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Trusts 101: Understanding the Fundamentals of Setting Up Trusts

June 7, 2023

In this episode of “Simply Money,” Mark Reckman explains the basics of trusts using cars as an analogy. There are lots of makes and models designed to do different things, but there are basic elements that all trusts have in common. Learn what kind of trust may be right for you and how it can help protect both your assets and loved ones.

Episode Transcription

Amy Wagner:
Listening to Simply Money presented by Allworth Financial. I’m Amy Wagner along with Steve Ruby and Steve Sprovach.

Trust me, there’s a lot that you probably don’t know about trusts and it’s a lot of important information. So joining us tonight is our estate planning expert from the law firm of Wood + Lamping, our good friend, Mark Reckman.

Mark, you said there’s top 10 questions probably that you get about trusts. Let’s launch into those. What do you think it is that we need to know?

Mark Reckman:
Well, to cover the basics, I think the first question is what are revocable trusts and what are living trusts? And the answer is that a living trust is a trust that is created during the lifetime of the person who creates it. When you create a living trust and you set the thing up, you get to pick whether it’s revocable or not revocable. So revocable trusts are living trusts that the creator can change after they’re drafted. An irrevocable trust is a living trust that the creator cannot change except in limited, very limited circumstances.

So when I set up a revocable living trust, do I lose control of my assets?

Mark Reckman:
You do not. And that of course is why they’re so popular because you continue to be in control of those assets, but you were not legally the owner. And there are some real advantages to that in terms of planning for your death or disability, because it makes it really easy for someone else to step in and take over managing the assets and paying your bills.

Steve Sprovach:
All right. So for the average person, Mark, they’ve heard about trusts, don’t understand why they may or may not need them. When do you usually see the average person need a trust and what does it accomplish that you can’t accomplish with just a will?

When do you need a trust and how is it different from a will?

Mark Reckman:
Well, there’s a whole lot of answers to that question, Steven.

And the bottom line is that a trust can do any number of things. It can manage your money for you, it can pay your bills for you. It can also keep your assets out of probate when you die. And those are the three big ones.

And then last but not least, it can also be a vehicle for managing money after you’re dead. Now, why would you do that? Well, maybe you’ve got a second wife who you want to support financially, but you don’t want to leave the money outright. Maybe you have small children, maybe you have grown children who are not good with money. Maybe you’ve got children who are disabled for any number of reasons and trusts are like cars, Steve, in the sense that there are lots of makes and models that are designed to do different things, but there are basic elements that all trusts have in common, just like cars.

Amy Wagner:
I like Mark that you just mentioned a few examples of that, right? I have a blended family. My father has a blended family. It can just be sticky sometimes when you’ve got kids coming from different parents and different assets coming into those things. So a trust can be a great way to figure out if it’s just not super straightforward what you want to do when you’re gone. But I think a lot of people have the concern of like, “If I put it in a trust, do I still have that control?” I know we talked about revocable and irrevocable, but what do people need to know about that?

Revocable Trusts vs Irrevocable Trusts

Mark Reckman:
A revocable trust does not compromise control. So if I set up a revocable trust and I name myself as the grantor, or if I name myself as the trustee, or if I hire a trustee because it’s a revocable trust and I set it up, I still have control over who the trustee is and I have control over what they do. And so there is not a loss of control when it comes to revocable trusts. Irrevocable trusts are a little less flexible because I can’t change a trust after I sign it. When I set it up, I can change itI, I just can’t change it afterwards.

Why would you even do an irrevocable, you’re giving up control. What purpose …?

Mark Reckman:
Well, there may be a number, one is that you may be worried you are the kind of person who was in a high risk business, let’s say you’re a director who does this, or an [inaudible] in a business, that demolition expert or that heavy equipment and some risks reasons. Another reason in a second or third marriage, only available to you but new from creditors, just like there’s a variety of why there’s so many makes and models.

So if I have a trust, do I have a will?

Mark Reckman:
Yes, a will is supplement. It’s really unnecessary, when we set up a trust, if we have assets that’s under the trust, really own no assets in our own, then at our death go to probate, the will document that controls, what happens. So if I have no probate assets, don’t need a will, but scenario, and I have to tell you it is very common that there is, maybe I just bought a car and I’m still making payments, put it in my trust or do a asset. Then I didn’t put it in the name of the trust. And there’s that loose end that the will control that’s not in the trust and the up is the will’s assets that are not in the trust after I’m gone, they’re called pour-over wills.

Amy Wagner:
You know, Mark, I think people, when we talk about trusts, they just, “It’s fund babies. My situation is not so.” Or, “I don’t have millions, don’t need a trust.” What do you want to clarify about people who say, “I don’t have millions, so I don’t need that?”

Can the average person benefit from a trust?

Mark Reckman:
Well, in fact, that may be true. However, generally keeping your money out of probate saves a fair amount of money. It cuts your probate administration costs in half. And so if you’ve got, even, let’s say a half a million dollars, you can cut your probate expenses in half. That can save you 6 or $8,000. If you can have your assets placed in a trust, it’ll reduce your probate expenses by about 2%. So if you have a half a million dollars, 2% of that would be 10 grand. The cost of a trust is generally in the 3, 4, $5,000 range. So trusts are a great way to save money, but what I would say is that that’s only one of 10 major reasons. Probably the biggest reason is to maintain control over small children or irresponsible children or a second spouse. There’s a whole lot of other reasons why people use trusts, but the savings alone kicks in, just having $100,000 or $200,000 is about the break even point where a trust starts saving you money.

Amy Wagner:
I have seen so many scenarios throughout the years where people have come into our offices with, “I’ve got this one child, I’m concerned about them.” Or whatever, and the answer has often been a trust. And so I think it’s just really good to be able to explain, “Listen, there’s a lot of scenarios that might be bouncing around in your head that you’re worried about and this could be the solution for you.” Great insights as always from our estate planning expert from the law firm of Wood + Lamping, Mark Reckman. You’re listening to Simply Money here on 55KRC, THE Talk Station.

About the Author

Mark S. Reckman

Mark S. Reckman

Mark Reckman has been with Wood + Lamping since 1979

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