By Allen Giese, ChFC®, CLU®
Allen: I'm sitting today with estate planning attorney Patricia Voss. Now, Pat is one of those rare lifelong Fort Lauderdale residents that you hear about every now and then. She got her law degree and her Master of Laws degree in estate planning from the University of Miami, which is my alma mater. Go Canes. And she's been a member of the Florida Bar since 1997. Now, we've had a close business relationship with Pat's office for many years, and she's also just a wonderful person. So, Pat, welcome to the vlog.
Pat: Thanks, Allen.
Allen: Hey, listen. Protecting our wealth and transferring it efficiently is something that we're all concerned about. Now, I know it's already on most of our clients' radar—it's one of their most important goals. But there's a lot of misunderstandings that we see, not just in whether or not they should have a trust but how trusts work and what are the responsibilities of the players involved. What I wanted to do today is just have a little discussion about trusts and maybe answer a few client questions as we go.
Pat: OK.
Allen: Awesome. So one of the big questions that people have is what's the difference between a revocable trust and an irrevocable trust?
Pat: OK, well, an irrevocable trust is one that can't be revoked, hence the name, irrevocable—and those I don't see as often as the revocable trust.
The revocable trust is used real commonly for estate planning, not so much today because of the $11.2 million estate tax exemption, but primarily now for probate avoidance. The other advantage of a revocable trust is that if the person who creates the trust becomes disabled, they've already said who they want to take care of their assets during any period of disability. Typically, we think about using trusts after death, but really during a protracted period of disability, they really shine.
Now, you asked about the irrevocable trust. The irrevocable trust is often used for in a dynasty fashion, like where it's intended to last for many generations because you know, with the revocable trust, only the person who creates the trust can revoke it or amend it.
Allen: So it becomes irrevocable upon your death?
Pat: On death. But some people start out with an irrevocable trust in the beginning because they have a significant amount of wealth that they want to protect for generations to come. But implicit in that whole “generations to come” conversation is that there's a lot of decision-making process that goes into that. Who's going to be the trustee? You might start out with an individual and switch to a corporate trustee because the corporation will survive the generations where the individuals will not, and they also keep up with the laws as related to administration of trust.
The other thing is that a common misconception that I hear is that, "Oh, I need a revocable trust to protect my assets," and that is not true. A revocable trust, because it's revocable, means that your creditors can get it because there's no penalty for you revoking it. But with an irrevocable trust, the creator has to totally give up control of those assets, so you can understand that's why you don't see it as often.
Allen: Sure. It's hard to basically kiss it all goodbye into an irrevocable trust.
Pat: That's right. And maybe they only put half of their wealth into an irrevocable trust to protect it from the claims of future creditors, but then they have to have enough of the other half to last the rest of their lives.
Allen: And is there just no way at all to get it back out of the irrevocable trust?
Pat: There is a type of irrevocable trust called an irrevocable life insurance trust, and that trust, though, only really owns a life insurance policy. And if you wanted to get back that life insurance policy, you would just quit making the premium payments.
Allen: Quit making the premiums, right.
Pat: Yeah. There's about eight other ways to get out of a life insurance trust, none of them easy or inexpensive, and so usually nonpayment of premium is the way that people get out of those types of trusts, the irrevocable life insurance trusts.
Allen: OK. A question that we get quite frequently is where a client will call and say, "Hey, Allen, my brother's put me down as a successor trustee. What does that mean? Is it something I should do or something I shouldn't do?” What are your thoughts there?"
Pat: If the client who's called you is of a certain personality type, meaning that they are articulate, educated, able to read and take direction, they're probably OK to act as the successor trustee for their sibling's trust.
Allen: OK, sort of like an organized person who probably feels like their finance is well anyway.
Pat: Yes, but probably the most important thing is that they need to know that they should call someone's—whether it's their own or their sibling's—attorney, if that person becomes disabled or deceased, because even the brightest of individuals would have no way of knowing how to administer a trust, what even the first thing to do is. They really just need to be able to call an attorney and ask questions about that.
Allen: What are your thoughts about having a co-trustee? I have one case in particular, one client who is asking because she's worried about the relationship with her brother and sister if she becomes the successor trustee as her parents want her to be on their trust. So I told her, go back to your attorney and maybe talk about using a co-trustee in the corporate world.
Pat: Well, it's my preference to have one trustee at a time just because then there can never be a dispute that can't be resolved as to some decision that needs to be made. If you have one trustee, then that person has discretion, presumably, under the trust document to make decisions that are deemed to be in the best interest of whomever the trust has been created for. If you have two, then you always have the possibility of a deadlock in decision-making.
Allen: Yeah.
Pat: So sometimes you see a trust drafted that creates a trust protector, somebody that would act as a tiebreaker, but it's unclear because that's a new thing in Florida—meaning in the last 10 years—whether or not that trust protector actually has the same fiduciary duties to the beneficiaries that the trustees actually have.
Allen: Kind of a basic question that we do get every now and then is someone saying, "I don't really need a trust today, or I don't feel like I have enough assets to put into a trust. Can I set up a trust now and then just put everything in it when I die?"
Pat: Well, if somebody came to me and said that they didn't have enough assets, then that usually is in the context of not wanting to spend the fees on the trust. But let's suppose that you do have that rare individual that doesn't think that they have enough—and that's not even a reason for creating a trust, by the way, but that is a common misconception among newcomers.
Allen: Right.
Pat: No, they can't have a trust that has nothing in it because that's a dry trust, and dry trusts are not valid. You have to have a trustee, a beneficiary, and a corpus, meaning the assets of the trust, and if you have no assets of the trust, then you have no trust.
Allen: Is there a minimum amount in the corpus?
Pat: Usually, we agree that the trustee has taken possession of $20 on the day that the trust is signed to prevent that eventuality.
Allen: So, Pat, are there any limitations to how the trust can dole out the assets, or is it pretty much up to the creator, just anything that he or she wants to do?
Pat: It's pretty much up to the creator as to how they would like to dole things out after they're gone. Having said that, there are some things that people have asked me to do that just are not enforceable or supportable. One of those things is, in other states, trusts and wills have these clauses called in terrorem clauses that say, “If somebody complains about what I've left them, then they don't get anything.” Well, in Florida, they're not valid. We don't have in terrorem clauses or no-contest clauses in Florida. So every now and then somebody might insist that I put one in there, and they're thinking that the person who's reading the trust after death won't realize that Florida doesn't have that kind of clause in its law, but that's one of those things.
Another one is if the person says, "I don't want to provide for my child, so I just want to leave them a dollar." I would say, "No, no, no." Because then the trustee has a duty to search for that person to give them that dollar, and that's just too expensive and time consuming, and it never ends well. So in that kind of a situation, if the person has a family member, child that they don't want to benefit, then they should say in the trust that I'm intentionally not leaving anything for my son or my daughter, so-and-so, because of reasons known to them or known to me, and leave it at that.
Allen: Can a person create a trust outside of using an attorney? Can they do it themselves?
Pat: I suppose it could be done.
Allen: I've never heard of it.
Pat: I suppose it could be done. There are some things under the law that a person can do for themselves. So if, for example, somebody took a piece of paper and wrote "Trust" across it, "I hereby leave $100 to my brother and tell him to keep it and give it to my sister five years from now," and sign it with two witnesses, two attesting witnesses—that means they have to be there all at the same time—that's probably going to be a valid trust. That same person could not do that for anyone else because then it becomes unauthorized practice of law.
Allen: Ah.
Pat: The same thing with deeds. People can prepare their own deeds. It's sort of like the law doesn't care how much you mess up for your own self, but it won't let you mess up for someone else.
Allen: Oh, OK. All right. So have you ever seen a situation where somebody had a trust and they really just didn't need it?
Pat: I have, and in that case, I advised the woman to revoke her trust. It was a simple one-page document, and she signed it. You might be thinking, "How does that situation come up?"
Allen: Yeah.
Pat: Well, she was in her 80s, and she sold her apartment and moved into one of the places like John Knox Village or Palm Aire that has the independent living, assisted living, and skilled nursing. She didn't have any property that needed to be transferred at death—because that's what the trust is used to avoid probate when transferring property at death. She had two children, but her one child was a bad actor, and so she just left the other child as the beneficiary on her bank accounts.
I don't always recommend doing that, but in her case, this was way better than them having to worry about the trust year in and year out.
Allen: Very good. What would you say are the most important benefits that a revocable trust gives somebody?
Pat: In Florida, the biggest benefit, absent the estate tax liability that might be avoided for married couples, avoiding probate would be the number one reason to use a revocable trust.
Allen: OK, so that's pretty much what drives people to get a trust if they're under $11 million?
Pat: Yes, because the cost of probate. People come to me, "Oh, I don't want the state to have my money." It's not the state. The filing fee's the same for everybody. It's a little over $400. The money goes to the attorney on an hourly basis or on a percentage basis depending on how the attorney and the client decide that the billing is going to take place. But it's not uncommon for that probate to take a year or two years depending on how uncooperative just one individual is.
Allen: So if it takes, say, like you said, one, two, or maybe even three years to dole out an estate through a probate process, what would the process—what's the length of time through a trust?
Pat: That depends on what the trust says to do after death. If in the simplest of circumstances, mom dies and she leaves everything to all three of her children outright, and nobody is involved in bankruptcy, divorce, or a lawsuit, then a couple months maybe. We have to wait a few weeks to get the death certificate, and they have to get a tax ID number for the trust because it became irrevocable on death, and then set up a bank account in the name of the trust and marshal the assets wherever they might be—because it might not be just one bank account. It might be an investment account, proceeds from an IRA. But once the money is into the revocable trust bank account, then they can just divide it up, pay what expenses they have, and close the trust, terminate it.
Allen: So one big question a lot of clients have is how are trusts taxed? So if I set up my own trust or revocable trust, how is that taxed, and then how is it taxed after I die?
Pat: While you're living, your revocable trust is not taxed at all. It uses your own Social Security number, so you have no special tax return for it.
Allen: So it's still taxed just like it's my money.
Pat: Just like it's yours. It's a conduit or a see-through in the eyes of the IRS, so no special tax considerations while you're alive. However, after death, the tax brackets that most of your clients—not all clients, but most of your clients—are familiar with, the maximum tax bracket for an individual isn't reached until three or four hundred thousand dollars in income per year. But for a trust, that maximum tax bracket is reached somewhere around 13 or 14 thousand dollars per year.
Allen: Wow. That's low.
Pat: It doesn't take very long to get into that highest tax bracket, and then depending on—there's another method of taxation depending on what investments might be in the trust. If you have tax-free bonds, those of course don't pay any tax, and you've got other taxable investments, and then when the money gets distributed out to the beneficiaries, they get a K1, which I'm sure you're familiar with and a lot of your clients are too, itemizing these various types of income and what they're supposed to report to the IRS on their own return.
Allen: OK, so there could be a considerable taxation to them?
Pat: There could be, and I probably should have said that if somebody has an IRA, that the best way to pass an IRA on to someone else is to name a human as the beneficiary, because then they have options after the death of the original IRA owner. But sometimes if the person is single, and they don't have any children and they have a gaggle of nieces and nephews that they want to divide the money up, bringing the IRA proceeds into the trust is the only way to do it. So sometimes being in the higher tax bracket inside the trust is kind of like an insurance policy. It's the premium you have to pay for being able to do what you want to do.
Allen: Ah. So, Pat, what about the idea of using a corporate trustee as opposed to a family member?
Pat: Most families do not want to use corporate trustees. It's a hard sell from my position to talk someone into using a corporate trustee because they get their fees—they're paid in a percentage manner based on the assets under management. So all the client can see is dollar signs about how much it's going to cost for one of the local trust companies to administer their trust based on whether they have $500,000 or $5,000,000 in assets. The work doesn't change, but the fee becomes much greater. So I get a lot of resistance from clients on that.
That said, if the family members are not numerous to where you can name five or six, because you know families eat together, families vacation together, and unfortunately sometimes families get sick and die together. So if you don't have five or six layers of successor trustees in the trust, then it's really better to look at the corporate trustee from the beginning because they get paid to keep up on the law. Your brother-in-law doesn't.
Allen: Yeah.
Pat: And won't.
Allen: That's an instance where maybe it is worth the fee.
Pat: Absolutely. There are lots of instances for that one reason.
Allen: Sure. OK. So, Pat, thanks so much for your time. And thank you very much for watching, and if y'all have any questions, by all means feel free to give my office a call or Pat's office a call. We'll put our number at the end of the video.
Pat: Thanks, Allen.
Allen: Thank you.