Book Appointment

Trusts Demystified: What Every Investor Should Know

Season #2

If you've been hearing that you should get a trust, or you've been wondering what the heck they are...let's dive in to it. Awhile back, I had a client, let's call him Joe. Joe was a hard-working guy who had spent his life not just earning his wealth, but managing it well. When Joe finally decided it was time to think about wealth transfer, he was surrounded by numerous friends and family saying, "Joe, you need a trust!"

Being a wise man, Joe decided to reach out and discuss it with me. I asked him why he felt he needed a trust, and he wasn't sure. It’s just what he had been told. The first thing I pointed out to him was what I'm sharing with you folks today. A trust, as it's a legal entity, could introduce numerous complications if not structured and managed properly.

Sure, using a trust, Joe could dictate how his wealth was managed and distributed after he was gone, but did he really need it? After a deep dive, it turned out that his financial goals and estate planning needs could be met with much simpler tools. In the end, Joe was grateful for the discussion, and I was relieved we could prevent the unnecessary complications a trust could've introduced.

What is a Trust

Now, a trust, in simple terms, is like a safe box where you place your assets. This box can be customized according to your wishes and instructed to operate under certain rules, which you would've set. It can be tied to you whilst you're alive or can operate independently, like a corporation. This sounds appealing to many, as it provides an opportunity for them to control the fate of their assets even after they passed.

However, much like our friend Joe, folks end up overlooking the fact that a trust is essentially a legal entity. As such it's subject to a plethora of rules, regulations, and potential legal obligations. And contrary to what some might believe, there are no trust police are not going to swoop in and help if things go awry.

You see, a trust is not like having your own personal bodyguard or a government agency that's keeping tabs on your financial affairs. It's simply a legal entity that operates under a set of rules outlined in a trust document.

Think of it as giving someone a power of attorney, but instead of granting them authority over your personal matters, you're granting them authority over the trust. The trustee, who is appointed in the trust document, is the one who carries out the instructions you've outlined. They're responsible for managing the trust assets and distributing them according to your wishes.

But here's the catch, folks: just because you have a trust doesn't mean everything magically falls into place. The trustee still needs to understand the rules and responsibilities that come with being in charge of the trust. It's not a task to be taken lightly.

So remember, when you set up a trust, it's not a guarantee of smooth sailing. It's important to select the right trustee and ensure they have the knowledge and expertise to handle the job proficiently. Otherwise, the trust could end up being nothing more than stacks of paper gathering dust instead of a useful tool for accomplishing your financial goals.

The Different Kinds of Trust

Let’s break this down some more, folks. You see, setting up a trust is a lot like deciding on a new suit. There are lots of styles and materials to choose from, but what's most important is finding the right fit for you. Now, there are various kinds of trusts, each with its own unique purpose and set of guidelines.

Revocable Trusts

Starting off with what we call a revocable trust. Think of this type as your trial run into trusts. You can put assets into the trust, and if you decide it's not for you, you can take those assets back out. It's like trying on the suit before you pay for it. This trust doesn't need to file a separate tax return and it can open accounts in its name, much like you creating your own company.

Now, you may be wondering, "Leibel, why go through this rigamarole?" Well folks, just like having your company gives you liability protection, a trust can offer a shield against creditors. This simply means if somebody has a beef against you, they can't come gunning for your trust assets.

But do hold your horses before you jump headfirst into this thinking it's the ultimate legal shield. Every state has its own set of rules, and there could be better ways to protect yourself from lawsuits. So, a trust is just one of many tools in your toolbox.

Irrevocable Trusts

Moving onwards, we have the polar opposite - an irrevocable trust. This, dear friends, is a one-way street. Once you set it up and put your money into it, there's no taking it back. With great power, comes great responsibility, as they say. An irrevocable trust has to file its own tax returns and it’s taxed at the highest bracket, so it's definitely not a decision to be taken lightly. For some, the benefits may outweigh the complications, but for the majority, it might not be worth the additional paperwork and tax implications.

Lifetime Interest Trusts & Remainder Trusts

Alright, folks. Let's chat about something interesting now - Lifetime Interest Trusts and Remainder Trusts. Quite a mouthful, isn't it? Well, don't worry. We're going to unpack that in a way that makes sense, just like we always do.

Lifetime Interest Trusts, also known as Life Interest Trusts, are a little bit like renting your favorite beach house for life. Let's say you're the beneficiary of a Life Interest Trust. You'd have the right to enjoy the benefits from the assets in the trust for your entire lifetime - just like enjoying that beachfront view and absorbing those sunsets.

But here's the catch: you don’t own the 'house’ – or in this case, the assets. You can use them, benefit from them, but you can't sell the assets or give them away. When you pass away, the assets in the trust will be passed on to the remainder beneficiaries.

Which brings us to Remainder Trusts, the 'final owners' in our beach house metaphor. These guys are like the people who buy the beach house after your lifetime lease is up. They come into play once the life tenant (that's you in this scenario) passes away. That's why they're called 'remainder' – they get what remains. This can take the form of Charitable and non-charitable, where the proceeds go to charity, this allows the grantor to get a tax deduction, while still retaining use of their property. This can be really powerful when combined with an annuity provision that allows the grantor to get a paycheck for life, get an upfront tax benefit, while providing a great donation to charity upon their passing.


Last but definitely not least, there's a testamentary trust. This is born out of a will or life insurance policy upon a person's death. It goes from nonexistent to fully functioning the moment you shuffle off the mortal coil.

The Best Trust For You

You may be wondering right about now, which trust is right for you? Here's the thing to remember, trusts are like different tools in a toolbox. Each one has a unique purpose and is used for specific scenarios. Like an ETF, or an Exchange-Traded Fund, which is technically a trust. They're all like different tools designed for different jobs, and for the right person in the right situation, they can be incredibly handy.

But here's the key thing to remember. Just because there are a bunch of shiny tools available, doesn't mean you need them all. For many people, if you're considering a trust as a substitute for a Will, or in addition to a Will, there are often simpler and potentially more efficient avenues to achieve the same goals.

At the end of the day folks, a trust is just a tool. And like any tool, it's only useful if it's being used correctly and for the right purpose. What’s important is ensuring that your assets transfer to your loved ones exactly as you intend, and sometimes that means opting for a simpler, more straightforward solution.

Better Than a Trust

In an ideal world, your assets should be transferred while you're still around and not after you've passed away. You might be raising an eyebrow and saying, "Hold on, I don't want my children to have my house or money before I kick the bucket. That's my hard-earned cash."

Well, when we talk about transferring assets, I'm not suggesting you hand over the entire keychain to your kin. What I'm recommending is that you set up a plan with whomever is holding your assets - whether it's a bank, broker, or even retirement accounts - and ensure there's a clear, legally-binding agreement on what happens to your assets when you're no longer around.

Having beneficiaries specified on these accounts means the transfer of assets upon your death supersedes any wills or trusts. In fact, the Supreme Court has held this up multiple times. This type of transfer can happen almost immediately as it's a private agreement between you and your bank or insurance company. It's like having an "In case of emergency, break glass" sticker on your assets.

Instead of setting up a complicated will or trust, you can simplify things with these beneficiary forms. Because let's talk straight here, folks - in a perfect world, none of us would need a will or a trust, right? When someone passes away, the most seamless transition would be for their loved ones to carry on, paying bills and managing finances, as though there were no interruption. Because financial hiccups can throw things into chaos, and we certainly don't want that.

Instead of jumping through the hoops of courts and lawyers, or even the IRS, what we really want is for our bank accounts, properties, and other assets to automatically transfer to our loved ones. And by setting up beneficiaries, we can accomplish that without getting tangled in red tape.

But hey, life can throw curveballs. If you're worried about protecting your children, especially in a scenario where both parents may pass, or you want to ensure assets are handled according to specific wishes, then you might consider setting up a will or trust.

But remember, keep your will focused on your final wishes rather than who gets what money. As for who gets the house and the bank accounts? Those should have already been sorted out before the will is even read. The will should direct loved ones on your burial plans, location, and who you trust to settle your affairs.

So just remember, always consider the big picture and don't get too caught up on a single tool or technique - it's the overall strategy and goals that truly count. Work with your financial and legal advisors to understand your options and make the decision that best suits your unique situation and objectives. As always, if you have any questions or would like help getting your financial transition plan in order, don't hesitate to reach out.

Download our 5-Minute DIY Estate Planning Guide (Click Here)