I Don’t Need a Trust: Examining the Misconceptions Around Trusts in Estate Planning

[00:00:00] Atty. James Jones: Welcome to Legacy Talk. I’m your host, James Jones. I’m an estate planning attorney in Tacoma, Washington. I’ve been practicing over 20 years and my main practice areas include estate planning, probate, and estate administration. On Legacy Talk, we discuss topics surrounding families and estates. Estate planning can often be a confusing and complicated topic, but my goal with this podcast is to make it accessible and understandable to the people who need it.

[00:00:30] So, if this is something that interests you, I’d appreciate it if you click the subscribe button and like this episode so that you can follow along as we break down the barriers to estate planning.

[00:00:40] I’m excited to get to today’s topic. Today’s topic is, I Don’t Need A Trust Examining The Misconceptions Around Trusts In Estate Planning, because knowing the benefits of a trust will allow you to decide what type of an estate plan makes sense for you.

[00:00:58] So, on today’s show, we’re [00:01:00] talking about, I don’t need a trust examining the misconceptions surrounding trusts in estate planning, so let’s get to it.

[00:01:08] I don’t need a trust, my estate is simple. Trusts are too complicated, trusts are only for the mega rich. I’m married and all of my assets are owned jointly with my spouse. I don’t need a trust, my kids are grown. They can manage their own inheritance, they don’t need a trust to help them with that, trusts are too expensive.

[00:01:26] These are some of the most common reasons people give for not thinking that they need a trust as part of their estate plan. But most people, when they learn of the benefits of a trust, realize that they’re a useful tool to have in their estate plan after all,

[00:01:43] I really like trust as a caveat, I’m what you’d call a trust guy and not a will guy. If I could use trust in every one of my estate plans, I probably would. There’s only a limited group of my clients that would not benefit from trust, probably less than 5%. [00:02:00] And in those situations, it just doesn’t make sense, there’s just not very many assets that would cause probate. They don’t have any money like those kinds of things. You don’t need a trust necessarily.

[00:02:10] But 95% is what is left when you only have five or less percent that don’t need a trust. 95% could benefit and do benefit from a trust. And so there must be something to them, right? That’s what my clients come to learn in most cases.

[00:02:28] So, today we’re talking about and examining 10 Misconceptions Around Trusts And Estate Planning. And I wanted to start with this and explain what a trust is. Because not everybody knows what a trust is. Like I talked about all the time, you are probably not an estate planning junkie.

[00:02:45] You probably don’t want to read about estate planning all the time, it’s not a hobby of yours, it’s not a hobby of mine, honestly, it’s my job. But here’s the basic definition of a trust. Okay. A trust is an arrangement with three parties. Okay. There’s a [00:03:00] settlor or a grantor that is the person that establishes the trust, they set it up. Okay.

[00:03:06] They take assets like a house or real estate, bank accounts, investments, and they transfer these assets to a trustee who manages the trust. And the trustee manages the trust and these assets on behalf of a beneficiary who benefits from the trust. And so, there’s three parties to the trust, the grantor, the trustee and the beneficiary.

[00:03:32] And so, there’s many different kinds of trusts and we’re not going to get into it even a fraction of those today, because we don’t need to get into that, right? We don’t need to get into every little nuance with regards to the types of trusts there are. If you need a certain type of trust, you know, we’ll know it. Right?

[00:03:48] But for general purposes, most people use one or two or three different kinds of trusts in their lifetime. Okay. So, the most common trust that you’ll see or hear of probably is a revocable trust or a living [00:04:00] trust. And that trust is just like, the trust definition that we just had. The difference is, a revocable trust typically has you as the grantor, you as the trustee, and you as the beneficiary.

[00:04:14] So, you’re all three parties. So, you maintain full control of the assets, the management of the assets, and you receive the benefit of the assets. So that’s a revocable living trust, you don’t have to be trustee of a revocable living trust. But during your lifetime, most people are.

[00:04:29] There’s also trust for minors, there’s trust for people with special needs, there’s life insurance trust, there’s all kinds of different trusts. But for today’s purposes, we’re probably only going to talk about a few different ones. And so, that leads us to our 10 misconceptions. Okay.

[00:04:42] Now that we know what a trust is, an arrangement between three parties. Now that we know what that is, we can talk about 10 Misconceptions Surrounding Trusts In Estate Planning.

[00:04:49] So, number one is. Avoiding probate. Contrary to popular belief, you can avoid probate in more ways than [00:05:00] one. But trust is not the only way to avoid probate. There’s methods like joint ownership, beneficiary designations, payable on death accounts. Those things can bypass probate, and we’ve talked about those in previous episodes.

[00:05:14] But like we’ve discussed on other, the same episodes, beneficiary designations, payable on death accounts. Those kinds of things are not always the best way to distribute your estate, because in a lot of cases, those kinds of transfers by operation of law or by beneficiary designation can be delayed.

[00:05:35] Beneficiary designations often require long paperwork to be filled out, complicated paperwork. There’s typically delays, they have to go send that paperwork to the legal department. Is this really the right person? And that can take weeks sometimes to get money back, months.

[00:05:49] And in the meantime, your bills aren’t getting paid and the kids are often having to front that money out of their own pocket. And they’re getting those funds at a delayed [00:06:00] basis and sometimes it’s not good for them just to get money in their own name because that could lead them to blow it all. And so, beneficiary designations or operation of law to transfer assets is not ideal. It’s suboptimal as we could say in a lot of different cases. Okay.

[00:06:17] Because you want to be able to have the people that are managing your estate or your assets, right? You want to have them have the ability to make decisions and actually pay bills, deal with creditors, pay for your funeral, pay for your house payment before it’s sold or whatever happens to it, right? Keep the utilities on.

[00:06:35] So, transferring all your assets to beneficiaries individually without leaving any funds in the estate really leaves your trustee or your executor footing the bill for a lot of stuff. And so, that’s not ideal.

[00:06:49] Number two. Cost efficiency. Well, some might say that a trust costs more upfront, which it almost always does cost a little bit more upfront. It definitely can save you money in the long run. [00:07:00] And the reasons of this are many.

[00:07:03] First of all, it will avoid probate and the vast majority of cases are revocable trust that you use as your central estate planning document. If it’s funded properly, we’ll avoid probate and those fees. And it can also avoid estate taxes or minimize your estate taxes. It can also avoid legal challenges to your estate.

[00:07:24] So, it might cost a little bit more upfront to have a trust, but the long run, you’re going to be saving money on lawyer fees in time, in contests with beneficiaries or outsiders that want to have a peek at what you’ve got and avoiding all the court costs.

[00:07:42] So, it is in the long run cheaper. Contextually, as of today, which is March 2nd, 2024, a typical probate in my office is probably around $7,000, whereas a typical trust in my office is between, you know, [00:08:00] four or five or $6,000, maybe, you know, depending on what you do. So, you’re paying a lot less to do the trust and avoiding that probate fee.

[00:08:07] Number three. Privacy concerns. One of the things about probate and going through probate is, it’s all a public record, it’s at the courts, court records are public. There’s very few court records that are sealed from the public’s view. And estate assets and a will are not one of those types of assets. You know, they don’t fall into that category as sealed from the public.

[00:08:29] And so, having a trust and not having to go through the probate proceeding keeps your assets private. It keeps the way you’re distributing your assets private. And Basically keeps that nosy neighbor from checking in. Well, what did Bob have after all? I bet he had a lot of money stored up somewhere, you know, that nosy neighbor is someone we want to avoid.

[00:08:52] And we want to avoid creditors going in there and looking to, right? We don’t want to have to tell them what your assets are. We don’t want to have to tell them [00:09:00] what your will says, who gets what.

[00:09:02] We don’t want your kids or beneficiaries creditors or family, you know, or estranged kids or friends or people that want to manipulate them knowing that they’re getting a bunch of money from mom and dad or from the great aunt, right? Or grandma and grandpa. We don’t want that stuff public, ideally. So, privacy is a big concern and it’s a big reason to do a trust and avoid that probate process versus a will.

[00:09:29] Number four. Flexibility and distribution. Now, a trust, like we said before, it’s an arrangement between three parties. The grantor setting it up, a trustee managing it, and the beneficiary benefiting from it.

[00:09:41] The type of trust where we can be flexible in distribution. So during your lifetime, if you have a revocable trust, you can do whatever you want. It’s you on paper, you can take whatever assets out of there that you want, use them for whatever you want, no restrictions.

[00:09:57] But you can also, with that revocable trust, [00:10:00] create irrevocable trusts for your beneficiaries. And so, irrevocable trusts unlike revocable trusts, can’t be changed. They have a trustee involved that’s tied to the document and the terms of the trust as you provide it.

[00:10:14] So, you can be very flexible in how assets are distributed to your family and to your beneficiaries. So you can put specific conditions on distributions based on certain milestones like reaching a certain age, graduating from high school or graduating from college or graduating from graduate school or getting married.

[00:10:34] You can base it on certain events, you can give money for certain events like buying a house, helping with the down payment or opening a business. You can provide benefits and sort of, times where it makes sense that they can get a little bit of extra money to help with those kinds of expenses that are positive things.

[00:10:50] You can do income matching to sort of keep people working. You can limit distributions to income only for one example so that your kids don’t become these [00:11:00] trust fund kids where they’re not working. Right? And they’re living on the trust.

[00:11:03] A lot of people that have that tendency or that worry put in provisions to say they can get income for life. They can’t take the principle from the trust, which is the bulk of the assets where they can take income, but only if they make income themselves, right? If they make $2,000 a month, they can get another $2,000 from the trust.

[00:11:24] So, they’re not really able to survive on the trust as it is, they have to work. And so, we want to keep that work ethic and intact. Right? We want to reward work, we want to reward moving forward and progressing through education and milestones, so that’s one way to do it.

[00:11:42] And then for minor beneficiaries that we talked about before cannot hold assets in their name. And so minor beneficiaries, if you have minor kids, even if you don’t have a revocable trust that sets this up, we’ll set up a minor’s trust for your kids.

[00:11:56] And that minor’s trust could say, well, let them have money for [00:12:00] their education and support and their health care and sort of say, you know, pay for college, pay for room and board. And then whenever they reach a certain age, you can say 25, 35, 45 or 55, right?

[00:12:14] Whatever age. They can take control of the funds or they take the money that gets distributed to them or you can make a tiered distribution where you say they get, you know, a third at 25, a third at 30, and the rest at 35, something like that. Those are very common distributions for minor’s trust. So, flexibility and distribution, big thing with trusts.

[00:12:34] Number five. Incapacity planning. Incapacity planning is significant and it’s under emphasized, and it’s something that people don’t think about typically when they’re talking about their estate plan.

[00:12:45] We’ve talked about this a lot, that your estate plan is for your estate when you pass away. But it’s also for how things should be managed and putting parameters and putting safety nets in [00:13:00] place. If you’re not able to manage your estates, like durable powers of attorney, things like that for financial and medical decisions with a trust, a living trust in this instance, if you set up a living trust or revocable trust, your successor trustee that you name, that’s basically the executor person can use the assets of the trust, manage the trust for your benefit, continuing to pay your bills, making sure that your assets are intact, that they’re invested properly.

[00:13:25] They can monitor the investments in the market, that kind of thing. Work with your financial advisors and other advisors, tax people, and make sure that your assets and your estate is continuing to be managed while you’re unable to manage it yourself.

[00:13:40] And it avoids the need for things like guardianships and conservatorships, which we’ve talked about briefly, has some of the worst things in the world for having to do. So, we don’t want to have to do that. But if you’re unable to support yourself or manage your affairs, a trust is a significant tool in incapacity [00:14:00] planning. So that’s number five.

[00:14:02] Number six. Protection of assets. And so Washington State does not have a self-settled asset protection trust, we don’t have one. There’s many states in the country that do the kind of like trust haven states, like Alaska, Nevada Wyoming, I think has one Utah, I think has one anyway, so we’re not talking about self-settled asset protection, trust self settled means you set it up yourself. Okay.

[00:14:31] We’re talking about protecting assets and irrevocable trust that you would set up for somebody, right? Maybe for your children, other beneficiaries, friends and people with special needs. And so, these types of trust, these irrevocable trusts, sometimes called dynasty trusts, can protect your beneficiary’s inheritance, from creditors, from lawsuits, from divorce settlements.

[00:14:56] So, a lot of people worry about, well, I don’t want my kid’s wife or husband [00:15:00] to take all their money that they inherit from me. And so, a lot of the time it makes a ton of sense to create an irrevocable trust. for that beneficiary. So that their spouse, if they ever did get divorced is off the table. Okay. That money is off the table.

[00:15:15] And another thing that you can do with protection of assets is if this beneficiary of yours, if you have a child or a friend, whoever your beneficiaries are, that’s not good with money. A trust would have, help you have someone appointed that can help manage, help that child manage the money.

[00:15:32] A lot of the time on a typical trust, the child, your beneficiary would take control of the trust at a certain age, maybe 25, 35, you know, 40. But if that child is not doing right, right? If they’re substance abuse problems, or they just can’t manage their affairs, they can’t function in life. Like you’d hope your trustee can help them manage those assets so that they don’t take up those things and blow them, right?

[00:15:58] And then like kill themselves or something with [00:16:00] drugs or something like that, which is a problem in our society today, unfortunately. So, having someone help manage those funds for someone that might need help is a significant thing. And you can’t do that without a trust.

[00:16:13] Number seven. Avoiding family disputes. Clearly outlining your wishes in a trust help prevent family disputes and they minimize the likelihood of legal challenges to your estate when you pass, and I always tell people, you know, everything can be contested, right? You can contest a will, you can contest a trust, you can contest whatever, right? In court.

[00:16:33] We can sue people about anything now, whether it sticks or not is the question. With a trust, not going through probate, it makes one of the hurdles a little higher, maybe, for people trying to contest your will or your estate, okay?

[00:16:48] With a will, and going through probate, there’s a venue, right? There’s a court case open. They can go look and see what’s going on. And then, they have a venue that says, well, I want to contest this. [00:17:00] And so, they refer to the case that’s in there and they don’t have to file a new case in a lot of instances.

[00:17:06] And so they sort of have their venue, their platform for contesting it and questioning things. And so, I tell people with a trust, the likelihood of being contested when there’s no court case is significantly higher than when there is. And so, not having to go through probate and create that venue for where a contest of your estate would happen just puts another hurdle for potentially unhappy beneficiaries or creditors.

[00:17:31] And so, why would we give them that platform to start? Why don’t we make it a little harder for them? Okay.

[00:17:36] Number eight. Minimizing estate taxes. So Washington, we’ve talked about, has a very low estate tax threshold. There’s an exemption in Washington for the estate tax, which is 2.193 million as we speak now. That means anything above 2.193 million will be subject to tax.

[00:17:55] And in order to avoid estate taxes or minimize estate taxes, [00:18:00] trusts are essential. And so, basically we create a trust called a credit shelter trust or a bypass trust in many cases. There’s strategies that you can make gifts during your lifetime to beneficiaries, to reduce your taxable estate in trust, a credit trust or a bypass trust or trust created when there’s a married couple and a deceased spouse of shares put into a trust called a credit shelter trust.

[00:18:28] That shelters their share of the estate and so that money when the surviving spouse dies doesn’t count against the surviving spouse’s taxable estate. So, in a scenario where there’s say, $4 million, we’d put two million in this credit shelter trust and the other two million would be in the spouse’s name or a survivor’s trust and only the money in the survivor’s trust or in the spouse’s name would count against their taxable estate, not that two million from the deceased spouse. And so ideally they would pass with very low estate taxes, if any. So, minimizing estate [00:19:00] taxes is a big part of trusts.

[00:19:01] Number nine. Continuity of management. Trusts offer continuity of management, ensuring the assets are managed even after your death. Okay? So if you have a business, having a trust own the business or have a trustee in charge of the trust, They can manage the business is a big thing.

[00:19:20] There’s no interruption or delay caused by probate and like I talked about before, if your kids need to pay bills or pay expenses for your spouse, having a trust where they just become the successor trustee and they can access the funds in the trust, allows them to do that without having to go to court and have delays and wait for beneficiary money like we talked about before.

[00:19:40] We want to make sure that they can access funds when they need them, right? And they’ll need them when someone passes away, it’s not cheap. And so, that continuity of management, making sure that funds are accessible to the people who need them right away, rather than having to wait for a judge to sign an order or an attorney to [00:20:00] draft up the probate documents, which could take, you know, weeks, sometimes it could take weeks for the judge to sign it. And so having the assets in a trust where a successor trustee can just step in and access those funds is critical.

[00:20:13] Number 10. Tailored solutions. Trusts can be tailored to specific needs and circumstances, we’ve talked about some of them, right?

[00:20:22] They can talk, they can be tailored to deal with complex family dynamics, that trust baby thing, right? Making sure kids are taken care of, but not too well, that they don’t want to work. They can be used to accomplish your charitable giving goals, there’s charitable trust that you can create that benefit you estate tax wise and the charities after you’re gone.

[00:20:41] Sometimes while you’re alive, there’s special needs trusts. If you have a special needs friend or relative or child. A lot of people say, well, and we talked about this in an episode previously, a lot of people say, well, I’m not going to give that child anything because I don’t want to get them kicked off of their benefits. Right? I’m not giving that guy [00:21:00] anything, my other kids will take care of them, they’ll do it. Right?

[00:21:03] But a special needs trust is a trust where you can put some money away for a special needs child or beneficiary. And that money can be managed by a trustee to benefit them during their lifetime. And it won’t disqualify them from any public benefits that they might be on.

[00:21:18] And so, it really takes the burden off of family to say, well, you know, Bobby needs some, you know, new clothes or he needs something like, you know, something that they would have to pay with out of their own pocket, whereas with the trust, they can take money out of the trust that set aside for him and make it so that he doesn’t have to, you know, rely on the charity of others necessarily to have things that aren’t covered by the state.

[00:21:44] And so, it just makes it a lot better, it just makes it a lot easier for families and surviving children to have a way to manage assets for a special needs sibling or friend or beneficiary.

[00:21:57] And a lot of these [00:22:00] things that we talked about, these special situations are typically not discussed in a will, because the vast majority of the wills that we come across or that you see are simple wills. Everything goes to the spouse or everything goes to the kids directly.

[00:22:11] There’s no planning involved, there’s no, you know, gates as far as what happens to these funds. There’s no trust involved, which is where you get that gate.

[00:22:20] So, those are the 10 things and now we’re at the story time. And you know, I’ve got a billion stories about trust versus wills, but this is the breakdown really. Okay?

[00:22:29] This is what I tell people that I meet with regarding like, what’s the difference between administering in a state with a will or in a state with a revocable trust? Okay?

[00:22:39] And so that means the trust administration process versus probate. And so probate, like we’ve talked about is a court action. You’ve got to get a judge to sign an order from the court, appointing an executor to make decisions, be able to administer assets of a deceased [00:23:00] person. It’s public record, oftentimes you have to hire an attorney that’s six to seven to $8,000 or more for a simple probate.

[00:23:06] Probably you’ve got to pay court fees, you’re going to have delays because there’s certain deadlines and times where the estate has to be open. You give notice to creditors and that time typically is four months or so. And so, there’s a lot of delays, there’s a lot of time. It’s six to 12 months of your life on average dealing with that stuff, particularly with the court. And why would you do that? Right.? Versus a trust administration.

[00:23:34] And so, a trust administration is private, there’s no court and typically this is what I tell people for a simple revocable trust type plan that trust will be administered within, you know, two or three appointments with me. We’ll have everything done with regard to what we have to do to get that thing administered, get assets transferred.

[00:23:53] It’s not nearly as long as the six to 12 month window that probates are open. There’s no deadlines, there’s no [00:24:00] court intervention. It’s not a public record, like I said, and it just makes it a lot easier.

[00:24:04] And I think when people know that, when they know that, when I meet with clients and they meet with people in my office, they realize, well, I didn’t know that a will makes it so they have to go through probate. I thought it will avoid a probate. No.

[00:24:18] A trust will avoid probate as long as it’s funded properly and the assets that cause probate are in the trust, which is typically what happens. It’ll avoid probate and be so much easier. And it’ll make your life and your family’s life and your trustee and executor’s life so much easier.

[00:24:32] And it doesn’t cost that much more, if anything, in the long run it’s less. And you don’t necessarily even have to fire an attorney to do a trust administration. If it’s just direct distributions, you barely even have to have a lawyer.

[00:24:44] So, which puts me, I guess maybe I should do the wills and do probates only, I don’t know. Some lawyers do, I’m not that guy.

[00:24:50] So, that’s it for today. I’d like to thank you for listening to today’s episode of Legacy Talk. If you liked today’s episode and would like to learn more, [00:25:00] please like and subscribe for more great content.

[00:25:03] I’ve been your host, James Jones to your legacy.