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A Wiser Retirement®
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.
Related Podcast Episodes:
Ep 295: What Happens If You Die Without a Will? The Legal Nightmare
Ep 279: What Should Parents of Children with Disabilities Know About Estate Planning?
Ep 233: How Second Marriages and Blended Families Impact Estate Planning
Related Financial Education Videos:
Prevent Family Conflict with Legacy Planning
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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 .
Speaker 2Life situations are going to dictate . You know how . You know these . These trusts should be used Right . There are
Revocable vs. Irrevocable Trusts
Speaker 2times 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 .
Speaker 2It can't be changed . Control is the big thing . Once it's in
Benefits of Revocable Living Trusts
Speaker 2an 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 .
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
Testamentary and Charitable Trusts
Speaker 2things 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 .
Speaker 1So these are the crats and the cruts that
Special Needs and Spousal Trusts
Speaker 1if 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 .
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
Generation-Skipping and Residence Trusts
Speaker 2million 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 .
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
Life Insurance Trusts and Final Thoughts
Speaker 2, 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 .
Speaker 1Thanks for listening to today's episode . If you're interested in learning more about Wiser
Episode Wrap-Up and Resources
Speaker 1Wealth 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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