Does Your Client Really Need a Trust?

Does Your Client Really Need a Trust?

Before I begin this discussion be reminded that I am not an attorney, and my conversation today is not designed to provide legal advice nor contradict any legal advice you or your client may receive.

I’m becoming increasingly bothered by the number of clients I run across on what seems to be a daily basis who have trusts established. I’m bothered because when I ask them why they set up a trust, the most common answer is “I don’t know” or “because someone told me I needed one.”

Let me invite you out on my limb for some non-legal, but 61-year-old grandpa advice. In my humble opinion (IMHO for you hipsters out there), people set up trusts to address an agenda they have and a fear that the agenda won’t be handled properly once they are no longer around to provide sage advice to their heirs.

I was reminded of my opinion just recently when I had lunch with an old friend of mine. While you would expect us to talk about how the Cardinals are doing or what chance St. Louis will ever have in landing another NFL team, we got into the subject of trusts since my friend informed me he was going to meet with a mutual attorney friend of ours later that week to set up trusts.

So, I asked him why he wants to set up a trust. He responded by asking me why don’t I think he needs one. I replied by telling him I’m not trying to talk him out of a trust but rather I’d like to ask a few questions, ok?

Here we go:

• Do you want to be able to control how your children receive assets once you are gone? (Both of his children are 30 somethings).
  • His answer was “no”—I just want them to get their hands on assets as quickly as possible
• Are you wanting to make certain your grandchildren have their educational needs addressed or do you want to leave assets specifically to any grandchildren?
  • His response again was “no”—I want my kids to receive our assets; they can deal with their children themselves.
• Ok, are you wanting to create any type of charitable legacy such as donating to a charity and then at some point in the future either having principal go to your heirs or to a specific charity?
  • Again, the answer was “no.”
• Would it bother you if right after you die, either or both of your children could walk into a bank with a death certificate and monies you have would immediately belong to them?
  • His response was that he wants the process of inheritance to be that simple.

Doesn’t sound like much of an agenda exists here, does it?

I suggested:

1. He establishes POD (Paid on Death) registrations on his bank accounts. In the meantime, he and his wife are in 100% control over their bank assets and their children have no claim to these accounts. The moment they are both gone, the children can walk into the bank, present death certificates, and my friend’s bank accounts now belong to the children.
2. He has an investment account. For this asset I suggested they add a TOD (Transfer on Death) registration to the account. While my friend and his wife are alive, the children have no right to do anything with their parent’s accounts, but upon their death, the children go to the broker with a death certificate and the assets within the account are split up 50/50. For example, if my friend’s investment account held 100 shares of Amazon, those shares would be split equally into separate accounts belonging to each child. Each of them can individually decide if they want to hold their share of the stock or sell; one party’s decision will not influence the other at least legally.
3. For their IRA, annuity, and life insurance contracts, I suggested they review the beneficiary arrangements and name the children and not the estate as beneficiary. They want the assets to pass easily to their heirs.
4. I also suggested he consider TOD registration on real property assets to achieve the same ease of transfer upon death.
5. I specifically suggested he avoid putting any assets into joint tenancy with anyone other his spouse. Such an arrangement with the children could indicate immediate ownership on the part of the children and my friend’s assets could be at risk if the children were to divorce, be sued, or just decide they want their inheritance now.

While it’s no small feat to do the paperwork for the registration changes, IMHO it makes more sense than establishing trusts, at least in the case of my friend.

My friend then gave me a common retort, which was that a trust would save taxes. I responded with a question I already knew the answer to…I’m assuming you want to maintain control of your assets until your death? This means you would be establishing revocable living (also called grantor) trusts. He agreed with my assessment. I explained that any assets he (they) control on the last day of life are part of their gross estate for potential estate claims and tax but that would include revocable trust arrangements.

He thanked me for the 61-year-old grandpa advice, and I got a free lunch.

I want to leave you with a scenario where a trust is most certainly needed (right now my teaching partners Sue and Catherine are groaning since I’ve shared this story so many times). If you want to gain a better understand about when someone needs a trust, I encourage you to search Netflix or other streaming services and find the 1988 film Rainman, starring Dustin Hoffman and Tom Cruise.  While you watch, I want you to put yourself in the position of being an advisor to a character in the movie you hear much about, but never meet, Sanford Babbitt. He’s the father of Raymond and Charlie.

Here’s his agenda:

• He’s widowed
• He has a special needs son who cannot live on his own (Raymond)
• He is estranged from his spendthrift, high-on-the-hog living son (Charlie)
• He has substantial assets (and let’s not forget the Buick and the roses)

After you watch the movie, ask yourself, did Sanford Babbitt have an agenda? Did Sanford Babbitt need to be able to speak from the grave? Did Sanford Babbitt need a trust? The answer was certainly yes.

Let’s hope for all involved that Sanford had lunch with a 61-year-old grandpa who asked him questions and then told him to go see an attorney. Definitely—he definitely needed an attorney. (you’ll get the reference after you watch the movie—definitely, after you watch the movie).

Stay thirsty for knowledge my friends.

by Tom O’Saben, EA