This episode, we welcome estate planning attorney Bill McQueen of Legacy Protection Lawyers to break down the essentials of trusts and why they matter. Bill explains the key differences between wills and trusts, clears up common misconceptions, and highlights the importance of properly titling assets to avoid probate. You’ll also learn why beneficiary designations can override your trust, the pitfalls of leaving your trust unfunded, and how working with both financial advisors and attorneys ensures your plan truly carries out your wishes.
Learn more about Bill and Legacy Protection Lawyers
Contact info: www.legacyprotectionlawyers.com
PFG Website: https://www.pfgprivatewealth.com/
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.
Time once again for another edition of Retirement Planning - Redefined with John and Nick from PFG Private Wealth. We're continuing our conversation, our great conversation, with the folks from Legacy Protection Lawyers. Nicole Cleland was on the podcast, and Bill McQueen is going to be joining us now on this episode as we talk a little bit more in-depth about what they do, and some of the differences when it comes to getting these financial and legal documents into place. As always, Nick's here with me. Nick, my friend, how are you doing?
Doing great. How about yourself?
Doing pretty good. We had John on the last episode, so good to have you here with us, and Bill McQueen is joining us. So Bill, welcome in. Thanks for being here.
It's my pleasure. Thank you all for having me.
Absolutely. Looking forward to chatting with you. And again, you guys are from Legacy Protection Lawyers, and you can find you guys online at LegacyProtectionLawyers.com. That's LegacyProtectionLawyers.com. Give us a little background on you, Bill. You've been doing this for how long, and all that good stuff. Tell us a little bit about you first.
Certainly. Well, I've actually been an attorney for almost 40 years, but I sort of had a circuitous professional career. I was a CPA for my first few years out of undergrad and then I went back to law school, practiced law for about seven years, but then I actually ran a family business. My father died when I was getting out of law school, so I took over a family business and ran that for about 15 years, and then came back to the practice of law about 15 years ago now, after I got a Master's of Law in Estate Planning, and so that's where my full focus has been over the last 15 years or so.
Nice. Gotcha. Yeah, I mean, so obviously you've been doing this for a while, and you guys work with Nick and John, occasionally helping them out with some of their client situations as well?
Yes, yes. We work closely with Nick and John and they help our clients out with financial planning and wealth management, and we help out in the estate planning arena when his clients need that.
Nice. Nick, how long have you guys known each other?
Bill, when you said 15 years, I was thinking about that, so I think it's got to be close to 10 years, something like that? Around 10 years?
Been at least that, because I started the firm back up in, I guess, 2013, so too soon after that. I met you through your other former partner and we started doing seminars and stuff together.
Sure [inaudible 00:02:11]
We all lose time in that COVID era, right? It seems like everybody always does that. We're thinking about time and we're like, "Oh, man, there's like a three, four-year window I've lost when trying to think of some things." Well, let's get into our conversation today.
When Nicole was on, we kind of left off, Bill, where she was talking a lot about probate. She went through a lot of great topics and kind of broke some stuff down for us, needing an estate plan, what makes an effective estate plan, things of that nature. We kind of wrapped up a little bit on the probate conversation, and then we started to get into trusts, and she said you were the man when it comes to talking about trusts, so we thought we'd kind of kick things off there. So, tell us a little about what is a trust and just kind what some of the, I guess, misnomers that come with that conversation, or with that word.
Sure. Well, actually, technically or legally, a trust is actually a relationship where legal title of the assets are held by one individual or an entity for the benefit of somebody else. But I tell people, "The easiest way to think of a trust is more analogize it to like creating a corporation or a limited liability company." Again, technically it's not an entity. We typically use trusts so that, as Nicole mentioned, I'm sure during the episodes that she was on with you, a last will and testament only controls where assets that are titled in somebody's individual name go.
But in order to get those assets to the desired beneficiaries after the owner dies, we have to go through the court system to do that. And so many, if not most, of our clients instead use a substitute for a will, which is a trust, or a revocable trust, which allows us to take assets that are in somebody's individual or joint name and retitle them into this trust while they're alive so that when they die, the trust is basically still alive and it can direct where the assets go, but we don't have to get the courts involved, which obviously saves a lot of money, time, and keeps everything private.
Yeah, I think that's a big piece for people too is the difference when going through probate ... And I was telling Nicole, she said she was going to steal this from me and use it, and I said, "Hey, go ahead." But I was like, I was always taught that a will just means you will go through probate, and she's like, "Oh, I like that." And obviously that's public record, whereas if you do a trust, you can kind of keep those things private from creditors and things of that nature, correct?
Yes. Oftentimes people think, "Well, I have a will, so because I have a will, I'll avoid probate," and that's not the case. It's all how the assets are titled. So, if they have a will, they're executing their privilege to sort of personalize their estate plan where assets go. Otherwise, if they have something in their individual name and they don't have a will, then Florida law basically gives them a will and says where the assets will go. But in either instance, we got to go through the court system.
With a trust, we don't, and the trust definitely does remain private, so we do not have to posit a trust instrument if things are done correctly with the court system, as we do with a will. When somebody dies, by law, at least here in Florida, whoever has their original will or comes across it is required to posit it with the court in the county where they were residing at the time of their death, and at that time it becomes a public document. So, anybody, be that the nosy neighbor or the newspapers, reporters or whoever, could go down to the courthouse and read your will, see where you're leaving your assets, maybe who you're not leaving assets to, and even get some sense of what your assets are. That's not the case when we use a revocable trust. All of that remains private.
And just for clarity, for most of the people listening, the terminology, and correct me if I'm wrong, Bill. But the most popular or frequently used sorts of trusts are either living trusts or revocable trusts, which oftentimes are the jargon or the terminology goes hand-in-hand with each other, just from the standpoint of sometimes we've had clients confused between the difference of the two, or if there is a difference between those.
Right. That's right, Nick. Actually, when we talk about trusts, there can be trusts that are revocable trust, also revocable trust, I guess potato, potato, but a trust that's revocable, which also sometimes is called a living trust or even a living revocable trust. But then there can be trusts that are irrevocable, and those are much more often used for more advanced planning type techniques, be that asset protection or estate tax minimization, or planning for nursing home care in the future, Medicaid planning.
But when most people talk about, "Oh, I have a trust as part of my estate plan," we're talking about a revocable trust. And so like a will, when somebody creates a revocable trust, they keep a lot of control over that, and they have the ability to amend the trust document at any point in time in the future. So, if they like their son-in-law today, but maybe they don't like their son-in-law somewhere down in the future, they can change the trust and take the son-in-law out. They can even revoke the trust in its entirety if they want to, and if that were to happen, the assets would come back into their individual or joint name. So, when we're typically talking about estate planning, we're talking about a revocable trust, which again is just really a substitute for a last will and testament, because it's going to direct where the assets go once you die.
When you have a revocable trust, sort of to give a little more clarity on it, typically, when someone sets up a revocable trust, the person who creates the trust serves as the trustee of the trust while they're alive. And the role of trustee is sort of similar to being the president of the corporation, if we're thinking of it like an entity, so that trustee has the authority to deal with those assets in the trust. What the trust says is that while the person who created the trust is alive, they can do anything they want with the assets in that trust, so they can consume them, they can give them away, they can put other assets in the trust, they can make loans or sell assets, just like they could if they were in their individual name.
But then the trust goes on to say, "If the person becomes incapacitated or they die, here's what happens to the assets now," and that's when we put the same types of terms that we would normally put it in their will into that trust document. And so, the fact that when they die, they don't have any assets in their individual name, hopefully they're all in this trust, or they have beneficiary designations that put them into the trust, then those assets will go to where they want them to go, but we don't have to get the court system involved again.
Gotcha. Yeah, when you started talking about that, I was going to ask you, sometimes people ... For folks who don't deal in this world, or very often, we hear about being the executor of an estate, right? Is that different when you're kind of in charge of the trust? Are those terms interchangeable, or is that different?
No, good question. The executor is the common name for who would administer a probate estate or be in charge of a probate estate if you had a will and the assets were going through the court system. Here in Florida, we call that role something else, but it's the exact same thing as an executor. We call it the personal representative of the estate.
A trustee is similar to that role of executor, but the trustee is in charge of assets that are in the trust or owned by the trust, and so they're not assets going through the probate. So, both the trustee of a trust-based plan does pretty much the same types of things when someone dies as the executor or personal representative of a estate would have to do, a probate estate, if we're using a will. And what I mean by that is, your revocable trust is responsible for paying any and all valid creditors that the deceased individual might've had at the time of their death, just like what happens with a probate system. And the trustee is also responsible to make sure that the deceased individual's, all of their tax returns have been filed and taxes have been paid, things of that nature. So, they do a lot of the same sorts of things like an executor.
But again, they're handling that initial administration outside of the court system, and so we can start right away. We're not waiting for a court to appoint the person as trustee. In fact, on the day the individual who created the trust dies, we could appoint the successor trustee on that day even, because again, we don't have to get the court involved, and we can start paying creditors and making sure all the tax returns are filed and taxes are paid, and we're not waiting on the court system to handle all this. So, things go a lot quicker and smoother from that standpoint.
Gotcha. Okay. Do you set up beneficiaries kind of the same way you would do with other things, and I guess you're putting all the different assets under the trust umbrella, and then you have beneficiaries for individual items? Or is it like an overview in the trust, if that makes sense?
I mean, what happens is, again, it sort of could mimic what's in somebody's will if they're using a will.
But what happened would be ideally, we're either going to put all the assets into the trust during the person's lifetime, or there's some assets we can't put into a trust. They have to stay in the individual's name during their lifetime. The most common one for that would be retirement accounts. IRAs or 401k plans have to stay in the individual name of the owner or the participant under the plan up until their death, but we can direct those assets by a beneficiary designation into the trust once the individual dies, so we avoid the probate process by doing that.
We may very well name individual beneficiaries, and occasionally, there might be specific assets that people want to leave to certain individuals, and so we would put those specific provisions in the trust document. Maybe they want to leave this house to somebody, their boat or some other piece of real estate or something of that nature. There might also be specific cash gifts they want to make. And then ultimately, we have what is typically referred to as the residuary of the estate, everything else that's left over, where does that go?
We more often use percentages of somebody's estate when we're putting together an estate plan rather than specific assets or specific dollar amounts. And the reason we advise to do that is because whenever we're doing an estate planning, I tell people, "We're taking a photograph or a snapshot of what your life looks like today, what your assets are, what the current law is, who do you want to benefit, things of that nature. But hopefully, we're not going to have to use these instruments until somewhere far out into the future, and we just don't know what your estate might look like when that day comes, your death, that we have to now implement the plan."
And if somebody is making a large gift, let's say today their estate's worth $3 million or something, and they're going to give away $1 million to somebody, and then the rest they want divided among their children. If due to healthcare or other reasons, their estate goes down in value before they die to maybe it's only $1,000,001 when they die, that individual's still going to get the million dollars, and then their children are only going to split $100,000 versus the $2 million that they thought they were going to split when they put the plan in place. If instead they use percentages rather than specific dollar amounts, then it doesn't matter as much whether their estate goes up in value or goes down in value. At least regarding the relative size of the gifts, they'll be the same, and so that's usually an approach we would prefer to take, really, than using specific dollar amounts for gifts within a trust.
And I'll jump in on that a little bit too.
Just because oftentimes, from a front line standpoint as an advisor, we're sitting with clients and they're adjusting beneficiaries. So one example of a conversation I've had with a client is, so maybe they have a 401k at a previous company and maybe it's a couple hundred thousand bucks, and they have a beneficiary listed there. And then they have a second 401k that they've had at their current employer for the past few years, and there's less money in there, and so people tend to segment accounts in their minds. And so they'll say, "Well, I'll put this other person on this one, because I have my sister or my brother or ..." on the first one.
Just them not thinking that, "Well, hey, later on in life, things may be consolidated," or you may spend from one account before you spend from another account, and using the percentage kind of strategy tends to be much more effective for people. And just to kind of jump on that beneficiary side of things too, because I know that you guys run into this and we run into it, but I think one of the things worth mentioning is, and you can kind of walk us through it more thoroughly, Bill, is just the conflict between beneficiaries listed on an account and a trust, and how one can supersede the other, because maybe somebody didn't update their beneficiaries or things like that.
Sure. When somebody dies, how assets can pass are in one of three ways, but one of the ways is by contract law, and those are assets that you can put a beneficiary designation on. And I mentioned earlier, retirement accounts are common accounts that you really need to put a beneficiary designation on. But on a lot of financial accounts, be that a bank account or a savings account or a brokerage account, if somebody wants to, they can hold that account in their individual name, but they can put a beneficiary designation on those that are referred to like a pay on death designation if it's a bank account, or a transfer on death designation if it's a securities or brokerage account. And what that means is that when the owner of that account dies, by contract law, the institution agrees to pay that account to whoever their named beneficiary is. All they have to do is take a death certificate to the institution, and that becomes that beneficiary's account.
The issue that people need to keep in mind, though, is sometimes people put beneficiary designations on assets, and yet let's say they have three children, and then through their will or their trust, they say, "When I die, I want to leave everything equally to my three kids," but for whatever reason, they put a beneficiary designation on an account that named just one of the three children. Legally, that one child will inherit that account, because that's what's going to control that account, that beneficiary designation. And it doesn't matter what their will or trust says, because it will pass outside of going through the probate process, and it also won't go through the trust if it's an account that was in their individual name with a beneficiary designation in favor of one individual.
And so, people need to make sure when they're doing their estate plan that everything lines up and is in alignment, as far as accounts, if they have beneficiary designations on them, that they agree with whatever their trust or will that they're using calls for. Or at least they have an understanding of how that's going to flow. I don't know if that's what you're referring to [inaudible 00:17:13]
Yeah, yeah, just kind of the uniformity and the importance of, I think, from the extent from how we see things, that a lot of times as an advisor we suggest to a client to get an estate plan done, and then we stand ready, willing, and able to help them implement, like retitling accounts in the name of a trust or updating beneficiaries. But there's instances where not all the accounts are through us or just different things that happen. And so that implementation, that second phase is super important, and I think people do kind of tend to assume that, well, hey, if I have my trust and I've gone through and I've done this process and I've written out exactly what I want to happen in my trust, then all my accounts should just automatically follow those rules. And I think people understanding that that's not the case, that a beneficiary designation on an account can supersede a trust, is super important, especially if it happens to be an ex-spouse or something like that, which is not a great situation. So, I just wanted to bring that up.
Okay. Yeah, that makes sense. And what we'll do is we'll do one more question here and then we'll wrap this episode up, and that way we keep these at a normal timeframe, and then we'll have Bill back on again for a continuing session to chat some more about this topic. One of the things I was going to ask you when you guys were running through some of this stuff, and I've heard this before from other advisors, that a common mistake is that you go through the time and the effort to get a trust put together, Bill, and then people don't fund the trust. Can you kind of explain what that means?
Right. Yes. That can be a common problem with a lot of individuals, and not with our clients, but [inaudible 00:18:53] the standpoint that some people think that, okay, I go to my attorney, they create this trust document for me that's going to avoid probate. I sign the agreement and then everything's done. That's not the case.
What happens after you create the trust, you now have to what we call fund it, which means retitle assets out of that person's either individual or joint name into the trust, or add beneficiary designations onto the assets, if they're able to use a beneficiary designation that would be in favor of the trust so that when they die, even though the account is in their individual or joint name, it automatically passes into the trust. If somebody doesn't do that, if they don't fund the trust, if they just sign the instrument, but they don't go out and retitle these various assets, then what's going to happen? They're going to die, at the time of their death, the trust doesn't have anything in it yet.
And when you have a trust-based plan, if it's done right, you're still going to have a last will and testament that we refer to as a pour-over will. That's really there to catch assets that for whatever reason were not put into the trust, or a beneficiary designation was not put on them directing them to the trust at the time of the person's death. So that pour-over will says, "Hey, when Bill dies, if we find anything in his individual name, this will's going to take that asset and pour it over into Bill's trust that will direct where the assets go." But to get that asset or assets out of Bill's name over into that trust, we got to go through the probate process to do it.
We don't want that to happen, so it's very important that when your trust is put in place, that your attorney and your financial advisors and everybody, that we have all this information. That's why we work very collaboratively with advisors like Nick and John to make sure that we've identified all their assets, and that they are titled into the trust at the time they create the trust, or they get a beneficiary designation on it.
And the way you title those assets into the trust, I tell people the rule of thumb is, if you were going to sell that asset to somebody else, how would you do it? So if it's real estate, we have to do a deed and deed it from that person's individual name into the trust. If it's a interest in a closely-held company like a corporation or an LLC, we have to do an assignment of that interest over to the trust, or a new stock certificate. If it's accounts like that Nick and John are managing, then it's very easy. They go ahead and retitle those accounts from the person's individual name into the trust. But all those steps have to be taken, because otherwise they've got this trust document that ultimately will direct where the assets go after they die, but we're going to have to go through the probate process to get the assets into that, and it sort of defeats one of the primary purposes of having a revocable trust.
Exactly, so you've got kind of like a shell with not much in it, I suppose.
Okay. Well, look, so as Bill said, a lot of times they got to work hand-in-hand, so that's the importance of a team and working with financial planners and estate planning attorneys, and so on and so forth. We talked quite a bit about that the last couple episodes. If you need some help, we're going to jump out, we'll come back in with a new episode here in about a week or so, so reach out to John and Nick, or reach out to Bill and Nicole as well. You can find Bill and Nicole at LegacyProtectionLawyers.com. That's LegacyProtectionLawyers.com. They're based out of St. Petersburg, Florida. You can check the show description. We'll have a link down there for you. Or you can also just call 727-471-5868, 727-471-5868.
And of course, if you want to talk with John and Nick, as always, don't forget to subscribe to the podcast and find them online, and all that information is at PFGprivatewealth.com. That's PFGprivatewealth.com. Nick, thanks for being here, my friend, as always, and of course, Bill, thanks for being here and being our special guest. A lot of great information and really did a great job kind of breaking that down for folks.
Absolutely, so we'll have you back on in about a week or so. We'll talk a little bit more about our four-part series on estate planning with John and Nick on Retirement Planning - Redefined.
