Attorney Thomas B. Burton is joined by Attorney Matthew Underwood, of Underwood Legal, LLC, in Madison, Wisconsin to discuss "Are Living Trusts Just for the Rich?" and in this video they discuss several misconceptions about living trusts stemming from historical uses of trusts by wealthy people. Attorneys Burton and Underwood explain how living trusts can be useful to everyday middle class folks to avoid probate and provide incapacity protection.
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Thomas: Welcome back to 'Ask the Attorneys', I'm once again joined by Attorney Matthew Underwood and today Matt, I want to talk about the title which is 'Are living trusts just for the rich?' and I came up with this topic because it's something I encounter in my own practice and I wanted to talk about it with you today on the show. Sometimes, I see out there, a misconception that living trusts are something only movie stars or very wealthy people use and sometimes what I'm asked in a meeting is if there's a specific dollar level of assets where you should have a trust or not have a trust? I wanted to kick our discussion off with that today and throw it to you.
Matthew: well thanks Tom and thank you for putting me on the spot right in the beginning here.
Thomas: you're welcome, you're welcome.
Matthew: but we do get that question a lot too and in other words, clients will say, "well how much money do we need before it makes sense to set up a trust?" and I always tell people, there's no dollar amount, there's no set answer where all of a sudden you go over X dollars and now we're doing a trust, in that a will. It doesn't really work like that. You know what I tell people is your estate planning should be driven based on the goals you have. So, let's look at what your goals are, is the goal to make sure that we're keeping things private, we're keeping your affairs private, you know, typically that means we're keeping your estate out of probate court. We're avoiding court, court cases and things like that. So we want client goals to really drive what type of planning they do. So, you may have clients that just based on their goals, you know, whether it's privacy, maybe they want to do asset protection for kids or maybe they have a child with special needs. Based on people's goals and situations, that is usually where we want to lead that estate planning discussion rather than "hey let's look at your balance sheet" and then "based on your balance sheet, we'll pick a plan based on that number", that's you know, that's not the best way to do that estate planning. So I would say that maybe in the past, there was kind of that you know, misconception that 'I need to be a wealthy person to set up a trust but trusts are much more common for everyday people, middle class people and I would say that, when we talk to most people and we talk about their goals, a lot of times that does push us over to that trust side because again things like avoiding probate court, asset protection, that's where we would see those types of trusts going. So Tom, do you, I mean what do you tell your clients when someone comes to you and you know with their situation and they're wondering will or trust and maybe they feel like they're not established enough for whatever reason that maybe, a trust isn't for them, what would you say to that?
Thomas: yeah so as you were talking I was thinking about this even more and I do think historically, there is some connotation with trust thinking that wealthy people use trust or only the uber wealthy use trust and I think some of that was driven by tax planning in the 90s and earlier years, that was done when the estate tax levels were much lower and now we have higher estate tax levels currently but they're actually historically high when you look over US history. The levels that they're at per person. So but today when we're talking about living trust, I agree with you that when we're talking to most folks about using a trust, it's to do goals like avoiding probate and providing incapacity protection because with the higher estate tax levels, it's not so much about maybe trying to do some of these tax avoidance measures that might have made sense in the 90s. Now I will say there's still added benefit to a trust because if we do a trust plan, we can build in some flexibility if estate tax levels change in the future, right and for my clients, who do have more assets, I try to build some of those protections in but for a lot of middle class folks, they don't currently have an estate tax problem because the great news is the federal estate tax exemption is 11 million plus per person and Wisconsin doesn't have its own estate tax, right? And like our neighbor next door Minnesota has its own state estate tax. So I want to be clear, there's still reasons over there where you can use a trust for those tax reasons as well but talking about this issue with the rich, one thing that came to mind was a special needs trust and I think some people have heard of this but it basically the idea is it's a trust you set up for someone with a disability or special needs to provide for their care and these are quite common in the world of estate planning and can be very beneficial to someone who needs to keep receiving government assistance throughout their life but also qualify for those when they receive an inheritance for example and I was just thinking how in my living trust plan, revocable living trust plan, we include protections in there, what if one of the beneficiaries is someone who needs special needs, down the road, right? There's a way we can segregate those funds into a special needs trust for them, so that it can help them over their life but it doesn't impair them from receiving other government assistance, simply because maybe their parent died while they were young or you know a grandparent died and left them some money. So when you were saying about the asset level, I think sometimes people think there's got to be a certain number before you can form a trust and really with special needs trust, all the time they're formed for even very small amounts of money and we have an organization in Wisconsin, WisPACT, which is a great, administered special needs trust for lots of people that would seem even small amounts of money can make a big difference to people right, held in those trust funds. So in general, I agree with you, there is no one answer about what level makes sense. I think it's more about the clients’ goals and then their mix of assets too.
Matthew: that's a good point Tom.
Thomas: you know do they have real estate and other things and does it make sense to avoid probate on all this stuff and save the court costs and fees.
Matthew: right, yeah in particular, in real estate, if somebody has their house in Wisconsin and then maybe they have a house down in Florida and maybe they have a hunting cabin over in Minnesota, so now we have real estate in three different states. Well for not doing a trust, for that client, that could mean that if they pass away, there's a probate open in Wisconsin on the home, there's a probate in Florida for the second home and then there's a probate in Minnesota for that vacation home. So that's three probates that we're dealing with for one person. So I like what you said about we have to look at the type of assets and particular real estate is where we want to be careful with things and using a trust to, avoid three probates, I mean just think of the cost savings by setting up that trust versus letting things happen in probate court. So I'd say, yeah that the real estate might not be worth a million dollars a property but the cost savings of doing a trust rather than probate is well worth it.
Thomas: right Matt, that's a great point about the two states and not to mention the hassle of trying to successfully, whoever your personal representative, whoever is left behind administering, the assets trying to successfully complete a probate in two states, to me sounds like a nightmare for most regular folks because it involves dealing with state law and state courts in the two states where the real estate is situated. So I see that misconception often as well. If you own real property, real estate in two states, the law of each state is going to govern that piece of real estate. So you may think of yourself as a resident of Wisconsin or Florida or whichever one for tax purposes, right, but it doesn't mean if you pass away owning both those assets that they will just let it all flow through the other state's probate court.
Matthew: right.
Thomas: I totally agree with you and I just put two trust plans together like that in the last couple of months, where they had another property in another state and a nice property and it totally made sense to put both the primary residence and that property in one trust and avoid probate on both and when I told the clients that, they were really happy to hear that because when they come in a lot of times they tell me I want to make it simple and easy for my kids you know, and if they tell me that, then I say and especially when you've got these two real estates in two states, I say, "hey then this is the way you want to go" and the children aren't usually there but they'll thank me later. So...
Matthew: yeah, yeah, that's right, that's you know, it's kind of ironic because you know it's actually the wealthier people, you know, the rich people that can afford to go through probate in multiple states and you know hire an attorney in all these different places and have a you know a good team of lawyers to handle everything but it's you know I think it's our clients, it's the you know the regular people, middle-class people that can really stand to benefit from setting up trust and you know avoiding costs if people pass away or if you know become incapacitated.
Thomas: right.
Matthew: So I think you know in some of those cases, you know, having less money is even, even greater reason to do trust planning to avoid those costs in the future.
Thomas: and I should point out the great thing about trust law is you know for our listeners listening, who may be living in Wisconsin right now but they think "ah maybe 20 years, I'm going to retire to another state" or move around for their job right, but if you put a trust together, it can operate, you can continue to use that trust, no matter where you move. So that's the great beauty. It's more flexible if you are the type that moves around than a will plan which is governed by each state's laws you know? So in our example, if you put a trust plan together and you put your two properties into the trust, you can keep using that trust even if you do move to another state, down the road and I see this as a misconception as well but you know how we are talking about sometimes trust costs a little more upfront to put together but the lifetime of it is longer. You'll get your use out of it if you keep using that trust for your properties no matter where you live.
Matthew: right, yeah the trust is a, I think a better tool to grow with people over time. You know maybe you're set up a trust when you're you know a young family starting out but then you know as the years go by, you acquire more property, you know kids grow up and they move out on their own, the trust is something that you know through working with your attorney, you can keep that trust up to date and you know even as your situation changes, we can make sure that that trust is always going to do what you need it to do. So again I would just you know, just to recap, I would say that you know there's different types of trusts but you know when we're talking about living trusts or revocable trust, those aren't just for the rich and you know it's really getting back to what people's goals are, what our clients goals are. We want the goals to drive that estate planning conversation. We don't want the money certainly factors into it but we don't want the money to be the number one driver. We want the client's goals to do that.
Thomas: Well, very good. thanks Matt for taking the hard questions once again.
Matthew: well thank you Tom. I'm glad you gave me that hard question.
Thomas: and thanks to everyone for tuning in. We'll see you next time.
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