AAR34-Part 2: What is Trust

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3:32And I guess an easy way to think of it, it's a business. it's a business that you that you own that owns all of your assets and when you die you designate who you want to take over that business and run it for you and so if you do not designate that that business will dictate that you know person a gets car a and person b gets car b and so on then it's then it all comes down to

4:13Dave Ahern:good evening everyone and welcome back to at any rate my name is evan wright and we are here to help you make sustainable financial changes without breaking a sweat and please welcome back a fan favorite in today's guest dave ahern how are you doing tonight don't don't laugh at that that's the truth well thank you evan i appreciate the kind words it's great great to be here it's great to be back uh talking to you after the holiday break yeah heck yeah this first time we've talked since that a lot of great rest um a lot of great family time but we are back at it and today is actually going to be a sequel to episode 31 episode aar 31 and that was covering wills now we covered wills and kind of more towards the latter half of the episode Dave started uncovering that there was a lot more that could be discussed on specifically trusts and that wills you know were a big portion of the conversation and a very important part of the conversation but that they weren't the whole story and there's and there's a lot more to tell and a lot more opportunities to discuss when it comes to trust so that's what today's episode is going to be is that exact follow-up episode and and similar to last time today's episode is not going to be framing me as the expert like I told Dave before there's no amount of research that I try to do into trusts or wills is going to catch me up to the level of understanding that Dave has on it because of all his experience working as a bank manager and prior to that clerk.

5:31Dave Ahern:And so today's episode is going to be framing it as just that. I am the dum-dum here who's asking questions and trying to learn alongside everybody who's listening. And I'm just going to be trying to ask the right questions to lead us in the right direction. Does that sound good, Dave? Sounds great. Beautiful. So I did a ton of research for this first question, and I hope you like it. What is a trust? What is a trust? That's a lot of research. Well, let's start with what is a trust versus a will. We'll assume we can use the previous episode as a landing pad for kind of understanding. So what is a trust versus a will?

6:06A trust is a legal document that is established between lawyers and a bank that give you control of how your assets will be handled during your lifetime and after you pass. And so it's basically whatever dictates or whatever mandates or however structure you want things to be set up for when you pass away will legally be handed not only by the courts, but also by the bank and or any other financial institutions that you have money with, including things like brokerage accounts, IRAs, 401ks, mortgages, any property that you may own. There's lots of different things. A will is basically a document that you can create on your own that will dictate how things will be set up as well, but it's not legally binding in the way that a trust is.

7:04And it's also not really designed to set up things that are a little more complicated. So if you have, and we'll get into this, but basically it's a simple document that just tells a bank or people that you set up the will for, I want this to be done this way. And it just helps avoid probate and some of those kinds of things. But a trust is far more definitive and far more involved and far more detailed than a will is or needs to be.

7:37Dave Ahern:Okay, okay. That makes a ton of sense. Something that you quickly mentioned there was probate. Could you just quickly summarize what could happen if you passed away, for example, without a will or a trust in place? What are the downsides and dangers that could happen if you don't have either of these? If you don't have either of these, the downsides are that the state, wherever you reside, will ultimately be in charge of your assets after you pass away. So if you do not have, for example, just using your bank accounts as kind of a simple example. If you have a checking account and a savings account and your wife or your significant other is not either a beneficiary of those accounts or a signer on those accounts, when you pass away or something happens and you can't access those funds, they cannot act as your representative on those accounts.

8:31i.e. let's say that you let's say use a hypothetical let's say that evan got in a horrible horrible car accident and jen your significant other was not able to access your accounts and she needed to pay the mortgage on the house well in theory the house if you don't pay the mortgage on time you could default on the loan and eventually you could end up losing the house while you're in the hospital even though you have access you have funds that would cover that and that was how you and your wife had it set up. If she was not a designee on that checking account, either through a will or through a trust or through some other legal document, she cannot access those funds, period, into discussion.

9:19And let's say, let's go a step further. Let's say that you pass away. And then what happens is that because there is no legal guardian or a representative that's assigned to those accounts through one of these mechanisms, then the money that's in the account has to go through what's called probate, which means that the state that you live in will have to assign somebody from the courts to assess whether your significant other has the legal right to access those funds. And it's not meant to be a punitive process, but it is set up to protect people. So shady people can't come in and try to steal all your hard-earned money from the people you really wanted to go to.

10:11But it can be very long and very drawn out. So when I worked in the banking industry, I lived in Minnesota. And in Minnesota, I remember a lawyer telling me that probates in Minnesota at that time were running anywhere from eight to 12 months at the quickest before decisions were made. So imagine having a sitting with another that was the primary breadwinner of the family and managed all of the accounts and managed all the assets for the family. And then that person was in a horrible accident and they had nothing set up, no mechanism set up. Then the family that was reliant on the breadwinner is now in a lot of hard, you know, they're going to have a lot of hard choices and a lot of hard decisions to make because the state, while it is not heartless, it also will not move any faster than it can.

11:06And so it can take a long time. I had a customer I had to work with when I was at the bank that had this very situation happen. And that's how I know about it was this poor woman had to go through all this and it took six, eight months before she was able to access the money. They lost their house. The kids, she had to go live with her kids. It was a real hardship on a lot of people in the family. So it is definitely something to be aware of and take a responsibility to fix.

11:34Dave Ahern:Absolutely. It's so much more a protection of the people around you than even just yourself. Because obviously we all want, when we pass, we want the right things to happen. We want what we wanted to happen to happen, of course. But even more important than that, It's an absolutely horrible and depressing and horrifying thought to think of passing away and without even meaning to, because you're not thinking about it. A lot of people out there, I would venture to guess most people out there, don't think about what would happen to them if they passed away, including, like you said, if they're the primary breadwinner of the family, if they just control the financial accounts for the most part, their names are on the accounts, they have the logins, blah, blah, blah.

12:11Dave Ahern:it's very easy to forget the importance of that and and the horrifying scenario of you pass away and now your partner does not have access to any of that you that they're left with nothing essentially or at least nothing for quite a long time because i mean eight to twelve months is in is an eternity to wait for financial payments for something like you said like a mortgage or a car payment or these things that you really need you desperately need to pay or else your entire life is going to change. That's a horrifying, horrifying story. What are some pros and cons for a will versus a trust? Because I'm sure that they each have some upsides and some downsides.

12:49Dave Ahern:So what are those? Yeah, for sure. For the will, I would say the upside is they're easy to do. You can literally write it on a piece of paper. You can take it to a bank or any place that has a notary and get it notarized. And then it's considered, air quote, legal. So it's very easy to do. You can type it up in a Word document or a Google document if you want. You could even type it on a notes on your Apple phone or Samsung if you have a Samsung. It really is very uninvolved. And it's an easy way to designate how you want your assets to be divvied up in the case of something happening to you. And so it's very easy to do.

13:33Now, the downside is that they don't have a ton of legal standing, and so they can be disputed. There can be, if you have a lot of complicated assets and you have a lot of family members that you're trying to divvy things up and, God forbid, you forget somebody or you write somebody out of the will. You see that on TV all the time. There is no legal recourse, and it can get very, very, very messy because it isn't designated and it's a little more, it's a less, I guess, legal way of handling it. It's very easy to do, and it's a great safeguard if you have simple assets and whatnot. Trust is, it's more involved for sure, but it is a far more definitive legal document.

14:24It has to be notarized. It has to be done through a court. And there are certain procedures and processes you have to follow to have it be considered a legal document. And when you do it through the bank, it has to go through the bank's legal department to make sure that everything is on the up and up. and they have to approve it before it gets assigned to an account, whether it's a mortgage or whether it's a simple checking account or whether it's a brokerage account with millions of dollars in it. It all goes through the same process. The downside is that they are complicated and they can be expensive to do because you have to use an attorney to do it.

15:04Now, there are online sites like LegalZoom that you can use And each state will have differences in how the trusts have to be set up. So sometimes one thing to be, I guess, aware of is if you live in Florida and you want to fill out a will, then it has to be done through the Florida website. If you live in Texas, you've got to do the same thing. So even though maybe your family members all may live in Hawaii, but you live in Texas, you have to do the will through the state that you reside in. And there are slight differences to the wills, how they have to be filled out, who can be the designated, the people that are in the will, and how many you can have.

15:52So it is more complicated, and that's probably the downside to it is it is much more involved to get it done, and it takes a lot longer to go through the process to get them done. But the upside is it offers far more protection. It has the legal standing of the courts as well as the banking system, for example, and so it's easier if you have complicated assets to deal with.

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18:44Dave Ahern:It's available for our Value Spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal once the stock hits$45. Check it out at einvestingforbeginners.com. So is a trust pretty much set up that if you were to pass away and you weren't there to say anything, there's essentially nothing that could change about it? It's set in stone? Yeah, basically. Yeah, it is. It's set in stone. And the only way that the beneficiaries can access the trust is if they are designated in the trust. So let's use an example. Let's say that you have three siblings in a family and two of the siblings are designated as beneficiaries or they are designated as the trustees of the trust.

19:32Then once the person that set up the trust passes away, only those two people that are designated in a trust can access the accounts that are designated in the trust. The third person that's not listed in the trust has no legal rights to come to the bank, for example, or go to a mortgage house or brokerage and demand that they have access to the monies or the asset itself. They have no legal standing. It all has to go through the trust and the trustee. And that's what I was saying about some trusts in different states are only allowed two designates. Some will allow more than that. Some will only allow two.

20:15And so it has to be thought through carefully. And if one of those designees passes away before the trust is executed, then that has to be changed. And if it's not changed, then they will only allow one, even though there may be three or four other siblings that are still alive, to work with the trust. So it can be a lot more restrictive, but they do it for a specific reason so that it is more organized.

20:44Dave Ahern:Yeah, that definitely makes sense. You're trading flexibility for protection, essentially. So if you were to designate, let's say, one person in a trust, and that one person was to pass away before you, or maybe pass away at the same time as you or something like that, would the money just be maybe put back into probate, or what would happen to it? It depends on what, I think I would probably, I never encountered that, but I would imagine And there's probably some legalese in the trust. These are not short documents. They're generally 100 to 150 pages, give or take. So there's a lot of language in there.

21:24And probably there are, what's the word I'm looking for? There's probably dictates, blanking on a better word than a dictate, but there's probably a legal precedent in there that would cover situations like that. whoever you designate as maybe a beneficiary. So there is usually trustees, there's a primary and a secondary trustee, and then there could be beneficiaries. So in a circumstance like that, I would imagine it probably just defaults to the beneficiary. But again, you would have to consult with a lawyer and consult with a bank and see what kind of situation they have set up there. But none of it can be accessed without a death certificate.

22:10So whoever set up the trust to protect their assets, depending on how the trust is set up, the people that are designated as the trustees cannot access the assets in the trust until there is a death certificate, until that person passes away. So let's say, for example, let's say that the father designates two of his kids to be the trustees of the trust, and then they all get in a fight. And then they decide they want to go take all the money away from dad because they're pissed off at him. Well, they can't walk into the bank and announce that they're going to take the money because they don't have a death certificate.

22:50And so unless they're designated that they take over as trustees, let's say at the age of 45, then they have no rights and they have no standing with the bank other than going to a lawyer and trying to fight it out of the courts. So it is a pretty ironclad document once it is established. And then I'll just kind of mention too, the one thing that's kind of a pro about doing this is that you can set it up to do these kinds of things. So just another example here. Let's say that you're a very wealthy individual and you want your kids to have access to some of the money that you would like them to be able to use to maybe pay for college or maybe to start their own business.

23:39But you can designate that they can't access those funds until they're 25. Or you can designate that they cannot access those funds until they graduate from college. And so you can set restrictions on the trust and how certain people can access the assets that are in the trust depending on the conditions that you set up ahead of time. So you will find, you'll see this, a lot of wealthy people will set these different limitations on trust so that their kids, and hopefully the kids don't turn out to be bad apples. And at 16, they start living off a dad and doing drugs and going down a bad path kind of thing.

24:24The stuff you see on TV and that kind of thing. So that is another pro of a trust is that you can designate different restrictions and different conditions to be effective at a certain point regardless of whether you pass or not.

24:39Dave Ahern:Okay. Yeah, that's definitely incredibly helpful for a lot of people out there. We all, again, likely have very specific ideas of what we would want to happen with our money. and I'm sure there are a lot of people out there that maybe are just a little bit of control freaks or have very good reason behind it that don't want their money to just you know be left in cash essentially like hey here's everything go nuts but to have a lot more control over it to make sure that they're they're protecting people in the way that they would be if they were still alive so I can definitely get the reason behind that so let's say that somebody is convinced and they think a trust is a good idea for them and they want to move forward what kinds of trusts are they're out there that somebody could choose between and what kind of differences do they have?

25:20Dave Ahern:There's two kinds of trust. There's a revocable trust and an irrevocable trust. A revocable trust is one that will offer a lot more flexibility. It also allows the grantor to change terms and control assets and primarily avoiding probate, which we talked about earlier, which is a bad thing. Irrevocable trust is a lot like what it sounds like. It's a permanent transfer of assets and it's far more permanent and it's much, much harder to make changes. It does allow a lot more control than a revocable trust, but it is far more restrictive if you want to make any sort of changes. The one that I worked with the most, honestly, was revocable trusts because those were easier to set up and probably cheaper to work with the attorneys.

26:10Revocable trusts are far more complicated. I did do a few of those, and those were very, very challenging because there was lots of rules and regulations that we had to follow in the banking world. The grantor, the people that were setting it up, were also far more specific about how they wanted their assets divvied up and how they wanted things distributed in the case of their passing. And so it was far harder to set up. And some states will only allow revocable trusts and some states will only allow irrevocable trusts. So again, something you probably want to check on before you go start down the path of doing that.

26:56And it's very easy to do. You just you can simply Google, you know, what does your state allow? Do they allow revocable and irrevocable trusts or is it one or the other? And they'll tell you and then you can kind of go from there. So that is kind of what I remember about trust. So those are the only two that I'm aware of. There may be other ones, but those are the only two that I work with when I was in the banking world.

27:18Dave Ahern:Okay. Okay. So that's probably one of those. Even if you have both available to you in your state, then that's likely something the representative would help you decide between once you kind of explain out your situation and your preferences and what you're hoping to gain from and everything. Absolutely. Absolutely. And one thing I will mention, if you're wanting to go through a trust and you're wanting to set up a trust, you can't go to the bank and get legal advice. We in the bank, we can't give you legal advice. We can't have you come in and tell you. We can't tell you legally whether you should do a revocable or irrevocable or who you should set up as trustees of the trust.