Legal Document - Contract - Agreement - Asset Protection - Estate Plan - Trust - Living Trust - Last Will

Living Trusts: What and Why You Need One

Intro

1 out of 3 US adults have an estate plan. 3 out of 3 need one. Revocable living trusts are powerful, flexible estate planning instruments which all adults should seriously consider, especially if there are children or significant assets involved.

In this episode, we detail the advantages and disadvantages of living trusts. We also discuss the risks and headaches of dying either with only a last will or no estate plan at all (intestate), which furthers the case for having a living trust.

Some of the items discussed include:

  1. Probate: Costs, time delays, asset protection, and privacy concerns (public records)
  2. Payable on death (POD) beneficiary designation headaches and risks
  3. Living trust advantages: Bypass probate, asset protection, protections while still alive, flexibility and control after death
  4. Living trust disadvantages: Costs, complexity, may need revisions if moving to another state
  5. Pour-over will to transfer non-trust assets to the living trust upon death
  6. General trust and living trust basics: Terminology, parties, structure, purpose, revocable vs. irrevocable
  7. The importance of having an estate plan – for the sake of your heirs

Podcast

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Hey everybody, welcome back to the Bigger Insights Finance podcast where we’ll help

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you live a life you don’t need a vacation from.

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In this episode, we’re going to talk about everyone’s favorite topic: Estate planning.

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But more specifically, what living trusts are and why you should probably have one.

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But first, bear in mind that we are not liars, I mean lawyers, and nothing in this episode

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or our podcast as a whole should be construed as legal advice.

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We also want to stress that this information is specific to the United States and may vary

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depending on your jurisdiction, so be sure to run any of this by a qualified attorney

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in your county.

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Before we bore you to death with the basic principles of trusts, let’s tease you with

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some of the advantages that a living trust offers.

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When you die with a last will, your estate is administered per the terms of your will,

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but through the probate court.

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When you die without an estate plan at all, this is called dying intestate, which is

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also handled through the probate court.

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However, dying intestate is worse than dying with a will because the state will decide

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how to handle your assets and liabilities and your minor children, which may be done in

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a way that you wouldn’t agree with if you were still alive.

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For example, they may distribute your assets equally to all of your children, but you may

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not want that because perhaps one of your children has a drug problem and you wouldn’t

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want them to use your money for that purpose.

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A last will can help with that issue in particular, but the probate process has serious disadvantages.

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For starters, you’re probably going to want to hire a lawyer to help you with this and

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they’ll probably take about 10% of the assets of the estate.

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Second, whatever is done in probate is generally public record.

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Before the internet, that wasn’t necessarily a huge deal for most people, but now that

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a lot of the courts are making these documents publicly available on the internet, this is

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pretty concerning.

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Just imagine for a moment that you died with a stash of gold and that was distributed to

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your young daughter through the probate process.

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Well, that’s public record, which I don’t know about you, but I certainly wouldn’t

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feel comfortable with that if I was in her shoes.

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The third disadvantage is that probate can be very time-consuming.

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This can be a major issue depending on the types of assets in the estate.

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If a probate case involves a business, real estate, or other illiquid assets, these can

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be essentially frozen for months.

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I heard a lawyer talk about this once and he threw out some statistic about this that

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stated that some large majority, I want to say it was like 75%-90% of small businesses

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that get tied up in probate end up going out of business, for a number of reasons,

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but one of which is how long it takes to get everything sorted out through the probate

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court.

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So if you own a business or real estate, you should really be taking this into consideration.

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And there are other issues with probate, but the last one that we’re going to discuss

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is depending on the circumstances, it may be easier for creditors, distant relatives,

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spouses, and other ne’er-do-wells to get their hands on your assets without a trust and definitely

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without a will.

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You might not think that that’s a big deal, but just ask an attorney sometime for stories

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about these types of people coming out of the woodwork when someone dies so they can

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raid the estate’s assets.

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Your estate can really turn into a feeding frenzy, which is sad, but that’s the way she

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goes.

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And some people have this attitude like, “Well, I’ll be dead, so what do I care?”

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This is such a garbage attitude.

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If you wouldn’t appreciate cleaning up after someone else’s mess after they die, you shouldn’t

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want to dump your mess on someone else either.

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I certainly don’t want to be responsible for probating someone else’s estate.

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Ain’t nobody got time for that.

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A comprehensive estate plan can help you in some circumstances while still alive, but

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they’re mostly for the benefit of those you leave behind, so do the right thing and take

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these things seriously.

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Now let’s talk about how a living trust can help solve these problems as well as how they

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can make other things easier for you and your heirs.

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First, living trusts bypass the probate process.

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As long as there are no issues like someone contesting the trust, your estate can be

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administered privately without the probate court.

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However, even in the event of a contest, some jurisdictions may allow your trust to require

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private arbitration.

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I know this because I have a living trust, and this is one of the terms.

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If you want to contest it, that needs to be done in private arbitration.

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And because you don’t need to go through the probate court, the trustee of your trust could

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also fulfill the terms of the trust without needing to hire a lawyer, although they may

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still want to for some work, depending on the circumstances.

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And of course, by skipping probate, the trustee can get control of the assets much quicker,

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and this is more private because the trust and most of its activities are private.

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I say “most” because the public may still see some things like who the trustee is and what

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they do to some degree, like if they’re buying or selling real estate in the name of the

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trust, for example.

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But for the most part, administering an estate with a trust is more private than a will.

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Second, a living trust may also provide better asset protection than dying intestate or

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with a will.

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I remember when I set up a trust, I asked my lawyer about one word that was in the document:

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“may”.

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It said something like “the trustee may pay creditors”, in more lawyerly language, of course.

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I asked him about this because I was curious about it, and he had this smile on his face and

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explained that the wording is there so that the trust protects my assets with this one

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weird trick.

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We’ll go over this later in the episode, but when I die, my trust becomes irrevocable.

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When that happens, unsecured creditors are not in a very good spot because they’re not

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beneficiaries, obviously, and they need to ask the trustee for some of the trust’s monies,

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many, many monies, which he, she, it, or they may not be very enthused about handing over.

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Third, a last will is for your death.

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A living trust handles your death as well, but can also handle certain situations while

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you’re still alive, such as if you enter the advanced stages of senility, it’s called

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Senilitus Maximus, or if you go to prison, you go missing, or if you just want to hand your

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assets over to a trustee for whatever reason.

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Just kidding about that whole Senilitus Maximus thing – that’s from Happy Gilmore. But it is

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a serious issue when people wait until they’re old to establish an estate plan, only to find

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out that it’s too late because they’re senile or they have some other issue, which renders

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them unable to make such decisions.

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Now in fairness, you can handle some of those situations with other means, like a power of

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attorney, which you should also have, but a living trust is very helpful for these kinds

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of unforeseen circumstances.

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Third, trusts have other, smaller benefits.

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If you don’t have an estate plan, you should at least set beneficiary designations on the

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payable on death (POD) accounts that you have.

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If you have a bank or brokerage account, you’ve probably seen these before.

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And if you’re really paying attention, you’ll notice that there are a lot of headaches with

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payable on death accounts.

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1. Every institution has different beneficiary designation options.

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I’ve seen banks that do primary beneficiaries only, so no contingent beneficiaries, and other

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annoying things like not allowing you to change who gets what.

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So if you had five beneficiaries, each would automatically get 20%, which you may not want.

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2. They usually want you to give them the social security number (SSN) of your beneficiaries,

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which they may not be comfortable with, or you may not want to do because every time

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you do this, you run the risk that that data will get abused or leaked.

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3. Your beneficiaries may not know that you’re doing this.

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So let’s think about that for a second.

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If you put your life savings in pancake coin on some exchange, set your mom to be your beneficiary,

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and you die without telling her, how is she going to know to go to the exchange and ask

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for your coins?

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4. Setting minors as beneficiaries is a little sketchy.

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If you’ve got minor children or siblings that you may want to distribute assets to, you’re

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much better off with a trust because you may not like how your bank or state handles sending

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those assets to minors.

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5. And five, keeping these designations up to date over the years as people come and go,

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your assets and accounts change, and you have falling outs with people, is pretty tedious.

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A trust can help with this because it’s worded to handle pretty much any event.

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For example, my trust has a formula for distributing assets to my child or children, regardless

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of how many I have, if any, when I die. I don’t need to update it as these things change.

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I don’t need to update all of my bank and brokerage firms when things like this change

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in my life.

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This is a big deal that you don’t realize until you start building assets and you see

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for yourself how convenient this really is when you manage them with a trust.

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I’ll give you another example.

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I’ve seen many stories where someone died but forgot to update their beneficiary designations

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so their ex-wife gets their bank accounts, brokerage accounts, and life insurance payouts

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with the actual wife and kids left holding the bag.

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With a trust, you don’t need to worry so much about that stuff because in this situation,

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for example, your trust could be worded generically to refer to your spouse at the time of your

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death, if any, without having to name them explicitly to avoid this type of situation.

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So instead of saying something like, “Distribute my many, many monies to Karen”, it could say,

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“Distribute the trust’s many, many monies to my wife, if any, and otherwise”, so on and

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so forth.

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So to make a long story short, as long as your institutions do trust accounts, which some

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of them do not, we’re looking at you, Capital One, you title your account in the name of

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the trust, which eliminates this whole issue with designations.

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When you die, your trustee goes to the banks and other institutions, tells them that you

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gave up the ghost, and gets control of your accounts.

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They don’t need to know or care about who the real beneficiaries are.

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That’s the trustee’s problem now.

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And if you can’t open or don’t want an actual trust account for whatever reason, like if

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you bank at Capital One, you can designate your trust as the beneficiary, but we prefer

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to title assets directly in the name of the trust rather than do beneficiary designations,

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but that’s better than nothing.

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All right, so hopefully by now we’ve convinced you that living trusts are actually pretty

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sweet, at least relative to just having a last will or having no estate plan at all.

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Let me go ahead and summarize what those advantages are.

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Then we’ll finish off by going over some trust basics.

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1. A living trust bypasses probate, which is easier, cheaper, quicker, and more private

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than dying with a will or intestate.

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2. A living trust may provide better asset protection for your estate and assets.

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3. A living trust handles many unforeseen and unfortunate circumstances that can happen

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to you while you’re still alive.

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4. Living trusts are much more flexible in terms of distributing assets to beneficiaries

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than payable on death designations are.

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All right, now that I think about it, I didn’t do a couple of this points justice.

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So let me expand on them.

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Regarding asset protection, this isn’t just about creditors.

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Without a trust, there are many situations where your assets can end up in the wrong

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hands or used in a way that you wouldn’t agree with.

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So in my trust, for example, there are spendthrift, and other clauses to protect my assets

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from, for example, a child who mismanages money or has a drug problem, as well as other

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situations like allowing the trustee to refrain from distributing assets to a beneficiary who’s

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going through a divorce.

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So think about that for a minute.

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Imagine you die and leave a bunch of assets to your child who’s married or later gets

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married.

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Then that child goes through a divorce and their ex-spouse wants to get their hands on

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those many, many monies.

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Well, in that case, my trustee will tell that ex to go pound salt.

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But without that trust, he or she would be able to poach some of my hard-earned assets.

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Because some of my assets are now my child’s assets, which makes some of them marital assets.

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Regarding flexibility, this isn’t just about beneficiary designations.

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It’s also about terms and conditions.

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With a will, your executor typically distributes the assets and just calls it a day.

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It’s the same deal with payable on death and transfer on death (TOD) designations.

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They don’t care what the situation is.

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In a living trust, you’ll typically have strings attached to those assets before the

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trustee just hands them all over.

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This gives you a lot more say in how your assets aren’t just distributed, but managed

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as well.

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In my trust, the trustee is instructed to manage my businesses and assets, more or less

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as if I was still among us, rather than just liquidate everything and cut some checks.

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That’s pretty cool.

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And if we want to get Black Mirror on you guys, my trustee could even use AI to clone

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my voice and keep this podcast going, which this isn’t even my real voice, by the way.

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We like to keep things mysterious over here at Bigger Insights.

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That keeps things interesting.

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And there are plenty of other advantages, but those are the highlights that we want

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to focus on in this episode.

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But before I move on, bear in mind that those are only advantages relative to dying with

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a will or intestate.

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There are many other benefits to having an estate plan in general, which we’re not really

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going to go over in great detail in this episode, but possibly in the future.

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So with your trust, you can appoint guardians for your children, decide who gets what assets

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and under what circumstances, decide who and how your pets should be cared for, etc.

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So now let me bore you with some trust basics.

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A trust is a legal agreement between three parties: 1. The grantor or settlor, who establishes

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the trust, 2. The trustee who administers the trust, and 3. The beneficiary who has a beneficial

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interest in the assets of the trust.

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Trusts are very flexible.

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So when we say three parties, that could be one person satisfying all three roles, that

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can be a grantor, trustee, and a thousand beneficiaries, and these roles don’t need to

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be people either.

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They can be other trusts, entities like LLCs, businesses, charities, and so on.

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In the case of a living trust, you can set this up however you want, but typically you’re

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the grantor, trustee, and beneficiary while you’re alive and have your wits about you.

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When you die, that’s when your successor trustee steps in and starts administering the trust

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for the stated beneficiaries.

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Living trusts are typically revocable, meaning that you can amend or revoke them at any time

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while you’re still alive.

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This makes them very flexible, but keep in mind that a revocable trust won’t really

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give you any asset protection while you’re alive, that’s the trade-off.

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We don’t recommend this for living trusts, but you can also set up irrevocable trusts

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that do offer some asset protection, but the trade-off there is that you can neither amend

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nor can you be the beneficiary of your irrevocable trust.

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After you set up a living trust, you fund it with whatever assets you want to be managed

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by that trust.

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For most everyday people, that’s probably all of their assets, but there are many circumstances

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where you may want multiple trusts, which we may discuss in a future episode.

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A living trust should also be supplemented with a pour-over will so that if you die and

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forgot to move an asset like a home or a car into the trust, your pour-over will will

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transfer that over to your trust, similar to a transfer on death affidavit.

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This all might sound pretty overwhelming, but once you sit down and think about these

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things and get your estate plan set up, it makes a lot more sense.

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And even though we’re not lawyers, we can sit down with you and help explain some of

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these things in more detail and give you our two cents to help point you in the right

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direction.

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The reason why we do this is because lawyers are typically pretty busy and obviously charge

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an arm and a leg, which we don’t.

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So we help get our listeners and clients started with the basics so they can engage their attorney

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with some fundamental understanding. That might not sound like a big deal, but it’s pretty

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unsettling asking someone to do work for you at $400 an hour when you have no idea what

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they’re doing or whether they’re even doing a good job.

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I don’t want to be a jerk, but a lot of lawyers use templates, fill out very basic details,

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then dump these kinds of documents on their clients without really explaining to them

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what they are, how they work, how you should maintain them, and how you should make sure

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that the right people get the right documents at the right time.

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This is something that we can help you with.

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So if that sounds interesting to you, go to our website, BiggerInsights.com, and fill

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out the short form at the bottom of the page so we can schedule your initial consultation.

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All right, now let’s put it all together and wrap this up.

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Living trusts are very powerful.

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We think nearly all adults should have one.

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We saw an interesting quote on Fidelity’s website, it said, “1 in 3 adults have

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an estate plan. 3 out of 3 need one.” And we agree with that.

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If you don’t have one, get one.

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There’s this myth out there that only old, wealthy people need an estate plan, but this

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really isn’t the case.

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In fact, we would argue that having a living trust early on is a better way to go because

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it makes it easier to build assets in the name of your trust, rather than add them in

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later and risk forgetting adding them to the trust.

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And living trusts are great for parents with younger children.

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For you younger parents out there, you may be healthy, but ask yourself this question.

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What would happen to my kids if I died or me and my spouse died in a car accident, for

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example?

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In that case, we would hope that you have a trust in place to name their guardian and

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establish a plan for taking care of them over the next several years.

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From this standpoint, this idea that estate plans are only for old people is actually

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pretty backwards.

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You know, if you’re 80 years old, chances are that your children are older and already

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self-sufficient.

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So in that case, a trust may not be as relevant as one would have been when you were younger

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and at risk of dying and leaving them out to dry.

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And like I talked to a little bit earlier, even if you’re not married and you don’t

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have kids yet, you can still account for future spouses and kids in a trust by wording it

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that way.

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So your trust could say something like, “These assets should be divided equally among all

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of my children, including any stepchildren or adopted children,

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if any. If I don’t have any children, do X, Y, or Z.”

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You see what I mean?

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However, we should mention that trusts have some drawbacks as well.

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Here are just a few.

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1. They’re not exactly cheap to set up.

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For a basic living trust, as long as you’re not going to ask a lot of questions or ask

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for revisions, that’ll probably run you about $1,300 to $1,500.

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2. Trusts are typically governed by state law.

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So if you plan on moving to another state, you should definitely talk to an attorney

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about how this affects your estate plan.

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But in fairness, this applies to last wills and other estate planning instruments as well.

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3. Having a trust does introduce some complexity.

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Some businesses don’t like dealing with trusts.

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They prefer dealing with individual people because they’re easier to deal with and push

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around than trusts and entities. And you’ll run into little annoyances like if you want

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to call the bank, there may be a lot fewer staff that you can talk to for trust accounts.

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I also heard a story once where an attorney set up a living trust for someone.

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She went to the bank to open a trust account, and the teller insisted that the trust needed

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its own tax ID number, which isn’t true for a living trust.

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You can use your social security number.

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So she did what the teller told her to do and got a tax ID number, which if I recall

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correctly, this indicated to the IRS that this was an irrevocable trust and ended up

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causing big problems for her.

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But the point is that since so few people understand trusts, you need to get up-to-speed

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because many people won’t be able to help you, and they may even give you really terrible

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advice.

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4. Choosing a qualified trustee can be difficult.

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We may discuss that in another episode, but your trustee will probably have pretty broad

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powers, so you need to make sure it’s someone or a trust company that you trust and is qualified

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to be a trustee.

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This is one of the issues that I ran into.

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Very few people even know what a trust is, so that really limits your pool of potential

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candidates.

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However, this is basically an issue regardless because without a trust, your probate case

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will be handled by an executor, which essentially presents the same issues.

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5. And the last drawback we’ll discuss, which isn’t an inherent limitation of trust, but

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more of a word of caution, is that with great power comes great responsibility.

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The flexibility that a trust offers is powerful, but it can be quite tricky, especially if you’re

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younger, to construct a trust in such a way that it will cover most any situation, while

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being flexible enough to not need to be constantly revised as your life changes.

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The example that I used earlier was verbiage that I added to my trust to account for any

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circumstance I may have in the future regarding any number of children, if any, and that also

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accounts for adopted children.

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So if or when I have or adopt children, I won’t need to revise my trust, although I

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can if I want to.

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There are many circumstances like this that you’ll want to consider when drafting a trust.

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But if you’re going to go this route, we recommend that you spend as much time as you can getting

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this right to minimize revisions down the road.

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There are a lot of things to consider, like how do you want the trustee to handle your

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assets for minor children?

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What about stepchildren?

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What authority or instructions should you give the trustee so he or she can manage the

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trust in a tax-efficient manner, and so on?

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We’re not going to go down the rabbit hole on this one because it runs deep, but there

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are complicated situations that you might not expect.

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For example, can your trust be the beneficiary of your IRA?

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And if so, what are the rules for the beneficiaries who receive assets from that IRA?

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I’m not just making stuff up here.

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I spent hours reading about this and it is very complicated because there is this concept

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of a see-through or a look-through trust, which analyzes whether the primary beneficiaries

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are natural persons.

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Because if they’re not, that causes problems regarding distributing that IRA to the beneficiaries

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and so on.

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It’s kind of a mess.

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But the point is that these things are complicated, but very important.

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So take them seriously and talk to your attorney.

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All right, so that sums it up for this episode.

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We would like to reiterate that we think pretty much all adults should have some sort of an

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estate plan, which may or may not include a living trust.

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That’s something you should discuss with your lawyer, especially if you’re on the fence

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about it.

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We would also like to emphasize that we’re of the belief that everyone who has children

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who aren’t self-sufficient, whether they be minors, college students, or they have some

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kind of special needs, should have a living trust to help protect them.

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If you fall into that category, please, please take this seriously.

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Not so much for your sake, but for their sake.

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We are once again asking you to share and subscribe to this podcast so we can help as

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many people as we can.

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All right, thanks for tuning in.

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Go talk to your lawyer about setting up a living trust, stay healthy, and stay wealthy.

Disclaimer

We are not lawyers or other legal professionals and do not practice law in any regard. Nothing in this episode, our podcasts in general, or our website should be construed as legal advice. The content of this episode is specific to the United States and may vary depending on your state and local jurisdiction. Although believed to be accurate as of the date of publishing this episode, some of this information may be inaccurate, may not be appropriate for your situation, or may change as the laws change. We encourage you to discuss any of this content with a qualified and competent lawyer in your jurisdiction. See our full Disclaimer for details.

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