Advisor Enablement Archives

The Role of Conservators, Guardians, Trustees, Executors and Agents in Estate Planning

When creating your estate plan, it’s important to understand the critical roles you may need to name to manage your affairs. Among these roles are conservators, guardians, trustees, executors and agents, each serving distinct functions and responsibilities.

Knowing the nuances and potential intersections of these roles will help guide your decision on whom to choose for each one.

In this article, we cover the tasks of each role, where they may overlap and how you can approach choosing someone to fullfill each one.

What is a conservator?

The court appoints a conservator to oversee the finances of an individual declared unfit to manage their own affairs, thereby protecting those incapacitated due to physical or mental disabilities.

For example, a conservator may be named if a person experiences a sudden mental breakdown, if they become severely disabled, such as paralysis, or have chronic drug use. Well-known cases include Brian Wilson of The Beach Boys or Britney Spears, who both were placed in conservatorships for mental health reasons.

The main responsibilities of a conservator include financial management, such as paying bills, managing investments and ensuring that any financial obligations of the individual are met. A conservator usually retains a lawyer to ensure compliance with court rules, which typically include keeping the court up-to-date on the person’s financial obligations and actions taken.

Most often, a conservator’s responsibilities are limited to financial oversight. But other types of conservatorships include:

General: A conservator has complete oversight over all aspects of a person’s decisions.

Limited: This type gives the conservator control over certain aspects of the person’s life. This may allow a mentally disabled adult autonomy over most aspects of their life but requiring a financial allowance and/or health treatments.

How is a conservator named?

A conservatorship usually begins with a petition being filed with the court. The person who filed the petition, like a family member or parent of an adult child, details why they want a conservatorship. They typically need medical documentation proving that the individual is unable to live independently.

During the scheduled hearing, the court evaluates the evidence and hears testimonies from various parties, including the petitioner, other family members and medical professionals.

If a court approves the petition, it will select a conservator who is willing and able to serve. The person who files the petition may suggest themselves, or they can recommend someone else, but the judge will ultimately decide who is the best person.

How long does a conservatorship last?

The length of a conservatorship depends on the situation. In emergencies, a short-term conservatorship may last about 90 days. In the case of a temporary conservatorship, the length will be determined by the court.

A permanent conservatorship lasts indefinitely. Its length will vary depending on updates from the conservator and the reasons it was established. The court can revoke a permanent conservatorship if it decides it’s no longer needed.

What is a guardian?

A guardian is the person you choose to care for your children if something happens to you. Most often, the term “guardian” refers to a child or minor. The guardian has broad oversight decisions for your child, the same you have as a parent.

A guardian can also be named for an adult. The term is sometimes used interchangeably with “conservator.” The differences are typically that guardianship refers to physical custody of the person, much like the guardian of a child, while a conservator manages their finances.

How is a guardian named?

You can name the guardian for your children in your estate plan. You can name multiple people in order of preference in case the chosen guardian is unable or unwilling to take care of your child.

It’s important to make the decision carefully. Consider whether you trust them to raise your children according to their wishes, provide for them financially (especially regarding your estate’s assets) and the quality of life they’d be able to provide.

You should always talk to the person you’re choosing to make sure they’re willing to take on the responsibility. Failing to discuss your choice may result in their refusal to serve as your children’s guardian. If this occurs and no alternate guardians are named, the court will decide. Usually, this will be the closest family member, like a grandparent, uncle or aunt, based on the court’s assessment.

The decisions you make today are not set in stone. You can update your estate plan at any time if you have a falling out with the named person or if they pass away.

What is an agent in estate planning?

An agent is the person you name in your Financial Power of Attorney (FPOA) or Advance Health Care Directive (AHCD) to make decisions on your behalf if you become incapacitated.

The term “agent” may refer to someone who can make medical or financial decisions for you, should you not have the capacity to do so.

You can provide the agent with broad or limited powers over decisions, such as overseeing only specific financial decisions or transactions. It’s usually recommended that when creating your Financial Power of Attorney and Advance Health Care Directive that you be as specific and comprehensive as possible in what decisions they can make on your behalf. Otherwise, there’s a risk that their ability to make decisions for you could be delayed or negated due to vagueness or a dispute from another party, like a family member, hospital or financial institutions.

How is a Financial Power of Attorney or healthcare agent named?

You are able to name these people in your Financial Power of Attorney and Advance Health Care Directive documents.

You can update or revoke these documents if you wish to name someone else in the future.

How does a power of attorney agent interact with a guardian or conservator?

Naming a power of attorney gives you a significant level of control over who will make decisions for you if you become incapacitated—without having to go to the courts.

The agent may even eliminate the need to name a guardian or conservator for an adult. This can simplify the process of managing decisions during incapacity.

However, if there are any disputes about the scope of the power of attorney’s role, or if they were only granted limited decision-making authority, a court may still step in to name a conservator or guardian. Still, the agent(s) you named may still be able to help guide the court’s decision during hearings.

What is a trustee?

A trustee is a person (or corporate fiduciary like an investment firm or bank) who you name to be responsible for managing the assets held by your trust.

They manage the assets that you have placed in the trust, such as cash, stock or investment accounts or your home. They must make decisions about how to protect and grow the value of those assets.

They also oversee the distribution of those assets in the trust according to the terms you have set. This may be making direct payments to beneficiaries or allocating resources for specific purposes, like school tuition.

They must also maintain accurate records of all transactions and actions they take as well as periodic reports about the performance and status of its assets. The trustee may also be responsible for filing and paying taxes for assets in the trust.

How is a trustee named?

When you create a trust, you name the person in the trust document itself. You (the grantor) can designate either individuals, like a family member, or an institution, like a bank, to serve as trustees.

If you prefer to choose an individual, you should consider a few factors, including their financial acumen, trustworthiness and willingness to take on the responsibilities. It’s important to make sure the person you choose doesn’t have any conflicts of interest. This will help maintain trust in their decision-making.

If you don’t have any family or close friends who you believe have the financial knowledge needed to manage a trust, then you can choose to have a bank or trust company act as the trustee.

In the case that the trustee is unwilling or unable to serve, the court may appoint one based on the laws of your state and needs of the trust. This is why it’s important to choose someone carefully and discuss the decision with them.

How does a trustee interact with a conservator, guardian or power of attorney agent?

There is likely to be overlap with a trustee and a conservator, guardian or an agent under a power of attorney. Since a trustee is only managing assets held in a trust, they will likely need to coordinate with any of these roles that may need to access those assets.

For example, if you die and the guardian you named in your estate plan is now caring for your children, your trustee will manage any distributions from the trust pertaining to the care of your children. How so depends on the terms of your trust.

If you specify that your children receive a set amount every year from the trust, the trustee must coordinate that distribution with the guardian. If you specify that the trust pay your child’s tuition, that must also be coordinated with their guardian.

This scenario is similar for conservators or power of attorney agents. If a person is under conservatorship, the conservator would coordinate with the trustee to manage any distributions for the benefit of the person.

Similarly, a trustee may collaborate with a power of attorney agent to ensure alignment on any actions under the terms of the trust.

What is an executor?

Your executor is the person you name who is in charge of administering your probate estate after you’re gone. This person is responsible for collecting your assets, paying your debts and distributing your probate estate to your beneficiaries.

Because property passing through a trust or beneficiary designation would typically avoid probate, such property would not typically be managed by an executor.

How is an executor named?

You can name your executor in your Last Will and Testament. If you have a trust, you are able to name your executor in your Pourover Will.

While having a trust in place typically avoids the probate process, anything left outside of the trust may go through the probate process so it’s important to still have a will in place, and have an executor named.

As with other important estate planning roles, it’s important to choose your executor carefully. It should be someone that you trust to both follow the wishes you’ve laid out as well as navigate the probate process, including the financial and legal aspects.

It’s always recommended that you talk to the person before you name them to make sure they are willing and able to serve as your executor. While they may want to consult with an estate attorney and/or financial professional during the probate process, it’s important that they understand the responsibilities.

If you don’t name someone, the person refuses or the person you named dies, the court will appoint an administrator. This typically begins with a surviving spouse or other close adult family members.It’s important to review your will periodically to make sure the person you have named is still the right choice. You are able to update your will if you wish to name a different executor because you may no longer trust the person you originally named, if they are no longer living or if you just have a change of heart.

How does an executor interact with a conservator, guardian, trustee and power of attorney agent?

While managing the probate process, the executor will likely need to coordinate with various role, including a conservator, guardian, trustee and/or power of attorney agent. For example, if you were under a conservatorship when you die, your executor will likely need to work with your conservator to administer distributions and other management aspects the conservator was involved in.

An executor would coordinate with a guardian you named for your minor children when it comes to managing their inheritance and how it’s distributed.

If you have a trustee, meaning you have a trust in place, the executor is likely overseeing the probate process for assets that were left outside of the trust which the trustee is not managing. However it’s possible they will still need to coordinate on distributions, debt collections or other aspects of your estate. If a power of attorney was used prior to your death, your executor might consult with your agent about any ongoing financial obligations or other considerations that were in place and should be considered during the probate process.

Can a conservator, guardian, trustee, executor and power of attorney agent be the same person?

Yes, the roles of a conservator, guardian, trustee, executor and agent under a power of attorney can be fulfilled by the same individual. As noted above, naming an agent in a Financial Power of Attorney and/or Advance Health Care Directive may negate the need for a court to name a conservator—or streamline the process of naming one—should the situation arise.

However, when creating your estate plan you can decide that the trustee of your trust, the guardian of your children, the executor of your will and the agents you name in your FPOA and AHCD documents are all the same person.

For example, you could decide that your sibling is whom you want to take care of your children if you die, make financial and health decisions if you become incapacitated, manage your trust and over see any probate process when you pass.

If you do arrive at that decision, make sure you understand the nuances of each role and that you trust one person to do it all, should it become necessary. While having a single person assuming all those responsibilities could simplify things, there is the risk that it could be too much for them to take on which could create issues.

Whomever you decide to name in these roles, creating an estate plan is critical to ensure that your wishes are carried out by the people you prefer and to minimize the need for the courts to make those decisions for you.

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Everything You Need to Know About Credit Shelter Trusts

If you’ve wondered if your client needs a Credit Shelter Trust, this episode details their value in estate planning. Hosts Anne Rhodes, Thomas Kopelman and David Haughton discuss why Credit Shelter Trusts are designed for estate tax planning, specifically to preserve the estate tax exemption for spouses. They go into the different ways Credit Shelter Trusts can be structured and the potential downsides of using one. They also touch on Survivor’s Trusts and why flexibility in estate planning is so important.

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What is Probate, and How Can You Avoid It?

If you have any experience with estate planning, you’ve heard about probate, most likely in the context of avoiding it.

But what is probate, exactly? And why is it often a “dirty” word in estate planning? In short, it’s the legal process that plays out after you die. It’s often recommended you avoid it because it can take time, it can be costly and it’s usually a public process.

That said, probate isn’t always something you need to (or can) fully avoid. But there are ways to ensure the process is, at the very least, streamlined. Typically, this is done by creating a Last Will and Testament or funding a Revocable Trust.

In this article, we break down what probate is, what you need to know and how a will and trust impacts the process.

What is probate and how does it work?

Probate is the legal process involving a court after someone dies to oversee the administration and distribution of the assets in their estate. Assuming the person has a will in place, the typical probate process includes:

Filing the deceased person’s (the “Testator”) will with the court to validate it.
The court officially appoints the executor (sometimes referred to as a “personal representative”) named in the will.
The executor takes an inventory of all assets in the estate. Some states also require a formal appraisal of all, or certain, assets.
The executor notifies any creditors and beneficiaries about the person’s passing as well as the existence of the will and the probate process.
All outstanding debts brought forward through creditor claims, such as credit card balances, are paid by the executor from the estate in addition to filing and potentially paying income and estate taxes.
The court resolves any disputes or disagreements among beneficiaries.
Finally, all remaining assets in the estate are distributed by the executor to the beneficiaries named in the will and they submit a final report to the court to close out the estate.

Voluntary administration for smaller estates

For smaller estates, many states offer an expedited process sometimes referred to as “voluntary administration.” This allows for a simplified, less formal process but still requires court oversight.

There may be fewer steps involved and it can be more of an administrative process than a legal one.

While voluntary administration can be a less complicated process, it is still technically considered probate.

How probate works without a will

The steps above are how the probate process plays out if there’s a will in place. Without a will in place, it will follow similar steps but is likely to be even more complicated and drawn out.

Dying without a will is known as intestate. If a person dies without a will, their assets are distributed according to their state’s intestacy laws, a process overseen by the court. Typically, this will follow the hierarchy of familial relationships, prioritizing spouses and children first, then parents or siblings and so on.

When someone dies intestate, the court appoints an administrator to manage the estate in place of an executor named in the will. The court may choose to appoint a surviving spouse or close family member but it is ultimately the court’s decision.

Reasons to avoid probate in estate planning

There are three main reasons you should avoid probate or at least streamline the process as best as possible: it can take a long time, it can be costly and it’s a public process.

How long does the probate process take?

Courts are notoriously slow. Probate can take months or even a year—sometimes even longer. Anyone with an interest in the estate can contest it. Even those that aren’t named in the will, but believe they should have been, may be able to contest it if they claim the will was created fraudulently or under the influence of someone else.

There is also a mandatory notice period for creditors that often lasts around six months. During this time, creditors are able to come forward and file claims against the deceased person’s estate. Assets typically cannot be distributed to beneficiaries until this process is completed.

Even if nobody contests the will and the process is as smooth as possible, it’s likely to take at least a few months before beneficiaries receive any assets.

How much does probate cost?

Probate can be an expensive process and the costs can reduce the value of the estate, ultimately leaving less to pass onto the beneficiaries.

Potential costs include attorney fees, court filing fees, executor or administrator fees and asset appraisal fees. Additionally, there could be costs associated with filing tax returns or selling property or assets, if necessary.

For smaller estates, especially, even moderate probate fees can eat into the estate’s value, seriously cutting into any inheritance designated for beneficiaries or even for charities.

Is probate a private process?

The probate process is often a public one. This is true even if you have a will because they must be filed with the court. That means that everything contained in the estate and/or the will becomes part of the public record, including who inherits what, the value of the state, debts and liabilities and even any family disputes.

Most people probably don’t want much of this information public, and doing so could create further complications. For example, making details of the estate or will public could invite people to contest its details.

Trusts, on the other hand, typically keep these details private, though there are exceptions detailed below.

How can you avoid probate?

In short, having a Revocable Trust is the most likely way you can avoid probate.

Assets passing through a will almost always need to go through probate. That’s because it’s a legal document that doesn’t actually have any legal effect until you die and then a court signs off that it’s valid.

Having a Revocable Trust, on the other hand, is like having a legal agreement with yourself to hold assets in the name of the entity. If you then transfer assets to that entity, that agreement dictates what happens to those assets when you die, not the court. Meaning, you will likely bypass probate by having a fully funded trust.

However, there are other ways to avoid probate as well. If assets pass to an individual automatically as a result of a beneficiary designation or joint ownership with rights of survivorship, these assets likely will avoid touching the probate process.

Common probate pitfalls

While having a Revocable Trust means your estate is likely to avoid probate, there are still situations where you risk entering probate with a trust.

The most common risk with a trust is that it’s not funded properly. If any assets aren’t properly transferred into the trust, those assets may go through probate.

One common example is out-of-state properties, which are often overlooked when funding a trust. If you own real estate in any other state(s) than where you legally reside, those properties may require a separate probate process. This is known as ancillary probate.

Revocable Trusts are often paired with a Pourover Will to “catch” assets not in the trust. But just like a Last Will and Testament, the Pourover Will must go through the probate process, along with any assets it “catches.”

Is it best to choose a will or trust to avoid probate?

While probate can come with some significant drawbacks—associated costs, time delays and a loss of privacy about the details of the estate—it doesn’t necessarily mean it should be avoided at all costs.

While a will is subject to probate, it still may be a valid choice for many people. It’s a simpler and more straightforward process to create one, and in some states it may be more cost-effective than a trust.

A will also allows you to name guardians, detail how assets should be distributed and name an executor that you trust to manage your estate after you pass.

A Revocable Trust, on the other hand, can cost more upfront. It also involves funding the trust with your assets, and may involve retitling certain assets like your home. If it’s set up and funded properly, however, you’re more likely to bypass the probate process.

A will likely makes sense if you have a smaller estate or aren’t concerned about aspects of probate, like delays or privacy issues. Otherwise, a trust is the best choice to avoid probate.

No matter the case, everyone needs a will. As mentioned above, if you create a trust then you’ll typically have what’s called a Pourover Will, which is a will that directs all assets to the trust in the event a probate is necessary for any assets. This type of will acts as “clean-up” in the case assets inadvertently did not get funded to the trust.

Ultimately, the decision for which type of estate planning document you want also comes down to associated costs of funding a trust at the front of the process versus paying probate costs out of your estate after you pass. Either way, having a Last Will and Testament or a Revocable Trust in place is always recommended to streamline the probate process or avoid it altogether.

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Individual vs. Joint Trust: How to Decide Which is Right for You

So you and your spouse, or partner, are creating your estate plan for the first time. Early on in the process, you’re likely to be faced with the decision of setting up a single Joint Revocable Trust or separate Individual Revocable Trusts.

Knowing which is best for you both may not be immediately obvious, and you should take the time to understand the differences between the two to come to a decision.

There are a lot of factors you should consider, including:

Your estate planning and legacy goals and wishes
Your family situation, e.g. if you have previous spouses or a blended family
If separation or divorce is a concern
If asset protection from creditors or legal issues is a concern
If you and your partner are legally married or not

The article below digs into these factors as well as the pros and cons of each type of trust to help you make an informed decision about your estate plan.

First, do you need a trust?

If you’re not sure if you should have a trust in your estate plan—let alone choose which type of trust—here are a few reasons why you should consider having one in place:

To avoid probate. Trusts help bypass the probate process, which can be lengthy and costly, so that your assets are distributed quickly and privately.
To protect and control asset distribution. Trusts provide a way to protect assets from creditors, lawsuits (like divorce), and even from mismanagement by beneficiaries by providing specific instructions for how assets are distributed to them. The grantor (the person who sets up the trust) can include further instructions for how their assets in the trust should be distributed and to whom.
Planning flexibility. Trusts can be tailored to meet a number of goals and wishes, from providing for children or those with special needs to laying out how a business you own should be dealt with after your death.
Tax efficiency. Depending on the trust and how it’s structured, you may be able to minimize estate and gift taxes, leaving more of your assets to pass onto your beneficiaries.

It should also be noted that this article is focusing on revocable trusts. As the name suggests, a revocable trust can be “revoked” or updated by the person(s) who set it up. Sometimes referred to as “Living Trusts,” they allow for more flexibility in your estate planning, especially if you expect your situation to change in the future.

An irrevocable trust, on the other hand, cannot be easily revoked or changed. However, an irrevocable trust—and there are multiple types—are often used for greater asset protection and tax strategies, as assets placed in them can be removed from your taxable estate. Though this could often result in the grantor losing control of those assets placed in the trust. Irrevocable trusts are also often used by those with more complicated and/or high-net-worth estates.

That said, revocable trusts are a great vehicle for many people due to their flexibility and ability to both help avoid probate and provide a seamless transfer of assets upon your death.

As a couple, your next decision is whether to create and maintain separate trusts or create one together. Below, we go through some factors that can help you decide what is best for you and your spouse or partner.

What is the difference between an individual trust and a joint trust?

If a couple opts for individual trusts, each person will create their own trust separately. This means both you and your significant other will maintain control over your respective trust, allowing each of you to independently manage your assets. Each person is able to determine how their assets are distributed, name their own beneficiaries, and set specific terms for how their trust is managed.

Alternatively, a joint trust is a single trust set up by both of you together. Assets are combined into one entity and managed jointly by you and your significant other. This represents a unified estate plan for your shared financial goals and intentions.

What are the pros and cons of an individual trust?

Just because you are married, or in a committed relationship, it doesn’t necessarily mean a joint trust is the right, or best, decision for you.

Individual trusts allow each spouse or partner to have control over their assets and their estate plan. Having separate trusts could make sense for couples that may differ in their approach to who should control which assets or how those assets should be distributed after their respective deaths.

You may also want separate trusts if you have concern over how your spouse or partner may handle certain assets after you pass.

Here are some factors that you should consider about an individual trust:

Strengths of an individual trust

1. Simple administration upon death

With an individual trust, asset administration becomes more straightforward upon death. It reduces confusion because the assets are already segregated between you and your deceased spouse. This helps streamline the process of transferring assets to the beneficiaries named in the deceased spouse’s trust.

2. Separate control over your estate plan

If you and your significant other prefer to have separate control over your assets, an individual trust allows for that rather than tying assets together in a single trust. This could be a benefit for those that may have previous marriages or children from a prior relationship and want to manage assets for those beneficiaries separately. It can also be a benefit in case you separate or divorce, since your estate plans are already separated and can help protect assets in any potential legal proceedings.

3. Allows for certain spousal gifting strategies

Individual trusts can simplify certain financial strategies, such as gifting assets to your spouse or significant other. For example, if one spouse needs to qualify for Medicaid, their assets can be moved out of their name and into the other spouse’s name. This allows one spouse to qualify for Medicaid benefits while still protecting the assets of the healthy spouse. It should be noted in the Medicaid example, however, that laws differ by state and you’ll want to understand the laws in your state if this may be a priority for you both when creating your estate plan.

4. Asset protection in certain situations

Individual trusts may protect assets in situations where one partner is exposed to legal or financial risks. By keeping assets separate, this could shield the other spouse from exposure to creditors or lawsuits.

5. Greater flexibility for beneficiaries

Individual trusts create more flexibility for couples that may have blended families or differ in their goals for how their assets should be distributed. Each person can structure their estate plan to suit their individual goal without needing to compromise the other person.

Weaknesses of an individual trust

1. Complexity during life

Having two separate trusts can certainly create complications for you and your partner. Especially if you want to keep the balance between both relatively equal. Doing so requires frequent monitoring and adjusting, which could be more time-consuming compared to a joint trust.

2. Higher administrative costs

Creating two separate trusts could result in higher legal and management costs. Each trust also requires its own documentation and could result in separate tax filings, which could create additional costs over time.

3. Potential for conflicts in decision-making

With each partner or spouse having full control over their own trust, this could lead to conflicts if both of you are not completely aligned on your financial and estate planning goals. This could be about which assets are put into each trust, if the trusts are equally balanced (or not), or if changes should be made to one, or both, of the trusts.

What are the pros and cons of a joint trust?

Creating separate individual trusts could require more oversight and frequent adjusting, but it could also lead to more streamlined decision making and execution upon death.

That said, a joint trust may require less management while you’re alive but it could create more complications at death or if you and your significant other were to separate.

Here are some factors to consider about a joint trust:

Strengths of a joint trust

1. Simplified and convenient asset management

Unlike needing to manage two separate trusts, you and your significant other will have all assets consolidated into a single trust. This helps reduce the paperwork and complexity of managing multiple trusts and also streamlines the process of moving assets into a single trust. If you want to make updates, it’ll be easier to do with a single trust versus separate ones.

2. Reflection of shared goals

A joint trust provides a cohesive estate plan that reflects the financial plan of both you and your spouse. It helps both partners agree on a single approach for how assets are to be distributed and aligns legacy planning.

3. Easier administration upon death

A joint trust creates a smoother transition of assets when one partner dies. With assets already consolidated and clearly designated, it creates even more protection from probate and allows for a smoother transfer process to the living spouse and/or beneficiaries.

4. Fosters clear communication

With a joint trust, both partners need to be on the same page. While that could cause some tough conversations up front, before the trust is created, it helps foster open and clear communication about what your shared goals and wishes are. It also creates transparency in handling shared finances.

Weaknesses of a joint trust

1. Complications in the event of divorce or separation

A joint trust can be problematic if you get a divorce, or decide to separate, since both of your assets are combined in a single legal entity. This can make dividing those assets time-consuming and, potentially, costly due to legal disputes. This can all be compounded if there’s a blended or complicated family situation.

2. Conflict due to differing estate planning goals

While creating a joint trust can help open up communication between you and your spouse, it can also lead to conflicts if you’re unable to resolve differences. For example, you may have a dispute about leaving assets to children from a prior marriage or which of your children should receive a certain family heirloom. Both of you must agree on the terms of the trust and it creates the possibility of opening up disagreements.

Even after a joint trust is established, you must both agree on any updates or changes you’d like to make. If one spouse wants to make an update, but the other disagrees, this can obviously create a conflict.

3. Potential lack of asset protection

Unlike two individual trusts which can help shield assets if one spouse runs into financial or legal issues, a joint trust means your pooled assets are potentially at risk in these situations.

Further factors and considerations when choosing a trust

Beyond these pros and cons for each type of trust, there are other factors that you should consider when deciding which is best for both of you.

These include:

Estate size and complexity: Larger estates or those that may involve more complex needs or distribution rules may benefit from individual trusts while a joint trust may be preferred for simpler estates.

Blended families or previous marriages: If you or your partner have previous spouses or children from a prior relationship, you may opt for individual trusts to separate control over certain assets.

For example, if you and your spouse have a joint trust and after one of you passes, a family member is upset that they are not named as a beneficiary, or are unhappy with the terms of the trust, they could try and contest it in court. If they are successful, that could throw out the entire trust for the spouse that’s still alive.

Your goals for managing your estate and finances: Some couples prefer to manage their finances jointly, while others prefer to do so separately. That doesn’t mean your estate planning needs to match but you should consider if you and your partner prefer to keep things separate or want to manage your estate together.

The state where you live: There may be nuances depending on the state where you live that could affect whether a joint or individual trust is the best choice. For example, if you live in a community property states—meaning assets acquired during marriage are jointly owned by both spouses, regardless of which person actually is named on the title or earned the income—a joint trust may make the most sense.

Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is also a community property state but only if both spouses opt in through a community property agreement.

Furthermore, how your state deals with estate tax may impact your decision to have joint or individual trusts. An example would be in a state like New York, which has a state estate tax that’s separate from the federal estate tax. Individual trusts may make sense in this case so that each spouse’s estate is able to use their full estate tax exemption. With a joint trust, you may forfeit some of those tax advantages because assets become blended between you both.

Whether you’re legally married or not: For those that aren’t legally married, a joint trust could complicate issues—especially if you and your partner don’t or can’t file joint tax returns. If you each need to file separate, individual tax returns, you’ll need to keep track of the income generated in the trust separately.

This can lead to tax reporting and accounting complexities, particularly when it comes to dividing trust income, capital gains, or deductions because each person must accurately report their portion of the earnings. Furthermore, having a joint trust can blur the lines of ownership which could complicate the issue even more.

Should you choose individual trusts or a joint trust?

Ultimately, the decision comes down to your goals and wishes each of you have.

If you have a simple estate, have no concerns about divorce or separation, and are in agreement with how your assets should be managed while living and after death, a joint trust is likely a good choice.However, if your estate is complex, your assets are considered high- or ultra-high-net-worth, you prefer to manage assets separately from each other, or have different views on how certain assets should be distributed, creating separate individual trusts may make the most sense.

You and your partner should sit down and discuss these with each other, and understand how you each want to approach legacy planning. It’s always recommended that you also discuss these factors with your financial advisor, CPA and/or an attorney in your state to help weigh the pros and cons against the financial plan you already have.

Also remember, both types of trusts are revocable—meaning they can be undone. While doing so could be messy depending on the terms of the trust, it’s something that can be done if needed.

If you want to learn more about the difference between individual and joint trusts, and how to approach choosing one, listen to this Practical Planner episode.

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What to Know About Naming a Trust as a Beneficiary of Your Retirement Account

A critical part of estate planning is deciding how to distribute your retirement assets, such as IRAs or 401(k)s. You can name either individuals or a trust as beneficiaries of your retirement accounts. This strategy can offer certain benefits, particularly in terms of control and protection, but it also comes with potential tax implications and administrative complexities. That’s why those considering naming a trust as a beneficiary should approach the decision very carefully.

That said, the decision ultimately comes down to what your goals and priorities are. So it’s important to consider the potential benefits and disadvantages of naming a trust, and how that may affect your overall estate plan.

In this article, we explain all you need to know, including pros and cons of naming a trust for your IRA, to make the most informed decision you can.

What are the benefits of naming a trust naming a trust vs. individual as an IRA beneficiary?

There are a number of reasons why you may want to choose a trust as your IRA beneficiary. But, the main reasons are usually about exercising control over how the assets are distributed and to provide potential protection from creditors.

Here are a few reasons why it may make sense for you:

1. Control over the distribution of assets

If you have beneficiaries who are minors, have special needs, or lack financial responsibility, naming a trust provides more control over how retirement account assets are distributed. You can specify conditions in the trust, such as age milestones for access, specific uses for the funds, or annual withdrawal limits.

2. Protection from creditors or divorce

A trust can act as a barrier from potential creditors, lawsuits, or divorce proceedings. Naming a trust as the beneficiary can help prevent the funds being accessed in those types of situations.

3. Multi-generational wealth preservation

A trust can be used to help preserve assets from a retirement account for future generations, such as children or grandchildren, by staggering the distribution over many years.

4. Managing complex family dynamics

If you have a complex family dynamic, such as a previous spouse, children from previous relationships, or estranged family members, naming a trust as the beneficiary can ensure assets are distributed according to your wishes if there are any family disputes, rather than being distributed according to default state laws.

5. Centralizing asset management

Naming a trust can be part of a strategy to consolidate multiple types of assets under a single entity, making it easier for a trustee to distribute according to your wishes, as well as handle any other administrative tasks or investments. This may be particularly relevant for those with larger estates or managing multiple beneficiaries.

Even if any of these reasons are a priority for you, you should still understand the potential disadvantages of naming a trust before following through, if only to make sure you fully understand the decision and you’re not hit with any surprises.

What are the disadvantages of choosing a trust as your retirement account beneficiary?

The primary drawback of naming a trust as a beneficiary of an IRA or 401(k) mainly has to do with taxes. Trusts don’t typically enjoy the same tax advantages of an individual. For instance, it’s much easier for a trust to hit the top tax bracket—37%—than it is for an individual.

Here are some common disadvantages of naming a trust as a beneficiary of your retirement account:

1. Trusts have higher tax rates

Because trusts have more “compressed” tax brackets, they reach higher tax rates at much lower income levels than individuals—hitting the highest rate at just $15,200 of income. This risks reducing the amount passed onto the people named in your trust as beneficiaries.

It’s important to note, however, that there are ways to get around having the trust pay the taxes (more on this below).

2. Less flexibility

Once you name a trust as the beneficiary, changing it later could prove complicated—though not completely undoable. But, remember, trusts are legal entities that include special instructions and may have limited ability to adapt to beneficiary needs, law changes, or just your overall wishes, especially if it’s an Irrevocable Trust.

3. Risk of mismanagement by the trustee

A trust requires you naming a trustee, someone to oversee its management, including the distribution of funds and other administrative tasks. While a trust includes special instructions, some may not be “codified” and may be left as recommendations the trustee should follow but isn’t required to follow.

While the trustee should be someone you trust to manage everything, there is always the possibility that someone that’s inexperienced or has conflicted interests may not do so effectively.

4. It can introduce numerous complications

Naming a trust as a beneficiary, unlike a person, can complicate how funds are withdrawn and taxed. These rules vary by the type of trust, making it difficult for an inexperienced trustee to manage without help from professionals like attorneys, financial advisors, or tax experts..

Again, these are just a few potential drawbacks. It’s also important to dig into a bit more about taxes, withdrawal rules, and the impact of 2019’s SECURE Act.

How the SECURE Act of 2019 impacts naming a trust as a beneficiary

2019’s SECURE Act made major changes to inherited retirement accounts, with the IRS issuing its final regulations in 2024. These had some major implications on how One of the biggest updates is that many who inherit a retirement account would be subject to the 10-Year Rule and required minimum distributions (RMDs). This rule also applies to trusts in most situations. Here’s what you need to know about navigating these changes.

Loss of the “stretch” rule

Previously, most trusts could stretch retirement account distributions over a beneficiary’s life expectancy. However, the SECURE Act now limits this period to 10 years, creating potential tax challenges.

Trustees face a decision: either spread withdrawals over the 10-year period or take smaller required minimum distributions (RMDs) annually and withdraw the bulk in the 10th year. Both strategies risk higher tax brackets because the IRA or 401(k) must be emptied by the end of the 10 year period.

In some cases, a 5-year rule may apply instead of the 10-year rule, which could present even greater tax disadvantages, depending on the type of trust.

When the 5-year withdrawal rule applies

The 5-year rule may apply in the following circumstances:

1. Non-designated beneficiaries. If you name a non-designated beneficiary, such as a charity or estate when the account owner dies before their RMD age, and the beneficiary does not qualify for the 10-year rule.

2. If the trust does not qualify as a “see-through” trust. A trust must meet certain conditions to be considered “see-through.” If not, the 5-year rule may still apply.

How to avoid the 5-year withdrawal rule

To avoid the 5-year withdrawal rule, the trust being named as the beneficiary of an IRA or retirement account must be considered a “see-through” trust. If it is considered a “see-through” trust, then the 10-year rule will apply, per the SECURE Act (again, the “stretch” rule would have applied prior to the SECURE Act).To be considered a “see-through” trust, it must meet four requirements:

1. The trust must be valid under state law.

2. The trust is irrevocable or becomes irrevocable at the death of the grantor (the person who set up the trust).

3. The beneficiaries of the trust are identifiable.

4. The trustee has provided the custodian of the retirement account with the trust document by October 31 of the year that follows the grantor’s death.

Once the trust has been established as the “see-through” trust, it must then be determined what the payout period is for the IRA based on the underlying beneficiaries. This depends on whether the trust is a conduit trust or an accumulation trust.

Here are the differences between the two:

Conduit Trust: This type of trust requires that all IRA distributions are paid directly to the trust beneficiaries. The IRS looks at the life expectancy of the beneficiary to determine RMDs, but under the SECURE Act, these distributions must still follow the 10-year rule in most cases.

Accumulation Trust: This type of trust allows IRA distributions to be retained in the trust for further management and control. However, the IRS considers the age of the oldest trust beneficiary to determine the applicable RMD period, which could also be within the 10-year window.

Why do these withdrawal rules matter?

The major disadvantage of the new 10-year rule is that it can have a significant impact on the trust’s taxable income, thereby risking reaching a higher tax bracket. If the trust is subject to the 5-year rule, it’s an even bigger disadvantage.

These new rules—the 10-year withdrawal period and mandatory RMDs—also apply to some individuals named as beneficiaries. We detailed some potential scenarios in another article.

However, they don’t apply to spouses named as beneficiaries. Another major advantage of naming a spouse is that they are able to roll over any inherited IRAs or 401(k)s into an account in their own name.

Can a person pay the taxes instead of the trust?

Trusts reach the highest marginal tax rate on income much faster than individuals. However, if the trustee distributes income to the trust’s beneficiaries, those individuals can report the income on their personal tax returns, potentially at a lower tax rate.

This approach is often possible with a Grantor Trust. In this context, however, the trust would not be considered a Grantor Trust since the grantor would be deceased. For other types of trusts, avoiding trust tax rates requires specific provisions in the trust agreement. The trustee must have the authority to distribute the trust’s income directly to the beneficiaries and issue a Schedule K-1 (Form 1041).

Trustees might choose this strategy when the beneficiaries’ personal tax brackets are lower than the trust’s tax brackets, optimizing tax efficiency. This decision must be weighed carefully, considering the beneficiaries’ financial circumstances and any potential conflicts.

In such cases, the trustee can issue a Schedule K-1 (Form 1041) to the beneficiaries, allowing them to report the income on their personal tax returns.

These details must be correctly set up in the trust before it is named as a beneficiary to avoid unintended tax consequences.

So while it’s possible to avoid the tougher trust tax rates, doing so still involves nuances and potential complications. That’s not to say that it should deter you from this strategy but it’s important to understand the nuances and that it may be best to consult with an estate attorney when setting up your trust if naming it as an IRA beneficiary is your intention.

So should you name a trust as a beneficiary to your IRA or 401(k) or not?

There isn’t a right or wrong answer. As detailed above, there are valid reasons to name a trust as the beneficiary of your retirement account. And there are reasons you may not want to.

In most circumstances, it may be best to name a spouse as the primary beneficiary because they are not subject to the SECURE Act’s 10-year withdrawal rule or the mandatory RMDs. And they are able to roll over any inherited accounts into an account under their own name—meaning it’s not counted as taxable income.

Ultimately, the decision usually comes down to control versus tax and cost efficiency. If having control over how the retirement assets are distributed is a major concern and you care less about maximizing the amount, then naming a trust may make the most sense. However, if you want to maximize the amount that passes onto your beneficiaries and don’t mind there being less control over how those beneficiaries receive and/or use the funds, naming them directly likely makes the most sense.

Either way, it’s a crucial decision and one that should be made carefully. It’s always recommended that you work with your financial advisor or a tax professional to approach the decision that makes the most sense for you and your situation.

Utilizing the Doubled TCJA Exemption before the 2025 Sunset with Chris Nason

In the latest episode of The Practical Planner, Anne Rhodes and Thomas Kopelman sit down with Chris Nason, a partner at McDermott Will & Emery LLP and a Trust and Estate Planning teacher at Stanford University. Chris provides a deep dive into The Tax Cut and Jobs Act of 2017, sharing insights on how advisors can craft effective estate planning and tax strategies before its benefits sunset at the end of 2025.

Don’t miss out on this valuable discussion to help you stay ahead in advising your clients.

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Where Estate Planning Fits Into Life Planning

Justin Castelli, Founder of RLS Wealth, joins hosts Anne Rhodes and Thomas Kopelman to talk about how his approach to financial planning has shifted to focus on life planning by placing a focus on his clients’ life goals and values at the center rather than focusing on the numbers first. By helping clients figure out what their authentic life looks like and how to achieve it, he believes it brings more clarity to the estate planning process. Check out this episode to hear how he helps clients figure out what’s most important in their lives and how that helps them plan for what happens when they pass.

For any questions, email us at [email protected].

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Wealth.com Announces Family Office Suite™: Cutting-edge estate management for highly complex estates

Today, we’re announcing our Family Office Suite™, our cutting-edge collection of technologies for highly complex estate plans. These new features empower financial advisors to visualize their clients’ estate plans, model out potential scenarios and optimize for tax alpha. This is a major step forward in helping advisors reduce manual efforts and scale their estate planning services while providing greater clarity for their clients.

Family Office Suite™ introduces new features into the wealth.com platform while establishing the connectivity between existing features to seamlessly collect, structure, model and visualize all information in a clients’ estate plan, culminating in an elegant, personalized and co-branded client deliverable.

Over 400+ wealth management institutions already trust Wealth.com to elevate their estate planning services. Now, they can rely on our modern approach to estate planning, built with revolutionary technology, for a better way to manage their clients’ estates, even for the most complex plans, especially high-net-worth (HNW) and ultra-high-net-worth (UHNW) households.

With Family Office Suite™, advisors gain the ability to:

Visualize the complex.New capabilities like EstateFlow™, Irrevocable Trust One-Pagers, and the Heritage Map empower advisors to make estate planning tangible and easier to understand. These tools bring clarity to intricate topics such as sub-trust distributions, estate and GST tax exposure, and administrative cost modeling.

Quantify tax alpha. Estate tax calculators and scenario analysis capabilities give advisors the ability to quantify tax implications and identify tax optimization opportunities.

Organize and collaborate. Advisors can simplify data collection by leveraging the wealth.com Vault and Ester™ AI to instantly extract and centrally store all key information from estate planning documents. Collaboration is further enhanced between advisors, in-house specialists and important intermediaries through in-app tooling and direct API integrations with leading CRM and Portfolio Management systems.

Deliver refined reports. Financial advisors can create the ultimate client deliverable, in seconds, using the Report Builder. Wealth.com does the heavy lifting by transforming all underlying client data into ready-made visuals and slides. All reports can be firm-branded, complete with custom colors, fonts and logos.

“As we advance our product roadmap, particularly for advisors serving high-net-worth and ultra-high-net-worth clients, we are committed to transforming all aspects of the estate planning service model to be a more efficient and effective process,” said Danny Lohrfink, chief product offer and co-founder of Wealth.com. “The Family Office Suite not only elevates the client experience but also unlocks greater productivity for advisors—what used to take weeks now takes mere minutes. ”

Learn more here.

Ready to provide your clients unparalleled clarity and insight on their estate plans? Get a demo.

Approaching Difficult Conversations with Clients with Anna N’Je-Konte, CFP®

Estate planning can be difficult due to tough conversations you may need to have and make. This can be exacerbated by certain cultural and generational expectations and taboos.

Anna N’jie-Konte, CFP®, President and Director of Financial Planning at Re-Envision Wealth, joins this episode to share how financial advisors can help their clients approach these conversations and why having them now can be beneficial for all their family and loved ones.

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How to Approach Real Estate in an Estate Plan with Jennifer Rozelle

Jennifer Rozelle, Owner and Attorney at Indiana Estate & Elder Law and host of the Legal Tea podcast, joins hosts Anne Rhodes and Thomas Kopelman to discuss what advisors need to know when helping their clients figure out what to do with their real estate assets. They touch on common mistakes to avoid, gifting strategies and why it’s often about helping clients have conversations they’ve been avoiding.

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Full transcript below:

Thomas Kopelman: All right. Hello and welcome back to another episode of The Practical Planner podcast. I’m your co-host, Thomas Kopelman here with Anne Rhodes, my other co-host and then join with us is Jenny Rozelle. Jenny is just an awesome attorney in my neck of the woods, Indianapolis, Indiana.

Obviously you’re outside of Indianapolis, but nobody’s going to know the small towns anyways, so we’ll stick with that. And Jenny is also a part of Wealth.com as of, I don’t know, maybe was it like six months ago or so that you were one of the attorneys on the platform?

Jennifer Rozelle: Time is weird. We’ll go with it.

Thomas Kopelman: Yeah. Some time since they’ve been created, you got on the platform. But Jenny, we’re really excited to have you here talk all things real estate, everything from simple titling to complex transferring of assets between family members.

Jennifer Rozelle: Awesome. Well thank you guys for having me. And I have to tell you that I listened to your guys’ podcast, the last guest you had, Tyrone, and I hope that I can mimic his energy level so you guys can grade me towards the end.

Thomas Kopelman: That’s actually funny because Tyrone’s maybe the highest energy person, but you actually do match it. I don’t think there’s very many attorneys that we’re going to bring on that the energy is going to be that high, but that’s actually perfect back to back, now that I think about it.

Jennifer Rozelle: Setting the high bar, right.

Thomas Kopelman: Exactly. So I think real estate is obviously this really complex area, and I think what you wanted to do is really start with some of the more basic side of things and just even just go through documentation, titling, et cetera. So I’d love to hear from you how to get this right and some of the mistakes that you often see happen.

Jennifer Rozelle: Yeah. Where my head instantly goes when I think of real estate and estate planning is all the mess-ups I see, honestly. All the people that will pull deeds and things online and they try to do it themselves and they don’t understand how property ownership may affect someone’s estate plan. And it does. There’s just endless amounts of mistakes that are made all dependent on when you initially draft that deed or in some cases some people just hand write it. And unfortunately those have significant legal consequences, especially when people pass away. And really what transpires with that person’s ownership interest, depending on how they own the property and their interests as well as what type of estate plan that they have. So from a very high level, that’s where my brain instantly went was unfortunately the mistakes that I see and that I clean up all the time.

Thomas Kopelman: Yeah, I think one of the most common things I see from the Wall Street Journal to the regular market watch or whatever those articles are like, “What do we do? Parents passed away. Two of us don’t want the house, other sibling wants the house, they can’t pay for the house. They can’t buy us out of the house, they can’t maintain the mortgage. What do we do?” And so maybe it’s interesting to think through some of these conversations and is this really the parents’ issue? Should they have thought about this better ahead of time and clearly spelled out and helped mediate these conversations? And how do you do that?

Jennifer Rozelle: Yeah. Oh my goodness. Well, first the parents let’s call them Mr. and Mrs. Client, they actually have the ability to spell things out pretty specifically like that, whether it’s through things that are called specific bequests where they may want say their lake home or their cottage in Michigan or whatever to go to very specific people. So very much you can do that, though what I find mostly people will do is just leave it to the kids or the beneficiaries to “figure it out” later. And at that point, it’s really the executor or the trustee’s responsibility to weigh what the beneficiaries want and also take into account how much time do we want to give beneficiaries to line up financing or how much time do we want to give beneficiaries to figure out what they want to do. And so what I always tell beneficiaries in that situation is basically whatever they agree to, I can make happen.

But so often they get into one of my favorite things in the world is analysis paralysis where they get into just throwing out all these different ideas and sometimes don’t take any action and the executor or trustee, they’ve got to keep things moving forward. And so it really can get a little hairy pretty quickly. And so to answer your question, sure, the parents, whoever created the estate plan can put some pretty specific provisions. Most of the time at least I find they don’t. And then the beneficiaries are left deciding what they want to do and how much time they want to waste, I shouldn’t say waste, but how much time they want to spend working things out.

And I’ve seen it work both ways. I’ve seen it where beneficiaries absolutely will come to a consensus and come to an agreement. I’ve also seen beneficiaries start duking it out World War III style, unfortunately. So I’ve seen it all as I’m sure Anna’s seen it all too, but unfortunately at the end of the day, estate planning documents, they can do a lot. They can do pretty little as well, but when you start adding people and personalities into the mix, that’s when things get a little different.

Anne Rhodes: Yeah. I’m happy to jump in here and say a couple of things, horror stories or ways to plan around the horror stories as well, but the first thing I think that’s commonly misunderstood is you during your life or your client during their lives may really be enjoying this property and they think, “Oh, when I pass away, of course my children will all come back to the shore and remember the good old times and everybody will maintain this property and it’ll be great.” But actually this is where an attorney can be so, so helpful to give a reality check to the clients and say, “Do you really think this is going to happen? Is there a structure that we can put in place here so that it improves the chances that this will happen, that your dream for what happens upon your death will happen?”

Because the default, if you just leave a property to two or more beneficiaries is something called a tenancy in common. And that is a form of ownership where yes, there can be a specific percentage owned by the folks on the title, but actually every single one of them is on the hook for a hundred percent of the maintenance costs, the taxes, et cetera. And then each individual beneficiary can actually use a hundred percent of the property too. So it’s not like, oh, if I only own 50% of the property, I can only own half the house. That’s not how it works. So all of a sudden you’re already seeing anticipate, you have, let’s say one child who really loves that property, uses it all the time, but may not have the resources to actually maintain it. And now all of a sudden that causes jealousy with the other sibling where they’re like, “I never come to the home, or I come once a year and you go every weekend. So now all of a sudden I’m supposed to be on the hook for the taxes.”

And so that really creates a headache for the family. And you see beneficiaries really, like siblings, start fighting over whose usage and maintenance, who contributes to the property. So then with some of my higher net worth clients, when they have a dream of passing on the same property to multiple beneficiaries, we used to have a very real conversation with them about potentially forming a trust for that vacation home or whatever. But when you form a trust, which can be very detailed, as Jenny said, you can put anything in there, how they use it. You can really go into great lengths and you set up a trustee who’s going to be then managing that property. You have to also think about an endowment for your trust. And that’s where even the high net worth clients are like, “What is this endowment?”

It’s like, who’s going to pay? How is the trust going to generate money to pay for the income taxes, etc. So with our clients, we basically modeled this out and said, unless you have an endowment of, usually it was like half a million to a million dollars just to start it, then it’s not even worth doing that trust potentially because you still have the same maintenance issues. So those are some of the things that you start thinking about. And the last thing I’ll point out is sometimes you just give real estate to one beneficiary. So you may have a client who owns the home for one of their children, and we’ll talk a bit about intra-family loans as well to help that child get started, down payment, all of that stuff. But maybe that client owns a significant interest in that child’s property and it’s just one child.

So they say, “At my death, I want to just forgive the debt or just pass that property because it’s in my name right now, straight to that child.” So they just own it outright. The issue then becomes one, if there is debt on that property, what do you do? Do you also pass it free of debt or is it subject to the debt? So that comes to Thomas and Jenny saying, how do you service the debt? The second thing becomes, what about other beneficiaries? Because real estate tends to be a really significant chunk of that person’s net worth. Are you treating all the other kids equally? That can become a huge issue of equalizing gifts between kids. That gets tricky as well.

Thomas Kopelman: Yeah. I think the other issue I see is that even when you pass on an asset like this without a mortgage, there’s all of these quickly growing areas. I think about where my parents live right now. They live in Lake Geneva, Wisconsin, really nice lake, and it’s like there’s all these issues of all these people on lakefront properties that literally can’t even afford the property taxes anymore because just to have a spot on the lake is like $2 million. So parents maybe weren’t that wealthy, they just had this place for 70 years, it gets passed on and you’re sitting at 50, $60,000 a year of property taxes, and that’s just a whole issue in itself to maintain.

Jennifer Rozelle: Yeah, and one thing I thought of while you guys are both talking is I’m sure all three, well, I know I’ve heard it, I’m sure you guys have heard it too, that properties come in different shapes and sizes. And so here in Indiana land, I work with a ton of farmers. I have a ton of farm families, farm clients that I really have to counsel a lot of clients into when they call attorneys, counselors sometimes I really do feel like I’m a counselor because I will hear them say things like, “I want this to stay in the family forever and ever and ever and ever and ever and ever and ever.”

And I hear that a lot with farm families and what I see from my seat is, sure, it may go down the first generation, but when you start talking about generations after that, I consider that I’m not doing them a very good job if I don’t really advocate for some rip cord where beneficiaries are locked into this trust like Anne talked about, or any other mechanism whereby golly, they’re going to keep that property in the family until Lord knows what year. And it’s like that is very unrealistic. If someone came to the table and offered to them bazillions of dollars, you seriously would want them still to keep that and most of the time they will say yes.

And so to each their own right, to each their own. And there’s just so much counseling that goes on through these conversations from the legal end, from the financial end, from the tax, all the different perspectives. I just immediately when you guys were talking, I was thinking about my many, many farm families that, and I’ve heard it before with lake houses and houses down south in Florida, in Arizona, that they want it to stay in the family. And you just have to really weigh, I always say tee it up, talk about the pros, talk about the cons, and as long as my client knows what the pros are, what the cons are, I can say I’ve done a good job if they understand totally what that option’s pros and cons are, and from there, it’s their decision.

Thomas Kopelman: Yeah, I love that you brought this up because I think you would apply this to businesses too. I’m thinking about, I have a few friends who their parents own super, super successful businesses, and it’s like the two boys are anesthesiologists and pharmacists and the daughter’s a PT. Things are not looking good that anybody’s going to be taking over your business, but it’s been passed down from great grandpa to grandpa to dad. And I remember asking one of my buddies about this recently and he’s like, “Yeah, I have no idea. We haven’t really talked about it.” It’s like, “Yeah, your dad’s like 60-something, you guys are very wealthy. You might want to retire. You guys are going to take it over.” A lot of these estate planning things are just conversations that people put off and never want to have versus let’s have the hard conversation. But I know there’s a lot of kids, you don’t want to upset your parents, so you’re like, “Well, mom and dad die, farm’s gone. But right now we’re keeping the farm mom and dad, for sure.”

Jennifer Rozelle: Yeah, wink wink, yeah, keeping it. Yeah.

Anne Rhodes: On that note with the businesses, I have to say, it’s interesting because my father-in-law has one of these businesses that was grandfather to his dad and him now, and he’s looking at his kids, four sons and don’t think I want to settle. Two of them are lawyers, the older ones, the two younger ones, who knows. And so it took him a year and a half to two years to sell off his business in pieces because he came to the realization this was the end of the road for his family owning this business, which I think is very prescient-

Thomas Kopelman: Yeah, I respect that.

Anne Rhodes: And very self-aware. But then I’ve worked with clients and their families where for their businesses, they did keep them in trust and they set up whole structures, voting agreements or voting trusts so that the kid who runs the business keeps voting the stock the way that he feels like it. And his sisters I think just trusted him. They got the economic interest of the business, but they just trusted him to run his business accordingly. So you can do some really interesting estate planning structures for businesses, but you have to be really realistic about what it looks like.

Jennifer Rozelle: Yeah.

Thomas Kopelman: Totally. Okay, so let’s transition into some of the passing this on between family members and the way that I think about it is, and actually I’m working on a client right now who parents own a lake house. Parents are like, “Okay, this is going to you. Your siblings never use it. They don’t really want to”, but dad’s not in great health, mom’s not in bad health. And they’re like, “Well, we’re pretty close, almost 60, is planning to retire somewhat soon. We’d love to have this place”, but well, why would mom and dad, they could gift it to me now and use the exemption, but then now I have to take on and get a new mortgage so that doesn’t feel like a good idea.

The other one is like, well, what if we just wait until they pass away? But then it’s like, what if that’s 15 years? And their big thing is they don’t want to put money into a property that potentially isn’t theirs. Then when they pass away, their siblings fight about it and it doesn’t work out their way. So I think I’m just saying that to bring out, it doesn’t always feel like there’s a really good way to do this.

Jennifer Rozelle: Where my head was instantly going is my practice is split between estate planning and also elder law. And when I start hearing people talking about gifting my elder law brain just about explodes because there’s a lot of considerations there. We keep anchoring back to the same theme I think of there’s a lot of conversations that have to happen and with all sorts of property, whether it’s that someone wants to take a property like that, gift it, possibly use some of the exemption, maybe not, and let it pass through their estate plan, of course you get your potential step up in basis at that point.

From my elder law side of my brain, most of the time gifting doesn’t make a ton of sense because that could bite us in the rear at some point down the road. But that’s just one piece of a much larger puzzle. And so it really comes down to what is the parent’s goal, what are they trying to accomplish and what are the true realistic options when the kids get involved and what they’re able to do? Because last thing you want to do is get this house gifted to one of the kids and then the parents watch the kid not be able to afford it. And so just a lot of conversations have to happen in regards to these sort of things.

Thomas Kopelman: Maybe the best place to step back from this example and just talk and just educate people on what are even our options to think through in this side of things.

Anne Rhodes: Yeah. So I’m happy to jump in here because I had a lot of clients in New York and San Francisco who did a lot of interesting planning with real estate, particularly because it was quickly appreciating and they had some wealth to be able to play around with. And real estate has so many benefits under both the income tax and the estate tax side that it’s worth, I think, unpacking some of this. So the first things first I think is just helping a child when you’re thinking your client is wealthy enough to do a wealth transfer, how do I help my child grow their slice of the pie, the American dream? And so much of that I think for us is tied up in real estate in this country. And so how do I help them with the first down payment or potentially even just buying the property.

And so for my clients, the first thing, if it’s just a small chunk of that, let’s say the down payment, there’s a really cool article that just came out today, and this is April 1st, April Fool’s Day, in the Wall Street Journal but I encourage all of our listeners to read, and it’s about using intra-family loans to do some of this wealth transfer because it doesn’t use your gift tax exemption or your client’s gift tax exemption, so you’re not touching the $13.61 million. You don’t have to necessarily start doing even gift tax returns because what you do is a loan, but the line between a gift and a loan can be very thin when it’s intra-family, when it’s a mom or a dad helping their kids. And so some considerations, what happens is you make a transfer of let’s say $200,000 to your child to help with their down payment, but you structure it, you paper it, and the papering is very, very important.

You paper it like a loan, as though you were the bank for that child. You have to have a promissory note of some sort. That’s the debt instrument. You should have a mortgage. So that’s a deed titling thing that attaches on the deed, and you should have some sort of payment schedule that outlines at this percent interest we’re going to be paying on this schedule. So think is it amortized? Is it interest only with a balloon payment? You can structure that loan in different ways. There are certain ways that are more aggressive than others, and then it starts looking less like a loan and maybe more like a gift, but by and large, as long as you paper it like a loan as though you were the bank, that’s really good. You should talk to an estate planner at that point just to make sure you’re on the right side of the loan versus the bad side and giving a gift.

Then you can actually forgive interest payments or principal payments using your gift tax exclusion every year. So every year, every American is able to give $18,000 to any individual. And so that could be your child, and if you have a spouse now it’s $36,000. You just forget that on the debt. And that’s actually something that can also fast-forward the gifting of wealth transfer, although it’s papered like a loan. So that was a commonly employed technique that my clients did. You can be very creative. I had a client who was so smart, so one thing I didn’t mention is that interest rate. Why is it so good for you to loan versus a bank? The reason for that is because you can gift at a much reduced interest rate compared to what a private bank would give to your kid.

Let’s say right now the average interest is 7.5%. You can actually, you have to gift it at a certain level called the applicable federal rate. It’s just a rate that’s published by the IRS and depending on the length of the loan, it’s a slightly different rate. But let’s say it’s a long-term rate, it could be as low as 4.5% right now. So right there, you’ve given your child a gift of that 3% difference. And so anyways, all of that is to say that’s a really creative technique. Another technique… Oh, sorry.

Thomas Kopelman: I just want to add, I think there’s levels to this. I think there’s the maybe more middle-class family who it might be like, let me help you on the down payment. And if you think about the family that has two parents, three kids, you could give them quite a lot of money or you could even split it between a December and January payment where if you think about that, I mean $36,000 from the two parents per person gets you a long way. But then I think you’re talking about this next level of wealth of like, “Hey, we got to get money out of our name. Well, we couldn’t pay for the whole house without using a lot of our exemption, so let’s set it up in the loan this way.” And even on a $2 million property at 5%, even with that whole family structured in there, you do it right, you could basically forgive principal and interest every single year, but this is something that needs to be documented well.

I want to definitely go into how to do that because I’ve come across a lot of people who they are doing this with no documentation. Parents just gave us a mortgage and we’re just doing it at 3% and they’ll just follow market rates or whatever, or hey, parents do this, this, and this, and they didn’t even know. They just thought they were borrowing money from their parents and they didn’t even know about AFR rates. They didn’t know it would be a gift. If not, they’re just like, “Mom and dad helped us out and we’ll figure out how to pay them back when money comes our way.”

Anne Rhodes: Jenny’s face said it all.

Jennifer Rozelle: We like paper, we need paper, we need paper.

Thomas Kopelman: Well, is this like how the IRS gives you a three-year thing, if it is past three years, statute of limitations is passed. So in all likelihood it’s like what is the chance that you’re in that 0.1% that’s audited probably low, but you don’t want to be the chance that it is and then you’re just clawing back even though I guess it’d probably be you just lose some of that exemption, but still.

Anne Rhodes: Yeah. The issue with the IRS, that three-year rule that you’re talking about is there are ways to start the three-year clock because if you don’t even start the clock, then the IRS is like, “I’m free at any time to come and audit this transaction”, which is an issue. And then the way that you actually do start the clock is by filing a gift tax return, which we can talk about in a later episode. But the idea here is how would the IRS even know that this was happening? If the whole point is you structured it not as a gift, but as a loan, it shouldn’t even be on your gift tax return. It’s not a gift.

So that becomes a very interesting question, which is why when Jenny made that face, I wanted to make the same face because it’s like papering is so important because the first thing the IRS auditor will ask is, “Do you have paperwork to show this, that this is not a gift but a loan? Do you have payments to prove literally checks from your kid showing that they’ve been making these interest payments for X number of years?”

And I will tell you, I once for a client had to go back and try to figure out the paper trail, and I was sent all of these Venmo screenshots from the child for a few thousand dollars every month to mom and dad. And of course some of them are missing because the child forgot that month or it was Christmas and they were spending the money on something else, and that starts to really muddy the water. So you have to commit to this idea of the loan if you’re going to go that route.

Jennifer Rozelle: And you imagine the professional fees and doing this cleanup work. It’s the classic, you do it and you probably save yourself money in the long run versus you don’t do it necessarily the right way and you very well could be paying people like me significantly more money to do this cleanup work and the cleanup work may not indeed actually clean it up. We just cross our fingers and hope it does. And so it’s the classic, you just need to do it right from the get go. And I hate to be so old school about it, but at the end of the day, if there’s one thing I hear from most of my client, I want to say all of them, but is they don’t want Uncle Sam in the mix. They don’t want to pay more taxes. Well, if you don’t want to pay more taxes, then you need to be willing and able and ready to commit to doing things the right way as well. And this is to do things the right way, is documenting your way through this kind of transaction.

Thomas Kopelman: I think this applies to so many things though. I recently met with a prospect who DIY to holding company with three businesses, and I was like, they’re like, “We want to check the structure.” I’m like, “You need to go to an attorney. I could tell you that this is not right. How to fix it. I don’t know about that part”, but the amount of things that I see people try to DIY to save a few thousand dollars that is going to end up causing tens to hundred thousands of dollars in fees, taxes, penalties, et cetera, down the line is crazy what people think that they can do from Google.

Jennifer Rozelle: And a lot of times it’s not even malicious. A lot of the times it’s not like, “Oh, I’m not going to pay a darn lawyer to do that.” They just genuinely think, when I was at the very beginning of this episode when I was talking about people polling deeds and things online and go into the county office to fill out their blank little forms, it’s not like people are maliciously trying to cost themselves more of a hard time. They just don’t know. And unfortunately when you don’t explore your options, that’s just the way sometimes the cookie’s going to crumble. And I dare say if you start talking about real estate at all with the whole topic of this episode, when you start talking about real estate at all, it is never going to hurt you to get an attorney’s advice. Even if it feels so simple, it’s not going to hurt you.

Thomas Kopelman: Totally. Totally. Okay, cool. So we hit on inter-family loans, AFR rates. What are some other ways to maybe be passing on real estate and the good and the bad of those routes?

Anne Rhodes: I’ll mention a couple if I can jump in here. The second way that I’ve seen clients pass real estate specifically is a trust called a QPRT. And it’s a Q-P-R-T. And what that does is try to reduce the amount of gift tax exemption that you’re using on those transfers. And it’s specifically for property where you yourself or your client owns it and is trying to retain some usage right over that property. One of the things that can be confusing for clients when they’re doing these big transfers is in order to have made a successful transfer out of your own estate, so it’s no longer within your taxable estate for your client, is that you can’t keep using the property. You can’t retain the benefits of it. It has to go to your descendants. And so with a QPRT, what happens is you can chunk out the gifts to your descendants, but you want to retain for a certain number of years, perhaps the use over potentially the whole property.

And so what you do is you retain an interest within it, and that is calculated at an interest rate that is set by the government. So it is reflective of the current interest rate that you’re in, that environment, and we’ll talk a little bit about why that matters. But anyway, so you retain an interest in it and what remains after a number of years when that property has been sitting in that trust and that trust terminates, let’s say after five years, that remainder interest then passes to your descendants and you can take a property, chunk it up, do a five-year QPRT, or let’s say a three-year QPRT, five-year, seven-year, ten-year and give out little pieces progressively to your beneficiaries. It was very popular and it is very popular when interest rates are really high. So this was a technique that we didn’t really see for a little while until more recently when interest rates have increased and all of a sudden right now QPRTs have resurged in popularity as a result.

Thomas Kopelman: What’s the discount part of it? I always see people talking about there’s a discount component. I’ve seen posts recently that through using them, you can get pass on real estate at a 45% discount now. I think I just saw a thread about that last week.

Anne Rhodes: So the idea is that that’s the value that you’ve retained. You’ve retained the use for five years, that’s calculated at that interest rate. And so when you calculate the difference between the remainder interest and your retained interest, that’s where you got the discount. Because let’s say you passed property, a property chunk like a value of 100K and the remainder interest was valued at 55% of the total and your retained interest was the 45%, that’s where you’re seeing that discount because you passed full value of 100K, but you didn’t claim a tax exemption usage of 100K.

Thomas Kopelman: Usage mean living in it pretty much, or how does it really enforce? Because if that was my parents and I’m like, “I can bring guests, whoever and whenever I want”, what is there to say I can’t invite my parents to come up for 18 weekends a year?

Anne Rhodes: Right. So exactly. So actually as long as the parents still has that retained value, they can actually use the whole thing. Remember we talked about tenancy in common, how X percent, you may own only X percent, but actually you retain the use over a hundred percent. So that follows this retained use. So you own only X percent because that’s your retained use, but actually the entire property is available to your parents to continue using if they’re the ones doing the QPRT, if that makes sense. So it’s a really nice way to slowly have the parents let go, take the value of the property out of their taxable estate so that when they pass away, it’s completely out of their hands and doesn’t inflate their own taxable estate, but also not use the tax exemption over the whole value of the property. So again, in that example, let’s say it was 100K house, instead of filing a gift tax returns that uses 100K of my tax exemption, instead you’ve just claimed 55% of that, like a 55K gift and you retain 45K.

Thomas Kopelman: Is this more of a strategy for people over the taxable estate? If you were like, hey, we have $2 million net worth, is this even something that you would… My mind goes, you might as well just gift it to somebody if you’re never going to have a worry about estate tax issue.

Anne Rhodes: This is for somebody who for sure is hoping to squeeze every dollar of tax exemption that they can out of that transaction. So they don’t want to just do a one-to-one transfer of their tax exemption to that heir. So they want to, instead of having a $13.61 million exemption, they actually want to inflate it to potentially like $20 million, $25 million.

Thomas Kopelman: Okay, that makes sense. That’s a good strategy. Jenny, what about just gifting in general? Let’s say, I’d love to go through the, okay, if parents are going to give real estate to one child, for example, let’s say they keep it simple, what is the upside and the downside of doing that while still alive versus waiting till after they pass away?

Jennifer Rozelle: Yeah, actually that question and your last question go hand in hand because what I was thinking, if you have someone that’s more maybe middle class, average net worth, not high net worth that maybe they do want to consider gifting for whatever reason. I mean, the reason they’re gifting sometimes doesn’t matter to us. They may have just their own motive or reason to gift something to someone else. A strategy maybe that they could potentially explore is maybe gifting as well as retaining what’s called a life estate interest, which basically also gives them the ability to remain in the house. They still have the rights to continue to enjoy it. So it’s maybe a more average net worth ability to do exactly what Anne was just describing. But for whatever reason, they’re wanting to gift the property out of their names, they could do that for whatever reason and maintain a life estate interest.

And the reason that I mentioned right before we started recording, I work with not a ton of people that are super high net worth. And so that’s why I actually asked Anne to speak more into this. And so I come more from a place of those are my people that the people I often help, Thomas, or those people that most of the time transparently, they’re not looking to gift. They’re really not too close, or I shouldn’t even say too close. They’re not close at all to any sort of estate tax threshold. The only time I ever hear people, my kind of clients talking about gifting is when they’re trying to gift out of their names for, say, protecting it from “the nursing home” and things like that. So from my side of the table, I don’t deal with a ton of gifting unless there’s some very specific reason to do it like they’re trying to help their kid get off the ground or something like that.

Thomas Kopelman: Well, I think about just the thought of, okay, what if parents, maybe they have a second little lake house or something, and for them it’s like we don’t really have the ability to go use and enjoy it, and we don’t really want to maintain the property and the cost, et cetera. So it might actually just make sense for us to give this now.

Jennifer Rozelle: A lot of my clients still don’t do that. They will wait until they passed away and they’ll set their estate plan up to absorb something like that. And I do do a lot of estate plans that, like Anne was referring to earlier, that may build in a little trust to house that property. And what I usually encourage them to do is to plop some money into that trust as well to take care of the expenses, the maintenance, the debt, all the things. And still you can tell this must be what’s at top of my mind, still give those beneficiaries a ripcord. And so most of the time my clients aren’t really gifting too much. They’ll put those specific provisions in their estate plan to say, leave the lake house to the kids or leave the farm to the kids, or whatever. And we’ll just strategize different ways to try to accomplish what they’re attempting to accomplish and really set the kids up or the beneficiaries up for success as well. And usually that means plopping some money inside that trust as well.

Thomas Kopelman: Okay, that makes sense. Anne, what about you? Do you think there’s any downsides to gifting while still alive that you guys can think of?

Anne Rhodes: I mean, it’s that you lose the access to the property because the idea of gifting is you can’t… If the whole point is to get that thing out of your taxable estate, you have to be willing to let go of the use. Who gets to decide what happens to the property, including maybe selling it at some point? You have to put that in the hands of others.

Thomas Kopelman: But no step up and cause spacious issues or anything like that.

Anne Rhodes: The one thing I will mention also is I did have clients in this ultra-high net worth space who they’re like real property landlords. They have extensive real estate portfolios, and there the major downside is cash flow loss because the idea is this is how they generated their income. They lived a really nice lifestyle, now they’re starting to gift away the real property. You have to gift away the benefits, the economic benefits, which is not just use, but the income that generates as well. So you have to really use a financial advisor’s help to model out what that income is. What is the income per real property asset, perhaps even like they’re put in an LLC. What’s the income that you were expecting and living off of from that LLC and what does that mean to your cash flows?

The other thing you worry about with real estate, I’ll just point out in case you have a client like this, is that real estate is not very liquid and you don’t want to be forced to fire sale it upon death. And so one thing that ended up impacting a lot of our clients who had extensive real estate portfolio is if they have a taxable estate, if they have huge tax bills, how are you going to generate liquidity to pay for those things? And sometimes it’s actually as a financial advisor worth it to talk to that client about having a life insurance wrapper or life insurance proceeds to generate liquidity so that the beneficiaries are not stuck with an enormous tax bill that they have to generate cash for by selling property at a fire sale.

Thomas Kopelman: This is one of the best permanent life insurance uses. I am not the biggest proponent until you get to that high net worth space. And then there are some good uses just like liquidity in paying estate tax. I think that’s a really good one to add.

Jennifer Rozelle: Can I add two super quick things?

Thomas Kopelman: Yeah.

Jennifer Rozelle: Okay. So one is a fun little nugget. So on my podcast, I recently did a podcast episode on Joe Robby, the founder of Miami Dolphins. And that’s exactly what he had to do, Anne, where when he passed away, his entire estate value pretty much was in the stadium that he built and his team, the Miami Dolphins. And so long story short, they had to sell both of them to pay for all the administrative expenses, including estate taxes. So there’s a fun little nugget. The second thing, which is I guess I’m on the theme of fun little nuggets, I tell clients when we start talking about gifting, I’ve totally made up a word that I need to trademark or something because I call it a gift is untake-a-backable.

Once you gift it, you can’t take it back. It’s untake-a-backable. I know that’s not a word, but it’s a funny word and it usually makes people laugh, but I’ve had clients where they will gift interest or shares of a farm or a business and something has happened and they’re like, “Hey, I want that back now.” And it’s like I’ve seen where the kids are like, “Sorry, dad, not giving it back.” So gifts are untake-a-backable. Just to add on to what Anne mentioned, that you just got to be okay with this, it’s gone.

Thomas Kopelman: I think that’s the perfect way to think about financial planning, estate planning, et cetera, is I think you can really lead with what’s the best way to minimize taxes? Do this, but it might not be the best thing for somebody’s life. And I’m thinking of an example of somebody that I worked with that they were super wealthy for a second. It was like they sold business, it was worth $30 million. They were 40 years old, but 75% of it rolled into a new company. That company went from $10 a share to 70 cents a share. And luckily, they weren’t people who ended up using your evocable trust moving a lot of this stuff out of their name because if they did, I mean this person went from $25 million net worth to three in a year. Maybe that’s going to bounce back. Maybe it’s going to be great or maybe their $3 million net worth and it would’ve been really unfortunate to have half of that into some irrevocable trust because in that year it was the best idea ’cause they were so wealthy at 40 years old.

Anne Rhodes: And you also have to have a real conversation with your clients about what their future to be. I’ve had so many clients who made the money, were like, “I’m ready for my next startup”, or whatever. And then it turns out they just wanted to retire. Five years later, they come to you after doing all this gifting, and then they’re like, “Actually, I don’t want to work anymore.” And then you’re like, “How are you going to generate that income?” And so we always had a saying, which is like, “Do not let the tax tail wag the lifestyle dog”, because you need to live your life and then worry about the taxes. Worrying about taxes is a good thing, but-

Thomas Kopelman: This is so important, I guess, financial advisors and estate planning attorneys to hear this and think it, because right now we have a client we’re working on that’s very, very wealthy. He should be able to sell his business the next few years for, they don’t know, anywhere from $100 to $200 million. He owns 90% of it. He doesn’t want to give it to anybody. He’s like, “I’ve helped my kids. Over the next five to 10 years they’re still a little younger. We can fund life insurance for the couple million I would give everybody, but we’re going to spend every dollar we have left.”

And we keep meeting with some estate plan attorneys and we’re like, “Hey, listen, they care about charity and spending this money.” And they’re like, “Here’s you should do your evocable trust for this, this, and this.” And he’s like, “Can we go interview a different attorney because they’re obviously not listening to me.” And I think sometimes people forget as professionals in our jobs, it’s not to give you the best tax planning strategy, it’s to give you the best strategy that funds your life that ultimately next is tax efficient. It’s that before that, not the flip side. And I think a lot of people get really caught up being there.

Jennifer Rozelle: You need to drop the fictitious mic. There you go.

Thomas Kopelman: Well, cool. Is there anything else that we need to hit on in this topic as it relates to real estate?

Jennifer Rozelle: Do we dare go down the timeshare rabbit hole? I don’t know if we want to or not.

Anne Rhodes: Maybe another day. We will have you back, Jenny, so that we can talk about those timeshares. I think all of us love.

Jennifer Rozelle: Yes. I’m fine with not going down that rabbit hole. I’m totally fine with it.

Thomas Kopelman: Well, perfect. Well, Jenny, we really appreciate you coming on and sharing all the info with us. I think you’ll be a repeat guest for us between my podcast and this podcast. But we really appreciate your time and everybody thank you again for listening. If you want people like Jenny to keep coming back, let us know. Send us your questions. But please leave a review, subscribe, and we’ll see you back for the next episode.

How Often Should You Update Your Estate Plan?: A Comprehensive Guide

Nearly 70% of Americans don’t have an estate plan—but if you’re in the minority that do have one, you still need to stay on top of it. Estate plans aren’t “set it and forget it” but often need to be updated to reflect any major changes in your life. This ensures that your wishes will be followed, that your assets are distributed efficiently and that your loved ones are protected from any surprises after your passing.

This guide covers why regular revisions are crucial, how to keep your plan aligned with your goals and how financial advisors can be a critical part of this process for their clients.

Why regular updates are necessary for your estate plan

Estate plans are living documents that must evolve as your life does. Changes in your personal life, financial status or federal and state tax law can significantly impact how your estate is handled.

While having an estate plan—which should include a Will, Trust(s), Power of Attorney and an Advanced Health Care Directive—is better than not having one at all, having an outdated plan can also create unnecessary headaches for you and your loved ones.

An estate plan outlines what you want to happen with your assets after you pass and it also includes your wishes in situations if you become incapacitated or unable to make decisions. If you’ve accumulated more assets, want to leave certain items to new people in your life or you’ve just changed your mind about your legacy, these are all reasons you want to update your estate plan.

Ultimately, regular updates can help prevent unnecessary disputes and inefficient asset distribution.

How often do you need to update your estate plan?

There’s no hard rule about how often you should update your estate plan, though most experts recommend reviewing your plan every two years and doing a more thorough analysis and update every five years. Ideally, your plan should really be updated anytime there’s a material change that would impact it.

With a digital estate planning solution, however, you can update as often as you need to, and each update can be made quickly and easily. You don’t have to wait years to meet with an estate attorney, but can make sure that your documents reflect any changes in your life or how you wish your estate plan to be carried out.

Still, it’s important to understand what life changes may warrant updating your estate plan so you can stay proactive and keep your estate plan up-to-date.

Those triggers can include marriage or divorce, having a child, significant financial gains or losses, or moving across state lines to name a few. Below, we dive into some of the more, and less, common reasons you may need to review and update your estate plan.

12 reasons you may want to update your estate plan

Again, any time anything changes significantly in your life, it’s usually worth revisiting your estate plan. To help clarify what those “significant changes” are, here are ten common reasons you’ll want to consider revising your estate plan:

1. You get married

When you take those vows for better or worse, richer or poorer, you change—legally and philosophically—what happens to your property. In most states, if you die, your spouse will inherit your money and possessions, either before or in combination, with any children you have. But specifically naming your spouse in your estate plan will ensure your spouse is protected when you die. As soon as you get home from the honeymoon, update your estate plan to add your spouse or to create a joint will or trust together.

2. You get divorced

As a married couple, if you’ve created joint assets or property, you’ll want to update your plan if you decide to separate. Also note that if you and your spouse have a separate will or trust, you may want to remove them as a beneficiary and update the information on any joint property that you own.

It’s also important to know that if you are planning a trial separation period—or if your state requires one before your divorce is final—you shouldn’t wait to make changes to your estate plan. If you were to die while separated, your soon-to-be ex-spouse could still be your primary beneficiary in your now-outdated plan.

3. You have or adopt a child

Adding a new family member is a momentous and joyful occasion—and may come with many sleepless nights. But make sure you update your estate plan to reflect the money and property that you want your child or children to inherit. You should also rewrite it to name a guardian who will be responsible for your children until they turn 18. If you haven’t discussed guardianship with the person you’re nominating, you may even want to name a backup in case they don’t agree.

Adopted children are generally treated the same as biological children in intestate succession laws but you’ll still want to update your documents to include them. Foster children and stepchildren whom you don’t formally adopt as your own typically don’t have any legal rights to your estate unless you specifically name them in your will or trust.

4. The death of a beneficiary, executor or named guardian

If anyone named anywhere in your estate plan dies, you’ll want to update it.

Most people leave a large chunk of their estate to a single beneficiary, usually their spouse. If they die before you, you’ll want to update your estate plan to adjust your list of beneficiaries.

In the unfortunate event that one of your children, or another one of our named heirs, passes while you’re still alive you should update your estate plan to redistribute that property to other beneficiaries.

But you’ll also want to update your plan if someone you’ve designated as an executor, beneficiary or even a guardian of your children or pets dies.

5. You’ve had a falling out with someone named in your estate plan

Ruined relationships could affect your estate planning in several ways. If there’s a big family fight and you sever ties with a sibling, you might want to specifically exclude them as a beneficiary.

Another possible reason for a change is if you’ve named someone as your executor or trustee and you no longer feel comfortable entrusting them with that responsibility. You’ll want to identify and document a new person for that role ASAP.

6. Your wealth increases significantly

Maybe you’re the lucky one to win the lottery. Or you hit it big on the stock market. Or maybe you receive a large inheritance from a family member. Whatever the reason is, if your estate suddenly becomes larger than you previously expected, you may need to update your estate plan.

You should reconsider how your wealth should be distributed after your death. That may include how much your beneficiaries are getting or the amount you’re giving to charity. This is also an opportunity to do wealth transfer planning to reduce taxes at your death, like forming special trusts.

7. Your wealth is significantly reduced

If your finances are negatively impacted, you’ll want to revisit your estate plan because the distributions you’ve set up may no longer make sense. For example, if you’ve designated a certain amount to go to charity, that amount may now be the bulk of your estate and there won’t be enough left over for your other beneficiaries.

8. Moving to a new state

The laws that govern wills, trusts, and estate taxes vary by state, as do laws covering inheritance, real estate, and marital property. It’s important to make sure your estate plan is optimized for the state where you legally reside to ensure that you avoid potentially costly legal battles and to ensure that your wishes are still being met.

9. Starting or selling a business

Owning a business can present its own intricacies when it comes to estate planning, but that’s why it’s critical to update your plan. It’s important to create a succession plan for any business assets, including equity and ownership in the company.

Updating your estate plan may require coordination with your company, so it’s important to explore with an estate attorney how to approach those conversations and what needs to be discussed with the other business owners.

10. A child turning 18

Children reaching adulthood is a reason to review your estate plan. It doesn’t necessarily require updating because you may have already set up trusts to distribute assets in a certain way even after they’ve turned 18. At the same time, the need for a trust may recede and you may want to consider tax planning strategies with that adult child.

But there are other considerations for a child reaching adulthood. Perhaps you may now want to name them as a potential guardian for any younger children you have, or you want to entrust them with pets or other non-financial assets you have. And if you do decide those, that may necessitate updating other parts of your estate plan to ensure that they and your other children are set up financially.

11. Changes in federal or state tax law

While this may not happen often, it’s important to be aware of any changes in tax laws that could affect your estate plan. For example, the Tax and Jobs Act of 2017 (TCJA) nearly doubled the estate tax exemption, allowing individuals to leave more of their assets to their heirs without incurring federal estate tax. The exemption increased from about $5.49 million in 2017 to $11.18 million in 2018 for individuals, impacting decisions on asset transfers and trusts. And, currently, that law will sunset in 2025—meaning the exemption amount will be cut in half—so those that have assets over the current exemption limit may want to create strategies now.

12. You change your definition of what you want your legacy to be

It’s not uncommon that someone’s goals and wishes may change. Just as you may have had a falling out with a sibling or family member, you may have developed a closer relationship with an extended family member, like a cousin or nephew that you now want to be a part of your estate plan.

Maybe you’ve designated a portion of your estate to go to charity but your preferred charity has changed. Or you’ve adopted a new pet and want to designate a guardian should you die.

It’s possible that the decisions you laid out in your Advanced Health Care Directive have also changed. If so, you should revisit and update it. Same for any decisions you want changed about potential Power of Attorney scenarios.

People’s wishes change, and that’s OK! Just make sure those changes are reflected in your estate plan.

How digital estate planning simplifies updating estate plans

Traditionally, updating an estate plan isn’t always simple. Normally, they’d have to consult with an estate attorney to make any changes, hence the recommendation by experts to revisit every two to five years. Any updates an attorney makes can be subject to their hourly wages, as well as any discussion about those changes. Any other conversations about what changes to make and how to approach them, can also be subject to their hourly rate. Plus, you may need to wait to find time in your attorney’s schedule to do all of this.

But with a digital estate planning solution, there is no need to wait. You can login at any time and make any edits, as often as you want. If you’re having a child, you don’t need to wait until that child is born to update your beneficiary information. If you’ve moved and need to update your real estate information, you can just go ahead and do it (wealth.com’s Zillow integration will even notify financial advisors when a client has moved so they can proactively let them know to update their plan).

A digital estate planning solution makes it much easier for your estate plan to ebb and flow with the changes in your life. No longer do you have to make a plan that has barrier to revisiting and updating.

How financial advisors can help clients keep their estate plan updated

Financial advisors are uniquely positioned to help their clients ensure their estate plans are kept up-to-date because they’re already involved in overseeing their finances. While clients may not actively offer up that they’ve had a falling out with a sibling or that they’ve adopted a new pet, advisors will likely know if they’ve gained or lost a significant amount of money. But, even for those life changes that are more difficult to talk about, advisors can help uncover reasons their clients’ estate plans should be revisited.

Here are some actionable tips for financial advisors to help keep their clients’ estate plans up-to-date:

Schedule regular reviews: This can be as simple as incorporating estate planning into your quarterly or annual client reviews. While some reasons may be obvious, like moving to a new state, some, like family squabbles, may not be. Ask the right questions, like if they’ve had any significant financial changes or if they’ve come into possession of any non-financial assets they want passed down to their children. But it’s also worth doing a thorough review of their estate plan at certain points. This doesn’t have to happen at every review, but going through the details of the estate plan may help the client to offer up information they may not otherwise, like the person they named as executor has died or that they want to add a new family member as a beneficiary. Often, it’s not that your client doesn’t want to share this information, it’s just that they don’t think to share it. With regular reviews, you can help them stay on top of their legacy.
Keep documentation updated: Documentation is paramount! So make sure that you help your clients maintain all necessary records that could impact their estate plans, like deeds for properties and financial statements. Also make sure to keep all information about beneficiaries, trustees and executors up-to-date.
Stay informed about law changes: Keep yourself informed about changes in laws that could impact your client’s estate plan. Subscribe to newsletters or podcasts—wealth.com’s The Practical Planner podcast is certainly one we recommend. However you prefer to stay on top of legal and tax news, your clients are looking to you to be informed. Doing so will only strengthen the relationship you have with your clients.

If you want to dive deeper into when an estate plan should be updated, check out The Practical Planner podcast episode, “When to Update an Estate Plan“ hosted by Anne Rhodes, wealth.com’s Chief Legal Officer, and Thomas Kopelman, wealth.com’s Head of Community and Co-founder of AllStreet Wealth.

Ready to deliver modern estate planning to your clients? Book a demo to learn more about our comprehensive platform.

What to Know About Funding a Trust

Your client has set up a trust, now what? Hosts Anne Rhodes and Thomas Kopelman dive deep into what assets should go into a trust and what assets should not or, more often, what assets can’t go into a trust.

They cover real estate, businesses, international assets, retirement accounts, brokerage accounts, bank accounts and more. And why the key may be what your state’s threshold for probate is, known as “petition for small estate.” They also tackle beneficiary designations and more, sharing key insights for financial advisors.

Subscribe and listen on your favorite podcast platform.

Full transcript below:

Thomas Kopelman: All right. Hello, and welcome back to another episode of the Practical Planner podcast. I’m your co-host, Thomas Kopelman here with Ann Rhodes, chief legal officer of wealth.com. Ann, how are you doing today? Love the new background.

Anne Rhodes: Oh, thank you. Yes, I’m joining you with the greenish background that is actually very wealth.com appropriate to our branding. I’m doing well. How are you, Thomas?

Thomas Kopelman: I am doing well. I think this is the first time recording since I’ve been back from my bachelor party now six weeks away from the wedding, so just in this really busy season. But I’m excited to dive into the topic with you today. I think that funding trust is something that I just equate to the busy boring work. I think everybody gets excited about setting up their trust, especially the irrevocable side. And then you go through the pain point of like, “Well, now let’s get to funding this trust.” I think for certain ones it’s really easy. You just potentially move one thing in or you’re going through the process and you get the deed of your house moved. But the annoying ones with bank accounts, brokerage accounts, beneficiary designation changes, all of that, I just totally tee up to my clients and I say, “This is going to suck, and we’re just going to chunk away at a few a quarter. And the goal is about a year from now, worst case two years from now, everything is funded in the right way.”

But I think a lot of advisors and just people in general have no idea what goes in a trust, what doesn’t, what is supposed to be a beneficiary designation, et cetera. So I’m really excited to dive into this topic with you today.

Anne Rhodes: Yes, I’m excited too. And for those of you have listened before, you should also note that we address this topic in some respects on The Long Game, which is Thomas’s other podcast, woo-hoo.

Thomas Kopelman: Let’s just take two. It’s got to be better, right?

Anne Rhodes: Exactly. But we can’t talk about trust funding enough. So here we go. First things first is, why? Why fund a trust? And I think here it’s important to note that by and large people say to the extent that you can please do fund a trust. It’s a little bit more important in certain states or under certain circumstances than others. And so we’ll address those as well. But there are actually circumstances where you really don’t want to transfer an asset into your trust. So we’ll talk about that as well or can’t exactly. Don’t want to because you can’t. And so anyways, first things first, I’m just going to address the elephant in the room, which is some estate planners really are going to push you to fund your trust, and financial advisors who have learned from those estate planners might do the same thing.

This is particularly important in certain states, so California, Florida, for example, where if any asset is outside of your trust at your death up to a certain level, if you’ve left enough of them outside, will then trigger probate even though you have a trust-based estate plan. So this is in California here where I am, for example. The limit is 166,000 adjusted for inflation. So it might be a little bit higher this year, but the idea is that if you didn’t do your homework during your life and you left a bunch of your accounts real estate, etc, and the total value is above that threshold, then all of a sudden you might be subject to that onerous probate. So really important in certain states just to go ahead during your life chunk away as Thomas says, and just do it.

Thomas Kopelman: I was going to add, I think that’s a really important number. Honestly, that was something that I did not know the exact number for, but I think it’s a good reason as advisors when we’re having these conversations to point people to, “Okay, you’re 22 or 23, you’re just getting started. It is okay to get a will in place for right now.” And I think that sometimes something that I lean on for people is in the beginning it’s okay just to get there and graduate eventually to it, but those basic documents are it’s just easier to get done, easier to get enforced and not have to really worry about the next steps pre even a small amount of assets being built up.

Anne Rhodes: Exactly. And that threshold actually, which is called usually a petition for a small estate, is supposed to make the probate process easier because the idea is your estate is so small, not very complex, that things can just be passed to your beneficiaries much faster, and the judge has kind of a truncated process. But the issue, of course, is that different states have different thresholds. It can be as high as half a million dollars, that’s great. And then it can be as low as 20 or 50k, so you have to be aware of what’s going on in that state. But here in California it’s in 170k thereabouts.

So then the second reason, and we’ve touched on this, Thomas, in our last episodes, is if you own certain assets that make it imperative or more important for your clients to transfer their assets, so this is real estate that’s in a different state than where your client lives. So all of a sudden, let’s say they have a vacation home, so they live in Indiana, and they happen to have a vacation home in Florida. Well, that Florida real estate then opens the potential, and actually it will just happen. If your client passes away, there will be a Florida probate that’s opened in addition to Indiana probate, so it starts complicating things. And then you have businesses and assets like that where for incapacity planning purposes, you really do want to put them in the trust because the trust is a more robust vehicle. And we went through some of those decision points in a past episode.

Thomas Kopelman: I think honestly the easiest way to chunk at this is just type of asset for most people. And I think you obviously alluded to real estate. In your mind, I know if you have real estate in different states, it’s like what are you doing here, nobody wants to go through and probate in two states? But let’s say you just have real estate in one state, states like California, you get it right, probate’s long, it’s painful, do it. But what about some other states? Does it typically make sense for people if you own a house to put it inside of a trust?

Anne Rhodes: That will depend a little bit on state nuances, but by and large it’s always a good idea to put it inside the trust. There are a couple of things. I will just mention it’s annoying as heck when you have your real estate in a trust. So when you go to refinance or take out another loan of some sort on that real estate, your bank, the mortgager, may just require that you take it out of your trust to get the better rate because they have different interest rates depending on if it’s your primary home, if it’s in your own name as opposed to the name of an LLC or a trust. And so to get that better rate, they’re going to ask you to take it out of your trust, do the refinancing, and then a lot of people just forget at that point in time. They just left their real estate in their own names because of some other transaction they were doing and completely forgot to then put the real estate back into the trust for all the other reasons we’ve mentioned including bypassing probate.

So my recommendation whenever you’re putting real estate into a trust and then taking it back out is can you get a two-for-one deed preparation by asking whoever is doing the titling company or whoever is doing the transfer out to proactively also prepare the deed for the transfer back in. And then once your refi has happened and your bank usually says, “Oh, just leave it out for 60 days and then transfer it back in and we won’t care,” after those 60 days have passed, then just go to a notary, sign the thing, you already have the documentation, and just put it back in.

Thomas Kopelman: This is another pointer that you gave me too is if you have a client that potentially has not set up a trust yet and they’re buying a house right now to do the same thing, right? Oh, I wish we would’ve set up our trust. We know we’re about to do that in this year. Let’s get the two different deeds in place. So once we do have the trust funded, we can go get it notarized as well.

Anne Rhodes: Exactly, exactly. And then there are a couple of instances, Thomas, where I’ll just mention in my career where we said, “Please don’t put this property into a trust,” either because legally you can’t as you mentioned before or because it’s just a terrible idea. And so I’ll address those from the get-go. So the first one is retirement accounts, sometimes even life insurance policy. There are certain types of taxable accounts as well where until you pass away, there is no way for anybody but you, yourself, to own that asset in your own name. So this is your 401k. If this was a 401k that you earned while working until you pass away, you have to be the owner of that asset.

Thomas Kopelman: So you said houses are really are good, right? Businesses typically are good. Is there any instances before we really dive into all the rest that you see that that doesn’t make sense?

Anne Rhodes: Yeah, so actually that was going to be my second point, which is there are certain accounts located abroad. We’re a very US focused podcast, but in a past life I did do a lot of cross-border work. And so if that asset, that bank account or real property is located abroad, you may not even legally be able to transfer it into your trust or you can transfer it into your trust, but the local laws, especially income tax laws or transfer taxes might make it impossible or just a terrible idea. So we’ve had certain folks, for example, who tried transferring property located abroad and their CPAs or the accountants from that other country said, “Actually you’re going to be incurring so many taxes that it’s a terrible idea to fund this property into your US trust.”

Thomas Kopelman: What about people who are in US? I have a bunch of clients I work in this situation, I’m going to quiz you on this, we’ll see if this is something you’re familiar with. But what about people who they were citizens abroad, they now have US citizenship, but they’re not for sure going to be staying in the US for a long time. I have a bunch of clients who are like, “Hey, I’m going to work three to five more years in the US and go back abroad. I think the difference of keeping us residency and getting rid of it obviously makes a difference. But I’ve seen some mixed reviews from different estate planners about, “Well, if you’re only going to be here for a few years, is it worth the fees to set up a trust and fund things in the trust for a couple of years? I mean, what are the odds that we pass away?” What do you think of that?

Anne Rhodes: That’s such an interesting question because when you get into as you said, they may have US citizenship or what’s called residency, income tax residency in the US. So this is a green card or enough days spent in the US to trigger income tax residency, depending on what kind of immigration status they have, then they leave, there’s that exit tax that’s imposed. And we can talk about that some other time. But the idea here is, do you bother with a US estate plan, especially a trust-based one? That will depend a little bit I think on the circumstances of that person. If they intend to keep that real estate for the future, either their own use or they just want to pass it on as an investment property to their beneficiaries, it actually makes sense before they leave to talk to an attorney, make sure that they’ve done all their exit planning.

And one of the things that they want to consider is actually a holding structure so that if they ever sell the property, it won’t have this basically a transfer or income tax imposed on it. That’s something like 15% of sales proceeds because they happen to now be a foreign person. And so actually a trust might be a really great idea to set up in the US. And not just a revocable trust as a succession planning, like death time planning tool, but actually an irrevocable trust so that their descendants who are based in the US fall in love with US citizens, going to have US babies, just stay here forever so that their descendants have basically this US piggy bank, this US side trust that’s an irrevocable trust ideally set up in a really good tax jurisdiction, the South Dakotas world, and then that becomes their big vehicle in the US to invest their family assets.

So it really depends. If they’re just going to leave and they’re like, “Ugh, this is my temporary home here. I don’t ever plan on coming back,” then in that case it may not make sense to set up a trust. They can just do a will, a US side will.

Thomas Kopelman: Okay. So really it sounds like it’s more on the real estate side of things like brokerage accounts, things like that. It typically doesn’t seem like it would make a lot of sense to be putting inside of a trust.

Anne Rhodes: Yeah, I would say so.

Thomas Kopelman: Okay, cool. So sorry to deviate here, but I thought it was interesting when we were talking about the foreign side of things. So now we start to go into the retirement accounts. So you’re talking about 401ks, IRAs, all of these accounts that are in your individual name, are not good assets to be putting in a trust. It’s not even that they’re not good. It’s not even something that you can do.

Anne Rhodes: Right, exactly. And I think we had a listener question about this actually, so I just wanted to address it. It’s not necessarily that it’s a taxable account, meaning that there are income taxes building up in some of these types of accounts and assets, but it’s just simply that legally you can’t transfer those into the name of the trust. Where I think a lot of confusion comes in is that they can become transferred into the name of a trust once you have passed away. Once it becomes an inherited account or you, yourself, inherit an account from a parent or somebody else, that’s when the question becomes should you put that in a trust or in the individual’s name? And so how do you designate beneficiaries?

That question has actually become even trickier after the Secure Act. So this is Secure Act 1.0, the one that was passed in December, 2019. So at this point it’s about three and a half years old. And what that law did, and we can do a whole episode on this, I like talking about this when I have speaking engagements, but one of the things that it did was remove the ability to draw out those income tax deferrals based on the life of the younger beneficiary through a trust. So now putting that asset in the name of a trust and inheriting that way subjects you potentially to this 10-year rule and things need to come out. And so you have even more pressure when you use a trust on the income tax side. It’s also because trusts that own income generating assets, they pay income taxes at a compressed rate compared to an individual, so you, Thomas.

Because these become irrevocable trusts, right? You’ve passed away, you’re passing also retirement assets to a trust, which is part of your estate plan. So stepping back, let’s say you pass away, you want your retirement accounts to go to a younger beneficiary, like your child or grandchild, and up until they are X years old or maybe for their entire lifetimes, that trust is going to hold the asset for them. So that’s an irrevocable trust formed at your death. That irrevocable trust is the owner of your retirement account and is going to incur income taxes at a very different rate from having just passed that asset onto the beneficiary themselves, so that child or that grandchild. You have this issue of, “Should I just outright name my child as a beneficiary of that retirement account or should I name the trust for my child as the beneficiary?” And that will have different income tax implications to it.

Thomas Kopelman: But, really, I mean the core part that we’re talking about here is if you inherited as a spouse, you have very different rules than any other person other than your spouse. The 10-year period is that big thing that it went away to just stretch it over your lifetime. And now we have this part where most people are inheriting assets in their highest income earning years in their forties or fifties, and they’re required to take it out over 10 years in probably the highest brackets. And so I think that’s the important deciding factor here.

Anne Rhodes: Yes, the categories of beneficiaries matters tremendously. So there’s a reason I didn’t mention the spouse. The spouse is an ideal candidate actually to receive retirement assets. They’re something called an eligible designated beneficiary, so EDB. And so there are also special needs beneficiaries that fall into this category, beneficiaries who have disabilities, things like that. So we are setting those aside, but the idea here is inherited retirement account can be held by a trust, but there you have a whole Pandora’s box of things that you’re opening where you’re considering income tax implications.

Thomas Kopelman: I think the big issue here really is most common we see spouse first, not trust. Second though, you still commonly do see trust if kids are young, right? So if your kids are under 18, especially way younger than that, I feel like most commonly people are going that route. But I think what you’re getting at here is that might not be the best thing if you have adult children.

Anne Rhodes: Exactly. So we can, of course, talk about this in more length, but what the Secure Act basically put an onus on, an incentive on, is to revise your beneficiary designations at the point in time where you feel like your children or the grandchildren are old enough to have that asset in their own names. Before it didn’t matter as much. You could just appoint the trust for that child, and then if that trust was correctly structured, you could actually draw out. So this is the life expectancy. You could draw out the withdrawals, but now that doesn’t exist anymore. So there’s a huge incentive for financial advisors and their clients to review beneficiary designations on retirement accounts more proactively.

In the beginning you might say it’s worthwhile for me to take an income tax hit because I really do worry about this beneficiary’s controlling how they spend that asset. So the control factor outweighs the income tax hit, but eventually when that beneficiary is old enough, let’s say 25, they went to grad school or whatever, at that point in time you might say, “You know what? At this point, let’s switch it so that it’s no longer the trust that’s going to get the retirement account, but the beneficiary in their own name.” At that point, the control factor goes away, and the income tax benefits outweigh the control.

Thomas Kopelman: And this gets complex fast because the size of the account matters too. If you’re passing on to your one adult child the $300,000 IRA, what’s the income problems on that? It’s really just distributing that account to you that’s going to hit you at the income tax threshold because you ideally would probably space it out over 10 years unless you’re going to retire around that time or have a sabbatical or low income year where you can fill up lower brackets.

Anne Rhodes: Right, exactly. And just leave it to the beneficiary and hopefully a CPA working with your beneficiary to figure out how to best withdraw the retirement account benefits. But at least your estate plan should direct the asset to the right places. And, in fact, one quick tip, your estate plan, if it is trust related ideally would also allow for distributions in kind of accounts or assets out to the beneficiary. I think most trusts do this.

Thomas Kopelman: Versus selling the asset?

Anne Rhodes: Exactly. Versus having to withdraw and then give the asset the money to that beneficiary. Instead just pass the entire account straight to the beneficiary. That might be a way to bypass a stale beneficiary designation where the trust is the beneficiary where the trustee just says, “Hey, I’m just going to pass this asset out of the trust whole as it is straight to the beneficiary.”

Thomas Kopelman: This is where the advisors get to add a lot of value. I had a client in a very similar situation. Theirs was weird because the parent was still in their 401k plan active, so they had a five-year stretch period, which is super weird. I’ve actually never seen that, but I guess it happens sometimes. And all we did is they were business owners, husband and wife, both solo 401ks, both max them out. So as we’re withdrawing these assets, filling up brackets, we’re also deferring from basically funneling that income into a solo 401k. Obviously you’re not, it has to be your earned income, but reducing taxes in those years is probably really important.

Anne Rhodes: Right, exactly. And then I did want to address, once you have a trust and you’re starting the process of funding etc. And by the way, speaking of checklists that are account specific and you just work your way through the account, I did want to mention for those of the listeners who have a wealth.com subscription, once your client has a trust or a will, we actually do make available to you a manual. It’s called an owner’s manual, but the trust owner’s manual has a very detailed checklist that takes exactly the approach that Thomas recommends and uses with his clients. So it’s working your way through certain types of accounts quarter by quarter. But anyway, so I just wanted to mention that. But let’s talk about those pay on death or transfer on death designations outside of retirement accounts or foreign assets.

Thomas Kopelman: Can I ask one thing before we go there?

Anne Rhodes: Sure.

Thomas Kopelman: Okay. So we went through business, we went through real estate, we went through retirement accounts. This is the brokerage account side of things. And we still did hit on the brokerage account side of things. What about bank accounts? I think this goes hand-in-hand with what we’re going to talk about next, but I think a lot of times people sit and wonder, “Is it worth it to do with bank accounts because it’s obviously painful?” And for a lot of my clients I’m thinking about they have personal checking, then they have a personal savings there, and then they have five high-yield savings accounts for each different goal, and then maybe they have a couple other ones. It’s like, “That’s a lot going on, and that’s going to be a really painful process.” Is it even worth it or is it just potentially worth it doing your one big emergency fund or something?

Anne Rhodes: So I would say at the minimum, take a look at what the threshold is for your state for those small estate probates. Because some of our clients like here in California, we’re pretty resistant about putting all of their assets into their trust because you have to reopen accounts in the name of the trust. Your banker is going to ask for a certificate of trust or to look at a copy of your trust. Then new cards are going to be issued to you. All of your automatic deposits and other things like payment terms are going to need to be rejiggered and reconnected. It’s really annoying. So what we usually said is, ideally you transfer everything into your trust, but if there is some working account like your principal checking account and it’s under that small estate probate threshold, that’s okay to keep in your own name, but just be very careful because then if that’s what you’re keeping outside of your trust, then make sure that you’ve your homework on all the other accounts.

Thomas Kopelman: The other one, something that I’ve heard from estate plan attorneys is always have your own individual account with some money into it. So if this does happen or whatever and probates there, you still have access to some amount of money.

Anne Rhodes: Right. And I will say one small advantage, but this is something I learned last year when Silicon Valley Bank and First Republic were struggling is that there is an insured amount from the FDIC, and it’s per account X dollars. I think it’s like 50k if I’m not mistaken.

Thomas Kopelman: It’s 250k.

Anne Rhodes: 250k, thank you, Thomas. But the interesting thing is if you put it in the name of a trust, every single one of your beneficiary counts towards that so you can actually multiply the insurance. So that’s just a side bonus.

Thomas Kopelman: And there’s honestly now a lot of banks that multiply this. They have five million minimum and stuff like that. Definitely important to look at. I think people didn’t think that was an issue. And then last year that happened, but then last year everybody did get their money back, and they got bailed out. So we have this weird thing of does it matter? Does it not matter? Well, who knows, but you might as well just be smart.

Anne Rhodes: Right. So something interesting there, but those transfer on death or pay on death beneficiary designations that you had, review those. If you’re a financial advisor and your client finally has a trust and are starting to fund them, don’t forget to review those designations because they may have become stale. Now the client has a trust. I always think of those designations, so, for example, you have a joint account with your spouse, and there’s right of survivorship on that or you’re single, elderly and you have pay on death to five children because that way it bypasses probate, it goes straight to those kids once you pass away. Those designations may have become stale once you have a trust for two reasons, and I just wanted to address them. The first thing is that your trust is actually a more robust vehicle for determining how things are passed at your death.

So the first thing is that it provides for the payment of your taxes, your last expenses. This would be funeral expenses, attorney’s fees, whatever else. And also your last debts, so you made charitable pledges or just whatever debts you have. If all of your accounts passed by one of these designations automatically to your beneficiaries, your executor or your trustee would then have to go back to your beneficiaries and try to get assets from them in order to pay for those things. So that creates an awkward situation for your beneficiaries. It’s like, “Who’s going to volunteer?” Or, “In what proportions are you going to regurgitate the assets that you just got?” And do you focus only on the liquid assets or the illiquid ones too? It just becomes really awkward.

Thomas Kopelman: Yeah, so it feels like though that it’s like a step one, right? That’s better than nothing if you have a trust set up. I think sometimes people are like, “Do we keep those designations? Do we just end up funding it into the trust?” And it feels like from you, it’s take that extra step because now that it’s funded, you might as well utilize it because it’s going to lead to less issues and better results at the end of the day.

Anne Rhodes: Exactly, exactly. And less issues. It also includes things like not having to always take a look at the account levels to be like, “Ooh, am I giving enough to my daughter versus my son?” And things like that. It’s like if your trust just says 50% to my son, 50% to my daughter, just let your trust take care of gathering all the assets, a hundred percent of the estate and then dividing smoothly, fifty-fifty as opposed to each account trying to balance it out.

Thomas Kopelman: It feels like if you’re going through the pain, and obviously it is a pain to get a trust set up and get it funded, if you went through the pain, you paid the cost, you just have that last little part to get to the finish line to get everything in the right places. Don’t get lazy on it, get it done. And as advisors, it is honestly part of our job. I think sometimes advisors are always looking for more things to talk about. This is a really easy thing to talk about. It might be super boring in a meeting to watch them do some of these things, but we can help make sure that it gets done, and I think everybody will be happy because of it.

Anne Rhodes: Exactly. So that’s the episode I think on trust funding and some of those designation issues that you might see once your client has a trust and is starting to revisit those beneficiary designations. And we always encourage listeners to send us their questions because I’m sure that you’re touching on these issues.

Thomas Kopelman: Totally glad to finally get a question. We have more coming, but if anybody else has them, send them our way. But everybody thank you for listening. Please rate and subscribe, and we’ll see you back in the next episode.

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