Trust Issues: Navigating Revocable Trusts and Their Pitfalls

In this episode, Peter Klenk tackles the topic of revocable trusts—also known as living trusts—and why they’ve become such a popular estate planning tool. He breaks down what a revocable trust is, what it does (and doesn’t do), and dispels common myths, especially around taxes and creditor protection. 

Transcript

Hello, everybody. It's Peter Klenk at Klenk Law, here once again to talk to you about death and taxes—at least this fascinating subject that we all have to deal with.

Today, we're gonna talk about trust issues. That's right—trust issues. The idea of navigating revocable trusts and some pitfalls that exist.

Revocable trusts, you might have heard called “living trusts,” which is not really a legal term, but it's just a nice marketing term. Doesn’t “living” sound nice? It just sounds pretty, doesn't it? But really, what we're talking about here is a revocable trust.

There are two big, broad categories—and hundreds of variations—of trusts: irrevocable (those that can't be revoked), and revocable (which can be revoked). There you go, right? So, the idea that it's revocable and can be modified makes “living” sound nice. They’re interchangeable terms, just so you understand. If you're talking to a lawyer, you're talking about a revocable trust.

So, okay—what the heck are these things? What’s going on? What can go wrong with these? Why do we want one? I get it. These are all great questions.

These documents have become very popular in the last seventy to eighty years as they spread across the United States, mostly from California to New York to Florida. Revocable trusts have nothing to do with taxes. They have nothing to do with avoiding spouses or creditors. They have to do with avoiding the probate system—making things easier when you die.

So the first pitfall is that there are people out there who will sell you these things and tell you, “Oh no, you don’t have to pay inheritance tax,” or “You don't have to pay income tax.” That’ll be a harsh reality when the IRS shows up. None of that’s true. A revocable trust is a transparent document as far as taxes are concerned. You even use your Social Security number while you're alive. You don’t even use a tax ID number.

So don’t let anybody tell you… well, I mean, they can tell you—just quickly run for the hills when somebody’s telling you these somehow save you taxes, because that is not true at all. It does provide you some privacy, and we do use them for folks to keep assets quiet in a way. But again, they don't protect them from the people who might be after you. They just give you some privacy and keep you off the grid.

So that’s what I’d say is the first pitfall: don’t believe all the shenanigans and things people say about these things. They’re really a tool primarily meant to avoid probate.

Well, what does that mean? What the heck is that?

Alright, let's go through it. Probate, guys—we’ve had probate since the first human beings. People picked up stuff, then they died. And you know what? The tribe had to figure out who got their stuff. That’s probate. Who gets your stuff when you’re dead? That’s probate. That’s all it is.

Of course, you can imagine that eventually this was done by the priests or the king. Somebody was in charge of these rules and had the authority. And in every culture, that’s just the way it’s been.

Nowadays in the States—we’re going with the United States in this example—we have to, of course, make things even more complicated. When most countries have a federal rule dealing with these things, in the United States, we give that right to the states.

Why?

When we broke away from the British, we all agreed that we didn’t care for the British that much. But the states didn’t really care much for each other either, so they wanted to keep certain powers—and one of them was probate. So every state has their own system. That means we have fifty different probates.

Now you can imagine—if you have a house in Florida, and a house in New York, and a house on the Jersey Shore, or pick any two states—you’re dealing with two different probate systems. And they don’t necessarily play well with each other. So this can be a bit messy.

Then some states just have bad systems. They are either very costly, very irritating, or there’s a lot of paperwork. There are any number of ways a state can make it kind of messy.

Other states, of course, make it easier. But the classic three states that people talk about where things are just horrible? California, Florida, and New York. They just have systems that are irritating.

And I’m lucky enough to be licensed in Florida and New York. At this point, I’ll just let you know—in my career, I just won’t even do probate in those two states. New Jersey, Pennsylvania—fine. But not New York and Florida.

Why?

They're just so irritating, folks. It’s just so irritating to go through their process.

And if you’re up in New York—listen to me. New Jersey is right over the river and they have a great system. Why can’t you just do what they do? Florida—Georgia is right there. They have a great system. Why can’t you imitate them?

I don’t know. But that’s just the way it is. So you’re stuck with what you’re stuck with.

That means, of course, people have been trying to figure out how to avoid going through that process—avoiding the king, right? Avoiding the government. That’s what trusts were created to do.

Trusts are something that you create yourself. You don’t need a permit. You don’t go to the government to get a license. It’s always been a creation of people. The original creation was to create an entity to avoid the king’s oversight.

So now we’re back to avoiding probate—which is, again, avoiding the king’s oversight. It’s the same thing.

The idea is that you, or you and your spouse, can grant the power to a trusted person—now we call this person the trustee—to hold on to assets to benefit somebody (the beneficiary).

We have a grantor, we have a trustee, and we have a beneficiary. With a revocable trust, in general, you’re all of those things. You’re the grantor. You’re the trustee, overseeing the assets owned by the trust. And you’re the person who benefits from the whole arrangement.

If you’re married, it’s two people—and you’re both trustees, you’re both beneficiaries. You create this entity. It exists. It can own things—real estate, bank accounts, businesses, gold. It can own anything.

But again, who runs the trust? The trustee. That’s you.

So when you pass an asset into the revocable trust, do you lose control? No. You still do.

Can you rent the house? Can you live in the house? Can you manage the insurance for it? Yeah. You’re the trustee.

And who benefits from it? Well, you. You’re the beneficiary. So you haven’t given up any of the rights to benefit from the property.

Yes, it’s owned by this trust—but you control and enjoy it. Nobody else has that right. And it’s revocable—remember? It’s in the name.

If you don’t like this trust, you can always say, “I’m shutting it down. I’m taking everything back out. I’m putting it back in my name.”

So you don’t give up control. You don’t give up enjoyment. You can always shut it down.

Okay—why would you do this?

Well, the idea at its base is, again, avoiding probate.

During your lifetime, you’re trucking along. It doesn’t really affect you much at all—if at all. Maybe you don’t even notice it exists anymore. You’ve forgotten about it.

But when you die—who owns the house? The trust owns the house, not you. So did the trust die? No. The trust is fine. The trust is great.

You die, okay? You’re not the trustee or beneficiary anymore. But the trust just says, “Oh, now your kid’s the trustee and the kid’s the beneficiary.” Boom. That’s it.

Do we have to go register now with the county? Nope. Do we have to pay a county filing fee? Nope. Is your kid in charge as soon as you’re dead? Yeah.

We don’t have to wait for the whole process to go through.

So—do you still have to pay the taxes? Yes.

Do you still have to bury you and pay for it? Absolutely.

All the obligations are still there, but we just made things simpler, easier for the person who’s going to take over your handling of your affairs when you pass.

You can see where this is a huge advantage—especially, like the examples—it’s great everywhere, but it really shines when you have rental property. If you die and it takes your kid three weeks or a month or something to register the will, during that time period, nobody has authority over the rental property.

What’s the tenant doing? I don’t know. You don’t know. Your kid doesn’t know.

With the revocable trust, they’re in charge—right there, and easy to take over.

Same thing with just basic things, like—who’s paying for your funeral?

Remember—you’re dead. Doesn’t really bother you. But now the funeral parlor wants money. They don’t do it for free. So your kids have to pony up the money—or your sister, your brother—somebody’s paying that money and then they hope to reimburse themselves later on.

With a revocable trust, as soon as you’re dead, they have access to money. They can pay these bills. They can take care of your kids. They can take care of your dog. They can take care of whatever needs to be done.

Everything’s faster and simpler and cheaper and easier.

And again, especially if you pick somebody who lives in a different state. Really—they could just sit on the beach, drinking Mai Tais, handling your estate under the umbrella, and they never really have to come back. There’s just not a reason to. It really makes it simple.

You can see the advantages to it. And the nice thing is, it really doesn’t cost much more than doing your will. It’s a little bit more—I’m gonna give you an example, and this is 2024, guys. Don’t hold me to this in the future.

But in general, it’s like a couple thousand bucks to set up, and then you have to do a deed—six, seven hundred bucks plus the county filing fee.

With a will, you don’t have to do a deed, and it costs a little bit less. But that’s it, guys. I mean, it doesn’t cost much more to set up than the regular process. It takes a little bit more of your time.

But you’re spending a little bit more of your time so that whoever’s handling your estate—it’s just easier for them. Right? It gets done faster, and more organized.

Anyway, guys—that’s it.

If you’re curious about it, give us a ring. We do so many of these—I can’t even imagine how many we do in a year—because, of course, they’re very… you can see—they’re very easy to want to have. They make things simpler.

Give us a ring: 215-790-1095. That’s our main office for all of our offices—Jersey, Pennsylvania, wherever. They can set up a conference with the right person to talk to, and we can brainstorm and figure out what’s a good fit for you.

That’s it, guys. It’s been great talking to you.

Death and taxes. Yay! Fun stuff.

And like and subscribe, please, so that as I release more of these—dead—we still can talk.

Alright. Be well.