Demystifying Trusts: Understanding Their Role in Estate Planning

Paul: 00:00:15

Well, all right.

Paul: 00:00:16

Well, what a great, great day it is in the beautiful Pacific Northwest.

Paul: 00:00:23

Fall is here, the wind is blowing, our streets are decorated with beautiful colors of leaves, and I trust that wherever you are, you are warm, safe and sound.

Paul: 00:00:36

Today we have with us our good friend and colleague, Jim Bergeron.

Paul: 00:00:42

Jim is an advisor, education consultant in the Global Learning and Development Group of Nuveen, where he and his team focus on developing and delivering intellectual capital designed to help wealth management firms and advisory practices evolve and enhance their relationships with clients.

Paul: 00:01:02

Good morning, Jim.

Jim Bergeron: 00:01:04

How are you?

Jim Bergeron: 00:01:05

Paul, it's great to be back with you and it's great to be talking with folks again.

Jim Bergeron: 00:01:09

And I agree with you, this is one of the best times of year.

Jim Bergeron: 00:01:11

You mentioned the Pacific Northwest.

Jim Bergeron: 00:01:13

I reside in the Midwest here in the upper Midwest, and for me, this is that great time of year in which you've got absolutely beautiful weather, beautiful colors.

Jim Bergeron: 00:01:24

We're not yet at that point in which we're all frigid when we walk outside.

Jim Bergeron: 00:01:29

So it's a great time of year and it's great.

Jim Bergeron: 00:01:31

Great day to be back with you.

Paul: 00:01:33

Excellent.

Paul: 00:01:33

And it's great to be with you as well.

Paul: 00:01:36

You know, we're sharing a new series discussing advanced planning techniques that span different areas and needs, and they also touch on different professions and aspects of our lives that may need additional considerations.

Paul: 00:01:50

In our last discussion, we were joined by our very successful friend, singer songwriter Philip Nathaniel Friedman of Small Town Titans, and we discussed the need for planning regarding digital assets, which is not only a must for musicians and those in the arts and entertainment area, but increasingly in our own lives as well.

Paul: 00:02:12

And I'll place a link to that episode in the bottom of today's show notes.

Paul: 00:02:16

But I believe today we want to talk about and demystify trusts, what they are and how they can be effectively used in a coordinated plan, and perhaps touch on some of the basic trusts that people can understand and consider using in their own planning.

Paul: 00:02:34

So, Jim, I'm looking forward to this conversation today.

Paul: 00:02:38

So if I may, let me start off by asking a question a lot of people may have.

Paul: 00:02:42

What are trusts?

Jim Bergeron: 00:02:44

Boy, and that's, that's a great place to start, Paul.

Jim Bergeron: 00:02:46

And at the end of the day, you mentioned something at the very outset that I think is a perfect description of the trust world.

Jim Bergeron: 00:02:55

When you think about demystifying them, there is some mystique around trusts.

Jim Bergeron: 00:03:00

What are they and how they are used?

Jim Bergeron: 00:03:02

And I would say this, that trusts are both flexible and controlling, and what you want to derive out of that trust will Determine kind of which direction you go.

Jim Bergeron: 00:03:16

But that's part of the challenge as well, is that there are just so many options that we can utilize a trust for and goals that we can use a trust to accomplish that.

Jim Bergeron: 00:03:27

It becomes almost paralyzing.

Jim Bergeron: 00:03:29

But when you think about trust, and in its simplest term, a trust is nothing more than a contract, a contract between an individual and other individuals, generally speaking, family members, I can go beyond that.

Jim Bergeron: 00:03:47

But essentially a trust is something that I might put together, and as the grantor of that trust, I'm the person that is granting assets to that trust.

Jim Bergeron: 00:03:59

And then that trust in turn is going to dictate where those all assets ultimately land up and along that journey who has different responsibilities and different roles.

Jim Bergeron: 00:04:15

So I might be the grantor, the person that receives the trust assets would be considered a beneficiary of the trust.

Jim Bergeron: 00:04:24

And during that time period, there's another role, a role of a trustee, someone that oversees what's going on within that trust.

Jim Bergeron: 00:04:32

Essentially, they're following the instructions.

Jim Bergeron: 00:04:35

Okay, in a moment we might want to get into a little bit more of the differences between those general flavors, revocable or irrevocable.

Jim Bergeron: 00:04:43

But a trust really, at the end of the day is nothing more than that contract that ultimately is going to deliver assets somewhere.

Paul: 00:04:49

PAUL well, let me ask you this question.

Paul: 00:04:52

Somewhere on the spectrum of assets, net worth, someone may need to look at trusts, let's say from 0 to 13 million in, in net worth, they may need to look at trusts, they may not.

Paul: 00:05:11

There's that thing called federal tax issues.

Paul: 00:05:13

And then above 13 million, it may also really make sense to start looking at trusts.

Paul: 00:05:20

How do you define that?

Jim Bergeron: 00:05:22

And I think at the end of the day, Pong, what you're pointing to is the fact that if we want to start using trust to accomplish certain planning based goals or objectives, the type of trust, whether it's revocable or irrevocable, matters.

Jim Bergeron: 00:05:38

And if we go way back to our earlier sessions around just general estate planning thoughts?

Jim Bergeron: 00:05:44

We talked an awful lot about the use of revocable trusts.

Jim Bergeron: 00:05:49

And quite simply, revocable trust is the most flexible in that when you set up that trust, you can change it at any point.

Jim Bergeron: 00:05:59

As the grantor, as the originator of that trust, you can put assets into it, you can take assets out of that trust, you can completely cancel or revoke that trust, hence its name.

Jim Bergeron: 00:06:12

Now, the benefit of that is ultimate flexibility.

Jim Bergeron: 00:06:15

The downside is that you might not be able to accomplish some of the goals and objectives that you have.

Jim Bergeron: 00:06:20

For instance, perhaps Utilizing the ability to save federal estate taxes is one of the goals that you want to address with the use of trusts.

Jim Bergeron: 00:06:32

Generally, we're going to be utilizing irrevocable trusts to accomplish that.

Jim Bergeron: 00:06:39

An irrevocable trust, as its name implies, is a trust that you set up.

Jim Bergeron: 00:06:45

You as the grantor, initiate this contract, and that trust is ultimately going to deliver assets at some point down the road to an individual or individuals.

Jim Bergeron: 00:06:58

And at the end of the day, that process is overseen by that trustee.

Jim Bergeron: 00:07:03

Now, the big difference, irrevocable means once you set up that trust, you can't change it.

Jim Bergeron: 00:07:09

It's irrevocable in nature.

Jim Bergeron: 00:07:11

Once you put assets into that trust, those assets are removed from your hands and your ability to control them.

Jim Bergeron: 00:07:20

They're now essentially officially owned by that trust.

Jim Bergeron: 00:07:24

So at the end of the day, we might want to use a trust like that, Paul, to take advantage of some of that federal estate tax exemption.

Jim Bergeron: 00:07:34

We spoke earlier, we talked a little bit about that estate tax exemption.

Jim Bergeron: 00:07:38

Maybe that's something we want to go a little bit further into at this point.

Jim Bergeron: 00:07:42

You tell me, Paul.

Paul: 00:07:43

Well, yes, let's cover it.

Paul: 00:07:45

Let's touch on it and go into it a little bit.

Jim Bergeron: 00:07:48

When we think about that federal estate tax and that estate tax that's applicable to assets recall from our earlier sessions, we talked about the fact that at your death, the federal government may tax the assets that you're passing to the next generation or generations.

Jim Bergeron: 00:08:07

Now, that tax, it's called an estate tax.

Jim Bergeron: 00:08:10

At your death, there's a corresponding tax that applies during your lifetime called the gift tax.

Jim Bergeron: 00:08:16

Now, the good news is that once you go beyond a certain minimum threshold, and I say minimum, it's actually quite large, $18,000 this year.

Jim Bergeron: 00:08:28

Once you go beyond transferring that during your lifetime by way of gift, you might be facing a federal gift tax.

Paul: 00:08:38

So let me pause right there for a moment.

Paul: 00:08:40

So for that 18,000 for this year that you mentioned, does that mean I can gift anyone 18,000?

Jim Bergeron: 00:08:49

Yeah, you got it exactly.

Jim Bergeron: 00:08:51

And it gets even better than that, Paul.

Jim Bergeron: 00:08:53

If, for instance, you are married, you and your spouse can give to anyone 18,000, 36,000 between the two of you, you can see how the numbers can ramp up pretty quickly, right?

Jim Bergeron: 00:09:07

It's called an annual exclusion gift.

Jim Bergeron: 00:09:10

And this minimum amount means that when you make a transfer underneath that, you don't even have to worry about filing a transfer tax return, a gift tax return, in the case of a transfer during your lifetime.

Jim Bergeron: 00:09:26

Again, the benefit of that is that you can move assets, you can move them out of your estate for estate tax purposes and at the end of the day, maybe generate some tax savings.

Jim Bergeron: 00:09:37

But as we go beyond that amount, if you want to transfer more in the way of wealth, we probably should talk a bit about the federal estate and gift tax exemption amount.

Paul: 00:09:48

Now, I just want to make sure.

Paul: 00:09:49

So for Those listening, that's 18,000 or 36,000 by a couple.

Paul: 00:09:55

Is that per individual?

Paul: 00:09:58

So let's say I have five kids, and let's say I have the means to do that.

Paul: 00:10:03

Would I be able to give 18,000 per child?

Paul: 00:10:07

Or is that 18,000 total?

Jim Bergeron: 00:10:10

No, it's 18,000 per child.

Paul: 00:10:13

Ah.

Jim Bergeron: 00:10:13

So between you and a spouse, if you were married and you had five children, you could give to each of those five children $36,000.

Jim Bergeron: 00:10:23

Between the two of you, you could go beyond that.

Jim Bergeron: 00:10:26

Even if those children were all married.

Jim Bergeron: 00:10:29

For instance, you and your spouse could give 36,000 to your child, 36,000 to that child's spouse in this year.

Jim Bergeron: 00:10:41

And you can multiply those numbers out pretty drastically.

Jim Bergeron: 00:10:43

So at the end of the day, you've got it exactly right.

Jim Bergeron: 00:10:46

And you can transfer a fairly significant amount that way.

Paul: 00:10:48

Terrific.

Jim Bergeron: 00:10:49

We might want to get into a bit of these.

Jim Bergeron: 00:10:51

So why would we do that?

Jim Bergeron: 00:10:52

Why might I do that?

Jim Bergeron: 00:10:54

Well, first, maybe I do have enough in the way of wealth, however we define wealth, But I have enough in the way of wealth that I want to make some lifetime transfers.

Jim Bergeron: 00:11:04

I want to maybe see the benefit of those assets in the hands of my family members.

Jim Bergeron: 00:11:10

So if I do it during my lifetime, I, in turn, am making a gift that we just talked about.

Jim Bergeron: 00:11:16

You can move a fairly substantial amount, but once you go beyond that 18,000 this year, then you start dipping into this thing called the federal estate and gift tax exemption amount.

Jim Bergeron: 00:11:29

It's essentially the equivalent of what you could transfer before you actually have to start writing a check to Uncle Sam and transfer either during your lifetime or at death.

Jim Bergeron: 00:11:42

And this exemption amount would cover, this year, the equivalent of $13.6 million.

Jim Bergeron: 00:11:51

And similar to that annual exclusion, Paul, you and a spouse, if married, would have $13.6 million available to each one of you that you could use to essentially shelter or offset the tax cost on a lifetime gift or a transfer at your death through your estate.

Jim Bergeron: 00:12:13

Now, here's where we start to get maybe a little bit more complicated.

Jim Bergeron: 00:12:17

One of the things that we do have to pay attention to is if you find yourself in a wealth level, and by this I mean when you add up everything that you own, all of your cash, all of your marketable securities, all of your real estate, all of your business interests, the death benefit of life insurance policies, if you own those policies, that death benefit, when you add all of those things up, if you start to approach that $10 million level or maybe go beyond it, we may want to start thinking about using some of that estate and gift tax exemption sooner rather than later.

Paul: 00:13:04

That would also be helpful for those that have states whose threshold is less than that 13 million as well.

Paul: 00:13:12

Correct?

Jim Bergeron: 00:13:13

Really good point.

Jim Bergeron: 00:13:14

There are a handful of states, about 13, that have their own state level estate tax or transfer tax and they're going to have their own state level exemption amount and that may differ than the federal.

Jim Bergeron: 00:13:32

So we have to pay attention to that too, as we're talking.

Jim Bergeron: 00:13:36

And as you can see, it starts to get to be fairly complex.

Jim Bergeron: 00:13:41

And that's part of the reason why we will always talk about the fact that you want to talk about your own specific situation with your tax and legal advisors.

Jim Bergeron: 00:13:50

They know your specifics and they'll know the best use of these types of trusts that might give us the ability to transfer assets.

Jim Bergeron: 00:14:02

Utilizing, in the case of a federal tax, that federal transfer tax, using some of that federal estate exemption and using it now, as opposed to waiting a few years, when in fact that federal exemption is actually scheduled to go down in level before we lose it, is potentially worth exploring.

Paul: 00:14:26

Isn't that next year,: 2025

Jim Bergeron: 00:14:32

It's approaching quickly.

Jim Bergeron: 00:14:33

is there was an act passed in: 2017

Jim Bergeron: 00:14:46

And right now it's at $13.6 million.

Jim Bergeron: 00:14:50

It actually moves each year.

Jim Bergeron: 00:14:52

It gets indexed for inflation each year.

Jim Bergeron: 00:14:56

So next year that $13.6 million will actually get closer to about $14 million per individual.

Jim Bergeron: 00:15:05

And as you just heard Paul indicate, at the end of next year, the provision that increased that estate exemption at the federal level is set to expire.

Jim Bergeron: 00:15:20

And when it expires, the exemption amount, the amount that you can transfer without paying a federal transfer tax, gift or estates, is going to drop to closer to six and a half to $7 million.

Jim Bergeron: 00:15:37

And that's where the planning starts to come in.

Paul: 00:15:40

So there are some tax aspects that are really beneficial, obviously avoiding federal tax issues or mitigating, shall we say, federal tax issues, possibly state as well.

Paul: 00:15:53

There are some drawbacks.

Paul: 00:15:55

If you go, if you set up an irrevocable trust, once you have set that up, it's outside of Your ability to change that.

Paul: 00:16:03

It's been irrevocable at that point versus irrevocable.

Paul: 00:16:07

And obviously, like we said before, that there's some tax benefits.

Paul: 00:16:11

Can you share some differences, you know, maybe some basic irrevocable trusts that people might want to consider?

Paul: 00:16:19

Yeah.

Jim Bergeron: 00:16:20

Paul, if you've heard of an irrevocable life insurance trust.

Paul: 00:16:23

Yes.

Paul: 00:16:24

An eyelet, as they call it in the business.

Paul: 00:16:27

It's an irrevocable life insurance trust.

Jim Bergeron: 00:16:30

And why might we use that?

Jim Bergeron: 00:16:32

Well, you just heard me talk a couple of minutes ago about the fact that for estate tax purposes, when you pass, all of your assets get added up, including the death benefit of those life insurance policies.

Jim Bergeron: 00:16:47

If I own that life insurance policy, that death benefit would be included in my estate.

Jim Bergeron: 00:16:53

If I own it at my death, on the other hand, I might want to consider utilizing an irrevocable trust to own that life insurance policy.

Jim Bergeron: 00:17:05

In a minute, we'll go through maybe a little bit more of the mechanics, but the real rationale for that is that if a life insurance trust, this irrevocable life insurance trust, or ilot, as you and A, owns that policy at my death, the death benefit, the amount of money can still go to the individuals that I have identified, my children, grandchildren, whoever that might be.

Jim Bergeron: 00:17:32

But because it's owned by this irrevocable trust, it's not included in my estate for estate tax purposes.

Jim Bergeron: 00:17:41

So I remove those assets from my estate.

Jim Bergeron: 00:17:44

Now, that said, there are some mechanics around how you in turn transfer an existing policy to a life insurance trust or potentially set up an irrevocable life insurance trust and then in turn have that trust purchase the policy on your life that pays off at your death.

Jim Bergeron: 00:18:08

And again, in so doing, we remove that death benefit from that life or from that estate tax calculation.

Jim Bergeron: 00:18:15

And these can be pretty big ticket items given the level of insurance that some families have.

Paul: 00:18:21

Because the trust, the irrevocable life insurance trust, purchases the life insurance, therefore it is not in the individual's name anymore, then that insurance is outside of the estate for estate tax issues.

Paul: 00:18:41

Is that correct?

Jim Bergeron: 00:18:42

Yeah, that's the cleanest way of doing it, is set up the irrevocable life insurance trust.

Jim Bergeron: 00:18:47

The trust in turn buys the policy.

Jim Bergeron: 00:18:49

Some families have existing policies and they would like to move those out of the estate.

Jim Bergeron: 00:18:53

And we can do that.

Jim Bergeron: 00:18:54

You can transfer those policies to a trust, but it's going to be a bit more complex.

Jim Bergeron: 00:18:59

And again, that's where you're going to want to work pretty closely with estate and tax planning attorney or specialist that can guide you through that process.

Jim Bergeron: 00:19:07

But there is a way of getting those out of the estate as well.

Paul: 00:19:10

Now, is there a trust that one could set up that their spouse could have access to if they pass away, but still keep assets out of their estate?

Jim Bergeron: 00:19:24

And again, you know, it's almost as if you come up with a scenario, any scenario you come up with, I can design a trust around that scenario.

Jim Bergeron: 00:19:32

But let's assume the scenario goes something like this, that we find ourselves owning a sufficient amount of assets, maybe above that $10 million figure at the federal level.

Jim Bergeron: 00:19:47

And I'm going to set aside the states versus but above that $10 million level.

Jim Bergeron: 00:19:52

And you just heard me talk about the fact that that exemption amount that's out there, that's 13.6 million this year, is set to go down.

Jim Bergeron: 00:20:00

Well, if I don't use the exemption amount that drops before it goes down, I lose that amount.

Jim Bergeron: 00:20:11

So I might want to consider utilizing an irrevocable trust and in turn put assets into that trust, use the exemption amount that I have available right now, and in turn have those assets held in that trust ultimately to be paid out to my chosen beneficiaries.

Jim Bergeron: 00:20:33

And that could be kids, could be grandkids, whoever that might be.

Jim Bergeron: 00:20:38

However, one of the things that might cause me to hesitate is when I make that transfer, because we just talked about the fact that it's irrevocable and we can't change that.

Jim Bergeron: 00:20:49

It means also that when I make that transfer, I can't reach in and actually take use of those trust assets.

Jim Bergeron: 00:21:00

They're out of my hands.

Jim Bergeron: 00:21:01

It's as if I've given up ownership and control.

Jim Bergeron: 00:21:03

In fact, I have given up ownership and control.

Jim Bergeron: 00:21:06

Well, for some people, that causes some hesitation, especially when we're starting to talk about fairly significant amounts of transfers.

Jim Bergeron: 00:21:14

Well, there's certain types of trust that we can maybe utilize that will help that.

Jim Bergeron: 00:21:19

For instance, there's something called a spousal access trust.

Jim Bergeron: 00:21:23

And each state is going to operate a little bit differently with the laws around these.

Jim Bergeron: 00:21:28

But in its simplest form, it's a type of irrevocable trust that I set up.

Jim Bergeron: 00:21:34

I transfer assets to that irrevocable trust, ultimately for the benefit of family members, kids, grandkids.

Jim Bergeron: 00:21:43

And during the term of that trust, my spouse, whom I'm legally married, has the ability to access assets in that trust income and principal.

Jim Bergeron: 00:21:56

And it's designed in such a way where it utilizes that exemption amount before it goes down and ultimately gets those assets in the hands of those beneficiaries family members.

Jim Bergeron: 00:22:11

And in so doing, I've maybe used some of that exemption that I wouldn't have five or ten years from now.

Jim Bergeron: 00:22:20

And as a result, it's a sound planning concept.

Jim Bergeron: 00:22:23

And with all of these concepts, just want to make sure you're talking about it with your own planning and legal professionals.

Paul: 00:22:31

Well, how far can you go with that access?

Paul: 00:22:34

So let's say I set up that spousal access trust, and sometimes I think people will hear the term SLAT S L A T it it.

Paul: 00:22:43

It's the acronym for the Spousal Access Trust.

Paul: 00:22:48

How far can I go with that access and set that up?

Paul: 00:22:52

How much flexibility does my spouse or partner have when I set that up?

Jim Bergeron: 00:22:58

It's pretty flexible.

Jim Bergeron: 00:23:00

And so at the end of the day, your spouse, because.

Jim Bergeron: 00:23:03

Because that person wasn't involved in the transfer, has the ability flexibly to reach in and get income to get principal out of that trust.

Jim Bergeron: 00:23:13

Now, the provisions are going to dictate to what level that can happen, but at the end of the day, really quite flexible.

Jim Bergeron: 00:23:22

So one of the things that we'll sometimes get asked is, well, if this is such a good thing, what if I set one up and my spouse has the ability to access those assets, and then at the same time my spouse sets up a trust, same type of deal, and I have the ability to access those trusts?

Jim Bergeron: 00:23:41

Wouldn't.

Jim Bergeron: 00:23:41

Between the two of us, it's essentially as if we've given it away, but we haven't given away.

Jim Bergeron: 00:23:45

That's where we need to be really, really careful.

Jim Bergeron: 00:23:49

There are certain doctrines that the IRS would utilize in those situations to maybe argue that because you have both done this and done it at the same time with very similar provisions, we're going to essentially piece those two transactions together into one, and it's as if you haven't given away any of the assets.

Jim Bergeron: 00:24:09

So you want to be really careful about that.

Jim Bergeron: 00:24:11

But to answer your original question, there's a lot of flexibility.

Jim Bergeron: 00:24:15

When I set up a trust, and it's a singular trust on its own for my spouse to have access to whatever's in that trust.

Jim Bergeron: 00:24:23

Really quite flexible.

Paul: 00:24:25

Now, we live in a time where people change and families change.

Paul: 00:24:30

There's blended families now.

Paul: 00:24:32

How would one set up a spousal access trust?

Paul: 00:24:36

Or can they where they can set it up and if something happens to a partner or a wife or a husband, that I can redirect who the new spouse is because maybe someone gets married again.

Jim Bergeron: 00:24:52

And factor, I mean, that's one of the things that we want to pay Attention to.

Jim Bergeron: 00:24:56

As you heard me when I described the spousal access trust, I set it up and my spouse, one legally married, has the ability to access those assets.

Jim Bergeron: 00:25:07

Well, what happens in the case of divorce?

Jim Bergeron: 00:25:10

At the end of the day, does my ex spouse have the ability to access those assets?

Jim Bergeron: 00:25:16

That's probably not a result that I would be really keen on.

Jim Bergeron: 00:25:20

We can plan around that.

Jim Bergeron: 00:25:22

And as we've talked about that planning at the end of the day can be pretty specific and it can include in this case maybe simply my spouse, to whom I'm currently married, has access to these assets themselves.

Jim Bergeron: 00:25:40

And in the second marriage situation, that would mean that your current spouse has that access, not your former spouse, and we can cover those things off.

Jim Bergeron: 00:25:51

And again, I will just point this out, Paul, neither you nor I are practicing law and we are not providing legal advice here.

Jim Bergeron: 00:26:00

But at the end of the day, what we're pointing out are what are some of the potential options?

Jim Bergeron: 00:26:05

And as with all of these types of trusts, describing what you're trying to accomplish, your goals as a family and your wealth management and wealth tax savings goals all get factored into that conversation with your tax and legal advisors directly.

Paul: 00:26:24

Yeah, we are not saying one should use this trust or another trust.

Paul: 00:26:31

We're merely sharing that these trusts exist.

Paul: 00:26:35

Those are, those are two different.

Paul: 00:26:36

Two different statements.

Jim Bergeron: 00:26:37

Yeah.

Jim Bergeron: 00:26:38

Recommendations for some thoughts that might help as the listeners are thinking about their own situations and how they might utilize some of these things.

Jim Bergeron: 00:26:48

And all of this stems from, again, the fact that, as we stated at the outset, Paul, trusts are really quite flexible and they can cover a variety of different situations.

Paul: 00:26:58

Yes.

Paul: 00:26:58

So we've talked about the Illit, the life insurance trust, the irrevocable life insurance trust.

Paul: 00:27:04

We've mentioned the spousal access trust.

Paul: 00:27:06

And that's very helpful for spouses and in situations like blended families or if there's ways to write the document so that it's looking at your current spouse versus a former spouse.

Paul: 00:27:21

But what about residences?

Paul: 00:27:23

What about residents of physical properties?

Paul: 00:27:26

Is that something that can be put into a trust?

Jim Bergeron: 00:27:29

Yeah, good question.

Jim Bergeron: 00:27:30

Let's say that in the scenario that I'm manufacturing now, it's this idea that I want to make use of that exemption as we talked about before before, it drops in level.

Jim Bergeron: 00:27:43

But I don't want to use my liquid assets, marketable securities, cash.

Jim Bergeron: 00:27:49

I don't want to utilize those things to make this transfer.

Jim Bergeron: 00:27:52

Can I use real estate?

Jim Bergeron: 00:27:54

And to your question specifically, Paul, the residence, your personal residence.

Jim Bergeron: 00:28:00

Well, there is a type of trust out there that's called a personal residence trust.

Jim Bergeron: 00:28:06

And it allows you to essentially transfer this asset to an irrevocable trust.

Jim Bergeron: 00:28:12

And then at some point in the future, ownership of the residence passes from that trust to your beneficiaries, to your kids.

Jim Bergeron: 00:28:23

During the time period that you select, you essentially have all of the benefits of owning that residence yourself outright, and all the responsibilities.

Jim Bergeron: 00:28:37

In other words, you live there.

Jim Bergeron: 00:28:39

You're responsible for the upkeep, mowing the lawns, paying the insurance.

Jim Bergeron: 00:28:43

All of those things are still your responsibility.

Jim Bergeron: 00:28:48

And then at some point down the road, that term that you pick, ownership, passes to your named beneficiaries.

Jim Bergeron: 00:28:56

So why would I do this?

Jim Bergeron: 00:28:57

Because at the end of the day, when I make the transfer, because I have that time period in which I'm retaining that right to keep living there, I retain the ability to utilize that residence as I see fit during my lifetime.

Jim Bergeron: 00:29:14

I take the value of that retained, write and subtract it from the value of the residence.

Jim Bergeron: 00:29:23

And the difference is what's subject to tax.

Jim Bergeron: 00:29:27

That difference between those two values is the amount of exemption that I would utilize for this transfer.

Jim Bergeron: 00:29:35

And I'm going to caveat this with saying that each state is a little bit different in their rules.

Jim Bergeron: 00:29:41

And as we start to think about other states and jurisdictions, in some cases, these types of trusts may not work as beneficially, but for most jurisdictions, you can utilize your residence to take advantage of transfer, using that exemption to move assets out of your estate for estate tax purposes without having to move, for instance, and lose the ability to control those liquid assets, the things that you're living off of.

Paul: 00:30:13

That's excellent.

Paul: 00:30:14

So with these trusts, do they also take those assets and move them when they're out of the estate?

Paul: 00:30:23

Does it also move them out of a conversation regarding probate?

Paul: 00:30:28

I hear questions about that from time to time.

Jim Bergeron: 00:30:31

Yeah, that's a really good question.

Jim Bergeron: 00:30:32

And I start with this.

Jim Bergeron: 00:30:34

I don't know that I would consider the probate process something to be feared at all costs, to avoid at all costs.

Jim Bergeron: 00:30:42

Now, there are some complexities with it, and there are some administrative costs that go along with probating an estate.

Jim Bergeron: 00:30:49

And essentially that's just administering the estate transition process.

Jim Bergeron: 00:30:56

And if you think about it, sometimes those that are helping with that process will charge for that assistance.

Jim Bergeron: 00:31:05

Attorneys and banks, for instance.

Jim Bergeron: 00:31:08

And they'll charge according to maybe a schedule or a percentage of the assets themselves.

Jim Bergeron: 00:31:14

Well, if I remove something from the probate process, I might reduce that cost.

Jim Bergeron: 00:31:20

That's one concern, and I don't necessarily know that that's one that I would want to avoid probate at all costs for.

Jim Bergeron: 00:31:27

But one of the other things that we might want to utilize avoiding probate for, and the types of trusts that we've talked about here will avoid probate.

Jim Bergeron: 00:31:38

One of the benefits of that is privacy.

Jim Bergeron: 00:31:42

Yes, an asset that passes through the probate process, regardless of state, is open to public inspection.

Jim Bergeron: 00:31:49

In other words, any individual could go in and request information around that estate that has gone through probate.

Jim Bergeron: 00:31:59

And for people that are maybe concerned about the nosy neighbor syndrome or however you might define that, or just like the idea of privacy around transition of your assets, avoiding probate is something worth considering.

Jim Bergeron: 00:32:15

And the trust that we've talked about so far, those irrevocable trusts, the ILET Spousal Access Trust, we might talk about one or two more in today's session, but they will avoid probate.

Paul: 00:32:28

Well, that's good.

Paul: 00:32:29

That's good.

Paul: 00:32:29

Now, one that would, I would think, be high on the list for avoiding probate, and this also could be very beneficial are special needs trusts.

Paul: 00:32:40

There's a lot of families that have children, adult children with special needs, and that might be a trust to consider.

Paul: 00:32:46

Can you share share a little bit about that?

Jim Bergeron: 00:32:50

A special needs trust usually designed around that scenario in which a family member has developmental, cognitive, physical characteristics that warrant some additional assistance, maybe care and help.

Jim Bergeron: 00:33:08

And usually in a family context, mom and dad are doing that.

Jim Bergeron: 00:33:12

They're providing that.

Jim Bergeron: 00:33:13

Maybe it's older siblings to some degree, but at some point a family may want to consider providing an avenue for assets to be held and managed and then utilized for that particular individual.

Jim Bergeron: 00:33:30

And those are things that we would refer to in a grouping of trusts as special needs trusts.

Jim Bergeron: 00:33:38

There's a special need that we're looking after, and the trust is designed to help ease that process.

Jim Bergeron: 00:33:46

Someone can administer the assets, someone can help with bill pay.

Jim Bergeron: 00:33:50

If that's a need, the trust can provide assets for that individual as needed.

Jim Bergeron: 00:33:56

Perhaps for instance, a special vehicle is needed.

Jim Bergeron: 00:33:59

The trust can provide that.

Jim Bergeron: 00:34:01

And also this is where we want to be a little bit careful.

Jim Bergeron: 00:34:05

Those types of trusts are and can be designed in such a way where they don't necessarily negatively impact the ability to qualify for governmental assistance, as that case may be.

Jim Bergeron: 00:34:22

Again, I wouldn't suggest that as the opening point, but generally speaking, these are trusts ultimately that become irrevocable in nature that are designed to help family members that need some special A assistance.

Paul: 00:34:39

That's good to know.

Paul: 00:34:39

I know a number of families that have special needs children and have to plan accordingly and we definitely want to make sure that there's families out there that are in similar situations, that they speak with their attorney and professional advisors about looking into that.

Paul: 00:34:58

Well, Jim, we've talked about taking care of our families and our spouse and residents and special needs for children.

Paul: 00:35:05

But some of us have a concern about the community at large and have a focus on charitable giving.

Paul: 00:35:13

So are there any trusts that focus on charitable giving?

Jim Bergeron: 00:35:19

There are quite a number, Paul, and part of that stems from the fact, as you indicate, that as individuals, as families, sometimes there are things that we just have passion around.

Jim Bergeron: 00:35:30

For instance, for us as a family, it's that fight against cancer.

Jim Bergeron: 00:35:34

We feel like we've been touched by it more than our fair share.

Jim Bergeron: 00:35:37

And so as a result, fighting the disease is important to us.

Jim Bergeron: 00:35:41

Now, we can do that in a couple of ways.

Jim Bergeron: 00:35:43

We can use our time and volunteer and get involved in certain aspects.

Jim Bergeron: 00:35:48

In some cases, we might want to use our wealth that includes our economic resources, and we could give money directly to charitable organizations that fight the disease.

Jim Bergeron: 00:36:00

And in so doing, we might generate an income tax deduction, which is beneficial on our current income tax returns.

Jim Bergeron: 00:36:07

We may also want to consider ways of utilizing trusts to ultimately benefit particular charities.

Jim Bergeron: 00:36:15

And there are a lot of different types of charitable trusts.

Jim Bergeron: 00:36:19

But let's just pick one example, one idea.

Jim Bergeron: 00:36:22

So let's talk about a scenario in which I like the idea of utilizing a transfer to charity or making a gift to charity.

Jim Bergeron: 00:36:33

And they'll say, I feel really strongly about that charity, such that I want to give a fairly significant amount to that charity, but at the same time, I may not be willing to give that asset away completely today.

Jim Bergeron: 00:36:49

Well, there's something called, for instance, a charitable remainder trust, Paul.

Jim Bergeron: 00:36:54

This is again, another type of irrevocable trust.

Jim Bergeron: 00:36:59

But in a charitable remainder trust, I'm making a transfer to a trust for the ultimate benefit of charity or charities of my choice.

Jim Bergeron: 00:37:13

And during a time period, and I can pick that time period.

Jim Bergeron: 00:37:16

It could be a term of years, for instance, 10, 15, 20 years.

Jim Bergeron: 00:37:22

During that time period, the trust is paying back to me an ongoing annuity or income interest.

Jim Bergeron: 00:37:33

And so each year I might be getting an income stream from that charitable remainder trust.

Jim Bergeron: 00:37:38

And then at the term expiration, that term that I pick, the assets ultimately pass to that charity that I designate.

Jim Bergeron: 00:37:48

Actually could be a number of different charities.

Jim Bergeron: 00:37:52

But this is one type of trust that allows me to cede and fund a transfer to something that I'm passionate about or that my family's passionate about, but still retain the ability to have that income come back to me.

Jim Bergeron: 00:38:08

So in essence, doing the transfer today, and it's going to give me that income stream for some time period and then pay on to charity down the road.

Jim Bergeron: 00:38:19

And in doing this, I'm benefiting a charity that I like.

Jim Bergeron: 00:38:23

I'm also retaining an interest in this particular transfer.

Jim Bergeron: 00:38:29

And in this process, I'm also going to generate an upfront income tax deduction that I can use on my income tax return that I file next year.

Jim Bergeron: 00:38:40

So if I make the transfer today, I get to use that income tax deduction on that return that I file next April 15th.

Paul: 00:38:49

Nice.

Jim Bergeron: 00:38:50

And the benefit of this is that those assets, similar to some of the things that we've talked about already, those assets in that charitable remainder trust are outside of my estate, so they're not included in that estate tax computation.

Jim Bergeron: 00:39:03

So I'm getting a number of different benefits.

Jim Bergeron: 00:39:07

An income stream, an income tax deduction, funding a charity that I might have passion around and the assets are removed from my estate really provides some flexibility.

Paul: 00:39:19

Well, that's great.

Paul: 00:39:21

And I think you've demystified what some of these trusts are.

Paul: 00:39:27

The illit, the irrevocable life insurance trust, the SLAT or the spousal access trust, the qualified residence trust.

Paul: 00:39:39

And then we've talked about special needs and charitable trusts.

Paul: 00:39:43

And the underlying piece that we have shared time and again is these are ideas or explaining what they are.

Paul: 00:39:51

We're not suggesting that the listener take our advice or see this as advice and utilize one of these that they need to speak with their tax professional.

Paul: 00:40:04

They should speak with their attorney and other professionals first.

Paul: 00:40:07

We're merely sharing that these exist and how they work and how they potentially could benefit a family.

Paul: 00:40:15

Correct?

Jim Bergeron: 00:40:15

Paul, I think you make a really good point.

Jim Bergeron: 00:40:17

At the end of the day, it's not the listener's responsibility to remember or understand all of the different types of trusts that are available.

Jim Bergeron: 00:40:28

We went through a pretty good list of them today.

Jim Bergeron: 00:40:32

What's important is what do you want to accomplish?

Jim Bergeron: 00:40:35

What are your goals?

Jim Bergeron: 00:40:37

And from those goals, your planning professionals, tax advisors, legal advisors, your wealth managers can start to suggest the strategies that might make sense.

Jim Bergeron: 00:40:50

And it might be something like an irrevocable life insurance trust or a special needs trust.

Jim Bergeron: 00:40:56

But at the end of the day, having that conversation, talking about what you would like to accomplish that will help your advisors then to design the right trust strategies that will make sense for you.

Paul: 00:41:10

Well, Jim, that's excellent advice.

Paul: 00:41:12

I know that Nuveen would like us to share a quick housekeeping message.

Paul: 00:41:15

Would you be willing to share at this time.

Jim Bergeron: 00:41:17

Yes, thanks Paul and I really appreciate it.

Jim Bergeron: 00:41:19

We talked throughout about the fact that we're providing recommendations and suggestions for individuals to consider.

Jim Bergeron: 00:41:25

The material that we talked about today is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell, hold a security or investment strategy and is not provided in a fiduciary capacity.

Jim Bergeron: 00:41:40

The information provided does not take into account the specific objectives or circumstances of any particular investor or suggest any specific course of action.

Jim Bergeron: 00:41:51

Investment decisions should be made based on investors objectives and circumstances and in consultation with their advisors.

Jim Bergeron: 00:41:59

The views and opinions expressed are for informational and educational purposes only as of the date of our production and may change without notice at any time based on numerous factors such as the market or other conditions, legal and regulatory developments, and additional risks and uncertainties that may come to pass.

Jim Bergeron: 00:42:19

Nuveen provides Investment Advisor solutions through its investment specialists, Nuveen securities llc.

Jim Bergeron: 00:42:26

It's a member of FINRA and sipc.

Paul: 00:42:28

Well, thank you Jim.

Paul: 00:42:29

You know, the underlying component in sharing this information is that you as a listener are important, your family is important and your community is important.

Paul: 00:42:41

On behalf of Ellis Wealth Management and Nuveen, we want to thank you for listening today and we want to encourage everyone to always invest in what you love.