Does my aging parent need a Trust?

Transcript of Interview: ” Does my aging parent need a trust?”

Mike Barnes:

I think there’s a lot of misconception out there about trust. Why do you need it? What are the different types? Who needs one? Yeah, what is a trust?

Kim Barnes:

So today, we’re bringing in the experts. We have Jeff Barnett and Keith Leuty from Barnett and Leuty Law Firm. Thanks so much for being with us.

Jeff Barnett:

You’re welcome. Thank you for having us.

Kim Barnes:

I think a lot of people just throw out terms like, “Oh, you just need to get a trust. It’s simple, you just need that.” But let’s start with just the basics of what’s the difference between having a will and a trust.

Keith Leuty:

Well, a will is a legal document where you pass along assets upon your death, and it involves going through the court system through the probate courts. So, it’s really an inactive legal document until you die. A trust is a legal document or a legal entity that you create that can be activated right away and continue even beyond your death. The biggest thing with a trust is that the person who is in charge, called the trustee, has almost unlimited authority over whatever is in the bucket that you’ve created here of this trust. It’s utilized in different types depending upon what your goals are.
Jeff and I have noticed over the years that a lot of people who move here to Central Texas from California, in particular, have set up trusts out there because the probate process is so involved and lengthy. We always tell them that here in Central Texas, our court system is pretty well streamlined, fairly predictable. Credit to the judges and our court systems here, many people in Central Texas don’t need to set up a trust just automatically the way that they do in California, but they are very useful tools if they’re the right tool for your situation.

Mike Barnes:

It seems like there’s a misconception out there, I know there was for me, that only wealthy people need a trust. But people who are wealthy sometimes don’t have one, and people who are not wealthy sometimes have one, so it really varies, doesn’t it?

Jeff Barnett:

Absolutely, it makes no difference whether you have a small estate or a very large estate as to whether or not a trust would be useful for you. If you had a tiny estate, a trust would be ridiculous. But outside of that, if you’re talking about a $50,000 estate or a $100,000 estate versus a $34 million estate, there are people with multi-million dollar estates that don’t need a trust. We don’t always set up a trust just because somebody has a lot of money.

Kim Barnes:

It really depends on the objectives and how you’re trying to give the money away upon somebody’s death.

Keith Leuty:

That’s right, and not only that but the need for management during one’s lifetime as well. A revocable living trust or family trust is something that you set up now, you fund it now, and it becomes the mechanism to manage those assets right now during your lifetime, and then it continues beyond your death as well for some predetermined length of time or until some event.

Mike Barnes:

People say, “Get the trust so you avoid probate,” but you still need a will even with a trust, correct?

Jeff Barnett:

Definitely. You always have to have a will, even if you have a trust. A lot of people don’t understand that. Why do I need to get that if I’ve got this other thing? That is because of the thing that happens a lot: something accidentally gets left out. Maybe you put everything in that bucket at the very beginning, but then you sell something out of that bucket, replace it with something else, and accidentally forget to put it back in the bucket. That happens a lot. I see it a lot when somebody passes and then their loved one comes in here and says, “I think they have this trust, we shouldn’t need to go through probate, right?” We start asking about what’s the name on this, who owns this, and all of that. They start checking and it turns out there’s an account out here that isn’t in the name of the trust or a house that was purchased and it’s not in the trust. Sometimes the attorney that somebody used 30 years ago to set something up charged them a big fee and then didn’t even help them get everything into it, all of their assets into it. Sometimes you just ask, “So what’s in the trust?” and they say, “Yeah, you’re talking about what?” Then you start looking and there are literally no assets in the trust. That’s very sad. So you really want to pay close attention to knowing that you have to have a will.

Kim Barnes:

I guess in some ways that serves as a little bit of a backup if you have a trust, but you still are going to need that as well. So, who needs a trust and who doesn’t?

Keith Leuty:

Well, who needs a trust is a difficult question because we have to know what a client’s objectives are. There are different benefits of different types of trusts. What Jeff referenced, the living trust or revocable trust, family trust, goes by many different names. The two main benefits of that type of trust, and that’s probably the most common type, are speed of distribution of assets because even under ideal circumstances, probate is at least a three or four-month start to finish thing. Whereas if you have assets in a trust, a person passes away and you can dump out the bucket and start distributing assets immediately. The other big benefit of a trust is privacy. People don’t always understand that when you probate a will, the court keeps that will, and it’s filed as a county record for all of time. So it can be searched online, and people can find out how you distributed your assets. A trust is a private legal entity, so it is not put in any public databases. We’ve both experienced people coming in to set up a trust just based on the privacy issue alone.

Jeff Barnett:

Sometimes that’s privacy in the context of probate, or once in a while, we have a situation where somebody wants to set up a business and for some asset protection, but they don’t want their names in there. When you file something with the Secretary of State, when you form an LLC or a corporation, if you put your name on it, that discloses to the public that you own that business. But if you create a revocable living trust that’s anonymously named, just called the XYZ Trust or something very generic, as opposed to the Barnes Trust or the Barnett Trust, then you’re not telling anything about the owners. You’ve got this trust that is the registered owner or the managing person of the business entity, and your privacy is not compromised in that way.

Keith Leuty:

Definitely, if you’re a celebrity or if you win the lottery, the first thing you need to do is set up a trust and name it something totally unrelated to your name.

Kim Barnes:

Got it. Okay, so that’s a revocable trust, and a revocable trust can be changed.

Keith Leuty:

Definitely. A revocable trust, by its very nature, is set up. The way I’ve explained it to people is a revocable trust would be similar to if you wanted to set up a tent in your backyard and pretend that you’re camping. You can put it in one part of the yard and the next night move it to a different part of the yard. It is meant to be changed as often as you desire to change it. An irrevocable trust, by contrast, is more like building a brick wall where your intention is that this is going to stand and we’re not going to move it. Whenever I explain that to somebody, of course, they will say, “But what if?” They’ll ask that “what if” question, “What if we do need to change it?” I say, “Well, that’s what sledgehammers are for. You can always knock down the brick wall, but it’s going to be messy.” So you need to put some thought into whether you want something to be very changeable at a moment’s notice or if you want it to be more permanent. There are certain provisions you can put into a revocable trust that upon the death, particularly in the case of a trust set up by a married couple, and specifically more commonly when it is a second marriage and each spouse has their own set of children, they want to ensure, “Hey, if I die first, my kids are going to get what I intend for them to get. My surviving spouse is not going to have the option to go in and change and give it all to their kids.” You can have a provision in there that converts this revocable trust, at least partially, into an irrevocable trust to protect your children.

Kim Barnes:

Okay, so is it just in complicated situations where an irrevocable would be the right thing, or is that really where you just need to talk to an attorney to figure out what are my objectives and which vehicle would be the best?

Jeff Barnett:

You pretty much need to talk to an attorney. There’s also the scenario of a subsequent spouse. The surviving spouse could end up giving it all to the new spouse, or maybe they even have kids with the new spouse, and they leave all the kids by the other kids behind. There are lots of different scenarios, and depending upon the particular situation of the clients that we’re speaking to, we can customize a solution that works best for them.

Mike Barnes:

So it’s not something that we have to decide. We can think, “Well, I think we need a revocable trust,” and then we go and talk to you, and you say, “No, for what you all need, it’s irrevocable.” So we trust our attorneys to pick the best trust.

Keith Leuty:

Sure, I’ve always looked at it like the client that walks in the door saying, “I’ve researched it, and I know what I need.” We tend to look at that the same way a doctor would look if you walked in and said, “Doc, look, I’ve been watching the commercials, and this is the medication that I think that I want, so just write me the prescription, and I’ll be on my way.”

Jeff Barnett:

Definitely not a good idea.

Kim Barnes:

What are some reasons why somebody wouldn’t want to get a trust?

Keith Leuty:

When you do a trust, the cost of doing a trust is very similar to the combination of doing a will and probate. But with a will and probate, you’re paying for the will upfront and the probate after you die out of your estate. The trust, although it’s a similar cost, you’re paying more upfront. So sometimes people are reluctant to do that if they don’t see the benefit. If speed and privacy are not a big deal for them, now, when we get into a situation like with Medicaid and there’s other reasons to set up a certain type of trust, then it’s not really an option. You either do it, or you don’t.

Kim Barnes:

Are there other maintenance kinds of expenses or costs that you would enter that you would want to anticipate down the road if you have a trust?

Jeff Barnett:

Probably not a lot of costs, but there are absolutely issues with regard to maintenance. That’s actually something that we run into from time to time, where somebody has created a trust in the past, but then they left something out of it, or they bought something later and forgot to put it in. You’ve got to make sure that you stay on top of it and are diligent in what you’re doing as far as your future actions after you’ve created one.

Kim & Mike Barnes:

Gotcha. You mentioned Medicaid. We’ve done another interview with both of you about the Medicaid aspect and trust, but quickly hit on it about how trust can help in that situation as well. That’s a difference too, right?

Keith Leuty:

Sure, it’s an irrevocable type of trust. We call it a Medicaid asset protection trust, and we do quite a number of these. What’s different about it is the overall objective. Medicaid is a government-funded program that helps people pay for their long-term care when they need a high level of care, and it is based upon your countable assets. This particular type of trust, the reason we use this, is that it has the ability to convert countable assets into non-countable assets to make somebody eligible for Medicaid potentially without having to spend down all of their nest egg first.

Kim Barnes:

I know we talked about it, so we won’t go into great detail because we do have a whole other interview on it. But a lot of times, that setup, my understanding from learning from you, is that especially if you have one spouse who needs a lot of care and another spouse who doesn’t need that care yet, and you don’t want to necessarily use up all of the family’s money taking care of the one, then you have the other parent left with nothing.

Keith Leuty:

Yeah, if you have two parents and one is healthy and one is not, there are a few other steps we would get to before we did the trust, where you can convert the community property aspect to the 50/50 nature of the asset from one spouse to another and then eventually set up that type of trust on the healthier spouse because of Medicaid’s timelines and everything. Like you said, we’ve got a whole other section that goes into detail of it. But yeah, the Medicaid asset protection trust is a very specific type that we use that can save folks a lot of their nest egg money.

Kim Barnes:

So just to know, for people to know, that’s another additional type of trust that is available and may be the right answer in certain circumstances.

Mike Barnes:

But the biggest thing, whether you’re talking about Medicaid or millions and millions of dollars, if you’re not sure, talk to an attorney and trust them that they’re going to lead you in the right direction to protect whatever assets you have.

Keith Leuty:

Sure, and one other type of trust I wanted to make brief mention of is what we call a supplemental needs trust. From time to time, we’re approached by people who say, “Look, we’ve got a special needs child who is reaching middle age, and we want to make sure they’re provided for when we move on.” This is a specific type of trust that you set up to ensure that your child with special needs is cared for while still being eligible for all of the government benefits that are out there as well. You definitely want to talk to somebody who knows how to do that because if you do that wrong, you could wind up getting this child kicked off of their government benefits. It’s called either a supplemental needs trust or a special needs trust.

Kim Barnes:

When you are creating that trust or helping your parents as they’re creating a trust, you want to make sure that you have multiple trustees. There’s one primary, but then you want to have succession, correct?

Jeff Barnett:

Yes, you want to always make sure that whether it’s a trust, a will, or a power of attorney, you have multiple alternatives. You want to have a primary person that you’ve chosen, banking on that they’re going to outlive you, that they’re going to be the one in charge. But sometimes that person doesn’t outlive you or is incapacitated themselves, so it’s always good to have a backup. It’s very important to have multiple backups because things can happen. Generally, you want at least four backups, and you want them to generally serve one at a time in succession. That’s our most regular recommendation. You can have people serve as co-trustees or co-executors or co-agents, but we generally recommend one at a time.

Keith Leuty:

The reason we do this is if you needed a ride to the store and you had two friends, you would not ask one to work the steering wheel and one to work the pedals. It’s very cumbersome, and you’re asking for trouble. Just have one of them drive you, and the other one as a co-pilot.

Kim Barnes:

Gotcha, okay.

Mike Barnes:

You talk about asking for trouble. I know we have some people in our group who don’t have great relations with their siblings. When that’s the case, is there going to be any animosity because, “Oh, I’m the trustee, and you’re not the trustee,” or “I’m first, then you have a second”? Does it really matter? Does it affect things in the end?

Jeff Barnett:

It shouldn’t because the person serving as trustee has a legal or fiduciary duty to do exactly what’s in the trust. If you’ve set it up where it goes 50/50 or equally to all of your kids, then that’s exactly what it’s got to do. If it doesn’t, then that person in that role, that trustee, can be held accountable for that. We always encourage people to be transparent as trustees because transparency breeds trust. If you are more secretive, that can lead to distrust, and that happens a lot in families, unfortunately.

Kim Barnes:

I think that the overarching thing I’ve learned is whether you need a trust or not may depend on what city, county, or state you live in, and what your family objectives are. Every situation is going to be a little bit different. There’s not a one-size-fits-all.

Keith Leuty:

Definitely agree with that.

Mike Barnes:

Talk to someone like Jeff and Keith and get some good advice. Jeff and Keith, thanks so much. You’ve cleared up a lot of misconceptions here.

Jeff Barnett:

Thank you very much for having us.

Keith Leuty:

Our pleasure.

Kim Barnes:

It just goes to show that it is helpful to have the right questions to ask and information to be looking for in your particular situation. A lot of times, it’s going to be different. What works for one family isn’t always going to work exactly the same for another. Talk about it, get that expert advice.

Mike Barnes:

If you have any topic you’d like us to discuss, please let us know. Parenting Aging Parents.

*This transcript is auto-generated. Please excuse any typos or mistakes.