Everyone Needs a Living Trust — Almost No One Needs This One

The differences between an irrevocable trust and a revocable trust are significant. And regrettably, we have influencers out there pushing the irrevocable trust on people that really don't need them, and not enough people taking action for a revocable trust. Today, we're going to break down both, unpack them, and help you decide what's best for you, give you some warnings, and give you some important tips.

This is a really important topic and question that we're fielding at our law firm every day helping clients across the country, 'cause they're confused about what trust they should be using and what they're hearing online and in social media. And this is affecting your estate, your loved ones, who gets your assets, your taxes, your asset protection. It kind of touches on everything that you care about as you're growing and building wealth. So we want to break it down for you and give you the truth that you should know as you're thinking about what trust you need in your situation.

And what Matt and I have said repeatedly is that every American needs a trust. And that's true. It's just the right trust. Because a trust means you have a plan. A trust means you are organized. You are going to spend less in legal fees, especially after you pass away. But even during life, you are going to be more successful. A trust makes sense. Now we got to talk about the right type of trust. This revocable versus irrevocable. Matt, what do you think? Should we break down revocable first, kind of what we think everybody should be using, or should we kind of get the irrevocable off the table for the average person? I don't know. You can already see where I'm leaning.

I think we go with the revocable trust first because everyone needs this. Some people also need an irrevocable trust. But I will say, if you're doing an irrevocable trust, that means you already have a revocable trust. All right, I don't think you're doing one or the other.

So that's right.

So, but I think everybody's— we said, when we say everyone needs a trust, we're talking about the revocable living trust. And the purpose of this is estate planning. We're not setting this trust up to affect your taxes today. This is a pass-through trust. The IRS pretends like it's not even there. There's no separate tax return or tax rate on this type of trust. We'll get the differences on irrevocable here. But we're not doing this for tax planning. Trusts, these revocable trusts do not save taxes. We're doing it to avoid probate so we can pass on our assets to our loved ones without having to go to probate court and on the terms and conditions we want that protects our assets as they're passed down to our loved ones.

Yeah. And that's, this is a great opportunity to just say what a revocable trust is and isn't, because sometimes understanding what it isn't provides more clarity on what it really does. And I like how Matt said a revocable trust does not save taxes and a revocable trust does not protect assets from a lawsuit.

Yeah.

We're not doing this for asset protection. We're doing it to be freaking organized, avoid the probate, and leave our wealth that we're working so hard to build every day in a constructive way to our heirs, whether it's a spouse or children. Let's leave it organized.

Yeah, and I think when you think of your trust, this revocable trust, for example, one of the main assets most Americans have is your home. Your trust will be the owner of your home. What does that mean if something happens on my home, that, that's asset protected or no one can sue my home? No, the trust isn't doing that. It's not functioning any asset protection way. There's other ways we can talk about protecting your home. There's the homestead exemption and some asset protection strategies. But the trust here is not designed to protect your home. We're putting the asset and we're having your trust own the asset, your home here, for estate planning purposes so that it can pass carefully down to your spouse if you have one, or to your kids or other loved ones when you pass away. And what happens if you don't have this trust when you die, by the way, and we all die one day, we all have an expiration date. But if you don't have a trust, let's say you have a will or no will at all, Well, your family's going to go to court and they're going to have to file a petition in court and say, hey, so-and-so passed away. Joe passed away. I'm his surviving spouse or I'm his kid. I want that. Let's just go with the kid example here. It's a little cleaner. I'm supposed to get the house.

Good.

You're going to go through a court case. There's going to be notices and people can come and contest it. It's all public. Well, we— most people don't want that. And so the first thing that the revocable living trust is doing and why we love it And as part of your estate plan is it's avoiding this court process when someone dies. Now what happens is you say, here, who's your— who's your— here is who gets the house when I die. And your trustee, who's a person you'll name in the trust, is just going to deed the property to you if you're the kid that's supposed to get the house according to the trust terms. So that's its first and primary function, is just passing the assets outside of probate without having to go to court down to the intended persons that you chose. And you specified in your trust.

And after that primary purpose, I think the extra benefits of a trust are kind of a variety, and some may benefit you, some you may not care about. One, and you said about keeping your life private after you pass away, which a trust can do, no probate, but a trust can also create some privacy now while you're alive. I don't know if I want your name in the name of your trust. And sometimes you can even have an LLC serve as trustee. You can try to provide some anonymity, if you will, or privacy. So when this trust owns assets, people really don't know who owns them. Now, that can be a challenge. It takes extra work, but the revocable trust can open that door to more privacy planning when you want to embark on that. But the trust Has so many extra benefits. And I'll just throw one more here that, Matt, you started on and I'll begin, start that conversation. You leave your assets the way you want to, to your kids and your family. And you can get really creative with this.

Yeah. And I like, for example, you could say, hey, I don't want, when I pass away, I don't want my assets to go to my minor children or outright or to my kid that's 20 years old. That's, you know, they're an adult. And if I just pass away without a will, they'd get it all. Or even with the will and I listed them, they're going to get it all. You can stage the money out over time. You can put conditions on it. You can protect distributions going from the trust if they have a drug or alcohol addiction, where the trust will keep the money until they resolve that addiction or that issue. Or maybe your, your heirs have creditors that are chasing them down and judgments against them that if they inherit the money, that money's just going to disappear. Well, the trust will retain that money until those creditors are resolved. And so the trust is like protecting your wealth. In the sense it's going to make sure that it's going to pass down to who you want, and it's not going to be taken by creditors. It's not going to be taken by lawyers and court fees cost through probate. We're maximizing the amount that's going to pass down to your loved ones according to the specific wishes that you had, and that's what the trust is doing. Because you know when you're going through the process of setting up this revocable trust, and we're setting you know. We're setting up thousands of these every year for clients across the country at our law firm, is you're making all these estate planning decisions that most people think happens in a will. You know, who gets what? What are my assets? What am I— who do I want to get this wealth when I pass away? Everything I've been working so hard at, we're dictating that in the trust terms.

Now, all of this sounds great, but too many people procrastinate and don't embark on this planning. They say, okay, that all sounds good. I'll get around to it sometime. Well, Matt mentioned your expiration date. You don't know when that is. And just in this last year, it's been quite the show. Theo Huxtable from The Cosby Show back in the '80s— I'm an '80s kid, so I remember Theo— passed away. Malcolm Jamal Warner, his real-life name, Malcolm Jamal Warner. And sadly, he died without his estate plan up to date. And now it's gone to court. Now there's a legal dispute between his widow and his mom. Come to find out, he did his estate plan and got a revocable living trust and did it back when he was single and made his mom the owner of everything. And then he got married and his widow is like, I thought we updated that trust. Remember, you were going to do that and it's been sitting on the shelf. That's what happens when we procrastinate Because it can turn into a fight when we don't get organized. And that's what I think a trust really does, is it helps us get to the table and deal with things because we're not gonna live forever, people. We got to get this done. Yeah.

And I think the, the process of setting up the trust itself is super helpful in you communicating with your spouse if you have one, or your kids, and just figuring this stuff out. It's not complex. I mean, we've been working with clients for decades. Getting this stuff in order. And the nice thing about this, and this is the really the key point here when we, we're wrapping up revocable trust, is it's revocable. That means you can change it whenever you want.

Hmm.

So you can update it, you can amend it. You get divorced, you have another kid, you can change the terms of who gets what. You want to cut one of your kids out because they're being a pain in the ass, cut them out. All right, you can do whatever you want. This is a revocable trust. Which gives you flexibility. Again, the IRS pretends like it's not even there for tax purposes. You're not in trust tax rates or trust tax returns. You don't have to worry about that. But it, it springs into action when you pass away, and it allows your family to receive your assets cleanly without probate court, and also ensures that the most of your assets and the wealth you've been building, all those blood, sweat, and tears you've put into building this wealth is going to pass down without going to the courts, without getting tied up, without being all, you know, public in the public sphere in a court record. So we love the revocable living trust. And I just say, if you do not have one, you own a home, you have kids, you have some assets, you need to get a revocable living trust in place, whether you use our law firm or work with someone else. We just— it's when we say every American should have a trust, like, we really mean that. Like, everybody should have this. Yeah, maybe you don't have any assets yet to pass on, just do a will or something like that. But if you have some assets, a home, retirement account, life insurance policy, you should be having a trust to make sure that your loved ones get those assets when you pass.

Yeah. And I think before we jump to irrevocable, and it's a great transition after saying the word revocable and what that literally means, and then we're going to get to irrevocable or irrevocable. I, I, one thing we offer at our law firm that I need to really point out, and I feel like it's, it's really critical, is we like to design what's called a trifecta at the same time we do your trust. We want you to be able to see everything your trust should own. You want to fund your trust. If you just sign it and put it in the drawer, it's worthless. You've got to use it. You've got to make that trust the owner of your LLCs. The owner of your corporation if you have one, your investments, the beneficiary of retirement accounts, own your home, your cabin, the land, the whatever. And so your trust has to be brought to life with this funding process. And so we build a trifecta, this visual image that's, we think, the coolest thing out there in the legal world, this trademark image of your pieces and parts, your ordinary income, Your passive income and your legacy or your trust. So when we meet with a client, we're not just kicking out a document, we're having a conversation and we're going to bring the whole process together. And that's what a lot of people miss when they try to DIY their trust or the pieces, or they go talk to a lawyer and spend 5 or 10 grand and there's not even a conversation about funding the trust on day 2. So make sure whatever action you take, you remember that whole process. And there's a link to our law firm down below where you can learn more about the comprehensive estate plan that is so affordable and could even be tax deductible to some degree as you coordinate your business assets into it and have a business continuation plan that should also be in your estate plan. So, all these things are so, so, so important and not every law firm sees it that way.

Yeah. And let's just say, just so you know, costs on these too, because, you You know, we're doing revocable living trusts depending on how the size of your estate for let's say $2,000 to $5,000. You're in there and that's depending on, you know, you got tens of millions in assets, you got less than a million. I mean, you're gonna kind of swing in that area. But when you get to an irrevocable trust here, let's just break that down. The first thing I wanna say is these are far more complex and expensive to set up. The average ordinary American does not need an irrevocable trust. These are unique specialty type trusts That really even most of the 1% don't even have. But there are limited situations where we've used them for clients. We want to break them down so you understand them, so you can get in context of why this is getting hyped. And here's probably the first thing I want to say is because I'm sick and tired of all these influence out there, influencers out there talking about irrevocable trust. Like, oh, this is what the wealthy do.

Well, cool.

The wealthy have a jet too. Does this mean you should have a jet too? What is that doing for you? All right. They're, they're trying to say because this benefits them, it will benefit you. And this is some secret that you just don't know, which is totally BS. They're just trying to sell you something or sound smart, and which you don't need either of those. So we want, we want you to put in context what this irrevocable trust is.

So the way I like to look at irrevocable trust is it's a pretty large category. I mean, it's like saying, I want to drive an SUV. There's all sorts of SUV sizes, shapes, colors, and designs now.

Yeah.

An irrevocable trust can be extremely useful in a charitable type trust. We set up CRUTs and CRATs all the time. These charitable remainder trusts for tax planning are pretty amazing. You might set up an irrevocable life insurance trust. It's called an ILIT. And this ILIT trust might help keep some of your assets from being taxed when you pass away. It's specific for estate planning. You might set up a spendthrift trust. You have a handicapped child or your mom or dad has Alzheimer's and you want to protect some wealth and you put it in a special type of trust called a spendthrift trust. And another trust which I want to talk about later is the Domestic Asset Protection Trust, the DAPT. It is used for asset protection and it can be useful, but it has some limitations and we'll talk about that later. There's Medicaid trusts out there that are irrevocable and there's, I could go on and on. There's irrevocable trusts that have very specific purposes. But the one that Matt's talking about that gets oversold all over the world are the asset protection trusts. Sometimes called a credit shelter trust, or, and I'll, it'll come to me here, some other acronyms people use out there to make 'em sound even cooler or sexier. And so these irrevocable trusts are irrevocable. You can't change 'em. That's a big word. And they're going to protect your assets in a certain situation. That's the concept. Now we got to unpack what that means so you just don't run into them going, oh, that's cool, I want to protect my assets. Whoa, whoa, whoa, slow down, tiger.

Yeah, and I think, um, the— there is some truth to this. So this is why there's this always this like complex, you know, analysis. When you put assets into an irrevocable trust, you say these aren't my assets anymore. And many of those irrevocable trusts will give you the ability to take some income from those trusts during your lifetime But you can't just go deplete those assets. Those aren't your assets. They're for some beneficiary you've listed in the trust, which could be your kids or even a spouse in some of these irrevocable trusts. Maybe it's— you've done this for like tax planning purposes, like the charitable trust that Mark talked about, a charitable remainder trust where you're donating an asset to the trust, avoiding capital gains tax on that. You get a stream of income from it, but eventually when you pass, that Asset is going to the charity. So yes, we are getting asset protection on it because what happens is if you get sued, the creditor can't go get into these trusts because it's not your asset. Well, it's also not your asset, so you don't get the benefits of it. Sure, I can get some income from it, but I think what many people don't point out that are promoting these, or most of these moron influencers—I'm excuse me—but I'm kind of getting sick and tired of it. Are they're not explaining to you how you can use those assets during your lifetime. It's not like you're going to go and buy a home with some of these irrevocable trusts, all right, that you're going to live in. Okay. There's some restrictions in how you get those assets are going to be used and deployed. And then, of course, who they're going to when you pass away. But the first thing I just want to point out is generally, if you're trying to get asset protection using an irrevocable trust, this ain't your asset anymore.

Yeah, it's so funny here. As some of you watching this on YouTube saw me here on my computer, I'm just looking at all the different names that are out there for these types of trusts. And I do want to correct myself a little bit here. I always want to be transparent and candid. The credit shelter trust actually refers to an AB trust for protecting the marital assets. Credit or the estate credit for tax planning purposes. So a credit shelter trust is protecting that lifetime credit that you have when you do estate, higher estate planning. So I'm trying to just keep it simple.

Yeah, which is like $16 million approximately, you know, and if you're a married couple, that means the trust will split into 2 and it shelters the credit so that the surviving spouse gets another $16 million so that, Between the two of you, you'll have $32 million passing without estate tax, without having to do an irrevocable trust, by the way. Your revocable trust will break into two. That, by the way, we do that quite a bit with our trust, is where you have this credit shelter or AB provision in it. So, but, but that really lives in a revocable trust, what you're setting up now. Yes. That turns into an irrevocable trust upon your passing, and it splits into two trusts. But you're really just setting up a regular revocable trust now that just has this credit shelter AB provision in it.

Yeah. And I want to give a couple summary points here too, that I found a guy that's selling a crypto asset protection trust. What's a crypto asset protection trust? It is the same damn thing as an asset protection trust that's irrevocable. Where you cannot be the trustee. You're going to put this asset in the trust and hopefully continue to use it, but your decision-making and use is supposed to be restricted. But people want to just sign these documents, put the asset in there, and think nothing changed. I can still use it, I don't own it, and no one can sue me and touch it. Yeah, good luck with that in court. So Be careful with these promises. And the truth is, too, and sadly, a lot of these folks selling these types of trusts are charging at least— I don't think I've ever seen them under $15,000, $20,000. They charge these astronomical, astronomical amounts and we get duped into thinking, oh, if I spend more, I'm getting more. Well, actually, you're getting less. You're getting a mess. Yeah. And I just think it's— and they're going to throw out Cook Island trusts. Delaware trusts, all these. I've heard Alaska referred to and they're just— be careful.

Yeah, I will say, you know, especially the international trusts where you're going offshore, sometimes called an offshore trust, is those are very complex. And also the creditor protections on that are not as well as you might think. There's been people that have literally been put in contempt 'cause they're like, all my assets are in a Cook Islands trust and they get sued in the US. And they're like, hey, judge, you can't make me pay this. And there's literally been judges put people in jail, held them under contempt of court for failing to satisfy the judgment 'cause they didn't bring the assets back from the Cook Islands or wherever to settle the trust. So I'd just be careful on those. We're not a big fan of them. Now, I want to say this, 'cause I want to make sure you understand this. If irrevocable trusts work, we would be the first ones charging you 15 grand to go and set these up.

Okay.

I do. You might be like, well, why are you guys crapping on this? That's 'cause you guys do revocable trusts. We do them at a lower price point because they're what most people need. We would love to go charge 15 grand for these trusts. They're not that much more complicated to set up. It's the same type of documents that we can prepare, and, and we have the expertise of attorneys meeting with people every day, but they just don't fit 99% of people's situations, so we're not setting them up. I want to hit a couple other points about the irrevocable trust. The second part is when you put assets into them, you get trust tax rates. Now, irrevocable trusts have to file a separate tax return from your 1040, from your personal return. You're paying under trust tax rates. Now, the maximum trust tax rate— so if that asset's making money, let's say it's a crypto you put in some irrevocable trust and it goes up in value, or you're getting income off of it from staking or anything else that's happening, Is, all right, I'm in trust tax rates, maximum 37%, but that 37% hits at $16,000 of annual income. Like, you hit the highest rate in the tax code at $16,000 of income. On the personal side, you don't hit 37% until you've made like $600,000 single, $700,000 plus married filing joint. And so the trust is going to hit these higher rates very fast, separate return. So it's not a good tax play. Moving assets into an irrevocable trust will cost you taxes on the income that that trust is generating.

Now, maybe this is a good time to bring up the DAPT, the Domestic Asset Protection Trust. This is a trust we set up at our offices, probably around $5,000, depending on, again, the amount of work involved. And this is one that does not have a tax impact. It's what the IRS call a grantor trust. And any assets in it, the income from it still flows onto your tax return. And if you pass away, there's no estate planning benefit. It's— so you're not going to save taxes with these DAPTs or get— spend more in taxes. But there's about 15 states that have said, we're going to allow for this special DAPT trust, domestic asset protection trust. And if a citizen in our state has assets in our state and all these things align, We're going to protect that if they put assets in it before a cause of action. So there's all these little hurdles you have to jump to make sure it's done right and you're not just getting in a car accident tomorrow and go start moving assets around. But these DAPs work. We've seen them work.

Yeah.

We've had other podcasts on this show about protecting a client's bank account with a trust. I think that was in the last month. Go back and listen to it. But that is a type of irrevocable trust. But it's not these flash-in-the-pan, super expensive, over-the-top irrevocable trusts that really cost you and don't help.

Yeah. And I think the distinction there is, is that, you know, 15, 20 states or so have recognized these in their state laws. A lot of these irrevocable trusts that are being creative— created are kind of just in the basic trust laws. They're not specially you know, statutes that it's following that's giving you these types of protections than these claims people are using them for. And I— and there are legitimate purposes for them, like the charitable remainder trust. I mean, that trust structure is created because you're donating an asset eventually to charity, so you're, you're getting some of their charitable deductions out of it. You are getting it out of your estate because it's not in your estate for estate tax purposes. The ILIT is a similar thing. And what I would say is where we actually typically start talking about an irrevocable trust, with the exception of the DAP, the DAP we like for asset protection if you're in those 15 states, but where we will have a conversation with someone for the most part about an irrevocable trust is 2 scenarios. One, you have more than $15 million in assets, or if you're married, more than $30 million, okay? 'Cause now you're going to pay estate taxes. If you're under that, There's no estate tax issue. And some of the purposes and benefits of these irrevocable trusts are getting assets outside of your estate so that the growth of them over time doesn't get attributed to you and on your estate tax return, which is almost— it's over 40% of a— it's between 40 and 50%, the federal estate tax. So a lot of high net worth people, again, $15 million single, $30 million are pushing assets into irrevocable trusts for an estate tax problem. Again, a 1% issue, not the 99%. The other scenario I'd say where we see these irrevocable trusts being used is selling a highly appreciated asset. You know, we've had people literally selling the family farm. We've had clients that have highly appreciated crypto or selling a business, and maybe they're using a CRT or even an ILIT strategy And there's some tax benefit on the gain that they're getting. They're getting it outside the estate. They also likely can get a stream of income back from it. But again, these are also million-dollar type transactions. This is not, hey, I'm selling a rental property and making $150 grand type strategies, okay? These are again, 7-figure type situations of what I would say here when you're selling an appreciated asset where you may want to consider Some of these irrevocable trust strategies.

Those are great points, Matt, because I think, like I said at the beginning of this, of irrevocable trust, as we try to get our head around it, there are great trusts in that genre that have specific purposes that are not a mess and not sold with hype. Well, this has been a lot, and I think, you know, I'm proud of you, the listener, watcher here, that you took the time to really get educated on this because there's a lot of pitfalls. falls out in this area. We have been helping thousands of clients do it right and affordably for years. And if you can't find the right resource, please at least have a discovery call with us to see what we might be able to do for you at our law firm. But I want to summarize in this way that something Matt said earlier, everybody needs a revocable living trust or estate plan with their trifecta, bringing the whole thing together. Then you might need an irrevocable trust. But cross that bridge by getting a second or even a third opinion if needed, and be careful being sold something that sounds too good to be true. And I think there's a lot of options out there in the irrevocable space.

Yeah, well said. Love that. I just put an amen to that. We'll leave it there, guys. Thank you everybody for tuning in to another episode of the Main Street Business Podcast. Make sure you're subscribed. Following. I don't know what the different things are out there that you can do, so you get the show every week because we're putting out an episode to give you better tools and strategies to live your American dream. Thanks for watching. See you next time.