Four Key Benefits to Setting up a Trust

Derek Gregoire:

 Welcome everyone to the Retirement Road Map video series. I’m your host Derek Gregoire, co-founder of SHP Financial and excited to be joined by Attorney Keith McManus from McManus Estate Planning. Good morning Keith. How are you?

Keith McManus:

Good morning Derek. Glad to be here.

Derek Gregoire:

Thank you for joining us.

Keith McManus:

Thank you.

Derek Gregoire:

Today we are going to share with you the top four reasons or the top four benefits of setting up a trust. So many folks come to us from the radio show, or introduced from friends, or whenever they come in and they ask us about trusts, but I think they have the wrong idea of what a trust can do. They might think it covers just one area, but we want to share with you four key areas that are properly, and that’s the key word, properly set up trusts can do for you.

The first area we’re going to cover is avoiding probate. That’s one that people are concerned about and one that a trust can certainly do.

Keith McManus:

It’s a great point Derek. Everyone is concerned about avoiding probate. Assets of estates that are very large, and very modest estates alone, no one wants to go through a probate court system if someone passes away. Moving inheritance instantly from a person to the next person, your beneficiaries for example, is an extremely important thing that I think people take for granted.

They think that maybe having a will does it and as you and I know, wills don’t do it. Assets that travel through the will, they’re going to be going through a probate system. That probate system is run by attorneys that are paid hourly. Typically that goes on for weeks if not months and it’s an expensive and time consuming public court process of moving assets through probate. We can do so much better with a trust.

Derek Gregoire:

Anyone who knows, has gone through probate knows how costly it is and how inefficient it is so step number one, avoid probate. Step number two, estate taxes. Massachusetts especially just from an estate tax has high, or a low level threshold of one million dollars.

Keith McManus:

Right.

Derek Gregoire:

Once you get over that one million dollars between property, life insurance, 401Ks, investments, you might be subject to this Massachusetts estate tax.

Keith McManus:

Absolutely, so in Massachusetts again as you said correctly, assets that if you have a net estate of more than a million dollars, you are looking at triggering a Department of Revenue estate tax. Now don’t be set off by that number. Sometimes people think oh, I don’t have that much in assets. I don’t think that’s going to be a problem. Remember, we need to calculate everything including things like death benefit of life insurance that counts toward your net worth.

Derek Gregoire:

Everyone always leaves that out of it.

Keith McManus:

Yeah.

Derek Gregoire:

You have a $500,000 term, and a $300,000 house and a couple hundred thousand in savings, and you’re over a million.

Keith McManus:

You’re right there and it’s a trigger point. Once you’re over a million, they’re going to count all of it. They’re going to tax. It’s a progressive tax and it maxes out at 16% of the whole thing for certain estates. Now it could be a little disheartening hearing that, like I don’t want to lose 16% of everything in the inheritance. With a properly drafted trust that has tax provisions in it, so this is a very narrow group of trusts that we want to custom make for the clients, you can address that Massachusetts estate tax sometimes completely eliminating it or at least addressing it and reducing it as much as legally possible.

Derek Gregoire:

Hopefully you see just from these first two topics how important it is to consider this within your retirement plan, your retirement road map, to have a proper estate plan. We talked so far about probate avoidance if you set up the proper trust. We talked about estate tax, reducing or minimizing or eliminating estate tax.

The third area we’re going to talk about is everyone is concerned about this, how to reduce capital gains tax. We all want to save on taxes. Can a properly drafted trust help with that?

Keith McManus:

Absolutely. You’re correct. We want to avoid probate. We want to address not only the Massachusetts estate tax, but also the federal estate tax-

Derek Gregoire:

Correct.

Keith McManus:

-which triggers at 40%, but also the capital gains tax. A real thumbnail sketch of capital gains, essentially when you acquire an asset and it grows in value over time, the difference between the acquisition cost and the sale price, that profit if you will, is going to be a capital gain in many instances. The CPA’s listening to this are going to throw their hands up and say there are so many other ways to address the capital gains tax but for purposes of a very brief video, we’re talking about growth in the estate.

We can address a capital gains tax. That’s a 23.8% tax on things such as an investment property that you might have acquired that’s grown in value over the years, or an investment portfolio that’s done very well and you’ve grown that asset and that investment portfolio from a small level up to a much higher level.

When that capital gains tax is calculated, it’s done by way of a 23.8% tax and that’s something that we want to try and avoid. We can often avoid that with marital credit shelter trusts and we’re able to do so typically upon the death of a surviving spouse and likewise prior to assets moving to beneficiaries. We want to try and address that capital gains tax.

Derek Gregoire:

Hopefully you’re seeing not all trusts are created equally. That’s why we’ve teamed up with Attorney Keith McManus and his team because so far we’re talking about most people just think probate avoidance. When it comes to trust planning we’ve talked about probate avoidance, estate taxes both state and federal. We talked about capital gains preservation or how to step up your capital gains and avoid that tax or minimize that tax.

The fourth area we’re going to talk about which is another important area of setting up a proper trust which is asset protection.

Keith McManus:

Yes.

Derek Gregoire:

That’s key.

Keith McManus:

I’ve got to say almost every single time we review a trust that’s not been drafted by our office or reviewed by SHP; you’re not going to see any mention whatsoever from the client or from the documents about asset protection. Can you imagine a situation where you work your entire life to accumulate some wealth and you want that wealth to pass by way of an inheritance to your loved ones, and maybe it successfully avoids probate and even avoids the estate tax and the capital gains tax. You get an adjusted cost basis, but then it goes into the name and Social Security number of the children or beneficiaries.

Derek Gregoire:

There goes the, yeah.

Keith McManus:

What if they’re in the middle of a divorce, a lawsuit, if they’re declaring bankruptcy, if they’ve been accused of something? You could lose that entire amount the next day. In other words, it would co-mingle with that beneficiary’s personal estate. That’s a terrible plan in my opinion. Again, not all trusts are the same. We need to have a custom made trust. Sometimes people hear this and they think oh, I did a trust. I’m sure it’s fine.

Derek Gregoire:

We’ve seen that many times.

Keith McManus:

Absolutely not the case. It has to be custom tailored for your particular situation. Asset protection Derek is an extremely important piece so that you’re moving assets to your loved ones in a protected entity.

Derek Gregoire:

Exactly

Keith McManus:

That’s not something that happens by accident. It has to be custom built for that.

Derek Gregoire:

This is why we feel like it’s so important to have a properly set up trust, or at least have your trust reviewed to make sure it’s properly set up. The four key areas that we talk about that Keith’s trust and his team, the way that they build their trusts, looks at probate avoidance, estate taxes, capital gains, as well as asset protection. Those are the four key benefits to setting up the proper, and again I’m going to emphasize that one more time, the proper trust.

If you look at our entire retirement road map process, we believe we each client should have five key plans; an income plan, an investment plan, a tax plan, a health care plan, and a legacy plan. Setting up a proper estate plan kind of covers a little bit of taxes, health care and legacy if you think about it. More the legacy portion, but it helps out in other areas.

What to do now? What do you do at this point? If you’ve seen this video and you want to get some additional information, maybe you have a trust, maybe you’re not sure what it covers, or maybe you don’t have any estate plan at all, what you can do is Keith and his team are opening up his office and our offices for a complimentary review at no charge. Go to our website at shpfinancial.com. Request a complimentary review and we look forward to meeting you at that point.

Any questions feel free to reach out and thank you so much for joining us. Have a good day.