The WAY to WOW Shows
Dealing with the 2 Main Trust Types
June 12, 2023
Automatically generated from YouTube captions; names and wording may contain errors.

[0:10] foreign States weekly I'm your host Kevin bemel standing again and we are here every Monday at 10 A.M uh Pacific Time 1 p.m eastern time and that makes it what noon Central Time and 11 A.M in the in in the mountain Zone and uh I'll have to let those of you who are not in the continental United States figure out your own adjustments it's uh it's too much for me I can't even tell you what Greenwich Mean Time would be at

[0:45] this point in any event thank you very much for joining me we're here for a half an hour each week to talk about various matters concerned with handling trust in estate matters and how to get business in in that realm and and do business with other practitioners in the whole probate and and Trust in the states Arena so one of the things that that I learned uh over the last uh several years um deals with the the two basic different kinds of trusts and it you

[1:22] know it's it's interesting because um just just this little bit of knowledge really helped me much better understand what I'm faced with and why different trusts seem to be the way they were organized so um traditionally uh when a married couple sets up a trust in which they put their assets so as to avoid probate they'll have I I don't think you've heard this term So Much Anymore intravivo's trust what is a living trust

[1:57] a revocable living trust whereas other times you'll you'll see that that things are set up as a irrevocable trust so my daughter for example has an irrevocable trust that was set up for her um by her grandmother and there are very uh specific reasons why one may be used over the other so let me start out by saying as as I often do this none of this is is legal advice none of this should be taken is this is

[2:33] what you should do uh first of all I am not a lawyer so I am not uh professionally competent to tell you what kind of trust you need to form that's a that's a discussion you need to have with your lawyer and accountant and based on your own specific situation so and and that's true of everything we talk about here all the professionals that I have on the different concepts that we discuss the uh broad advice

[3:08] that's given you can't just take that and run with it unless you are very knowledgeable yourself now of course if you're a lawyer you're yourself or you're an accountant so look you're presumably competent to make those decisions on your own but for most of us lay people as I call us right we're not lawyers and accountants we're not intimately familiar with all the vagaries of the law of tax law of accounting requirements Etc these are not decisions generally speaking that we want to make without having gotten proper uh advice from our professionals

[3:46] and in fact for those of you who saw my show last Wednesday on people making money we were talking about financial literacy and part of financial literacy is understanding when we need to reach out to other professionals to get their input so that we can make sure that we're doing the right thing with respect to our finances and so that our efforts to build wealth will work as well as possible okay now that that's not to say sometimes things are going to happen we're going to make an investment decision that doesn't pan out we're

[4:22] going to make a decision about how we structure something and then soon after that the situation may change and that may turn out to have been in retrospect uh not not the best you know path for us to have taken that that's you know what happens in life I I I you know one of my philosophies that I attempt to attempt to live by is uh we we can only make the decisions we can only make his decisions that are as good as what we know about at the time we make the decision and we don't want

[4:58] to either be paralyzed by never knowing enough nor do we want to be hampered by making decisions that are ill-advised because we didn't reach out to the proper Professionals in order to get their advice and so we want to hit that that middle ground there and accepting then in the end we're human and so mistakes are going to happen and we're going to have to proceed on that basis and do our best to recover from those mistakes hopefully they're not so devastating that they you know knock us out of the game and all that kind of stuff so so we're going to talk today

[5:34] about two types of trusts revocable and irrevocable trusts and I have my you know handy dandy uh PowerPoint here we go and slideshow okay beef and start so here we are trust and Estates weekly that's our show um and let's see so I realized I didn't put in my whole thing about the uh three pillars of attainment so you can see it here in the background this this you know everything we do relates to three pillars of attainment we're dealing primarily in

[6:10] the Pursuits pillar in the finances realm um but you're gonna see that when you are talking about types of trusts one of the key oops what am I doing here there we go one of the key issues to take into account is is relationships okay and so we you know that that's going to play into this as well okay so let's okay there we go all right so there's two types of trusts as I mentioned there's a revocable trust and an irrevocable trust okay that's now I'm

[6:46] sure there are others but for our purposes probably most of the trust situations that we're going to deal with are going to be one of these two all right so let's talk first of all about a revocable trust now one of the key features of a revocable trust is it's flexible okay in other words it's revocable so you can transfer assets you can set up a revocable trust you can transfer assets to it and if you want to down the line you can revoke the trust and pull the assets

[7:22] back out and distribute them okay the trust I mean it sort of has a life of its own but you're in control of that life okay now one so so and and this is why I think that um for a married couple typically the the living trusts they set up are revocable um unfortunately marriages are well unfortunately marriages are often revoked if you will right there there's dissolution of marriage here in California or divorce in states where there has to be

[7:58] um you know some sort of um uh precipitating event for the marriage to be dissolved and so um couples need the ability to um to uh revoke the trust disperse the assets um based on uh you know the terms of the divorce and and then move on their way um and and in many cases probably create another uh revocable trust um depending on you know what their assets are

[8:34] um you know how burdensome probate is in their state and and their personal situation etc etc okay so so that's sort of revocable trust has that aspect of being flexible uh it is now with a revocable trust it's taxable to the grantor or grantors if there's more than one so if it's a if it's a um

[9:09] wrong thing so if it's a um a married couple so then there's going to be two grantors and the uh transactions within the trust the trust won't file its own tax return the grantors will the in essence the what happens as a result of transactions will pass through to the grantors and they will deal with the tax consequences so for example let's say over uh of the

[9:46] past year the past tax year uh which would be a calendar year most likely uh the the trust generated um uh dividend and interest income of ten thousand dollars okay and it also generated Capital long-term capital gains income of uh ten thousand dollars okay so if the trust is a family living trust where the husband and wife are the grantors and let's to make it simple let's just say they file their tax return jointly so on their joint

[10:24] personal tax return they will report the ten thousand dollars in in dividends and and interest um on their tax return most likely as um investment income and they will report the ten thousand dollars in long-term capital gains as a long-term capital gain on their personal tax return now with their married filing separately so then that's a more complex situation and now here's here's where you need to get your account involved do

[10:59] they do they split the income 50 50 is it split according to the percentage of whose assets were transferred to the trust all of that you know would have to be worked out but the main concept to grasp here is that the trust does not file its own tax return it pays no taxes all of the activities in the trust that have any kind of tax consequences are passed through to the grantor or grantors okay not the beneficiaries okay so a trust as you recall from a previous

[11:37] show we did and and if if you want to go back and view that show please go to our YouTube channel I talk about some of the basics so a trust has at least one grand tour that's the person who sets up the trust it has at least one trustee that's the person who manages the Affairs of the trust and it has at least one beneficiary and that's the person who benefits from the trust at some point so for a married couple it would be somewhat typical for example for their children to be the beneficiaries okay with a revocable trust the the children

[12:15] the beneficiaries they there's no tax consequences um with respect to what happens in the trust until the uh grantors die okay and that's that's a typical case where a married couple would set up a trust is so that their assets can be passed along to the beneficiaries without having to go through probate so once that process has taken place and the trust has dispersed its assets to the beneficiaries so now the beneficiaries own those assets the

[12:51] trust doesn't any longer and so now they'll be responsible for any tax consequences as a result of owning that property okay but even when the uh grantors die okay a tax a final tax return a final personal tax return has to be filed for those grantors and and it will include whatever transactions or tax events happen with the trust property it'll be included in that final personal tax return okay so

[13:26] the wall the trust is in existence the beneficiaries don't have any tax consequences to be concerned about nor does the trust itself It all becomes it all passes through to the grantor okay now here's here's a key thing though about a revocable trust when The Grand Tour dies it becomes irrevocable okay so at that point it can't be dissolved Okay so when when the parents to use the example I was using a minute before once the the

[14:03] grantors the the husband and wife of a trust die now the trust can no longer be revoked okay prior to them both dying it can be okay and and then in fact the terms of the trust can be revised that you'll do a um it may be a restatement of the terms there's there's you know different you know lawyers have their own language and and and for good reason in order to be as clear as possible about what's happening I'm not going to get into that um however once the once the grand Tours

[14:40] now if there's one grantor once he dies that's it the trust is now irrevocable okay but if there's more than one once the last grand tour dies now the trust has become irrevocable okay now that doesn't change what happens tax wise Okay so the taxable advance of the trust will still pass through to the grantor's personal tax return it's just that the terms of the trust can no longer be changed so trustees and beneficiaries do not have the authority to change the

[15:17] terms of even a revocable trust okay the grantors do but then once they're deceased that's it that's why it becomes irrevocable because the parties that had the authority to change the terms of the trust are now dead and so it becomes in fact irrevocable okay so those are the the term the key uh aspects of a revocable trust there's others but I don't want to make this you know super super complicated these are the ones to have a working knowledge of as you're

[15:54] building up you know your ability to deal with trusts and Estates as you're thinking about questions to ask your lawyer your accountant in terms of your own finances okay these are the things to to keep in mind okay so that is the revocable trust Okay so the irrevocable trust okay so um again I mentioned my daughter has an irrevocable trust okay so once it was set up her grandmother who was the one who who I mean she didn't literally set

[16:29] it up right she had a lawyer Do It um and and actually I think uh probably her her husband did it you know for her dealt with the lawyers and such but what uh whatever she she was the gr she was The Grand Tour okay once it was set up that was it okay it was it could not be revoked she couldn't say oh I'm so mad at my granddaughter I'm taking that money away from her but couldn't do it the only way to change a an irrevocable trust is to get Court approval and also

[17:06] approval of the beneficiaries okay so just like with a revocable trust an irrevocable trust has at least three parties at least one grantor at least one trustee and at least one beneficiary now by the way it's it's not unusual for the grantor and the trustee to be the same person although not always okay so um it it just depends on what the grantor wants but notice here the trustees approval is not necessary the

[17:41] trustee is essentially a manager so if there is a compelling need to change some aspect of an irrevocable trust the trustee is probably going to be the party who who goes to court representing the Trust In order to explain to the court why the term needs to be changed okay but keep in mind that the trustee cannot do this unilaterally it requires the beneficiary approval now if the beneficiary is a minor so then I'm sure there's more complications that

[18:17] come out of that because as a minor the beneficiary doesn't really have standing and so you know all of that would have to be worked out this you can see pretty quickly why it's necessary to have good legal advice good accounting advice even as a trustee and a knowledgeable trustee okay you're gonna want to be careful about all of these issues and make sure that you're proceeding correctly as many years as I've been dealing with these things I I would never just you know go to court um you know on my own sort of authority as a trustee and petition the court to

[18:52] change the term of a trust without consulting with competent legal counsel without considering the uh tax the the uh yeah tax and other accounting consequences of that change all of that needs to be taken into account even by people very experienced in uh being a a trustee in dealing with trust matters okay so that that's you know the key and that and that's where the sort of irrevocable comes in okay now by the way with a court order and the beneficiary's approval in theory the

[19:29] trust could be revoked okay but that that's pretty pretty unusual the I off the top of my head I couldn't come up with a compelling circumstance where that would be you know where that would be something that the court would entertain although I'm I'm sure they're they're out there I don't want to take your time to you know puzzle over it all right so next is the an irrevocable trust is the less common form of the two Okay so in general the trusts you're going to deal with will probably be revocable trusts okay and that's because of the

[20:07] flexibility right so you can see this is a much less flexible Arrangement and so for people to do this they've got to be very sure about what their objectives are before they create the trust so it's just going to happen less often generally speaking within our when we're making financial decisions having flexibility is a good thing okay but there are situations where um there is you know flexibility is is is not as important as other issues okay now uh next on an irrevocable trust so

[20:46] an irrevocable trust becomes a separate taxable estate it's essentially like a separate person okay so when you think about um a corporations right there's there's two types of Corporations well two two general two general types of Corporations okay there's a C Corp and there's an S corp okay with an S corporation the investors get the protection of the corporation protecting them from liability but financially what

[21:23] happens financially the corporation is passed through to the owners of the corporation okay so the corporation itself is not really it's not a separate taxable estate but with a C corporation and and we all we're all familiar with C corporations even though we don't know it almost every big company we deal with whether it's a t whether it's uh uh Walmart those are C corporations okay so the corporation itself is a separate legal

[21:58] person and a tax return is filed by the corporation okay and whatever the corporation does it it is responsible for the tax consequences of that okay and then as far as the investors are concerned just like with the S Corp they have the the liability protection of a corporation however their benefit in being a shareholder is they get dividends okay now there are there are other but there are other Financial benefits they may get but generally speaking they're going to be paid

[22:33] dividends okay and in fact the profits of that Corporation typically will be will be taxed twice you may have heard of the double taxation of corporations that applies to a C Corp where the C Corp pays taxes on its profit first and then when it um distribute some of that profit to its shareholders in the form of dividends they will pay taxes on those dividends as well okay so with an irrevocable trust it's kind of like that

[23:10] C Corp in the sense that it's a separate taxable entity and it needs to file its own tax return generally now again this is not something that if you're not really knowledgeable about trusts you want to do on your own this is something you want to get legal and accounting advice about okay so the first of all the the tax rate for trusts very different than the personal tax rates okay and you can see by the way below here it's kind of I don't know

[23:45] hopefully you can read it it's in kind of small type so right now there's a federal tax exemption of almost 13 million dollars for individuals and 26 million dollars for married couples Okay so what that means is how the whole tax regime of of trusts work is very complex okay because it also ties in with with uh gift tax laws um there are there are lifetime um exemptions these these exemptions

[24:20] here are lifetime exemptions and so how how much of them have been used up how much can still be applied to the trust all of that has to be taken into account it's it's it's not like you know going on um uh Turbo Tax you know and and and and doing your your personal uh income taxes okay I I'm I don't even know if I don't think Turbo Tax problem I don't think it has a you know a trust um function in it I don't think it has a corporation one either by the way uh C 4.8 uh one and in in any event okay

[24:55] the trust a separate trust has to file its own tax return on the taxable events that happen with respect to the property held by the trust okay so you can see that there's a level of management in a trust if you're a trustee that is more complex than with a revocable trust so if you're if you're an accountant for example uh you know you're going to have more to do for some for some a taxpayer or client I should

[25:31] say who who is uh let's say uh grantor or a trustee of a uh irrevocable trust then you might for someone who has uh a revocable trust because with a revocable trust you're not going to be preparing a tax return for that trust you're just going to be saying you you'll be asked okay what kind of income to do the trust does the trust have did it sell any assets what are the results of those sales did it by any assets right and and you'll be collecting the same information about the trust that you would about your taxpayer and it'll all go together in one tax return so you may

[26:08] have more information but they'll still be only one tax return whereas for a client to you has an irrevocable trust somehow and involved in their finances so you're going to have a whole separate set of of uh tax issues and accounting issues to deal with for that trust as if it were its own person as well as the the private uh uh the personal tax return I should say of of the client now if you're let's say you're in the real estate business there's a big difference between

[26:43] um selling a property for um any I shouldn't say a big difference but there may be a difference to selling a property for an irrevocable trust versus a revocable trust in any event if you're going to be dealing with property held by a trust you have to make sure that the people you're dealing with have the authority to be engaging you to manage the TR you know to man to help you help manage the trust assets so whether you're a property manager whether you're a broker whether you're a

[27:18] mortgage broker uh whether you're an appraiser okay when you're dealing with property held by a trust just because someone calls you up and says hey um will you do this they may not have the authority or at least the authority to bind the trust to pay you okay and and to have you act on behalf of the trust now someone may call you up and say you know I'm disputing something about a trust and I need an appraisal for it but I'm not the trustee I'm I'm not a beneficiary I was and I got kicked out or so whatever it is so that's not to say that you cannot do the

[27:56] specific piece of work the person is asking you to but you need to be careful about who exactly is employing you and what authorities they have in all of that okay so all of that needs to be checked out before you proceed with the engagement okay um so which is better just real quickly because we're we're running short on time here um these are just some questions I'm not I can't tell you which is better like I said in the beginning it depends on your specific circumstances and and and that's something you need to talk to

[28:31] your lawyer and accountant about so are you looking to avoid probate what is your situation with respect to federal estate tax do you want to retain control versus relinquish control right in it with a revocable trust you're going to retain control with an irrevocable trust you're largely relinquishing control is your property going to change okay and and if so do you need the flexibility in order to accommodate those changes these are some of the questions you need to think about and discuss with your advisors

[29:07] before you make a decision about what kind of trust is appropriate for your situation okay so as always here's places you can go to to get help ask questions make comments good or bad um you know tell me if I've gotten my you know tongue over my eye teeth and couldn't see what I was saying correctly uh yes that's as good as the humor gets folks so sorry about that um you know I'll blame it on my daughter she says no no Daddy you're you're your dad humor is funny it's like I I don't think so but in any event these uh these

[29:43] links will be in the show notes after the show posts to our YouTube channel and then we just have you know the sort of legal stuff here I'm gonna go ahead and close out of this to wrap things up so that's the show for today talking about the differences between revocable and irrevocable trusts I hope I hope you enjoyed it hope you got something out of it increase your knowledge of course we can go we could dive ever ever deeper into this and I'm gonna I'm gonna be I'm working to line up some guests so we can have you know lawyers and accountants talk about these things I think that's better

[30:18] um uh that because then you know you're getting it straight from from the experts especially when it comes down to that sort of real granular information so I just want to remind you tomorrow at uh uh 11 A.M Pacific uh 2 p.m Eastern is my show business lessons from the military where we talk about um Doctrine history great leadership in the from the military and how we can apply that to our business lives to make them go better and then on Wednesday is my show uh people making money my guest

[30:55] this week is Brett Henderson he's a Financial Services professional with Strategic Wealth he also has a podcast dealing with veteran entrepreneurship and so I'm looking forward to speaking to Brett a new friend of mine and then of course next week it all happens again on the same schedule so I hope you will join me often and if you want to join the sessions live and interact with me live ask questions have discussions feel free to go to my Eventbrite page the link will be in the show notes and you can you can get a free ticket and

[31:30] otherwise you can always tune in on the various social media to watch the live stream and see the recordings on our YouTube channel youtube.com forward slash at the way to wow show so thank you very much for watching today looking forward to um oh um we've got someone in the waiting room here at the end of the show unfortunately um looking forward to seeing you later this week and wishing you a wonderful West rest of the day and a terrific week take care and Marie Garland You Are My

[32:06] Belle take care everyone