Real Life Planning Podcast Episode 34: Do Real Estate Investors Need a Living Trust?

In Episode 34,  Cynthia discusses the relevance of revocable living trusts for real estate investors and common situations where they are used.

“ …a trust is only effective for what you put into it.” - Cynthia Meyer

This week on Real Life Planning Podcast:

Takeaway Quotes:

“If you've got multiple rental properties and multiple LLCs, in my opinion, it's definitely worth talking to your financial planner about whether or not you should pursue creating a revocable living trust and what the general outlines of that structure might be so that when you're ready to go see an estate planning attorney, you've got a pretty good idea of what you want to accomplish in your estate plan.” - Cynthia Meyer

“It doesn't really make that much sense to explore creating a living trust if almost everything you own is in your retirement accounts and your primary residence. There are probably easier and less expensive ways to handle the situation from the estate planning point of view.” - Cynthia Meyer

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About the Real Life Planning Podcast

Host Cynthia Meyer welcomes fascinating guests to share real life stories of how they are realizing their financial potential. Each episode explores practical, realistic steps to create results.

TRANSCRIPT for Episode 34

[00:00:11] What's a living trust and do you need one as part of your estate plan if you're a real estate investor? Hi, I'm Cynthia Meyer with Real Life Planning and on the podcast today, we're going to talk about revocable living trusts. A revocable living trust can be a powerful estate planning tool. However, they are time consuming to create.

[00:00:33] Many people find them confusing. You have to implement them once they are created. And they're best drafted by an estate planning attorney, which can take some time and it can be costly. So what are some situations where it makes sense to create a living trust for yourself and your family in your estate plan?

[00:00:56] One situation that I've come across in my career as a financial planner where it really does often make sense is if you or your spouse has children from a previous marriage. Trusts aren't just for wealthy people. A trust allows you- you're the grantor or the person who creates the trust -to name both beneficiaries, who are the people who inherit your estate or the income from your estate. Trustees are the people who will manage those assets for the benefit of the beneficiaries. So, the beneficiary and the trustee can be different people.  If you and your spouse have children from a previous relationship, setting up a trust allows you to specify who inherits what for how long, under what circumstances. You can assign income to the surviving spouse for a while and then have assets passed on to the kids from your previous relationship, et cetera.

[00:01:56] So, lots of ability to customize here. If you are a step parent or if you yourself have children from a previous relationship, this is a great idea when you have a blended family. A living trust can give you a super customized estate plan that works out exactly the way that you want it to.

[00:02:14] The second reason to create a living trust is you want to keep your wishes private, right? Typically when somebody passes away, there's a core process that's called probate, right? Probate determines whether somebody's will is authentic and valid. If there may be- if there isn't a will, it determines how somebody's stuff is going to be distributed after they die; somebody's property.

[00:02:39] And although it's not likely to be on a reality TV show if the probate process, it is a public process. It's documented. It's also time consuming for your survivors and it can be costly. It can tie, if there are any decisions that are contested, or there's no will, it can be tied up in court for a long time.

[00:03:01] We've all seen stories on the news about celebrities, most recently Aretha Franklin, for example, who died without a clearly defined will. And how they eventually found one and was it valid and the kids were contesting it and- it's a whole public process. You may not want your family to go through that. 

[00:03:22] So creating a living trust bypasses probate. And so that  any assets that are listed in the name of the trust and correctly titled when you pass away are going to pass easily and privately to your beneficiaries. So this can be super helpful if you're a real estate investor in having your what's called successor trustee- the person who takes over after you pass away, and that could be your surviving spouse. That could be a child. That could be another- an institution. Is going to step in right away and have the legal power to manage your real estate. 

[00:03:59] That means there's no confusion. Tenants are continually served. There's always going to be somebody in charge. Your survivors don't have to go to court to get control over the bank accounts, for example, or your rental property software, anything like that. It may be a good idea to put your real estate business in the trust for this very reason.

[00:04:18] For example, as a general educational thing, thinking about how you're titling your LLCs- if you have a living trust, many people title the member of the LLC is actually the living trust and that makes it easier to settle on an estate if something were to happen to you and or your spouse.

[00:04:35] One thing to know is that putting assets in a trust doesn't mean that the assets aren't taxed. A trust is an estate planning tool. It could have some positive tax consequences if you have a very large estate, and we'll talk about that in a second. But keep in mind, that a trust is only effective for what you put into it.

[00:05:00] So a big mistake I see people make, and I see it all the time, is they create a living trust, but they don't retitle the things that they own. They might retitle a bank or a brokerage account, or they might not. They might retitle their house or rental property or an LLC, but they might not. So they create this living trust. They think they're covered, but in fact, they haven't retitled anything in the name of the trust. And so the estate still goes through probate anyway. 

[00:05:26] Just keep in mind if you do create a trust, you need to retitle any non retirement account- anything that doesn't pass directly by a beneficiary. Banks and brokerage accounts as well as real estate and other personal property like the car, for example, or to the name of your trust and whatever debt isn't titled in the trust is going to go through the regular probate process. 

[00:05:51] If you own most of your property in retirement accounts and your primary residence, a living trust may not be worth the expense and the time to do it and that's because retirement accounts pass by what's called beneficiary of law.

[00:06:11] So as long as you've created a beneficiary or beneficiaries and contingent beneficiary or beneficiaries then you're good to go on your 401k plans and your IRAs and your Roth IRA and your HSA, for example. If you just have mostly that and your primary residence it may not be worth the time to do a living trust.

[00:06:33] Many married couples in that circumstance, would own their primary residence as joint tenants with right of survivorship. Of course, that depends on person to person. You know what, a trust does involve creating a long legal document. It does cost some money to create if you're doing it properly. We want to make sure that you're really getting your money's worth out of it from an estate planning point of view. 

[00:06:57] As I mentioned before, the primary reason to create a trust is for estate planning. In the current circumstances under the current law, only larger estates are taxed or pay estate taxes.

[00:07:11]  An individual can pass $12,920,000 to the next generation and so that means a married couple can pass almost $26,000,000 right? $25,840,000 I think, to the next generation of beneficiaries without paying estate taxes. 

[00:07:28] That sunsets, by the way, if the Congress does not extend it- that's going to sunset in 2026. It will go back to 2017 levels, which are approximately, 5. 6 million and 11. 2 million for a married couple if Congress does not extend those higher limits later on. So, for people who are on the cusp- like they have more than a 5 million net worth as a married couple, for example, may want to start doing some trust planning now if they haven't done it before in case the law sunsets back to the 2017 levels. I think it's a good idea to talk to your financial planner and your estate planning attorney about this now to get ready for what could happen after 2026. If you're in that situation, if you haven't created a living trust yet, it's probably at least something you want to talk about with your financial advisor.

[00:08:29] Under the current law, only those estates of more than $12,920,000 or a married couple of $25,840,000, only those estates are going to pay estate taxes. Rates are fairly high. Estates and trusts pay a higher tax rate. You can also, by the way, when you're getting into those stratospheric levels of estate planning, people often gift to use some of that credit in their lifetime. That's another thing if you're in that category to discuss with your financial planner and accountant and your estate planning attorney- does it make sense to use some of that ability to gift the higher amount before 2026? But again, that doesn't apply to most people, but it's something to think about.

[00:09:21] If you've got multiple rental properties and multiple LLCs, in my opinion, it's definitely worth talking to your financial planner about whether or not you should pursue creating a revocable living trust and what the general outlines of that structure might be so that when you're ready to go see an estate planning attorney, you've got a pretty good idea of what you want to accomplish in your estate plan.

[00:09:50] Just in general, like we all know that things are unpredictable and making sure that whatever the situation, that everybody's got a will, a living trust if you need one, has a durable powers of attorney for healthcare and finance and has an advanced directive. Those are the not as fun or sexy parts of financial planning, but they're super important and they help you show your love for your family after you're not on this earth anymore.

[00:10:18] Again, I hope this has been a helpful conversation about living trust and whether it makes sense or not. Just to sum up here  it makes sense to consider creating a living trust if you're in a blended family- you or your spouse has children from a previous relationship. If you're very private and you'd like to keep the settlement of your estate completely private. If you're looking to have a business continuity in your rental property business and you want to make sure somebody can step in right away and manage those properties, it also makes a lot of sense. It makes sense to consider creating a living trust if you are above the current amount that you can pass to the next generation or if you're above that five or $5.6 or $11.2 million dollars- that it is going to revert to in a couple of years, it also makes sense to explore creating a living trust. 

[00:11:17] It doesn't really make that much sense to explore creating a living trust if almost everything you own is in your retirement accounts and your primary residence, there are probably easier and less expensive ways to handle the situation from the estate planning point of view.

[00:11:30] If you have decided that it's a good idea to explore creating a living trust, there are a couple of paths forward. There are some digital or online tools right now that allow you to DIY the situation. That's not my favorite option for people, in general. 

[00:11:50] I think that this is still a good situation where it makes sense to, to use an experienced estate planning attorney to help you. Making sure that you've created the trust and you've got it ready to implement and that you've got some legal advice about your particular situation.

[00:12:09] One of the things that you can to do to start with is if you are an employee and you have a legal benefit in your company benefits- is to reach out to those folks and see what kind of estate planning resources are available to you that may be a good place to get referrals to local attorneys as well as asking other real estate investors if they have an estate planning attorney that they would refer you to. 

[00:12:37] I hope this has been helpful and if you have any questions that you'd like to see us tackle regarding financial planning for real estate investors, just leave them in the comments below or email us at podcast@reallifeplanning.com. 

[00:12:50] All right. To your success. 

[00:12:51] Thank you for watching!

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