trust passes away. Which one gets red first? And how is that process work? Well, there are separate documents so that whatever was titled in the name of the trust, you would look to that document really separately of the will. But I mean, they'd be read at the same time, probably. But the trust assets would pass by whatever the trust document says or if it says in in a trust document, you have to parents that give money to the kids, then that's what would happen to that trust, whereas the well would be red. And if the parents are giving the money to their nieces and nephews, then that money would be separated out and passed out. We would have to go through the probate process, of course, because it's going through the. Well. But really, you're you're sort of reading them separately because they are separate documents and separate and become separate entities. Is there a cost similarity or differential to a will or a trust. Depending on how complicated the trust becomes? If it's a pretty complicated estate where you've got a multimillion dollar of the and that trust could become pretty complicated. That could be a couple thousand or even more, depending. And then a will could be $500 or or between 5000 and $1,000. So there's really a pretty big difference. A will is very straightforward. I want all my money to go to my wife and then my my kids and and you move on. So whereas the trust that will set out who is the trustee, who are the beneficiaries, when can they receive money. And so it's very strict in that way. Liesel Is there an age demographic difference between when people set up wills or trusts, number one, at what shall we say, minimum age? Do people begin to do that? And secondly, do people do wills and trusts at the same time? Do they stagger it? How does that work? That's a good question. So it all depends on your what you have for assets. If you're a 25 year old and you're just starting your career, you have some retirement accounts. Those retirement accounts are going to and this is going to be a step away from what we're talking about today. But their retirement accounts would be distributed by way of a beneficiary designation, so completely separate of a will and a trust. So they probably just need a simple that 25 year old probably needs a simple well that says I have a house and if I die it goes to whatever family member. So they're probably more of a simple case. Whereas somebody who's in their forties, fifties, now they're starting to accumulate wealth or maybe they've sold a business and they have a pretty significant amount that they've received from that. They're probably starting to think about setting up a trust and that they definitely, hopefully have had a will that whole time as well. But you might consider setting up a trust because now you're starting to accumulate pretty significant assets and you might have some feelings towards how your beneficiaries or maybe if your children would inherit that money and what they would do with it. So those are some examples. Everybody's situation is different. So it really just depends on your specific situation. That's it for today. Thanks for listening to You And Your Money. Find even more episodes, videos and other resources at our website, whzwealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network. Member FINRA/ SIPC , a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.