Money is the biggest source of conflict within a family. Discover how estate planning can eliminate conflict and ensure your legacy. Bill Clarke joins Tom to discuss living trusts.
04:02 – Why Is Estate Planning Vital For Everyone?
06:12 – What Benefits Do Living Trusts Provide?
09:09 – What Is Probate?
11:11 – How Does Proper Estate Planning Allow Your Family To Not Worry About Money?
14:02 – Why Is It Common For Clients To Not Fully Execute A Trust?
16:27 – What Assets Should Be Excluded From A Trust?
19:21 – How Does A Living Trust Work While The Owner Is Alive?
Announcer: This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Welcome to The WealthAbility® Show, where we’re always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility®. So we all know that money is the biggest source of conflict in families, and we know it causes divorces, it causes problems with children. The big issue, though, that we’re going to talk about today is the problems that it can create after you die, and what we really want to learn and what we’re going to discover today is how to maintain peace when you die. So peace among your children, among your spouse, among your former spouses. All of those things can be done with some very simple mechanisms and I feel very privileged to have one of the best estate planning lawyers in all of Arizona with us on the phone today. Bill Clarke is with Jennings Strouss, which is one of the largest firms in Arizona and Bill has a tremendous amount of experience here and a tremendous amount of knowledge and I’m sure he’s got tons of war stories that we’re going to be glad to hear about because there’s some really nasty stuff that happens if this isn’t done right. So Bill, welcome to the show.
Bill Clarke: Well, thank you very much for having me this morning.
Tom Wheelwright: So if you could, Bill, just give us a 30 second background of your experience and what you’ve been doing for the last 30, 40 years.
Bill Clarke: My background really started with … my first job out of law school was prosecuting taxpayers for the IRS at the IRS District Counsel office here. Since then, I’ve handled a number of … a variety of family business activities over the last 35 years. Family business activities really involve the smaller family businesses along with the succession planning for them. The succession planning really is the number one need for a small family business to keep going and perpetuate itself and the proper way of handling the succession planning is the most important ingredient to the continued thriving of a family business. Along with that there’s estate planning is really one of the ancillary topics there.
Tom Wheelwright: You know, that’s a really good point, and so one of the things that we hear a lot the last couple of years … we had this big tax act in 2017 and we had this big change to the estate tax, and so now you hear people talking about, “Well, you don’t really need to do a trust anymore. It’s just so much easier because not very many people are subject to the estate tax,” but estate tax aside, because really it hasn’t applied to a lot of people for a long time, not since we had a $600,000 exclusion amount. So we have this 20 some odd million dollar exclusion, but we still need to do estate planing. Though, I mean from your experiences, why is it important to actually plan? It’s not a pleasant subject to plan because you’re planning your death, basically you’re planning what happens when you die or you become disabled. Why is that so important, even ignoring tax issues?
Bill Clarke: Oh, you’re absolutely correct. The estate tax planning has moved really to the background, and the current estate tax regime really only applies to about the top tenth of 1% of the population, but estate planning itself is absolutely critical for everybody to consider. Today’s society, with a 50% divorce rate, really leads to a tremendous amount of blended families, and the blended families are really the stereotype problem for dealing with an estate issue. When you have a husband and wife who have children from their original marriages, then they have gone through a divorce proceeding, and then they’ve remarried, and you now have multiple interested parties in somebody’s estate. So you have the new spouse, you have the husband’s original children, and you have the wife’s original children, and possibly even children from the common marriage, and without proper definition and proper thinking about what people want to accomplish with their estate planning, you end up with a potential nightmare as to what is going to be the outcome of the allocation of assets, in particular if you go through an intestate proceeding.
Tom Wheelwright: Okay, so let’s talk about that. That’s exactly where I wanted to go. So most people know about wills and they know they need to have a will and they need to have a will because they need … especially if they have minor children, they need to designate their guardian and their will, but why isn’t a will enough? Why would we also need what we call a living trust or a family trust?
Bill Clarke: Generally two or three factors. Number one is a trust offers the benefits of holding your assets during your lifetime, such that in the event that you’re incapacitated, you have the trustee ready to step in and take control of your assets during your lifetime without the necessary appointment of a guardian or conservator. The appointment of a guardian or conservator is a very expensive and time consuming legal process that is necessary during a period of incapacity if you do not have someone that is already designated to be in charge of your assets, in particular, banks and financial institutions are very skittish about privacy and dealing with assets and therefore they’re not going to just simply take the word of a spouse that they are in charge, and the same thing with healthcare decisions.
Bill Clarke: A second factor is you’re avoiding probate administration by having your assets titled in the name of a trust and passing outside of any legal court proceeding. So there’s not a need for any public filing of inventories or assets, and third, and probably most importantly is people, when they do a will, when they do a trust, they generally are going into much greater detail as to what their intentions are after death and providing for a much greater level of control of assets after their death, and so therefore they’re able to specify much more specifically as to how they want their assets handled and administered on a post-death basis.
Tom Wheelwright: Absolutely, and that’s what I love about the trust is that I’ve … I’m the youngest of six children and so I grew up with absolutely no control over my life whatsoever, and so I have this thing, I love being in control and I love the idea of a trust puts us in control even after we die. So I kind of get a kick out of that, but it’s important. Now, let me step back just a minute if we can, Bill, and discuss probate just for a second, because I know some states probate’s pretty simple. If I understand right, and I want to have an attorney who’s specialized in this area make sure that I know what I’m talking about. So probate is really just a matter of the court transferring the title, the assets to the beneficiaries. Is that not correct?
Bill Clarke: Right. The probate is the court process under which title to an asset is passed from a decedent to the designated beneficiary after the death of the original owner of the asset. Arizona has actually a very simple informal probate procedure that unless you have a contest developed between beneficiaries, it’s not that arduous. In contrast, California has a much more complicated and a much more onerous proceeding. So in reality, if you’re a Californian or many other states, it’s actually much more important for you to have a trust to avoid probate than it is in Arizona.
Tom Wheelwright: You know, it’s a good point. At the same time, what I like about a trust … and we have clients in all 50 states, and what I like about a trust for anybody, even if there’s no estate planning issues, even if there’s no conflict, is you’ve already transferred the title. So I had a client a number of years ago. These clients, a nurse and doctor married to each other. She was his nurse and he died, and he had done everything right. He’d set up the living trust, he transferred title to everything in the living trust, and so she came to me afterwards and she goes, “What do I have to do?” And so I said, “Well let’s sit down with your attorney and let’s …” and we sat down with her attorney and the attorney says, “Nothing. You have nothing to do. It’s all done,” and that was such a relief, and so when I think about trust, I think, well, this is a way to allow your family to properly grieve without having to worry about money and not have to worry about who owns what and what goes where and dealing with courts and dealing with lawyers and all that kind of stuff. I mean do you find that with your clients?
Bill Clarke: Absolutely. It is amazing when you have done a fully effectuated trust implementation that there is very little that ultimately needs to be done after the death of the party in order to pass title to assets, but you bring up a point there. You touched on a point there that is very important, is not only the establishment or writing of the trust that’s important, it’s actually the implementation of the trust, which includes the titling of assets in the name of the trust prior to death, because you can have the absolute best estate plan, the best trust document ever written, but if you don’t title your assets in the name of the trust and the assets are still held in your personal name and pass according to your will. Now most people will have what’s called a pour over will to pour over their assets into the trust, but that then requires those assets to first go through probate before they actually go into and become part of your trust.
Tom Wheelwright: Yeah. Let’s talk about this for a second because I think this is a very critical point, and I had an experience with it and I had a client that had substantial assets, and he’d talk about when you have multiple marriages. So he had had three marriages and for the last 15 years had a live-in girlfriend, not married to her, and he’d had children from two of the three wives and he set up this elaborate plan. It was great. A university was going to get money and he had it all planned out, only he had not actually transferred the title of the assets to the trusts, and that litigation went on for years between … I mean you have … he clearly wanted to take care of his girlfriend who was ostensibly his spouse.
Tom Wheelwright: I mean she’d lived with him for the last 15 years taking care of him and they were close, close friends. He wanted to take care of her. At the same time, the kids are going, “Well what about us?” And of course ex spouses are going, “Well, if we get it to the kids then we get it to us,” and so they get some control, and I just found it was just such a nightmare and it was just … and he had this great plan and he just had not executed the plan, just like you say. I’m sure you’ve got to see this over and over again.
Bill Clarke: Absolutely, and I’ve had many situations where you have people going to their financial institution or their bank and the … I’m going to pick on the clerk at the bank for the time being, but the clerk at the bank is going to ask you, “How do you want to your account to be titled?” And the clerk of the bank will probably in default put the names of the husband and wife on the account and not the name of the trust. The result is that if husband and wife are both named on the account, virtually all banks deemed that to be held as joint tenants with rights of survivorship or community property with rights of survivorship. The real result is that upon death, those assets pass immediately to the surviving joint tenant in the account. Now that works in many, many cases, but if you really intended that those assets become part of a trust that provided, for example, lifetime income to the surviving spouse, but then upon death of the surviving spouse, the principle was to go to the children from the original marriage. You’ve now made an estate planning decision that is not what your intention really was.
Tom Wheelwright: You know, I think that’s a very important point, and you bring up this idea that we have to designate a beneficiary, and by putting it in a joint account we are designating the other person on the joint account as the beneficiary, and a beneficiary basically being the person who benefits from the asset. So it’s who ends up with it. We were talking about earlier, Bill, before we started, that there are certain things that you do want to go in the trust, but there are actually things that you don’t want to go into the trust and that you want the beneficiary to be designated to somebody other than the trust. Can you just talk for a couple of minutes about kind of the main items that you might not want to put into the trust, assuming everything else goes in there?
Bill Clarke: Oh, probably the most important asset to consider as sort of a separate category are your IRAs. IRAs are basically assets that are not … you do not title an IRA in the name of your trust to begin with. Your IRAs are held during your lifetime in your individual name, and upon your own death you have the opportunity to provide a death beneficiary designation for them. It’s very interesting that the IRA rules for death beneficiary designations were just changed in December of 2019 with the most recent budget reconciliation act here, and they eliminated what was called the stretch IRA concept. If you are dealing with an IRA and you have a spouse and you want to have that spouse have the maximum flexibility and maximum control over the asset, you want to designate the spouse in their individual name, generally, as the owner of that account.
Bill Clarke: That will allow them to, in general, have the IRA flow out under their required minimum distribution rules. The new change to the IRA rules has eliminated what is called the step stretch IRA provisions, and for non spousal beneficiaries you’re now dealing with having to take the distributions out of the IRA within a minimum of 10 years after the date of death of the IRA holder. The whole purpose here is to raise money for the Internal Revenue Service because the Internal Revenue Service wants this money out of IRAs as quickly as possible so that it gets taxed.
Tom Wheelwright: Thank you for going through that. That was a major change that kind of, I think, escaped the news for the most part, so I appreciate you adding that in there. So let’s talk a little bit about how trusts actually work during your lifetime, because I think people can be very concerned about, “Am I giving up control? Do I really want to do that? Do I want to go through that?” I have found personally that a family trusts, a living trust … they’re the same thing, that they’re really simple to operate and they’re very simple to set up, and very inexpensive, actually, relatively inexpensive to set up. So can you just walk through a little bit, Bill, how does that trust get set up and how does it work while you’re alive?
Bill Clarke: Well, while you’re alive, assuming it’s a revocable living trust, there really is very little or no change to how you own and operate your assets. If you have a financial institution account, you as [inaudible 00:19:42] and trustee of the account are going to have full and complete control over the trust. You have the ability to revoke the trust, amend the trust, and take assets in and out of the trust as you see fit. The trust, if it’s a revocable living trust, it does not provide any type of creditor protection, and it actually does not even require that you file a separate trust income tax return. Their revocable trusts are considered to be disregarded entities for IRS purposes and therefore they use your own personal social security number for tax identification purposes.
Tom Wheelwright: Right. So thank you for mentioning that. You don’t even have to have a separate employer identification number. I mean you can, but you can use your own social security number, which I think is something that scares people about trusts as well. “Will the bank understand this? And what about when I go to apply for a mortgage?” And all that kind of stuff. I’ve actually found that of all the different types of what we might call an entity … although a trust is kind of a quasi contract entity thing, but of all the different types of entities, the one that banks actually understand is a living trust. They seem to understand that this is just a pass through entity, that it’s not going to have tax consequences, it’s not going to have … they’re not going to have to worry about are they not going to be able to get their money, et cetera, et cetera. They don’t really understand limited liability companies, LLCs. They clearly don’t understand those. They rarely understand partnerships. Every once in a while they may understand a corporation, but I actually find they don’t understand those either, but a trust they seem to understand and they seem to be okay with, and so it seems to me like this is just one of those things where it’s not that hard to do and people just don’t do it. Why don’t people do this, do you think, Bill?
Bill Clarke: I think it’s a concern that they’re giving up control and it is basically unfounded concerns, and it is a belief that they’re somehow distancing themselves from the assets, but that is not the case at all.
Tom Wheelwright: And that’s what I love about the living trust is here you get to make it easy for your family when you die, you’re taken care of when you’re disabled, which the statistics … I guess you’re six times more likely to be disabled than to die. So that disability thing, which I’m so glad you brought up, that’s a big part of that and you really don’t have to worry about what happens, and your family knows. One of the things, I was always very appreciative with my mother, my parents, because they went through very carefully with the kids and we actually went through and they said, “Go …” because they were getting up in years and they said, “Go put your name … we’ll put a piece of masking tape on the back of a picture or piano or some piece of art. Anything that you want, go put your name on it now,” and they had us do that before they passed away and it meant that when they passed away, I mean there was names on everything so nobody had to worry about the stuff. I just find that the last thing that I want my clients to have to worry about is their family getting into arguments after they die and getting into arguments over money and having it cause a split in the family, which I’m sure you’ve seen, I mean dozens and dozens of times, Bill.
Bill Clarke: Absolutely. Yeah. The stereotype situation is the blended family, but it’s not necessarily limited to the blended family. We have plenty of situations where it’s children from the same family that are fighting over assets. A couple situations where it is really most important to deal with the is in the family business context, because if you have … say you have four children and you have two children that are active in the business and two children that are not, and you want the business to perpetuate itself, it’s certainly much more logical to have the family business pass to the children that are part of the active family business and have non family business assets pass to the children that are not active in the family business to avoid conflict, not only at the time of death but also in the future when there’s conflict over the children that are actively involved in the business versus not having different motivations.
Tom Wheelwright: No, thank you for that, and this is where life insurance might come into play, right? Where we might want to have life insurance that provides the funding to the kids not getting the family business, because I know a lot of business owners, their assets are all tied up in their business. They can be, and so they really don’t have a lot of other assets, and so life insurance can kind of compensate the children who aren’t going to be involved in the family business, and I’ll tell you what, having a bad partner is the worst thing in the world, and to have it be your sibling that’s the bad partner and they’re not doing anything, I just can’t think of anything worse than that for creating conflict. So as we wrap up here, Bill, just give us, if you can, what are two or three quick pieces of advice that you would give people when it comes to their estate planning?
Bill Clarke: Really actually following up on the topic that you just mentioned, the use of life insurance. I find one of the best uses of life insurance is in the blended family situation where you have the potential for a surviving spouse that you want to fully provide for but you also have children from an original marriage, and by providing a life insurance benefit for the children from the original marriage, you can in effect make sure that they are receiving something out of your estate while you’re not dissipating the assets that are held for the benefit of the second or third spouse. The most critical thing that I see in an estate plan is really … we’ve talked about it here today is … number one is you want to make sure you have a current and viable healthcare power of attorney, financial power of attorney, revocable living trust, and will, and you want to make sure that your assets are either properly titled in the name of the trust or have the proper death beneficiary designation.
Tom Wheelwright: Oh, thank you. Those are spot on. So Bill, if somebody, particularly somebody in Arizona wanted to reach you, how would they be able to find out more about Bill Clarke and Jennings Strauss?
Bill Clarke: Yes, we have the Jennings Strauss law firm and my name is William Clarke, C-L-A-R-K-E, and phone number is (602) 262-5886 and I’d be happy to have a consultation with anybody. I generally don’t call a charge for initial consultations.
Tom Wheelwright: Well that’s great, Bill. Thank you so much for taking time. Remember everybody that money is the biggest source of conflict in a family, and when we die, the last thing we want is to create conflict, and sometimes if we don’t plan for what happens when we die and we never know when we’re going to die, then we actually are creating a conflict that might not otherwise be there. So we want to really take care of that, make sure that our family can focus on grieving for our death. Hopefully they’ll grieve for us, and that they’ll really make it simple, and that’s what we’ve been trying to do today. So I would encourage everybody to listen to this podcast over and over again, and I want to thank everybody for listening to The WealthAbility® Show. Please subscribe on iTunes and leave a five star review if you enjoyed the show. We’d like to get this out to more people and we would love to hear from you. So please also share your comments and feedback. So just remember that when you do good estate planning, when you’ve got that living trust, you’ve got that will, when you’ve got good team members like a Bill Clarke on your team, you’re always going to make way more money and pay way less tax. Thanks. See you next time.
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