Ep. 35 | Revocable Living Trusts 101
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Speaker 2:Hey, everybody. Welcome back to Teaching Tax Builder podcast. On to episode 35 today, we're gonna jump directly into revocable living trust. So if you don't know what that means, hang tight. You're about to find out as myself and my partner in crime on this podcast, Chris Pacuro, AKA founder of Teaching Tax.
Speaker 2:Well, really jump into this topic. But before that, as always, let's take a moment. Thank our sponsor.
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Speaker 3:You can look in our show notes or email us at hello@teachingtaxflow.com.
Speaker 2:Hey, everybody. Welcome back to Teaching Tax Flow. The podcast is always, as you just heard before the sponsorship announcement, we're gonna talk about revocable living trust. So before we jump into it, though, and and before I let my partner in crime I'm John Chapalski, by the way. My partner in crime, Chris Pacquero, jump in and give us really the good insight.
Speaker 2:Think about this. Right? Just in that title, revocable living trust. So what does that really mean? It means that if you're listening to this, you're clearly still living.
Speaker 2:It's not too late to come up with one of these for yourself, for your family, for your partners. Chris, what are we talking about today? Let let's let's give a definition of revocable living trust for those that aren't familiar with that.
Speaker 4:Well, first of all, it's great to be back on the podcast, John. I missed you the last couple weeks, although we had some great guests. They were such high profile guests that I wasn't allowed to talk to them.
Speaker 2:No. We we keep you out of we keep you out of the mix. Right? We just shove you to the side.
Speaker 4:And and then so we're talking about revocable living trusts one zero one. Before I jump into this, I wanna take my hat off to all of the people in our defeating taxes private Facebook group that voted on this topic. We threw out there four topics. We also allowed people to add their own topics. This clearly won as the podcast episode, the next podcast episode.
Speaker 4:So you you spoke, we listened, defeatingtaxes.com is our private Facebook group. Make sure you are part of that group. It is completely free, and we'd love to hear from you.
Speaker 2:They won by a landslide. Wasn't it, like, 60 something percent?
Speaker 4:Yes. It was, you know, they won by a larger amount than you on the hot body contest back Oh. Twenty o five.
Speaker 2:Oh, you weren't at the one that I won then. Clearly, I won that. I was the only one in it, but, you know, and I I was by myself, but, you know, it stuck out.
Speaker 4:Thought maybe you had Cooper in there, your dog. I don't know.
Speaker 2:He he's, you know, he's one he's a basset out with one eyeball these days, and, you know, he kinda looks like a cranky pirate. So yep.
Speaker 4:That well, on a on a more serious note, according to Investopedia, a living trust is a legal document or trust created during an individual's lifetime where a designated person, which is the trustee, is given responsibility for managing that individual's assets or eventually beneficiary. So that sounds complicated, Doesn't it?
Speaker 2:Which which actually, though, when when we'll get into, you know, some examples of personal property in that. So, technically, I could put my dog in it. Is that true?
Speaker 4:Your dog? Could be a well, there are actually special living trusts for for pets. There are pet trusts out there, because a lot of times people have a pet that they they wanna designate money to. But that's a great point. Really, a living trust is a it's a legal arrangement you establish during your lifetime to protect your assets and make sure the distribution of those assets is in in alignment with your wishes.
Speaker 4:So 30,000 foot view. If you're listening to this, congratulations. If you're in heaven listening to this, we've really made it big. Send down some money. Send down some advice to tell grandma grandma and grandpa we said hi.
Speaker 2:I mean, I know we have a a pretty wide reach, but that's on a whole another level. We're we're taking it upstairs. Right? So so, Chris, actually, if if I could pick your brain on this a little bit. So I I I know a good bit about living trust.
Speaker 2:However, I haven't heard in full transparency, I have not heard the term revocable living trust as often. So maybe tell us a little bit about how that revocable, quote, unquote, plays a part with the living trust.
Speaker 4:I'd love to. Before I do that, I want to paint a picture for you. You are living, you're listening to the show, thank you very much. And you're in our defeating taxes Facebook group, thank you very much. You unfortunately get hit by a beer truck, which you know I love to use this example.
Speaker 4:Please don't have your beneficiaries delete your Facebook account because we'd love to have you as a member of our group still. But in all circumstances, you get hit by a beer truck.
Speaker 2:You're a lifer. Once you're in, you're a lifer, and we're never letting you let's be honest.
Speaker 4:You pass away. Alright? You have assets. Those assets then, if they are in your personal name and there is not a beneficiary associated with that asset or a a co owner. So let's say you have a bank account, John Chipolsky has a bank account at x y z Credit Union.
Speaker 4:The assets in in that bank account now are part of your state. In the probate court, where you live, is going to determine the distribution of those assets, the distribution of your bank account. You might say, hey, man, I've I have a will. I left this to my wife. I left this bank account to my daughter.
Speaker 4:That is that's very good. The probate court will take into account your will as a directive, but ultimately, they're the ones deciding where those assets go. And typically, your will will stand up, although the will can be contested. I'm gonna stop right there. I'm gonna say that we are not attorneys.
Speaker 4:We're gonna give you a great opportunity to talk to some attorneys after the show. We are talking about this from a tax perspective, so I wanna be clear here. But, ultimately, there the will could be contested, in in we're I'm working right now on with a with another tax professional, whose father passed away, had a tax practice and a bunch of assets, real story. He passed away what's called intestate. So he didn't have any type of formal documents.
Speaker 4:He had a family member jump in, claim that he didn't have any children, and stole all the assets. There's no living trust. And now that that's getting contested. So terrible situation, but that when you leave things up to the judicial system to distribute your assets, you're taking a risk. That was what would would happen without any type of, revocable living trust.
Speaker 4:So what the revocable living trust does is it allows you to place the your assets in an entity, the revocable living trust. While you're alive, you could revoke that trust. You can change change that trust. You could change anything about that trust while you're alive. And from a tax perspective, the revocable living trust any assets in that trust simply get reported on your personal return.
Speaker 4:We're gonna go back to episode two, single member LLC. So the revocable trust living revocable living trust is a disregarded entity, really, for tax purposes 99% of the time.
Speaker 2:And within those living trusts so I know there's there there's a list out there. I'm sure there's a list of it of assets that you could you could place into that. So, obviously, cash accounts, you know, bank accounts like you had mentioned, you know, non retirement investment accounts, annuities, stocks, bonds, personal property, etcetera, etcetera. So without going into everything that's out there, every option of putting it in there, maybe walk us through again, from a from, the 30,000 foot tax perspective, maybe tell us a couple things. If if you had to choose a few things to place into a revocable living trust, maybe your best recommendations, but then also maybe a couple things that, you know, you would kinda raise a red flag and say, oh, hold on a minute.
Speaker 2:Maybe let's not put that in there. Maybe give us some of those examples.
Speaker 4:Correct. And I was remiss to say something. A trust has to have a trustee. While you're alive, you are your own you are the trustee for your own trust. So you you have your own, you know, revocable living trust.
Speaker 4:You're the trustee. You can change anything while you're alive. So the advantage of this is one, you are controlling the distribution of your assets after you pass away. So if you have a grandchild that's six years old, and you wanna earmark money for them to specifically go to college after you pass away, that money has to go to that, and your successor trustee, meaning the person that takes over your the affairs of the trust after you pass away, has to has a due diligence and a duty to make sure that the whatever was in those trust documents is carried out. The other advantage of the trust, we said it avoids any type of probate course court.
Speaker 4:It also provides you with privacy. A lot of our clients that do real estate know that one way to find real estate deals is to go through court records, determine who passed away, and determine if they have real estate assets that are going through probate because they could lowball them and buy them in a distressed situation. Having a living trust provides you with the privacy of those assets never going through the probate court. You can't go to the county and Google someone and find out what their assets are if they're in that living trust. Now you brought up a great point.
Speaker 4:Which what assets should you put into the living trust? And typically, when you say putting an asset in the living trust means you create this revocable living trust, And once it's created, you don't even have to get a separate federal ID number at this point. You would then go to the bank and say, hey. I have these trust documents. I want my checking account.
Speaker 4:I want my savings account to be in the name of the trust. Because think about this. Let's say I get hit by that beer truck, and let's say, the account was in my name, and my wife needs to access that money to pay bills, to live, for any type of reason or to to pay the property tax bill. So there there's a lot of reasons why that, you know, revocable living trust makes sense. And then when you place the assets in the trust, typically, it's just retitling of them.
Speaker 4:When you pass away, the it is not a revocable trust anymore. You can't revoke something that you're not alive to change, and that's where it becomes irrevocable. Now that Didn't answer your question.
Speaker 2:No. You're good. And, actually, before before we get into the questions too, so, you know, you mentioned you know, privacy briefly on there. Right? So so, really, the these these trusts are not, quote, unquote, public documents.
Speaker 2:Right? So so, technically, I mean, as everybody, you know, is well aware of, we like to add a little comedy into these shows. I mean, Chris, you know, people know that, you know, we try to get up on stage and try to make people laugh every once in a while, but, you know, we get booed off everywhere we go. So this is our opportunity because this is not live at this very moment, so people cannot tell us that we're not funny. We just think we're hilarious.
Speaker 2:Exactly. Here here I'll put you on the spot for a minute. So think about it in your your crazy, creative, fun loving guy mode. Right? You can name a trust anything.
Speaker 2:Correct? It doesn't have to be like John Churpalski trust. Right? Correct. So if you had to make a trust, if you had to create one right now in the in the unfortunate event that you were not around anymore, what would you name this to make your beneficiaries laugh their behind off?
Speaker 2:What would be a funny name you would name this? I know what you're thinking. I can see it.
Speaker 4:I I well, we have a living trust already, but that was a we established that a long time ago. Right. To make people laugh, I might call it the pickleball player's living trust. Okay. Something like that.
Speaker 4:You know? As you know, I've kinda got hooked on pickleball. There you go. Okay. Alright.
Speaker 4:I I'll give it anything. And,
Speaker 2:I might even name mine, like, you know, hands off my dough or something like that. I'll you know? I don't know. We'd have a little fun with
Speaker 4:it, but I've seen some interesting ones. That's for sure.
Speaker 2:Well well, back to our regulars regularly scheduled content. So let's talk about a couple of those things again that the the question that we kinda led you down that path a little bit of, you know, what are the best things to place in there? What are the worst?
Speaker 4:Any asset can be placed in the trust or the trust be a beneficiary of of of an asset. So you can't take a a IRA and place that in the trust. The trust could be a beneficiary of it. So typically, the things you're gonna want to put the the in the living trust would be real estate real estate assets, like your primary residence, maybe you have a second home, checking accounts, savings accounts, brokerage accounts. There I'm I'm just thinking out loud.
Speaker 4:CDs, anything like that, you would want to maybe stocks, maybe a small business stock, something like that where, it gets, you know, it gets transferred transferred to the trust upon your passing, or rather the trust owns it. And if you passed away, then the then the beneficiaries would have it. The one thing, there's something sneaky though you have to be aware of. If you make the trust a beneficiary of an IRA or retirement account, what happens is the in general, depending on the age of the decedent, the assets have to be distributed out of the retirement account within five years. There's some exceptions if someone's I think it's older than 72, but let's just say let's say five years in general.
Speaker 4:That's a problem because, John, let's say your IRA is worth a million dollars, and you get hit by the beer truck, and now you instead of naming your wife the beneficiary, you name your trust. And now she's the beneficiary of the trust. She's gonna have to take a million dollars out of that IRA within the next five years and pay tax on that. Where if she was the beneficiary, she would have have what's called stretch privileges, and she could take the money out over the longer course of her lifetime based on life expectancy tables. So that's where it gets a little tricky when you have a trust as a beneficiary of a retirement plan.
Speaker 4:Again, we're we're gonna say, definitely consult your attorney and your tax professional when doing this, yet that's something that a lot of people aren't aren't aware of. A lot of times, what would happen is, let's say you have a a couple in their forties and their kids are five, six years old, maybe 10. If I had an IRA, my wife would be the the primary beneficiary, and then maybe my living trust would be the contingent beneficiary until my kids are older. The only reason I wouldn't want my children to be my contingent beneficiary is if I didn't want them inheriting that money or at age 18, 19, or or, you know, if they're five or six years old, they really couldn't use it till they're till they're older. But the living trust allows you to control your assets from the grave.
Speaker 4:I hate to be, dark about it, but that's really the best benefit. Now I'm gonna tell you the negative. The number one negative of this is the cost of it. The cost of establishing a living trust can get expensive, depends on that your amount of assets, amount of of what you've got going on, and it could it could run from a few thousand dollars way into the up to $10,000.
Speaker 2:And taking out just the cost factor is being somewhat intimidating to some people. I'm sure that the intimidation factor is fairly high with people that just don't understand it, right? Like, they probably said, oh, well, I have a will. That's what I was told to do since I was a kid. Why do I need a living trust?
Speaker 2:So I I appreciate the comparison between the two of them. And and, obviously, we as humans most like to control as much as they can while they can, in hopes of of obviously things ending up where they they should or where you prefer. So in most cases, would you say, again, not legal advice, but from a tax perspective, would you almost say that a living trust is always a better option over a will, or is it really case by case?
Speaker 4:It's I mean, it's case by case. The the other thing you have to understand is that if you don't have a a living trust and you pass away and the assets go through probate, you still have to pay a fee to the probate for it to administer these, which could be significant based on where you live. Typically, it's you never wanna say always, but a living trust allows you to it's it should be part of a sound estate plan along with what's called a pour over will so that if for some reason there's an asset that didn't get into the living trust, it it there's a will for that, for that asset. But, again, we're not you know, we don't wanna talk about the legal part of this, but it's part of a sound estate plan. And we worked extremely hard to make sure that we can, you know, provide these resources to the teaching tax flow community at a much more reasonable price than your typical, you know, living trust setup cost.
Speaker 4:But, again, you're gonna pay you know, if if the assets have to go through probate, you're still gonna pay to have those those go through that system.
Speaker 2:Either way, fees are being paid regardless. It's just whatever is best for your for your situation. Correct. And planning.
Speaker 4:Exactly. And and we feel, you know, in the I would say the more complicated your system more complicated your situation, the more need to have a living trust. Let let's look at a blended family. Let's look at a blended family where, or or even a better situation, let's look at maybe a grandfather, grandmother, a widow that that has a family, and they get remarried at age 60. And now they they wanna keep their assets that they have accumulated within their family, within their within their lineage.
Speaker 4:They want to have maybe they buy a home with their current spouse, and maybe they live there for twenty years, establish a long life together. You or and if one spouse predeceases the other one, then they wanna allow the remaining the living spouse to live there as long as they're unmarried. And then if they pass away at that point, they sell the house and the the assets. Think about all these situations that you're gonna have a lot more peace of mind by by tackling those while you're living and having those conversations. That's why when we hear how many of these these these families really fighting about money and this, that, and other thing.
Speaker 4:Well, we don't we think we know what people's intentions are, but we're not mind readers. And that's where I think the peace of mind and, ultimately, you're gonna pay one way or another legal fees or probate fees. The the revocable living trust is a is is a really especially what we've established with with teaching tax flow is really a great option from anyone, from people just starting out to to working working families. So that that's that's what I think. I think everyone should deeply consider it.
Speaker 4:And even if you don't think you have a complicated situation, you just might. And it's part of an overall state plan when you start talking. We're gonna have some more episodes talking about, you know, life insurance and and potentially some more advanced estate planning issues and retirement planning and and that Social Security planning and those sort of things.
Speaker 2:And that's probably one of the best closing statements you could almost leave that at. And I know over the next two weeks, this is this is gonna be a great episode, kind of a precursor for the next two topics, which you will see in a few weeks. I'm looking at them on my on my roster right here for show topics coming up. So just consider that. Everybody that's listening to this, you know, it's it's very cliche to say the best day to plan was yesterday.
Speaker 2:But take that into account. We will definitely send or put the link in the show notes here for our our partner that we work with, many, many times. Chris, you've had a relationship with them for a while regarding these living trusts, or anything to state planning wise. I know you've done a lot within the past, so we'll drop that link in there. We do get an excellent rate with them that we actually pass along to everybody as well.
Speaker 2:We'll give you some information on that. But as always, look forward to to more topics. Right, Chris? I I'm, like, dying to not give away any hints what we're about to talk about in the next couple weeks, but I know we got two really fun topics. But
Speaker 4:I agree. I'd say thank you for listening to this podcast episode. The takeaway is think about your overall estate plan and and deeply consider you know, check out our show notes. You're gonna wanna partner you're gonna have an opportunity to really implement some of the the revocable living trust, opportunities. And remember, just because you established a trust, it's revocable, meaning it could be changed at any time, and that's that's a feature that you have to consider.
Speaker 4:So alright, Johnny team. Thanks again, buddy.
Speaker 2:Absolutely. Absolutely, everybody. Thank you again for joining us. And as Chris always likes to say, let's twist it around a little bit. Just stay out of the way of a beer truck.
Speaker 2:We don't need you getting hit by a beer truck. We don't need you having to be in a position where you cannot revoke your living trust. So thank you everybody, and we will see you next week as always. Hey, everyone. Thanks for joining us as always on this podcast and hanging out with us here for a bit as we really jumped into that topic on revocable living trust.
Speaker 2:So, if you went into this episode not exactly sure what that meant, now you know. Now, you have all the answers. Right? And, the questions that you still have lingering, obviously, jump out of that private Facebook group defeating taxes. As we did briefly mention during this show, but without specific details, we actually have a fantastic partner with Teaching Tax Flow.
Speaker 2:Actually, one of our first partners when we put together Teaching Tax Flow and that's Legacy Lock. So if you actually go to teachingtaxflow.com backslash legacy, that's legacy, teachingtaxflow Com / legacy. You'll, you'll get a little video on there. So Chris did a great video really introducing Legacy Lock from his point of view. But even better than that is we also alluded to sometimes the biggest hurdle is not exactly, I'm not sure what this is, but it could be the price.
Speaker 2:Right? So, don't let that hold you back. We actually have a $200 discount on there too. So, you'll see that discount code on that landing page, that teachingtextflow.com/legacy. Go to that.
Speaker 2:You'll see the video. You'll see the discount code and a direct link directly to Legacy Lock's website to actually see what they offer. So, won't tell you too much about it. Follow the link. Watch the video.
Speaker 2:Grab the code. Trust me. You will be happy you did. And then afterwards, hop on the Facebook group. Tell us how it went.
Speaker 2:So we'd love to hear some feedback, how everything went with those guys over there at Legacy Log. Great, great team. We will work with them for a while. So as always, thank you from the team at Teaching Tax Flow again for joining us on this one, and we will see you next week with another great show. Take care.
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