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307. Unlocking the Power of Trusts: 10 Different Trusts & How to Use Them
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In this episode of the A Wiser Retirement® Podcast, Estate Planning Attorney Arun Gupta joins Shawna Theriault, CFP®, CPA, CDFA® to demystify trusts, what they are, who they’re for, and how 10 common trust types work in real life.
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What is a Trust?
Speaker 1You know, it's this legal arrangement where a grantor, which is the person who set up and established and maybe funded the trust, is giving the trustee control of certain assets, and they're supposed to be managed this way for future beneficiaries. That's, simply put, all it is. Welcome to a Wiser Retirement Podcast. Are you curious about the best way to use trust? I'm Shawna Theriault and today I'm joined by estate planning attorney Arun Gupta. Each week, we bring you practical advice on retirement, investing and planning for your financial future. Don't forget to subscribe to the podcast wherever you're listening. Let's get started.
Speaker 2All right.
Speaker 1Good morning Good morning. Good to see you.
Speaker 2Good to see you too, shawna. Always good to see you. Yes, yes.
Speaker 1It's a really heavy subject for for early in the morning isn't it yes and no, yes and no.
Speaker 1Yes, Well, I know we get asked about trust all the time and obviously that's your specialty and looking at it, and so we just thought it would be good to bring you on and talk about 10 different types of trust today and just go through them. And now all of these you and I've talked a little bit. You know all of these are not um everyday trust that everyone would use, but you know, if you've heard the term, it's kind of like, well, what is that? If you're curious about what it is and, um, you know so it's uh, trust are important. What? What is a trust Actually?
Speaker 2I looked up like the definition and it would probably be better coming from you, but so I think of it as, and some of these the terms in and of itself are confusing, but it's a. It's a. It's a legal document where someone, the grantor, is they should be funding a trust, and within the four corners of the trust it's almost like a. You can think of it like a contract. This is how the trust is supposed to be distributed for a beneficiary. Yeah, sometimes that beneficiary can be the grantor of the trust. Most people wouldn't think of it like that, but you. But that's what a trust is, and I'm sure people will often get some terms confused, as they should, because this stuff is tricky Revocable trust, living trust, irrevocable trust and then there's a million different types of trusts that have acronyms that are, you know, tough for anyone to keep up with. So it is confusing.
Speaker 2However, you know, the the concept of a trust is is not something for super wealthy people or anything like that yeah they are practical and your your life situation is going to dictate whether a trust you know is right for you, and it certainly shouldn't be dictated by. I don't have enough money to do this.
Speaker 1That's not what it's about. Well, right, because sometimes it's just the way you transfer property and so, yeah, the trust being, you know, it's this legal arrangement where a grantor, which is the person who set up and established and maybe funded the trust, is giving the trustee control of certain assets and they're supposed to be managed this way for future beneficiaries. That's, simply put, all it is. And so if you have a situation it's like, okay, this is where I like to like, you know, what is the end in mind. Here's my situation, here's what I'm trying to do. How do we solve for that?
Speaker 1Sometimes trusts are appropriate and sometimes they're not, and so there's all those different kinds of what you're trying to do. There's all these different types to choose from that we can use as tools, and so that's like the whole premise. But you should always use an attorney in this. Just because you know, such as yourself, is because it is confusing. I mean, even you know, even us, that we have, you know, 25 plus years as advisors. We always consult attorneys, you know, with all of this, it's very important.
Speaker 2Yes, and you know there's a lot of do it yourself trusts out there and you know, while there are benefits, they can at least get you started it never ends with the trust. The trust at the end of the day is it's it's their words, right, you have to. There's many steps involved after that funding a trust, making sure you review your estate plan consistently.
Revocable vs. Irrevocable Trusts
Speaker 2Life situations are going to dictate. You know how. You know these. These trusts should be used Right. There are times where you set up a trust and you don't even need it later down the road. These are things that should be, you know, revisited often Absolutely, absolutely.
Speaker 1So we're going to go through 10 different types of trusts, and this is not all comprehensive. This is there's more trust than what we're going through and a couple of these are. You know, they're kind of key buzz words that people have asked about, but some of them, you know, are not used regularly, but at least we can touch on.
Speaker 1What are they, et cetera. And so we're going to go through 10 different types of trust and you know some will go more into more detail, just because they're more practical, yeah, and they're used more widely by people, by clients or in some we'll just touch on. But that way you can kind of go through each one and say, ok, at least you have a somewhat understanding and we're going to, we're going to try to not make this too convoluted, but some of them are confusing. So you know, some of them will just be brief and and highlight, but starting with, you know we'll go through maybe who it's appropriate for, but starting with you know we'll go through maybe who it's appropriate for. So, starting with a revocable living trust, so yes, that is the most common type of trust.
Speaker 2It is the document that I probably draft the most. People will often ask do I, do I need a trust or a will? And what they really are getting at is do I need a revocable trust or can I get by with a will? And again, it's always going to depend on your life circumstances, but more often than not, my clients prefer to use revocable trusts as their main estate planning vehicle.
Speaker 2And a revocable trust is the situation where the grantor for example me, I would create a trust. I typically the grantor is also the trustee of the trust. The trustee is the person that's the point, person for the trust.
Speaker 2They're the ones that are signing the checks making sure that assets are distributed pursuant to the terms of the trust, and the main difference and a very important difference between revocable trusts and irrevocable trusts and most of the other trusts that we're going to talk about are irrevocable trusts, but it is flexibility. You can amend a trust basically whenever you want. As long as you still have capacity, you can change the terms very easily through a simple amendment. Or, if you want to change many things, sometimes it's easier to just do a restatement of that trust, where you're basically republishing it. But the intro provisions for a trust are pretty basic. It is anything that is titled under this trust is to be used for my benefit for the rest of my life and I can control it just as I would in my own individual account.
Speaker 1Yeah, exactly, that's so. Really you know the number. The first two were revocable and irrevocable trust, which you know. A trust is either revocable, meaning you can change it, or it's irrevocable, meaning you cannot change it.
Speaker 2Yes.
Speaker 1Right, and so that's kind of. I don't know if that's a specific trust, but it's also a type, it's also a function of the trust, and so what I like to say, how I explain it to clients is OK, think of a revocable living trust as an extension of yourself.
Speaker 2Exactly, I use that phrase all the time.
Speaker 1Yeah, it's just. It's still your social security number. Everything is filed on your personal tax return as if it was you. It's just a means for putting it in the trust for ease of transfer or administration later Potentially. Is that fair?
Speaker 2That's right, because a revocable trust as soon as you die or the surviving spouse dies, if it's a joint trust, but when that happens, it's not a revocable trust anymore. It is at that point, the terms cannot be changed and it is, you know, its own entity. And that's really the biggest difference between a revocable trust and all the other trusts that we're going to, we're going to talk about today.
Speaker 1Because all the other trusts are irrevocable, which means it cannot be changed. Yes, and if it's fair to say, if I may, an irrevocable trust think of it as its own entity, as its own. It's not a person, but it's a separate entity that files its own tax return.
Speaker 2Generally speaking, but some of them don't, some of them don't. Yes, some irrevocable trusts will file a tax return. The trust will file a tax return.
Speaker 2The trust will file a tax return I mean the trustee is still the person that's signing it. But there are certain types of trust that are called, uh uh, grantor trusts where basically, um, the person that you know is the grantor of the trust, they're still responsible for the tax consequences. Go to them, um, and and you? You brought up uh, uh, you know the irrevocable trust cannot be changed. And you brought up you know irrevocable trust cannot be changed. Yes, generally speaking, they can't, especially over the last few years. A lot of states, georgia too.
Speaker 2You can, you can modify irrevocable trusts. You can through. You can either go through court, which is way more expensive and time consuming, but you can have nonjudicial settlement agreements that can actually change the terms of a trust. However, it's not that easy. You'll have to have many people sign off on it. I don't want to tell a client that, hey, you're going to. If this needs to be changed later, you can do it. I mean, technically speaking, yes, but that's not how you want to, how you want to enter the contract or the illegal arrangement.
Speaker 1You should think of it as it's irrevocable.
Benefits of Revocable Living Trusts
Speaker 2It can't be changed. Control is the big thing. Once it's in an irrevocable trust, you lose control over it.
Speaker 1You just have to follow what the trust says. Yes, yes.
Speaker 2And if you, if you don't, and things must be changed for whatever reason, sometimes it's going to make, it's going to make sense to go through these other avenues to to alter or amend the terms of that trust, but it it's, it's a chore and it's a headache.
Speaker 1Well and and to you know, to Well and and to you know. To just extend on that and again, this is the first two. We're talking about irrevocable versus revocable, and a lot of trust in and of itself can just be irrevocable. It's just a type of whether you can change it or not. But the whole purpose of doing irrevocable trust is so that it can't be changed.
Speaker 1And so here's what I want, and I don't want it to be changed. And so you know, there are times where you know situations may evolve over time, where you're like oh, I didn't want to do it like that, so maybe that's where you're talking about you know, yes, but you wouldn't enter into it thinking oh, I can just change it later. Exactly, exactly, you want to?
Speaker 2think of it, and what I'll tell clients too is you know, once it's in there, OK, once, once it it's not yours anymore. It is the trusts that you are not the trust, and you know a lot of these are designed for tax purposes At the end of the day. There's many of these that we'll get into there's, there's tax benefits, and that's why people give up control of it. So there's a better tax benefit, either for themselves or when they pass away, for you know their loved ones and their beneficiaries, and they can be very useful tools.
Speaker 1Or family protection, or creditor protection, exactly Because it's a separate entity. I don't own this, it's not mine versus like a revocable living trust. I've heard some people say I want to protect myself from creditors. I want to put in a revocable living trust. Well, that doesn't do that.
Speaker 2I. That's a very, very common thing, that, that, that, that.
Speaker 1That's a misconception.
Speaker 2It's a misconception, because you know, the main benefit of a revocable trust is the my opinion is the avoidance of a probate proceeding at death. So any assets that are titled under a revocable trust while you're alive, or that name the trust as a beneficiary or some other beneficiaries, those are going to be distributed pursuant to the terms of the trust. You don't have to get a probate certificate in order, you don't have to have an executor appointed by a court in order to transfer those assets. That's the biggest benefit of a revocable trust in my opinion probate avoidance. But so it just exped.
Speaker 1it just expedites the process and it just makes it simpler. Yes, but.
Speaker 2But people will say, oh well, you know I want to put my home in a trust, so you know I get asset protection. No, that that's not gonna. That's not gonna help you liability wise If you have a rental property and you and your revocable trust owns it and there's a slip and fall on that property it's not like an LLC, it's it's it's a revocable trust is taxed at your own social security. It's an extension of you. It's not uh, a, a, a separate uh uh legal entity, that is is separate from you. You're still connected to it as long as you're alive and you can amend the terms of the trust. That's part of the reason why it's in that category. You can put your home in an irrevocable trust. I caution people against that, especially their personal residence, because again, once it's in there, all right to unwind. That is tough and you know we can trigger gifting issues.
Speaker 2There's that very complex, obviously yes, and mortgage issues with your, with your, with your too, there's that that's very complex, obviously, yes, and mortgage issues with your lender. It can create a headache, and before you do now you can do it, but before that actually happens, as long as you've got the information, then you can make a much more educated decision.
Speaker 1But you may not even need to do that If you're doing it for liability. There's other ways to do it that are cleaner.
Speaker 2Yes, exactly A simple LLC If it's a rental property, I usually will suggest if you're looking for asset protection, an LLC is the way to go. But you know that's going to be, that's going to be separate from a trust that's. There are other trusts here that will offer, you know, asset protection for your, for a property that you own there or any other asset that you own. But but generally speaking, um, uh, the revocable trust. You know that that's not what you're getting when you do that. That is more probate avoidance and making sure that uh there's a level of privacy that is offered with revocable trusts.
Speaker 2Um, uh, I'll. I'll just give you an example. Um, let's say that. Um, you know you have, you have three kids and one of your kids, for whatever reason it happens, but you have a falling out. You want to disinherit your kid. If you have, your will is your main estate planning vehicle in Georgia. When it's time to probate, even though you disinherited your child, they're still going to be served with a copy of the will. When you're petitioning the court to probate it, even though they're not named, and they are asked to sign an acknowledgement that this is a correct copy of the will. As far as I know and I'm, I'm OK with this executor being appointed. But hey, when there's a, if you disinherited them, there's probably a reason for it and if they want to, you know, cause problems, they can. If you used a trust as your main estate planning vehicle and no probate is required, they don't have to be served with a copy of the will.
Speaker 1They don't have to get a copy of the trust either. They don't have to pass this by who gets it. They don't, yeah, they're not required to know that.
Speaker 2So that's that's. That's a practical benefit that I've seen, you know, with the revocable trust versus a will.
Speaker 1But I so family issues maybe do revocable living trust, yes, kind of like yes.
Speaker 2Yes for sure. Probate avoidance, privacy, family issues, ease of administration those are the key benefits and a con of a trust and I say it's a con because I don't, in my experience especially, uh, over the past few years, as I've used trusts more once you sign the trust. That's the step one. There's a. There's a step two that is daunting for people and that is funding your trust. Retitling assets to the trust or naming your trust as a payable on death beneficiary. It's a lot if you've got assets in a lot of places.
Speaker 1That's a great point, because if you set up a trust and here's this paper document but nothing's in it and you didn't do anything with it, You're losing the whole point of it.
Speaker 2Yep, yeah, and it's work to do that, but it's not complicated work.
Speaker 2It's, in a sense, basic form filling or you know, and that's why I think it's important for your attorney to have a relationship with your financial advisor, with your accountant, to make sure everyone's on the same page about this, to make your life easier and once the the admin work of retitling assets to the trust or naming the trust as a beneficiary. Once all that's done, in my opinion it's actually easier to administer going forward, because when you amend the trust down the line, if you've already retitled assets or already put your trust as a beneficiary, it's going to capture any amendment you make.
Speaker 1So once you sign it, it's already updated Exactly Because it's just referencing the trust.
Speaker 2Yes. Now maybe you don't want all assets to flow in the same manner as your trust, so, regardless, it's always a good idea to you know, check in with your estate plan every few years, no matter what.
Testamentary and Charitable Trusts
Speaker 2But the daunting aspects of it. To me it's a one time. If you do it right, it's just the initial headache of it. That again it's form-filling. In my opinion, now, some of these other trusts the admin part is not. You can't just snap your fingers or fill out a form. It is heavy tax reporting. You've got to be real careful with a lot of these things to make sure that you're not skirting the system and you're not just doing something to not pay taxes In reality. I totally understand. That's the main reason why a lot of people use a lot of the irrevocable trusts. That we're going to mention is taxes and that's okay.
Speaker 1You have to do them properly to make sure you don't get taxed.
Speaker 2You have to do them properly. And the IRS? If you say, well, the whole point of me doing this is just to not pay taxes, you can't do that. No, however, these are designed. The tax rules are designed. If you follow them, you're going to be okay, but following them is important.
Speaker 1Well, let's get into just a few of these. So we went over revocable living trust. And what an irrevocable trust is Um testamentary trust, yes.
Speaker 2So a testamentary trust is is a, a trust that's created under a will. So if I have a will as my estate planning vehicle and I say am I at my death, Um, I want, um, my assets to be held in trust for for my children, that's a testamentary trust, which is very common. That's a very common language, very, very common, um, because it's a trust that was created under your last will and Testament.
Speaker 1That's what a testamentary trust and technically it doesn't exist until you die, and that's what triggers it. So the date of the trust is your date of death, correct? Right and so that's when it's actually formed. So it's referenced in your will, but it's not even alive yet. It's not created until you pass away.
Speaker 2Exactly it, and it holds no real. You can't use it as collateral, for example. You can't say oh well, I, my, my parents set up a trust under you know, under under the will, and I'm going to. It's not, it's not yours, they haven't died and this trust is not funded Right, it's words on paper, you know, until there's an actual event.
Speaker 1And technically they can always change the will and they can always change it.
Speaker 2Yes, and that's another reason why you can't use it, you know, as collateral.
Speaker 1So it's just, that is just simply a trust that is created in your will when you pass away, often used for minor children, and then it would have a separate tax ID. It is irrevocable in nature, it cannot be changed, and then whatever's referenced in the will and talking about how that trust functions, that is the trust document, and then it sets up a separate tax ID, files its own tax return, has a separate account, and then this is how it's administered and it names a trustee, et cetera.
Speaker 2Yep exactly.
Speaker 1Okay. So that's a testamentary trust, which is very common. That is referenced in your will. Yep, okay. So the next trust we're going to talk about is a charitable remainder trust.
Speaker 2Yes, okay, a charitable remainder trust basically is a document where you name it combines charitable giving and tax benefits. Basically, you are getting a. You set up a trust where you get a fixed percentage of what you funded with the trust. Let's say 5 percent each year. With the trust, let's say 5% each year. And then you know, at your death, the remaining trust assets will either go to charities or beneficiaries, and then charities. And the main point not the main point, but one of the benefits of it is you get an immediate tax deduction because it's calculated based on, hey, the charity is going to get something, so you're going to get a tax benefit, but it has to be funded. The trust has to, you know, actually exist with assets for you to actually, you know, get that tax.
Speaker 1So basically, you set up a trust, you put assets in there, you get a tax deduction for future value that's going to the trust to the charity, but you get an income stream from it Exactly You're still and then it's out of your state for state tax calculations.
Speaker 1So you basically am I explaining. You lose control of this. It is now in a trust you can get income from it but then it's going to charity. So this would be good for, you know, families that are philanthropic, potentially, yes that have a lot of assets that they're not going to use during their lifetime that they're eventually going to give to a charity potentially.
Speaker 2I think it's a good way to, to, to, to combo charitable giving and getting an immediate tax deduction and still having a stream and getting it.
Speaker 1Yeah, so it's not like you're just giving to a charity now getting tax deduction.
Speaker 3You don't get anything from it, you get income from it.
Speaker 1So you can have an income source during your lifetime and then, if you pass, maybe to family for a little while, but then eventually it goes to yes, yeah. So it's a way to give assets, get an income from it, get a charitable deduction and then it's out of your state.
Speaker 2Yes, but it also requires administration.
Speaker 1Administration.
Speaker 2Each year. You can't set it and forget it right.
Speaker 3Right.
Speaker 2There's at least yearly, annually. It's gonna require attention.
Speaker 3So quick check-in. Have you thought about the legacy you'll leave behind? Download seven steps to leave a financial legacy. A free guide from Wiser Wealth Management to learn more. It's not just about wealth, it's about leaving a lasting impact. Go to wiserinvestorcom forward slash guides to download your free guide today. Now let's jump back into the episode to download your free guide today. Now let's jump back into the episode.
Special Needs and Spousal Trusts
Speaker 1So these are the crats and the cruts that if you've heard of those and those are, they're all part of a charitable remainder trust. One has like a fixed dollar amount annually that you get. One is a percentage that you get, but there are certain parameters, administration. You said, obviously, that you have to do during the year it follows, a separate tax return. You know it has to. You know you have to calculate certain distributions to make sure that you're taking out enough, because there's a minimum you have to. You have to take out at least 5% a year. Yes, so you know, in order for it to stay and still be called this type of trust, so there are certain IRS regulations you have to follow. So that takes administration and work.
Speaker 2Yeah, so you know, there's the immediate tax benefit in a state, possible estate tax benefit and giving to charity, but the con I would say is you're giving up control and it's it's constant administration.
Speaker 1And then the assets are not going to go to the family in the end, obviously.
Speaker 2So you know it's correct.
Speaker 1So that's, you know, it's like some, some clients are like well, I want to save money and I want to save taxes, or I want to, you know, et cetera. But it's like, ok, even if you're and I'm not saying you shouldn't be philanthropic, please hear my heart. I'm saying but it's still reducing your estate and it's still going outside of the family you know, which if that's your intent, great, and I'm not saying we shouldn't be philanthropic, obviously.
Speaker 1But you know, just know, that if you're doing this for a tax benefit, you're also reducing overall what you're passing to your heirs, correct you are? So you know it's like that just has to be considered and a lot of time. You know, if you're, if your kids are well off or there's the state's large enough that there is enough, and you know this is, you know you're philanthropic it may be just a good option. I agree.
Speaker 2So the next kind of trust is a to for assets to be, you know, in a trust protected and to provide for a special needs beneficiary. Now that definition can. There's a lot that goes into it, but but you know, in a nutshell the idea of it is to provide for a special needs beneficiary but at the same time not having the value of those assets negatively affect the benefits that they would otherwise be receiving from the government. So in a simple way to put it is basically that's not their asset, that's the trust's asset. Even though they're the beneficiary, they don't have control over it, so it's not theirs and it's going to affect the. You know, if you just gave that asset to the beneficiary or put it in some other sort of vehicle, you may not be able to exclude those from the assets that you have to report to qualify for certain benefits that you receive.
Speaker 1So, in other words, if I were just to leave this money outright to my child who is special needs, even a grown child, and they're getting state benefits and anyone who has, well, I don't want to say that, but many people who have special needs in their family they understand the income and the assets and the calculations that go into that.
Speaker 1And if you don't, we have people that can help with that. But you know it's, if you just give the assets outright to them, then they're going to have to use those assets first before they can get benefits, and so it's a nice compliment to they have the access to this. The trustee controls it. They can get money from it. It's not in their control, but they can still also get the benefits.
Speaker 2That's right, that's right and these trusts can be set up while you're alive. You can say I'm setting up a special needs trust now and I'm going to fund it for my special needs child or you know other beneficiary and it's called a. That's a third party special needs trust where someone else is funding it.
Speaker 2But if you can also if you are a special needs person you can create a first party special needs trust where your income is, your assets are going into this trust, but usually, more often than not, my practice they are trust created after someone, after someone dies. Yes.
Speaker 2In their will or their trust revocable trust to ensure that, hey, when I, when I pass away, I want to make sure that my special needs beneficiary is receiving the maximum amount that they can be from from both you know, the assets that I've contributed and, um, you know, from the government.
Speaker 1Well, and you know, you just brought up, you just made me think of something too and all of these trusts it's like okay, sometimes we don't fund them until we pass away, because you know what we've been talking about is, if you created it now and funded, it and you ended up needing access to that it's gone, so it's very convoluted or complicated to access, and so that's the point of putting it in.
Speaker 2You know, when I pass, then this happens, yes, and I'll tell clients sometimes also listen if you're unsure about whether to create this now or create it after your death. If you want, you can create it now. You don't have to fund it completely right now. You don't even have to. You can fund it down the road. You may not even fund it right.
Speaker 1Right, you can fund it down the road. You may not even fund it, right.
Speaker 2Right. And then you know under your estate planning documents you can say you know, when I die, this share to that beneficiary is going into their already existing special needs trust that I've already created. If I haven't, well, here's a new one.
Speaker 1Then it sets it up yes, yes, okay, perfect, the next one. I've been hearing a lot about this recently. Actually, we added this in the SLAT yes, we have all these acronyms.
Speaker 2Yes.
Speaker 2SLAT, which is it's a Spousal Limited Access Trust. Basically, it's a way, it's a. In my opinion, this is a. It's a. It's a to protect against estate taxes and the way to maximize gifting. Basically, you can create a trust for the benefit of your spouse. You designate a trustee. That trust is to be used for that spouse's health, education, maintenance and support for the rest of their life. And then, when they pass away, it's distributed to whatever beneficiaries you have listed in there. Then, when they pass away, it's distributed to whatever beneficiaries you have listed in there. Once you fund this trust with an asset, it is removed from your taxable estate.
Speaker 1You as the grantor? Yes, but is it still in your spouse's estate?
Speaker 2No, it's in a separate entity and then it can grow estate tax tax free, because once it's out of your state it's no longer yours.
Speaker 1Now, sometimes, all I can hear is like divorce you know I, I, I, I.
Speaker 2What if?
Speaker 1we get divorced. So this is a stress set up and it's for the benefit of my spouse, and I'm divorcing.
Speaker 2Usually there's built in provisions that that that address those.
Speaker 3But obviously it's going to be an issue Right.
Speaker 2And then there's usually there's built in provisions that that address those, but obviously it's going to be an issue Right. And then there's also some spouses would say, well, why don't we just set up two of these? I'll do one for you and you do one for me and I'll be the trustee of yours. And when we do the same, the IRS will say you can't have mirror spousal. So you know, change it here, change it. There's a lot of these are gray areas, but usually it's an estate tax tool.
Speaker 1Now, so so really we want to look at these.
Generation-Skipping and Residence Trusts
Speaker 2If we have large estates, yes, and yeah, I want to back up for a second here and when I because we've been using the term estate tax a lot here, we've been using the term estate tax a lot here. So, right now, the estate tax exemption in the year 2025, if you die, as an individual, you can pass a maximum of $14 million without your estate being subject to a tax per person, and anything over that amount is taxed at 40%. The estate would have to. Within nine months of your death, there would be an estate tax that would be owed. Now, $14 million is a lot bigger than what most people have and it's been going up and up and up and up basically for the last 20, 25 years.
Speaker 3Right.
Speaker 2And 25 years ago, I think, the exemption was $675,000. That's a completely different ballgame here. So a lot of these trusts that we're talking about right now, they're more relevant when the exemption is lower.
Speaker 1That's not to dismiss them, which they can change it in the future, but they haven't been going down, yeah.
Speaker 2I tell clients, listen, I can advise you as to what the law is right now, what is projected to be on the books, but I'm not going to sit here and tell you this is how it's going to be forever. Congress can change their minds whenever they want. Now I don't think they will for a while, especially that's what the trend is, but I don't know what this world is going to be like in 10 years. I mean, you go back 10 years and you were to tell people this is the landscape of the political world, they would be shocked.
Speaker 1Right, right.
Speaker 2So you know these are, these are good tool. Having the information is the most important part and you can see whether it's right for you.
Speaker 1Right. So I mean I think with that that would be something you know, a lot of these special needs trusts. No, I mean that's not necessarily for anybody over the exemption, that's just if you're protecting a benefit, but something like a slat. That's like I need to get assets out of my estate but, I, grow out of my estate because I have large.
Speaker 1You know, I have large assets or assets that are going to grow. Um, you know, maybe you're going to get future inheritances. There's other things to take into consideration. Um, you know. Just for you know, the average probably not needed to be used for that. The average probably not needed to be used for that. So we hear this a lot and ask about it a lot the generation skipping trust. You know what it is and what it's for.
Speaker 2So that figure, that I said the $14 million figure right now. So there's another tax. It's called the generation skipping transfer tax. If you, if you give a grandchild, for example, and you're basically skipping over their parent. Maybe your idea is hey, listen, if I give it to them, then my kid's not going to have to pay, you know, because it's because I'm skipping them right now. Well, the government.
Speaker 1So if your child let's say your child is already very well financially endowed, you're like OK, then I won't give them my assets, which then further messes up their estate tax problem, if you will, and so I'm going to skip them and go to my grandchild.
Speaker 2Yes, but you can't do that. Well, there's a certain now the exemption is unified. Basically, you've got the same amount is exempt from this generation skipping transfer tax. If you give something to someone that is two generations younger than you, or I think it's 26 and a half years younger than you, that is considered a skip a skip. So, and a lot of trusts have built in GST tax provisions in there that give the trustee the authority to split a trust from a GST exempt to non-exempt. I know this gets a little heavy on the terms, but they are tools to explore in order to save taxes.
Speaker 1So there is a trust that you can set up to be able to preserve wealth across multiple generations, and it may have the language that allows it, it doesn't come into play with the the language has to be there right.
Speaker 2If you give a child the authority to pay off their creditors or give it to them, then it's not going to be exempt right. So all of the fine language needs to be in there.
Speaker 1So just know that if you're giving substantial assets or wanting to give substantial assets to a grandchild, then maybe you need to look at this option potentially or just talk to an attorney about it.
Speaker 2Yeah, talk to it and they would bring it up, probably. Yes, exactly, I think they can be tools that you can use, but having the knowledge is the key to all of this and understanding it.
Speaker 1So the next one is Qualified Personal Residence Trust, which is QPRT QPRT. Yes, that's what we call it. A QPRT Q-P-R-T yes so these are trusts.
Speaker 2Let's say you have a vacation home. You can gift your vacation home to this trust and the gift that you give, let's say it's a million dollar vacation home that you have and you gift it to this trust, Even though you gave a million dollar gift. Ok, the trust is going to say it's going to be for a term and then at the end of the term, the the home is going to be owned by the beneficiaries, let's say your children. Let's say it's a 20 year term. You've given a one million dollar gift to the trust. However, for IRS purposes, that gift is going to be heavily discounted because you have given up control over their certain market. You've given up certain things to reduce the value of that. So, for example, let's just say the IRS with these formulas you'll report it as a $500,000 gift. So really, you've given a million dollar gift but it's only reported at $500,000.
Speaker 1Meaning on your gift tax return that then reduces.
Speaker 2This is very complex.
Speaker 1You have 14 million today that you can pass the state tax-free. You just reduced it by 500,000.
Speaker 213.5, but really you gave a million dollar asset away and it's gonna grow. Hopefully it's gonna grow and grow and grow, right, and so then-.
Speaker 2And then it's going to the heirs, which is probably where it'd go anyway, yes, and then you can still live there after the term You'd be paying rent to your kids if they're the beneficiaries. So I mean, there's, there's, you can still use it, but you don't own it anymore. And then there's some other negative consequences the step up in basis If I leave something to somebody, then they inherit it at the value of it on my date of death. If you do a Cupert, they are going to lose that. That step.
Speaker 1Yeah, let's say you. Let's say you built that house for three hundred thousand and it's now worth a million. You gift it to this trust for 500. If you would have had it in your estate, you would have had an asset worth a million. That gets a step up. The 300,000 would get stepped up to a million, but now that 300,000 cost basis stays with it, yeah.
Speaker 2So then if they're like I don't even want this and you're gone, I'm sell it well, it's gonna be a game, yeah, so when they sell again the every is.
Speaker 2You got to make all of these things. First of all, you may not outlive the term. If you die before the end of the term, the whole thing's uh, it's unwound and it's like I didn't even do this. So all of the tax benefit that you, you, you, you lose it right, as with anything. You have the info and you got to give your best, best guess as to as to if I think this is going to be right for me and you can, you could put half of it in a five-year term and half of it in a 20-year term.
Speaker 2If you, if you, if you want to, kind of you know, hedge your bet.
Speaker 1So the last couple of trusts we're going to talk about um is. The first one is a grant, a grantor retained annuity trust. That's again reducing estate taxes.
Speaker 2Yeah, it's basically you're. It's somewhat similar to the concept in a charitable remainder trust where you're you're getting an income stream you know for a set amount of time and then at the end of that term, then the assets would go to the beneficiaries that you listed for a QPERT.
Speaker 1So it's not. So it's not going to a charity though.
Speaker 2No, no, it's not. It's going to beneficiaries you listed. Yes.
Speaker 1So the idea is you can put something, maybe like an asset that's going to grow. Get it out of your state. You can get an income from it and then it's going to pass the beneficiaries outside of your state.
Life Insurance Trusts and Final Thoughts
Speaker 2Correct Basically the Q-pert that I was talking about. We were talking about earlier. If you sell the home while you're it's in a cupid, it basically turns into a grab. Ah it turns, because then it becomes another asset that treated like an annuity Got it, you're getting the income stream. And then it passes to the again gift, an immediate gift tax benefit that you, you're getting a discounted gift, got it. So that's that's. That's what that is.
Speaker 1And then the last one is a life insurance trust, also known as an ILIT, because it's an irrevocable life insurance trust yes.
Speaker 2I've seen a lot of these in my career. Yes, because the estate tax.
Speaker 1To your point was really low. The estate tax exemption that $14 million we have now was really really low 28 years ago when I started in the industry, that's right.
Speaker 2It was less than a million, that's right, and a lot of times so the proceeds from a life insurance policy. That counts towards your estate. Many people don't think about this when they think of their net worth. I mean, it's not your net worth, but for estate tax purposes your taxable estate is going to count the proceeds of a life insurance policy.
Speaker 1So if you pass away and you have a million dollars in life insurance, that's going to be counted towards the 14 million is what you're saying.
Speaker 2Correct. So a way to get that out of your estate you can create an irrevocable trust. It's called a life insurance trust that the trust is the owner and the beneficiary of that policy.
Speaker 1Of the policy on you? Yes. So in the case of yes, yes.
Speaker 2Yes, the policy on you, yes. So in the in the case of yes, yes and uh, the benefit is you're reducing the value of your taxable estate because those proceeds are kept out of your estate. Now, a con to this is, uh, there's administration that is required. There are these things you may have heard called crummy letters and that's it's called crummy from from a court case, um, but basically, you have to. You have to give notice, uh, to the beneficiaries that they have a a right to withdraw a present gift. Um, it's administration that is required.
Speaker 1So, basically, what is set up. It's really, it's really strange. I've I've seen these, but it's very strange. So it's like you have this, you have this trust in the and it's titled as a trust and you have an account that's in the name of the trust and the premium payments for the life insurance go in there each year. They have to sit there for a certain period of time. The crummy letters go to the beneficiaries and say hey, you're you, we just made a gift, because that those premium payments to that future beneficiary, gold, goes towards their annual gift exclusion. So it's like, okay, I just made a gift, you have the right to withdraw it if you want. You don't want them to. And then, obviously, and then you pay the premium through that account to the life insurance each year. So that's the way that it, and so every year you have to do this. We have to fund the trust, to then pay the premium payments and then send the notices.
Speaker 2Yes, not in that order.
Speaker 1Yes, send the notices first and then pay the premiums. So, and you have to keep these letters.
Speaker 2Yeah, you have to. It's good to keep them in your records because if there's ever an audit, then having that, you don't have to sweat it Right. You don't have them, it's going to create a bigger headache.
Speaker 1But you could imagine years ago when the exemption was only a million. That's why many people had a million, and then you'd have life insurance on top of that and it's like OK well then, if we set up this irrevocable life insurance trust and then the life insurance policy goes, gets paid there, then it's not included in my estate tax calculation. But, since the exemption is so high. Now you know they're not used very much. I haven't set one up in years.
Speaker 2Not as much as they used to before. I think one of the reasons why they, in addition to the immediate, you know, estate tax protection that you get from it is a lot of these irrevocable trusts are giving up control, right, but for a life insurance, proceed, you're not really thinking about it like that because it doesn't exist when you're alive, right, the benefit Right. So in a way it's I'm not. What am I really giving up control of? I'm not giving up, you know but. But again, you know what I've seen before.
Speaker 1I've seen where you have a family that you know. Someone you know maybe, like the parents, set this up and it's for the benefit of the children later, and then they're spending down all of their assets because they're living longer, right.
Speaker 1Which you know. So they're spending down a lot of their assets. They may have this life insurance trust that's going to be funded and paid out. Well, then, maybe one of the kids went astray, so it's kind of like, well, we don't want to leave them as a beneficiary. You can't undo that whole thing. You can, but it's a mess.
Speaker 2Yes, exactly I was going to say. It's unwinding a lot of the only thing where these trusts were a revocable living trust, very, very flexible, changing almost anything else that we've talked about in any of these other trust vehicles. While it may be easier now than it was a few years ago, it's still time. Money stress. So really, before you fund them, is when you have to really make sure that you know what you're doing Creating these trusts. You're never done. Once you create the trust, you have to fund, maintain, always, check in. So you know these are vehicles that provide many, many benefits but just like everything, just like your finances, you got to keep up with it. You got to keep up with it.
Speaker 1So good. Thank you so much for going through all of these. You know, if you have questions, you can always reach out to us or reach out to Rune as well. We have some other podcasts referenced in the show notes Episode 295, what Happens If you Die Without a Will I think you and I did that one actually. Episode 279, what Should parents of children with disabilities know about estate planning. Episode 233, how second marriages and blended families impact estate planning. We have a couple other education videos in there and then, of course, we have a link to your website. If you want to reach out to Arun, he's extremely knowledgeable, does free consultations just to talk about a situation or see if it's something's a good fit for you. But thank you for coming again. I'm sure we'll have you again. It's always a pleasure working with you.
Episode Wrap-Up and Resources
Speaker 1Thanks for listening to today's episode. If you're interested in learning more about Wiser Wealth Management or would like to schedule a consultation to meet with our fiduciary financial advisors, you can do so by going to wiserinvestorcom or by clicking the link in the episode notes. We'll see you next week.
Speaker 4Thanks for listening to a Wiser Retirement Podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestorcom and reach out. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets or any other investment vehicles or a basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. Thank you for clients, listeners or similar interests. Investments involve risk and, unless otherwise stated or not guaranteed, be sure to first consult with a qualified financial advisor, tax professional, insurance professional and or legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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