Benefits of a Living Trust - A Financial Planner's View

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Tom PalkaThe Benefits of a Living Trust From a Financial Planner's Point of View
Presented by Tom Palka, CFP
President, 401(k) On-Site Specialists
Contact Tom at [email protected]

May 31, 2001

Visit the AccountingWEB Workshop Calendar for upcoming sessions.


For married couples with estates under $675,000 and who will have less than $1,000,000 in 2006 and beyond there are no estate tax reasons to put together a trust. In this workshop discussion Tom Palka explained the benefits of a living trust from a financial planner's point of view.

There are several advantages to having a living trust. In this workshop the topic is limited to reasons to have a living trust and Mr. Palka acknowledges the fact there are a few reasons not to get a trust outside of not having any assets.

The complete transcript from the workshop appears below.

Topics covered in the workshop included:

  • How much money or assets do you need to justify a trust?
  • Why attorneys don't like trusts
  • Potential problems with estates at death not held in a trust
  • How some attorneys create trusts with planned obsolescence.

Workshop Transcript

Session Moderator: Welcome everyone and thank you for joining us today! I'm happy to introduce Tom Palka, who will be presenting a workshop on the benefits of a living trust from a financial planner's point of view.

Tom is a Certified Financial Planner and the President of 401(k) On-Site Specialists. Tom received his B.S. in Investment Finance from Wayne State University in 1984 and his CFP from the College of Financial Planning in 1992. Tom's financial experience includes: Financial Planner for IDS/American Express, thirteen years as a Partner for Fairlane Investment Advisors, Inc., and President of 401(k) On-Site Specialists since 2000.

Welcome Tom!

Tom Palka: Good afternoon. I appreciate your taking your time from your business and investing it in yourself. I hope your find your time well invested.

First a disclaimer. I am a Certified Financial Planner, not an attorney. This material is not legal counsel and you are advised to seek qualified counsel.

Just a note about my firm. My firm, RIA Technology, is a Registered Investment Advisor specializing in management of 401(k) assets for employees of companies like Ford, Visteon, GM, Chrysler, Detroit Edison, AT&T and Verizon. In fact, if you are interested, we can do the same for your clients. Fees are based on assets under management. If you are securities licensed your Broker/Dealer will have to give their blessing.

On to the seminar.

The reason I am addressing the issue of Estate Planning from a Financial Planners Point of View is that I have been dealing with employees from these companies since 1987 and I have noticed having very similar conversations from one client to the next. I have found that most people share the same basic concerns and so today I will address the most common subjects in estate planning that I have found clients to be most interested in.

Purposes of estate planning and topics we will address:
1. Simplify the transfer of assets at death
2. Increase the probability of passing an estate to who it is intended
3. Reduce or eliminate estate taxes at the death of the second spouse
4. Leaving more to your heirs

In dealing with attorneys and living trusts it is common to hear many attorneys say, "Your estate is to small to bother with a living trust. It will cost between $1,500 and $2,500." These same attorneys will then charge you $300 for a will, $100 for a durable power of attorney, $100 for a living will. At the death of a spouse, one will need to be updated for $150 and if an attorney needs to go to probate get out the checkbook. Don't forget the time the family members may have to take off from work to see the attorney and go to court. If the will is contested an estate will experience the escalation in attorney fees.

Tom Palka: Have any of you experienced similar situations?

Session Moderator: No, but it seems like this would be a common occurrence.

Tom Palka: For married couples with estates under $675,000 and who will have less than $1,000,000 in 2006 and beyond there are no estate tax reasons to put together a trust. Estate taxes on amounts over $675,000 start around 43%. That alone is sufficient reason to get a Revocable Living Trust.

For large estates there are few reasons against a living trust. If you want a detailed list talk to an estate-planning attorney. It will probably be a short conversation. In today's discussion we will review the benefits of a living trust from a financial planners point of view on any size estate. We will assume that large estates (married with over $675,000) need a living trust.

There are several advantages in having a living trust. In today's discussion we will limit our topic to reasons to have a living trust and acknowledge the fact there are a few reasons not to get a trust outside of not having any assets. Does anyone yet get the feeling that I am in favor of Revocable Living Trusts?

Session Moderator: Certainly!

Tom Palka: To make sure we are all on the same page, a Revocable Living Trust is a trust that can be changed, modified or cancelled until the death of the person who created the trust.

How much money or Assets do you need to justify a trust? Not much. Let me give you one example.

20 years ago my 80-year-old aunt died. She was a widow with no children. Her home and assets totaled about $40,000 plus an old car. My father was the executor of her estate (he settled it). Being her favorite nephew she left me the car. I got possession of the car almost immediately. It took over 3 years for the rest of the estate to be settled. There were 8 relatives who shared in the remaining proceeds and before all the beneficiaries returned the paperwork to settle the estate, one of the beneficiaries died and the process had to begin again. There were 8 elderly heirs who lived at great distances.

Session Moderator: When there is no estate tax due, why does it take so long to arrange for disbursing the estate?

Tom Palka: Some people do not return items in a timely manner.

Session Moderator: It seems like the executor should be able to just cut eight checks, drop them in the mail, and be done with it.

Tom Palka: Some people had to be tracked down. They needed to sign off before the checks could be issued. When one died, the paperwork was changed top reflect the new distribution amounts and the process was repeated. The attorney's final bill was more than the equivalent of the cost of a good trust and my father would not have gone to probate and 3 years of smelly brown stuff.

Dealing with clients.

Have you ever noticed that clients do not always do what you tell them? The reason is that it is just easier to do nothing so nothing is what they do. In estate matters it really doesn't matter what is the size of the estate. Talking about death and dying can make some people uncomfortable. Some people have screwed up families and don't want to make the tough decisions. Others simply look at the cost of the documents.

We need to take the client's focus off of themselves and turn it to their family. They may be healthy now but what about in 20 years? What happens if one of them suffers a stroke? You must be of a sound mind to sign legal documents. Also, leaving a spouse on their own to make these complicated decisions is unfair. With the emotions of the death to deal with who wants to make a bunch of decisions on their own.

Potentially most horrible outcome is that leaving ends untied can cause the kids or heirs to fight over things and can ruin family relationships. Another fact is that what if a spouse dies and there is a remarriage. I'd hate to see my children miss out on their inheritance because I died, my widowed wife marries another man, she dies and leaves everything to him.

Session Moderator: Is it the case that if there is no will, the estate goes to the state?

Tom Palka: If there is no will the estate is divided based upon the rules of the individual state of residence. I believe in Michigan it goes to the children and if there are no children it goes to the parents and if the parents are deceased to the siblings. I'm not sure after that.


Make sure the attorney you find is competent. Just because an attorney practices law doesn't mean they know how to draft legal documents. I wouldn't recommend using an attorney you know that specializes in criminal law to draft and fund a living trust. Find an attorney who specializes in wills and trusts.

Many attorneys will talk a potential client out of drafting a trust because their assets are below $675,000. Tell the attorney that you appreciate their looking out for your clients' fiscal austerity and that you want it for all the other advantages of a trust.

I have talked with attorneys who feel very strongly about not drafting trusts for smaller estates (under $675,000) and who do not expect the estate to grow measurably. I have also witnessed the repercussions. People start to jointly title homes, stocks, and mutual funds with their spouse and children. The lost tax benefits are the stepped up cost basis at death.

An example would be an 86 widow with 2 grown children. Both live near mom. The first child who takes mom monthly to the bank and once a year to the stockbroker's office. In the bank mom has $250,000 in CDs. She also owns IBM, Ford, and Philip Morris all purchased during the 1970s at a cost of $20,000 and now they are worth $200,000. You know the story. The other sibling does everything else. The grocery shopping, cleaning mom's house, doing all the laundry, running to the doctors and keeping track of all the bills.

Mom dies. Suppose the child who's sole contribution was to take mom to financial institutions is the joint owner on the accounts. The widow's estate is faced with potential problems. First is the tax basis on the equities. There is only a stepped up basis at death on 50% of the stock that is jointly owned. This means the portfolio of $200,000 is divided in half and the cost basis of the $20,000 is divided in half.

If the portfolio were liquidated on after death there would be zero taxes on mom's 50% portion of $100,000 with a cost basis of $10,000 and capital gains would be owned on the $90,000 appreciation in the child's name at time of sale.

If the money were held in trust the stepped up basis would be $200,000 on the entire amount and no capital gains would be owed.

The next issue is sharing. Since the money is held in a joint account there is nothing legally requiring one sibling to share with the other. If the sister who inherits it all decides to give the 50% to the sister that their mother had intended to gifting issues come up.

I recently met with a client and this exact subject came up. A mother died holding all her assets in joint ownership with one daughter for convenience. The sister who was supposed to share the money continues to make a big production out of splitting the funds. She is now reminding everyone that, "She was not required to divide the money but would so anyway" and continues periodically reminded the other siblings. Needless to say this has soured their relationships considerably. One sister is clueless. I'm sure that is not what mom had intended to happen to the relationships of her children.


Pick the trustees of your trust with the utmost care. Use only someone with integrity that you can trust to carry out your wishes. If there is any doubt, use a bank as a trustee or co-trustee. They may be very conservative but they are supposed to be honest.

Willing to give share? Amounts are large? Gifting issues? If the surviving account holder is honest and writes a check for $100,000 and has the certificates divides in half to share with their sibling the IRS considers it a gift.

A person can only gift up to $10,000 per person per year. Assuming the siblings are married each spouse can gift $10,000 to the other marriage partners for a total of $40,000. That leaves $160,000 that is subject to gift taxes. The only other option is to gift it over a 5+-year period at $40,000 per year and avoid owing gift taxes.

Language tip:

One of the ways a good attorney will draft a trust is with open wording when it references the unified exemption. If the trust were drafted in 2001 it could state the unified exemption dollar amount of $675,000.

The repercussion of this wording is that as the unified exemption increases to $1,000,000, the trust needs to be amended. Even if the attorney used the $1,000,000 amount unified exemption still has the potential to be increased by law. Because of inflation, it is almost guaranteed to rise above the $1,000,000 mark. It is better to state something to the effect of "the maximum amount allowed at time of death." Otherwise trust documents need to be updated on a regular basis for a needless reason.

So from my perspective there are many reasons for a Revocable Living Trust. I hope this helps.

Thank you for your time and attention today.

Are there any questions?

Session Moderator: Tom - I realize you may not have had much time to think this through, but how will the elimination of the stepped-up basis with the changes in the new tax law affect planning? Is there a way to circumvent this problem?

Tom Palka: Tax deferred investing appears to have advantages. The other thing is that people will be more open to selling investments they may have held a long time. I have some clients who might sell Ford stock if the stepped up basis disappears. I think the elimination of the stepped up basis will give people more choices (those with larger estates).

Any other questions?

Session Moderator: Tom - Thank you so much for your time and for sharing all of this excellent information!

Tom Palka: My pleasure. Have a great summer!


Tom Palka, CFP, is the President of 401(k) On-Site Specialists. Tom received his B.S. in Investment Finance from Wayne State University in 1984 and his CFP from the College of Financial Planning in 1992.

Tom's financial experience includes: Financial Planner for IDS/American Express, thirteen years as a Partner for Fairlane Investment Advisors, Inc., and President of 401(k) On-Site Specialists since 2000.

E-mail: [email protected]
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May 15th 2017 07:14

It is important to seek professional advice from a finance company if you need to know exactly what are your financial options that you have for your future, either on your own or with a family. There are obviously many financial obligations that you need to take on and a living trust can help you in one way or another depending on your commitments. Professional advice can help you work out that obligation list to manage your finances better.

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