Revocable and Irrevocable Trusts: Exploring Estate Planning and Tax Efficiency

February 22, 2024

In this episode of FIN LYT by EWA, hosts Matt Blocki, Ben Ruttenberg, and Chris Pavcic dive into the intricacies of trusts, estate planning, and tax efficiency. They provide valuable insights into the distinctions between revocable and irrevocable trusts and the critical role they play in safeguarding one’s financial legacy. They discuss the benefits of revocable trusts, highlighting their benefits, including control, privacy, and the avoidance of probate. They stress the importance of thorough estate planning, encompassing power of attorneys and living wills, to ensure a smooth transition in cases of incapacitation or passing. Shedding light on irrevocable trusts, Matt, Ben and Chris emphasize asset protection, probate avoidance, and substantial tax benefits as key selling points for irrevocable trusts. The discussion details the significance of considering irrevocable trusts as a strategic financial tool, especially for individuals with substantial assets. Lastly, looking at current federal estate tax exemption limits, the team details additional strategies such as gifting within annual exclusion limits and spousal lifetime access trusts (SLATs) as methods to mitigate estate tax liabilities.

Episode Transcript

Welcome to EWA’s Finlit podcast. EWA is a fee only RAA, based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time.




Welcome, everybody. Today we are joined by Ben Ruttenberg and Chris Pavzick. We’re excited to break down the difference between revocable and irrevocable trust. First, got to ask you guys, who do you think is going to win the national championship?


I’ll pass the ball to the college football expert. Chris, over here.


Do you not want to talk about it? Since thou who shall now be named is not in the championship?


I haven’t watched a single college football game.


Chris is a hockey guy. So, Ben, you got to answer Washington or Michigan?


I think Michigan. I think Michigan is the better team. I think they’re going to win.


All right, I’m taking.


See, I think it’s going to be a great game, though.


All right, so revocable trust, irrevocable trust. So, first of all, we found there’s a lot of misunderstandings similar to the tax code. Some people think if I make more money, I’m going to hurt myself. Where the taxes go up on a graded basis. There’s so much misinformation or misunderstandings about trust out there. So we wanted to keep this simple and really break down the differences between revocable and irrevocable trust. What do they do? What do they not do? Who should set which up, and what are the pros and cons, essentially? So let’s just first talk about estate planning 101. Some of the basic documents that one should have are power of attorneys. So there’s financial power of attorneys, essentially.


If you are incapacitated and who’s going to make financial decisions on your behalf, you should have a healthcare power of attorney and then a durable, general power of attorney as well. And having those documents can come into key play if, God forbid, a catastrophe happens. Separate from that, some people have living wills in place, and this is going to direct, essentially, where assets are going to grow. But one of the biggest miss things we see in estate planning is someone creates a will, they feel great about it, they sign on the dotted line, they get it notarized, and then they don’t update any of their accounts to match up with the will. So, Chris, in that example, let’s say someone had a 401 and had a beneficiary at an ex spouse.


And they’re remarried kids and their will states that everything goes to their current spouse and their kids. What would actually happen if that person passed?


Yeah, that’s the problem. The account beneficiary trumps whatever is stated in the will. So you could do all this work with an attorney, get it to the 1 yd line, but doesn’t really matter unless you go through and actually set everything up to align with the actual estate documents.


So number one mistake we see is once the will or trust is created, not going and actually following through with it and labeling it as, some cases, the owner of the account, some cases the beneficiary of the account, sometimes the owner and the beneficiary of the account, depending on the setup, et cetera. But today we’re going to talk about trust. So some people decide between a living will and a revocable trust. So let’s talk about some of the benefits of a revocable trust. So just by definition, it is a revocable. I mean, you can change your. If I set up a revocable trust, I can change my mind anytime, any point, I can change who benefits from the trust, et cetera, as long as I’m living. So let’s just go around here. What are some of the biggest benefits of a revocable trust?


Ben, what’s your favorite benefit of revocable trust?


Well, there’s so many to choose from, but if I had to pick one, I would say just the control aspect. Like you said, it could be changed at any time by the grantor, which is the person that actually creates the trust and originates the trust. So he or she can terminate the trust. They have free access to any and all of the trust assets, whether that’s cash investments, life insurance that the trust is holding. They can remove beneficiaries, designate new ones. So that amount of control, despite having the money being held by the trust, is really important and allows for a lot of flexibility for the grantor.


Gotcha. Gotcha. Okay, so, Chris, one of the biggest things that we’ve talked about, some of the clients we’re actually jumping on a call later today is privacy. So, talked about what does revocable trust do that a will does not do?


Yeah, I think totally agree with everything Ben said. But beyond that, the avoiding probate and ensuring a smooth and efficient transfer of assets to whoever the beneficiaries are, I think is crucial, because if you don’t have that process can be really lengthy, and depending on the situation, you may or may not want to be dealing with that at that time, if you just lost family members, whoever it is. So having the will trust combo that ensures everything happens smooth, versus a month to several months to a year process that could be dragged out in the courts.


I was going to say probate is just like that. Lengthy court process, technically public record, that if either your beneficiary of an account is your estate or your property is tenancy in common. There’s a couple ways that assets can be subject to probate. And like you said, if they do go through probate, lengthy court process where courts are deciding how your assets are distributed may not be what your will is intending or what your actual wishes are intending.


Yeah, I want to talk about the avoidance of probate and privacy for a second. So the privacy, if you’re a high net worth individual or family and you don’t have a revocable trust, if you just have direct beneficiaries on stuff or a will, it becomes a public record. So then when your kids receive, let’s say, a million dollars, $10 million, whatever it is, especially now with AI, there are predators, there’s creditors, there’s people that are going to come after those that have money for the rest of your life, but versus if you pass everything through revocable trust, all of that’s confidential, whether it’s one dollars or $100 million inside of that. Now, your kids can operate with peace of mind without anyone in their business. So that alone is my favorite benefit.


The privacy aspect, I think, especially if your high net worth cannot be stated, the importance of that cannot be stated high enough. Just to give a quick story on the probate recently we had a client, unfortunately was diagnosed with terminal cancer. And so were going through and making sure everything was aligned. And there was one old stock that was. And it was so small. But this is just to give an example of what would happen. It became, or time was so much more important than going because they were going to require all this process. It was from a different state and it was hard to even get a hold of.


So it was a really small bank and so we wanted to change it into the name of the wife or joint name so it immediately transfer because it was in the individual’s name. And what happened before, it was such a lengthy process, but it ended up being two. Basically, the time involved, he decided, was not worth going to change. It was 2000. And now on the back end, the cost of going through probate and the time involved to go get this, it would be more costly to go through probate than to actually go recover that stock. So you really want to make sure that everything has direct beneficiaries, or the name of the trust is as the beneficiary, because avoiding probate, who wants to go to a court system when they’re mourning the loss of a loved one?


Who wants to go through that lengthy process, and who wants to have the risk of creditor being able to get that money if there was outstanding debts, et cetera, versus if you have a direct beneficiary or revocable trust, the assets go, no questions asked, it’s private, avoids probate, et cetera. So super important. One of the other benefits of a revocable trust is that once you can change your mind while you’re living, and then once you pass, you can have it written in there that it becomes an irrevocable trust in the future. And this is really important for a young family. Let’s say we’re talking to a family with three kids that are under the age of 18, and so they have a revocable trust. Well, they’re like, okay, I’m worried about my kids overspending the money. I’m worried about my kids.


If they get married and then get divorced, are those assets going to get split? So having a revocable trust, that turns into irrevocable trust, Ben, what are some of the benefits of that? What concerns can we immediately address with a revocable trust?


Yeah. So you can write in provisions for how your beneficiaries can actually access the funds. When the trust does spring into a new revocable trust, like you said, generally speaking, they can access funds for what are called hems provisions, which are health, education, maintenance, and support. It’s a pretty broad definition, but that protects any distributions. They can’t just take money out, know, buy a Lamborghini or go to Vegas. It has to fall under those four categories, health, education, maintenance, support. So you’re ensuring that a trustee is not only overseeing these distributions, but they’re being used to help support your kids and not make sure that they’re.


And those, you know, typically, we’ll see some of the most important factors to go into. Obviously, hire an attorney. We always recommend clients have, like have your balance sheet ready to go. And some of the decisions you should discuss, because the attorneys are to going ask you, who do you want, if, God forbid, something happens to both of you? And let’s say you have three young children in that example, who do want to be the guardian of your kids. Who do you want to be the trustee of the money, making those decisions, of what meets the hem standards? Health, education, maintenance, support. And those are some of the most important decisions. Who’s going to be the executor of your estate when you pass? Who’s going to basically take care of the business?


And these could be different people, or they could all be the same person if it’s a trusted family member having those decisions, because typically we see couples disagree on who those individuals should be. So if you have those discussions before you go meet with attorney, it’s going to save you a lot of time, a lot of billable hours and a lot of stress and headache. And that can get you ready to, like, are we ready to establish a trust? Well, you can agree upon those factors off the bat. And if you’re a single person with kids, then obviously you’re the one making those decisions. So, Chris, talk about some of the pros and cons of, and we’re still in this revocable trust world where, again, a client could go establish this, they can go amend it and change their mind the next day.


Literally, they could change it anytime. But the trustee discussion is obviously a big one. So let’s talk about the differences between naming an individual as a trustee and a corporation as a trustee. So give some examples of the pros and cons of those. Examples of someone’s choice between the individual and the corporate.


Yeah, I’d say personal route that person is going to be responsible for. Not quite like a second job, but another responsibility of having to make sure these distributions are in the best interest of the beneficiaries and making sure everything’s happening in accordance with what the trust document says. Then on top of that, oftentimes the trust has to file a tax return. If there’s investments or property in there that are generating income, that has to be documented for tax purposes, so that if that falls on somebody personally, they have to do that. Or if there’s a corporate trustee, they can take care of a lot of that stuff and take that homework off their plate and just make it an easy work in tandem with the personal trustee. But do a lot of the bookkeeping aspect of it.


Yeah, just in personal experience, I’ve seen when an individual is named as a trustee, sometimes, like you said, it can become a second job, not a full time job. Then the kids are always asking for money. Sometimes the kids are creating stories because they need money. That necessarily is what they actually need it for, and it can strain relationships if it’s an uncle. And the kids are just essentially bothering the uncle on a weekly basis for I need this and this. It can become quite straining on the relationship, and it can become very time consuming. It’s not just as simple as, oh, he’s in a management money. Make sure there’s decisions. Well, it’s almost like depending on the age of your kids, it’s like parenting the kids from a financial world.


So the corporate, not a recommendation, not like a blanket recommendation, but a set up, we’ve seen work better. And a lot of people say, oh, corporate trustees are so evil. Well, if you choose a corporate trustee, that’s a reasonable fee. So let’s plug fidelity, for example. I think it’s like 35 basis points with like a minimum fee. So if you have a couple of million bucks, it’s to be like zero point, 35%, a little bit over a third of a percent, and they’re going to take that heavy lifting. They’re going to make sure that any distributions meet that standards. Like Ben, you mentioned health, education, maintenance, support.


If they’re maybe 30, 35, 40, maybe they have access, a third or third of that principal, they’re going to oversee that, they’re going to file the taxes, they’re going to make sure that the trust is in compliance, and then that uncle who you want to be involved, you could make them like a trust protector. So essentially a much lower time implication and a bridge between the beneficiaries, which would be your kids, and the corporate trustee. So the communication mechanism, and that would put a lot of, be a lot more respectful of the family members time, like the uncle, a lot of the work would be off the plate.


But the communication level that you want that person there could still be in place overseeing, because what fidelity wouldn’t do is they’re not going to show up to your kids birthday parties and be involved with their life and know if they’re being responsible in college or not responsible. So I really personally have seen that corporate trustee, but then also choosing a trust protector. So the communication bridge is still there with a family member, a trust relative, et cetera. But any further comments on that?


No, I think that’s well said. It’s doing the right thing for the beneficiaries without sacrificing personal relationships with what a trustee could be doing with his or her family.


Okay, so depending on the state, most individuals, if you have assets, should have, again, the documents of the power of attorneys that we mentioned at the beginning of this podcast. We’re really big fan of the revocable trust, especially if you’re going to start keep accumulating assets. Sometimes it’s not necessary if the assets are relatively smaller, you could just do a living will and just have direct beneficiaries and the revocable trust. In Pennsylvania, there’s some provisions that don’t always make a revocable trust. If things are simple enough, you can avoid probate by just naming the direct beneficiaries on everything and doing title changes ahead of time.


But in general, we do like the revocable trust for the control factor of once you’re not here to make sure your wishes are in line with how you want your kids to handle or not handle the money, and also make sure that they’re protecting themselves from themselves, essentially depending on their age maturity level. So that’s where revocable trust can come into play, versus a will could have a trust in it, but just having direct beneficiaries and giving the money outright would not come into play. So real quick, before we move to the irrevocable trust world, let’s talk about what a revocable trust does not do. And so there’s really one thing I have in mind that a revocable trust does not accomplish whatsoever, and that’s avoiding what.


Avoiding a state tax does not help you with that because of all the elements of control that we outlined, we’re able to change it. We’re able to change beneficiaries, we’re able to change, the grantor can have access to the funds. All of these control aspects mean that this trust is still, by all intents and purposes, technically in your estate. So it does not help you from an estate tax standpoint. Assets held in a revocable trust are still subject to estate tax if that situation applies to you.


Okay, so let’s get some real world examples here. So there’s two taxes. We’re going to use Pennsylvania as an example. Some states don’t levy inheritance tax or an estate tax. Some states do. Pennsylvania is one of them that does. So Pennsylvania, for example, is a great place to retire, but not the best place to die, depending if you don’t have the right estate plan in place because of taxes. So let’s talk about Pennsylvania specifically in these examples and also federal. So let’s just use a case analysis. Someone has a million bucks. Someone has. And let’s break this down. $500,000 in an IRA. Keep this simple. $400,000 in just a house that’s paid off and $100,000 life insurance policy. Would federal taxes come into play here once that person passes? No.


No federal estate tax would apply.


But PA, inheritance tax, why would no federal tax apply? Chris?


Everybody gets a credit for 2024, it’s 13.6 million. So if you’re married, it’s 27.2, where, unless you’re over these figures, whenever you pass, there’s no federal estate tax. But if you’re a million dollars over, then federal estate tax is 40%. So you’d get.


Okay, so this example, they’re under that. Let’s say it’s a married couple that has this. They’re under that. So the big one, the 40% federal tax, assuming that they’ve not made any huge gifts along the way, assuming they still have that exemption in place, they pay zero federal taxes. And that would be the same no matter what state in America they live in. So any 50 states they live in this example, there’d be no federal taxes. The revocable trust could still be really beneficial for having those three examples go privately. Having those three examples be controlled if their kids are young. And what would not be accomplished, though, is avoidance of Pennsylvania estate tax.


So let’s assume that this is the second spouse passing, because if you pass money between spouses, there’s no state tax and there’s no federal tax from an inheritance perspective. So let’s say this is going to kids. So the benefit of life insurance is that it voids the Pennsylvania inheritance tax. So that 100,000 is a freebie that passes on without tax. However, the house, that’s worth 400,000, and the IRA, that’s worth 500,000 doesn’t get so lucky. So, Ben, what happens to those.


Yeah. Four and a half percent tax that are applied to direct descendants, and then if it’s going to siblings, it’s a 12% tax and then 15% tax to any other heir outside of, like, a charitable organization.


Okay, so just using $100,000. An example, if someone in Pennsylvania, a parent, were to pass money to a kid, the kid would have to pay $4,500 into Pennsylvania. If it was passing to a sibling, it’ll be 12,000. If it was passed into any other heir, it’ll be 15,000.




Just to keep the math simple, the one thing that avoids that would be life insurance death benefits. Now, I do want to say the life insurance death benefits are included in the estate from a federal perspective. So if you had money in a revocable trust, including life insurance, and let’s say you were worth $50 million and you’re married and you said that limit was 27.2. So that would mean 22.8 million would be above that exemption, again, assuming they’ve never made gifts. So there would be almost approximately 40% of that would get taxed. So 40% of the 22.8 million, in that example, $9 million would go to federal taxes upon that person passing. So again, revocable trusts are amazing for all the reasons we described, but they accomplish absolutely zero when it comes to estate tax planning on a state and a federal level.


So hence why. Now we’re going to talk about irrevocable trust. So irrevocable trusts, just by nature in general, are irrevocable. So let’s talk about some of the. That’s really the downside, right? It’s irrevocable. Once you establish this and you choose the trustee, literally, you need the trustee to sign off if you want to make any changes. And sometimes there can be changes made, sometimes there can’t. But in general, you have to go into this saying, once I establish this, I’ve handed the keys over to the kingdom. Whatever I put in this irrevocable trust, it’s not my decision anymore. To get the benefits from a tax perspective in there has to be a present interest gift. So once that money’s in there, it’s just like giving someone else. You can’t get it back unless that person gifts it back to you, essentially.


So irrevocable in my nature. But what irrevocable trust does do is it has a lot of benefits. It has the same benefits that we describe a revocable trust from, like, asset protection, avoiding probate, but also the huge downside of can’t change your mind. But the huge upside above a revocable trust, there’s a lot of tax benefits to that. So let’s talk about those who wants to take this?


Yeah, the irrevocable trust is great because like you said, you relinquish control of the assets. The trust owns it, so it’s completely outside of your estate. So if you’re above the estate tax exemption, which we’ll talk about a little bit in a second, any assets that are held by an irrevocable trust avoid that 40% federal estate tax. So like we mentioned before, the estate tax, right now we’re filming this in 2024, individuals have a $13.6 million credit that goes into their lifetime exemption. So if it’s two spouses and it’s a household that’s 27 million per household. So any assets above that, if you die, like in the case study that you said under that $27 million number for a married couple, there’s no federal state tax, period.


If you’re over that limit, anything above that $27 million limit is subject to a 40% federal estate tax. So this is the estate planning strategies that we often see is getting money into an irrevocable trust outside of your estate so that any money that sits there, whether it’s life insurance, whether it’s investments, are out of your estate, and therefore are not subject to that 40% tax.


Awesome. Ben, great summary there. Obviously, there’d be two candidates for an irrevocable trust. One, if you’re already above those limits, if your net worth is already above, essentially 27.2 million, now, that’s getting cut in half. So that was under the tax code before Biden. So under the Trump tax laws that were pushed through, but the negotiation between Republicans and Democrats, there were. This isn’t going to last forever. So when does this change back? And what do the limits change back to? Chris?


Yeah, at the end of 2025, that’s going to get cut in half. So while the limits right now, they’re as high as they’ve ever been throughout history, they can change at any time. We know it’s going to get cut in half at the end of 25. So while some families might not be above it today, in the future, they could be. Whenever you add up life insurance, death benefit, your house, properties, everything like that may not affect current rates, but future rates could be a problem.


Okay, so essentially, for a married couple, it’d be 13.6 together. So a candidate for an irrevocable trust, if your net worth is over $13.6 million right now, you got to start thinking about how you position assets, because anything above that, the government’s taking a 40% cut if you don’t do anything when you die. And then if you’re a single person, it’s half of that. So quick math, I say 13.6, that’d be 7.8.


Yeah, a little bit less than that, but, yeah, 17.


No, seven.


No, it’s 13.6 for 6.8. A little less than seven, which is what I did.


I miscalculated there, Ben. Thanks for calling me out.


I got you.


We’ll cut that out in post. Don’t worry about it.


No edits here. 6.8 million. So if you’re a single person, $6.8 million. So if you’re a single person above $6.8 million, you should start thinking about an irrevocable trust or a lifetime gifting strategy. So a couple of options to get money into your revocable trust, you have this 6.8 million. So let’s fast forward in a time machine. The 2026 is going to be here before we know it, right? So we’re in 2026, assuming that nothing has changed. $6.8 million. So one option would be, if your net worth is huge, you could just use all of your lifetime exemption at once, especially if you’re young and say, I’m going to get $6.8 million in what I think is going to be a highly appreciable asset.


And if that $6.8 million, let’s say I’m 40, then by the time I die at 90, turns into 50 million or 100 million, doesn’t matter. All of that money, because it was already in the revocable trust, passes to kids tax free, federally tax free, state inheritance tax free, et cetera, as long as the money was there before the look back period, which is generally five years from depending on three to five years, depending on what we’re looking at. So the way around that, though, is there’s also a freebie that you get every year called annual amount. It’s annual exclusion amount that you can gift per beneficiary. So let’s just say hypothetically, Ben, married couple, and you’ve got three kids, so you could give the option to. Why are you laughing?


You quiz me on some quick math, and here’s some quick math coming my way. I’m trying to do it right in my head.


But you got an iPad right there. You can start calculating. All right, so.


I’m listening. Go ahead.


Just like Ohio State can’t do math on their analytics when they decide what plays to run.


All right, I’m ready. Go ahead.


All right, so you’re married, you have three kids, you’re above the limit, and we establish an irrevocable trust, and you don’t necessarily want to give control up on all your assets. So the way around that is we could start slowly moving money over. Let’s assume that you’ve got the trust. You like all three kids equally. Okay, so all three kids are beneficiaries of the trust. So you and your spouse, how much can we put in there without using any of our big exemption? And we don’t even need to report it year to year basis.


This is a strategy we use annually for clients that are in the gifting phase. So you can gift in 2020, 418 thousand dollars per individual to each beneficiary. And so if I’m married and I combine that with my spouse, 18,000. Plus 18,000, we could gift 36,000 together to each of our kids. If we have three kids, that would be 108,000 that we could gift annually without having to file what’s called a form 709, which reports this gift to the IRS. So this is a completely estate tax free gift, tax free annual gift that we can make getting over $100,000 out of our estate, period, no questions asked. And then every time we do that, we’re essentially avoiding 40% on that number. So, 108,000 times 0.4, where you saved $43,000 in hypothetical estate taxes by making sure that we’re proactively doing this throughout the years.


So I just ran some quick math on this compound annual calculator I love. So, basically, assuming that the numbers never changed, it’s basically 9000 a month, assuming you’re married and have three kids, that you could throw in this trust without reporting. It’s tax free. Tax free gift in and obviously pass to your kids tax free when you pass on all levels. So 9000 a month. Let’s say you’re young, like you’re in your years, and just earn like a 7% diversified compound of return. You’ll put in a total of 4.32 million, but the account at 40 years from now will be worth 23.76 million. And that 23.76 million, where if you didn’t do anything, will be taxed at 40% plus on the state level, that’s all tax free.


So right off the bat, we’ve avoided over nine, probably close to $10 million between federal and state inheritance taxes in Pennsylvania. So if you’re in a good position where your net worth is really high, generally speaking, we recommend to have both a revocable trust and irrevocable trust. A revocable trust will be view all your assets as two universes. One universe is under your estate, one universe is the irrevocable estate. So in your estate, that’s where that revocable trust is basically the bucket where everything would fall into. Obviously, if one spouse passes, it’s going to pass the other spouse. Or maybe we have a bypass trust where some of it passes to. That’s a whole nother podcast. But the revocable trust is basically the landing place for those assets.


Not going to do you any good tax wise, but it’s going to make sure high level, your kids are protected. It’s private. We avoid probate. So many benefits to that. Now, if you’re young and you’re really high net worth, we’d also want to establish that second universe, which is the irrevocable trust universe. And that’s not necessarily, especially if you’re young. Then if you were my client in this position, we wouldn’t be saying, hey, let’s gift half your net worth over there right now. If you’re young, let’s say, no, we have this freebie every year. If you have the high cash flow, we’d be recommending to slowly move money on even a monthly or annual basis and getting that money in there.


And if you’re married, there’s really a benefit of doing what’s called a spousal life access trust, where you do actually get the best of both worlds, where the money goes in there, taxes are taken care of long term, from a death perspective, but you also can label your spouse as the trustee, and then essentially, you have backdoor access through the money. And then your spouse can do one as well, vice versa. You split that one, 8108 in half, so you each do 54. They cannot be identical. There’s a reciprocal trust doctrine you have to follow. Maybe we establish those in separate years and make age provisions differently, et cetera.


And then essentially, you have the best of both worlds, where technically, you have access to that money, where you’re living through each other and your kids receive the money tax free with all the benefits we’ve described. The downside there of the slat is if you only did one and you got divorced, whoever the trustee and the one is would essentially keep that money, and then everything else maybe gets split 50. So there are some pros and cons there. If you don’t have a prenup, if you do all discussions that we want to put on the table, just from an educational level perspective right now. Okay, Chris, you’ve been pretty quiet. What else do you want to talk about with the irrevocable trust?


I’m just taking it all in. The math has been. I’m impressed by you guys every day. I think the one thing.


Did your battery run out because you said you were under prepared, that you said you’re on 12%. Is that why you.


I’m on eight. No, I’m on 8%. I’m good.


We better wrap up pretty quick here, then.


One thing you guys haven’t mentioned yet, maybe you’re getting to it. Not all assets that we move to an irrevocable trust will affect the life you’re living today. So one of you guys mentioned it, life insurance, death benefits are included in your gross estate, but that’s not going to affect what you can spend right now. It’s not really impacting you, but benefiting your beneficiaries. So maybe you’re not over the exemption with your investment accounts in your house, all of your property, but if we factor in the death benefit of your insurance, that could throw you over the limit. So an irrevocable trust can own those policies. And that death benefit not only pays out income tax free, but also avoids.


You mentioned it already avoids the PA inheritance tax, but it would also avoid the 40% federal estate tax and usually like term insurance or high figures and then whole life insurance that can also be in there as well.


Absolutely. Well, Chris, that was very insightful. We appreciate it. Yeah, absolutely.


One other note that I want to bring up is, and I’ll just pose this as a question to you, Matt, but can I be on my deathbed and start doing this trust planning? Can I be a little crap? Can I be almost dead and then start saying, hey, I’m going to start gifting all this money, this trust, and kind of wipe my hands clean and say, I’m good?


Obviously, these are questions, you have to consult with an attorney, but I’ll give them my best staff with that disclosure. So, yes and no. Yes, you can. But if there’s disagreements between the beneficiaries, they could say, well, that person was incapacitated, they weren’t able to make, they could do a contest, essentially. So, yes, you can. Yes, you can establish a revocable trust. What you couldn’t do is if you’re trying to avoid taxes or avoid Medicaid planning, there’s a look back period for Medicaid. That’s five years. So, for example, if the government was funding your health care concerns at that point, past the 100 days, they go 30 days, partially 70 days or 30 days, full 70 days, partially essentially under Medicare, and then you flip onto Medicaid. But the government’s going to get all that money back.


If they see that you were gifting money last minute and they were paying the bill for you, they’re going to pull that money back. So there is a pullback period, five years in one day from that purposes perspective. And then even if you’re trying to avoid taxes as well, there’s look back periods as well. You have to be concerned. So, yes, you can, if you want to make sure that the money is like private and avoids probate from a tax or saving Medicaid planning perspective. No, you can’t. That makes sense. Okay, let’s talk about going back to that example where Ben was married with three kids and where Ben was really. That sounds like a great life. Three kids, married, three kids. You have an estate tax problem. What, are you up?


Yeah, I’m about to be 28, so sign me up for that.


Maybe Ohio State wins the championship that year, who knows? But anyways, so Ben, just living the life right now. So what do taxes look like inside that trust, though? So you can have an irrevocable trust. You can have a grand tour Trust or a non grand tour trust, which basically means are you going to pay the taxes on behalf of your young kids while it’s growing because there are tax consequences of depending on what you put in the trust, or is the trust going to pay the taxes? Well, if you want to save as much estate taxes purpose, you want to pay the taxes. So the more money stays in the trust to grow. If you’re like, no, I’m already giving them enough, the trust can pay the taxes, then that’s going to be less out of your estate. That’s a decision.


But irregardless, the trust, depending on what you put in there, is going to be taxed. And these tax rates actually, because the government knows people that do this properly, could be saving. An example used $10 million in the long term. So one way they try to get the money back is they tax you along the way. So now if you’re already in the highest income bracket, which is right now 37%, the trust also can get taxed at 37% if you put the wrong stuff in it. So let’s talk about if you had a couple of million dollars in irrevocable trust in corporate bonds that was earning in trust every year, or stocks, you were kind of like day trading that short term gains under a twelve month period. What do the taxes look like on that?


Yeah, trust tax rates accelerate really quickly.


Chris, you have 8% left. Did you pull that up? I saw you.


I have them.


What are we at now?


What’s that? But the first estate tax is 10%. Anything between zero to $2,900 is taxed at 10%. 2900 to 10,550 is 24%. And then we have another Runway from 10,550 up to 14,450, where it’s now 35. And then any income above 14,451 is taxed at 37%.


Okay, so if you have a million bucks in this trust, and you have it invested in a corporate bond, it’s paying 6%, that’s 60,000 a year of interest. The first 15,000 gets a little bit of a break, but you’re already in the 35,000 of that 60,000 of interest is going to get taxed at 37%. So we wouldn’t want to put anything that’s getting taxed ordinary income rates. Because in the trust, the Runway ends so quickly. You’re in that top tax bracket, essentially, right over that. I’m just going to round up. You’re kind of boring me with those numbers, Chris. I know you’re speaking fast as the battery is running out, but anything over 15,000, that’s a high tax rate. So how do we avoid this, Ben?


Yeah, so the best things to hold inside of a trust would be things that either grow tax free or are not subject to taxes. So, like, life insurance would be a perfect example. Life insurance is held inside of a trust and person dies. Death benefit gets paid tax free. And all of that growth happens inside the trust and is not subject to any of those tax rights that Chris so nicely pointed out just now. So anything that a life insurance policy is held in a trust, that would be one of the best things that you could hold.


So things you want to hold life insurance equities are great because equities, a trust, does follow long term capital gain rates. So if you’re selling stocks, it would be a capital gain rate. Top rate would be 23.8% versus that 37 you mentioned. So, essentially, for the normal type of investments, we recommend a mix of equities, even equities that are growth equities wouldn’t get taxed at all until you sell them. So a mix of equities and life insurance would be a perfect tax efficient way to fund a trust. A not tax efficient way would be to put some high income producing asset, like a corporate bond, for example, would not serve tax efficiency purposes.


But it’s after tax money going in, getting transferred in the life insurance will provide tax regrowth, and then, obviously, would avoid all the taxes on the back end, assuming that the look back periods have been met. Well, thanks, guys. I think that’s a good start for. We’re going to have to end this shortly because of Chris’s battery problems over there. But we appreciate everyone joining. Any closing remarks?


No, I think this is an important topic. And I think estate planning and trust planning, it’s not just for the ultra high net worth it can be for really any family that wants to promote financial responsibility for their kids especially making sure that they don’t inherit a lot of money or inherit money in general at a young age when they don’t necessarily may not know what to do with you know who should be doing trust know that has planning for children or minor beneficiaries or anyone looking to avoid probate which is public record like you said who wants a more private transfer of assets.


Daniel that was well said.


Well with that we got to end. Thank you Chris. Yeah absolutely. Thanks everybody for joining. Look forward to catching you next week. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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