Understanding Estate Planning: Trust Mistakes And Issues (Part 4) Retirement Planning

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Understanding Estate Planning: Trust Mistakes And Issues (Part 4)

6d ago 22:08

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We're excited to welcome back estate planning attorney Bill McQueen of Legacy Protection Lawyers! This episode dives into common estate planning mistakes, the nuances of trusts versus wills, and strategies to protect your assets and heirs. From funding trusts correctly to understanding step-up in basis, Medicaid planning, and safeguarding inheritances from creditors, Bill breaks down complex topics in a clear, practical way.

Learn more about Bill and Legacy Protection Lawyers

Contact info: www.legacyprotectionlawyers.com
Phone 727-471-5868

Helpful Information:

PFG Website: https://www.pfgprivatewealth.com/

Contact: 813-286-7776

Email: [email protected]

Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Marc:

It's time once again for another edition of Retirement Planning Redefined with John and Nick, Financial advisors at PFG Private Wealth. Find them online at pfgprivatewealth.com. That's pfgprivatewealth.com. And we're excited to have our guest speaker, Bill McQueen, back with us to continue our conversation about estate planning, and trusts, and probate, and all these pieces that we need when it comes to our retirement strategies. And, of course, Bill is from Legacy Protection Lawyers based out of St. Petersburg, Florida, and we appreciate your time once again. Bill, welcome in. How are you?

Bill McQueen:

Doing wonderful. Thank you.

Marc:

Absolutely. Good to have you back. Nick, my friend. What's going on this week? You doing all right?

Nick:

Oh, yeah, just fighting the Florida heat.

Marc:

Well, if you picked Florida, right, it's hot.

Nick:

I will lose. Yeah, I will lose, for sure.

Marc:

I mean, versus Buffalo, right? You got your choice there.

Nick:

Yeah. Rochester, yeah, close enough. But, yeah-

Marc:

Oh, yeah. Okay.

Nick:

... for sure. This time of year, I'd rather be there, but it's understandable.

Marc:

Par for the course? All right, I got you. Well, we're happy to have Bill back. And, of course, if you guys have questions about estate planning, definitely reach out to he and his team at LegacyProtectionLawyers.com. That's LegacyProtectionLawyers.com. And Bill, we were talking a lot about, obviously, trusts and funding them, and all the different kind of pieces that go in there. So, on this final episode, this part four of the series, we want to talk about some of the common mistakes and things that you guys see as professionals, then try to help people avoid these or highlight some of the things. So, we talked as we finished off about the funding issue of a trust. What are some other common mistakes that you tend to see?

Bill McQueen:

First off, I would say it might not be considered a common mistake, but a common misconception. A lot of people who think that, "Well, hey, I've created this revocable trust, and so my assets aren't in my individual name. Now they're held by my trust. And so, if something were to happen and I were to be sued, for some reason, my wealth is protected inside this trust." And unfortunately, that's not the case with a revocable trust. Again, the revocable trust just acts as a substitute for your last will and testament. And because the person who creates it has so much control over those assets, they can do anything they want with those assets. If somebody were to sue them, there'd be a lawsuit of some sort, and a judgment was entered against that person who created that trust. Those creditors can get at those assets that are inside the revocable trust no differently than if they were held in the person's individual name. So, that's something that we always need to advise clients that they're well aware of. There may be other ways to protect their wealth from creditors, but putting them in a revocable trust does not give them credit or protection from that standpoint.

The other thing that comes up fairly frequently is, I have real estate, and should I put it in my revocable trust or not? If that real estate is something that's not your primary home or your residence here in Florida, we would definitely say do that, and especially if the clients own real estate outside the state of Florida. They might have a vacation home in North Carolina or something like that. If they own that home in their individual name and they die, and we're using a will-based plan, not only are we going to have to do a probate administration down here in the state of Florida, but we're also going to have to do one in the state of North Carolina as well, a second one, because each state's very protective of their real estate. Whereas if they go ahead and deed that real estate into the revocable trust, then we avoid probate both in Florida and in North Carolina.

The issue, though, as to the primary residence, because under Florida law or Constitution, that's considered your homestead, and there are certain benefits that come from that, like a tax break, and it makes your home creditor protected, there are some restrictions on where your homestead can go, who can get it after your death if you're survived by a spouse or minor children. And so, that comes into play as to can we put that home into the revocable trust? And it used to be we would usually advise people not to do that if they're married because of these restrictions that were involved. Now we can do it if it's done properly, but there needs to be some special waiver language and things that are included in the deed. And unfortunately, if somebody puts it into their trust and they don't do the deed properly, then when they die, it's considered what we call an invalid devise. And that home may be going to people other than where they wanted it to go underneath the terms of their trust. So you can do it, and we do it for clients, but you definitely want to make sure you're getting good advice when you're setting something up like that.

Nick:

Yeah, I would say that's one of the most common questions that people have. Oftentimes, what leads people to act, obviously, hopefully, it's from working with advisors and stuff like that, but people talk amongst themselves. A lot of times, it's friend or family that are like, "Hey, my brother just retired and they got a trust put into place. Do you think I should do something like that?" And sometimes, the answer's like, "Well, hey, we've been telling you to do it for the last 10 years. But also, yes, there's things that can make sense to do, but you need to make sure that you work with somebody to understand the nuances." Because I would say one of the most common mistakes that people make is when they do talk with their peers, siblings, etc., that oftentimes they don't understand the dynamics between the differences of their situations. And so, somebody like Bill and the people at Bill's team can help walk them through how that works. And the majority of people, no matter what the situation is, when they're working with an advisor or an attorney, they have some sort of real estate holding, and so that's often one of the most common questions.

Marc:

Yeah. No, it makes sense. With you asking that and talking about that, Nick, Bill, what's your thoughts on people who say, "Well, who should draft this?" Right? Or, "Can I just go on to one of these, for lack of a better term, robo-advisors or robo-lawyers?" Right? I mean, you should be sitting down with an attorney in your area because state to state, law is probably a little bit different. I'm sure there's some things that are probably the same from place to place, but you want to make sure you're getting advice on your specific situation, not one of these cookie-cutter type deals.

Bill McQueen:

No, a really good point. Estate planning is specific per the state where you're residing, and that's the laws that will apply at the time of your death, so it is important that you're talking to an attorney who is licensed in that particular state where you live. But I would definitely advise against a do-it-yourself estate plan.

Marc:

Right.

Bill McQueen:

And there are a lot of, especially with the internet nowadays, various online programs where you can draft your own will or trust. The big problem with that is you'll never know if you're the drafter of a do-it-yourself will or trust, whether you did it right, because we won't know that. We won't implement it until after your death.

Marc:

And you won't know until it's too late. Well, it's too late for you, obviously, but your heirs are suffering. Right?

Bill McQueen:

So, if there's problems with it, we can't go back and correct it or change it. So that's very important. I also always tell people it would be ... I highly recommend you go to somebody who specializes in the area of trust and estates planning. You wouldn't want me to handle a criminal law matter for you, and you probably don't want a criminal lawyer to try to draft your will or trust.

And just to show you what the problems can be, as recently as within the last decade here in our state of Florida, our Florida Supreme Court had a case, that's our highest court here in Florida, where a lady drafted her own will. Actually, I think it was pre-internet. It was a form will or whatnot, but she left out of that will what we call the residuary provision, which is where the remainder of her estate goes, and that's where the bulk of her estate would go. And it was very clear, the court said, that her intentions were to leave it to her sister, but that's not what the will said. It was done improperly. And so the wealth went to someone else, and the court said they felt really bad about that, but they have to go with what the will said. And the will was validly executed and everything. It just wasn't properly constructed, and so, unfortunately, her estate went somewhere other than where she wanted it to go, and we don't want that to happen.

Marc:

Yeah. In a world where we can turn to the internet for so much stuff, there's just certain areas where I feel like it's just not a good idea. Right? Legally has got to be one of those. It's got to be the tops for a lot of those things. Nick, what else?

Nick:

Yeah. And these things tie together a little bit. I was having a conversation with a client the other day, and I've seen this in other instances, where clients in their 40s, the parents of the clients are in their 70s, and there's some concern on future healthcare planning. And from the standpoint of the transition potentially to Medicaid and/or titling assets, whether it's a home, whether it's other types of assets like investments, so obviously non-retirement, putting the kids on accounts to try to protect those assets per se and the future inheritance while somebody to qualify. Now, I know this is a long, convoluted thing, but I guess, just in general, especially in the state of Florida, maybe helping people understand is that primary homestead residence protected and/or just the definition or an explanation of step up in cost basis and how big of a deal that can be to somebody down the road. I know it's a lot there, so break it up and down, whatever.

Bill McQueen:

That was a lot, Nick. The issue regarding Medicaid, what I would say there is if we have clients where somebody, a parent, has maybe been diagnosed with early onset of dementia or something like that, so there's a high likelihood that they are going to need long-term care in the future. When that arises, they'd like to qualify for Medicaid as soon as possible. We can help them do that through using a trust. It's an irrevocable form of a trust where we can move assets that otherwise would be what we call countable assets, meaning that the government says you have to spend those assets first before Medicaid will take over and start paying for the long-term care. And we can move them into this irrevocable trust so that when they do reach that stage that they need the long-term care, hopefully, they can qualify right away. And this wealth that's in this trust will then ultimately still be there and able to go on to their kids rather than go to pay for the nursing home care.

That, though, has to be done well in advance of qualifying for Medicaid or trying to, basically, five years in advance. So, this is definitely a very proactive, forward-looking planning-type procedure. And it's not something that can be done once they need to get on Medicaid right away or on the near-term standpoint from that part of the equation. Here's my basic advice. Whether it's Medicaid or anything else, people will say, "Hey, well, what I'm going to do, I'm going to put my children's names on accounts with me in joint names, so one, they can maybe help pay my bills and stuff like that. Two, when I die, that asset will just pass by operational law to my child, so it won't go through the probate process, and I don't have to worry about probate."

I highly advise clients typically not to do that. One: when you put your child's name on that account with you jointly, at least as to regards to the bank or the brokerage house, that child now has the right to take all those funds that are in that account. Hopefully, they won't do that while you're still alive, but that could possibly happen. But two, the child might get sued or go through a divorce, and somebody else now might be trying to take those funds that are in the parent's account. So we would highly advise against that and instead, let that child maybe be given a durable power of attorney that I think Nicole spoke with you about in one of the earlier episodes so that they can help pay bills and do stuff like that, but they have no ownership rights in those accounts that maybe somebody else could get at those accounts that the parents will need before their death.

One big thing for estate tax or death tax planning purposes, the amount of wealth now that people can leave at their death or give away during their lifetime is at an all-time high watermark. Very few people pay federal estate taxes anymore, less than one-tenth of 1% of the US population. And here in Florida, as a Florida resident, all we're concerned about is the federal estate tax laws. So, instead, what we focus on is income tax planning for our clients. And so it would be much better for actually those parents not to, for instance, give away assets before they die to their children because what happens is if the parents die owning assets that have a lot of appreciation in them, that's been unrealized, and by example, maybe they've got a house that they bought for $200,000 30 years ago that today is worth a couple of million dollars here in Florida, if they give that house away to the child before their death, the child gets what we call a basis in that asset that's a carryover basis. It's equal to the $200,000 the parents paid for it.

And so, if the children ever sell that house, maybe after the parents die, they're going to have to recognize income tax or capital gains tax on that million eight of gain. If instead they hold onto the home, the parents, and when they die, they leave it to the children, that home then gets a step-up in basis for income tax purposes to what the house is worth at the time of the parent's death, the $2 million. So if the children sell the house soon after their parent died, they're going to pay no income tax, no capital gains tax, they get the full $2 million, and Uncle Sam doesn't take any of it in the form of income taxes. So, it's very important that people be cognizant of what the potential income tax effects could be if they're talking about giving away assets prior to their death versus holding onto them and passing them to their beneficiaries after death.

Marc:

Yeah, tax efficiency, right? It's just as important when we're no longer here, and our heirs would certainly appreciate that as well. Any final thoughts or anything that I didn't cover, Bill, that you'd like to share with folks when it comes to estate planning in general and what you guys do at your firm?

Bill McQueen:

Sure. I guess one thing I would just mention, and we've talked a lot about probate avoidance, but with a trust, a trust can do a whole lot more. And I guess I would just give one example. It's not uncommon for us to have families nowadays that are often blended families, so it's a married couple and they have children from earlier marriages. For those of my generation that grew up watching The Brady Bunch, a family like that. And by using a trust properly, what usually most married couples want to do, one thing we don't know from an estate planning standpoint which spouse is going to die first. And usually, the spouses want to make sure the surviving spouse is well taken care of for his or her remaining lifetime, and then the assets go down to all of their children from both sides of the family.

So, one way to do that is just when the first spouse dies, they leave everything outright to the surviving spouse, with the hope and understanding they're going to leave everything to all six children in this example. But what can happen is when they do that and they leave the assets to the surviving spouse, that now becomes his or her assets. And again, they can change their estate plan after that first spouse died. Instead, what can be done through that revocable trust is we leave assets into a new trust, a marital trust for the benefit of that surviving spouse, so he or she's well taken care of for the rest of their life, but that trust, that marital trust, is irrevocable. And so, the first spouse to die knows their surviving spouse is going to be well taken care of, but they also know when the surviving spouse dies, where the assets are going to go, and it's locked in that it will go to their children as well and not just maybe the surviving spouse's children.

And then the last thing I would say is when we pass the assets to the children, often, most people think the easiest thing is just to leave assets to the children outright. And that can be done that way, but it's often not the most effective. Often, nowadays, we will leave the assets to the children in a trust, and we'll let the children be the trustee of their own trust so they get their share of the inheritance. They have it in their own trust that they're the trustee of, but this type of trust does give that child asset protection. So, if the child ever gets sued during their lifetime, be it age 25 or 85, a creditor can't get at the inheritance inside that trust.

Also, if the child is married or gets married and unfortunately goes through a divorce, their former spouse has no rights to the assets inside this trust either, because legally, the child does not own those assets individually. They're owned by this trust that the child controls and the child's the primary beneficiary of, but it's insulated from what I'll call bad people being able to get at their inheritance from that standpoint. So, that's really how we try to protect that inheritance and pass it down to the people we want and keep those creditors and predators away from their inheritance from that standpoint.

Marc:

Got you. Yeah. I'll ask you this final question, and I set Nicole up with this as well. Just in general, I think, mindsets have changed through the years, but people often, many years ago, thought, "Well, you have to be really wealthy to A, have a financial advisor, and B, have a trust. You must be a Rockefeller or something like that." And that's just not the case anymore. So, are you seeing more people starting to realize or understand that this could be a useful tool for them in working with someone, and not just something for the ultrarich?

Bill McQueen:

Oh, definitely. We serve clients of all different sizes and net worths, and I tell my clients there is no bright line test as to when it makes sense to have a trust as your primary estate planning document versus a will. But if I had to use a rule of thumb, I would say if somebody has assets that are over a couple of hundred thousand dollars, it probably is more beneficial to use a trust as the primary estate planning document rather than a will because, again, looking back to my youth, there used to be a commercial, the Fram oil filter commercial, that they always said, "Pay me now or pay me later."

Marc:

Right, yeah.

Bill McQueen:

Yes, putting a trust-based plan into place is probably more expensive than a will-based plan, but it's not that much more expensive, and all the benefits you get far exceed the cost of when they do die, what it's going to cost going through the probate process. So, just looking at it from a cost factor alone, I would say most anybody would pretty much benefit from having a trust-based plan versus a will-based plan.

Marc:

Bill, does that include the home value as well? Obviously, those have skyrocketed the past few years, so it'd be pretty easy to get to a couple of hundred grand.

Bill McQueen:

It would, yes. And I would include the home value in that as well, yes.

Marc:

Okay. All right, Nick, any final thoughts from you before we go?

Nick:

Really, I think the takeaway, and a lot of things have been pointed out, and something that we try to emphasize with people, whether it's financial planning, whether it's legal planning, is that strategy and how just a couple of decisions can make a dramatic impact on somebody's overall situation and plan. Oftentimes, and Mark, you alluded to it, where people, for many years, had this perception of, whether it's an advisor or an attorney, it's something that only people with really substantial amounts of money have. And if anything, people with substantial amounts of money, they have a bigger buffer. You know what I mean? And can make more mistakes and recover, but really, a handful of decisions for a typical client that's worked hard their whole life, saved a whole bunch, paid off their house, want to enjoy their retirement and hopefully pass on some money to their kids, they can really benefit from strategy planning and adapting to what's going on.

Marc:

Yeah. For lack of a better term, Middle America, right? I mean, a lot of folks in Middle America could certainly use a team, a financial and legal team. And so, if you need some help, reach out to, of course, Bill and Nicole and their team there at Legacy Protection Lawyers. That's LegacyProtectionLawyers.com. That's where you can find them online, Legacyprotectionlawyers.com, or call 727-471-5868. We'll put a link in the show descriptions of this week's podcast as well. And you can also, as always, go to Pfgprivatewealth.com to get in touch with John and Nick. Don't forget to subscribe to the podcast, Retirement Planning Redefined, on Apple, or Spotify, or whatever podcasting app you enjoy using. Bill, thank you so much for your time. Great information. We really enjoyed having you here.

Bill McQueen:

Thanks for having me, Mark and Nick, appreciate it very much. Enjoy it.

Nick:

Thanks, Bill.

Marc:

And we'll see you next time here on Retirement Planning Redefined with John and Nick.

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