Estate Planning Essentials to Help Protect Your Assets and Legacy with Matthew Karr, ESQ – Ep 077

Matthew Peck: Welcome everyone to another edition of SHP Financial’s Retirement Road Map podcast. I’ll be your host today, Matthew Peck. And today, we’ll be digging further into trusts, estate planning, legacy planning. Very often on our television shows or on other podcasts or when you sit down with us at our meetings, we talk about the five different areas of financial planning – income planning, investment, tax, healthcare planning, but a fifth and extremely important one is legacy planning. And that’s why we’re proud to partner with trusted attorneys in that space. So much so that we’ll actually share office space with the attorney that I’m going to be bringing on momentarily out of our Woburn office up there in the North Shore. Although Matt does a lot of Zooms, we’ll talk a little bit more about that as we go.

He is also a recurring guest and has been in the field now for many years. I look forward to him, actually, setting this straight to say, hey, this is how long I’ve been doing this, buddy. But soon, I’m bringing on is Atty. Matthew Karr of Massachusett’s Heritage Law Center, again, based out of Woburn. I would say this before I bring Matt on. We’re going to be talking about general estate planning principles and questions that I have about how the mechanics of trusts themselves work and legacy planning works. But please note, everyone’s situation is different and do not take anything we talk about as pure legal advice. You all would need to talk to an attorney to talk about your specific situation. And that always has to be said and should be known before we dial in. So, without much further ado, I’d like to bring on our returning guest, Atty. Matthew Karr. And Matt, thanks for joining us.

Matthew Karr: Hey, Matt, glad to be with you.

Matthew Peck: Yes. So, just for all of our listeners out there, now we have two Matts out here, so I don’t think anyone’s going to forget any names here because we have Matt over here and Matt over there. Is that right?

Matthew Karr: Easy to go, yeah.

Matthew Peck: That’ll be the easiest part, especially as we dig into trusts. It’s like, okay, I forget the difference between irrevocable and revocable, but I do know there was two Matts speaking. So, that’s the easiest part of the test.

Matthew Karr: Know who to ask for.

Matthew Peck: Well, Matt, I knew you were on the podcast last year, so if you don’t mind, just tell our listeners again a little bit about your background and how you got into estate planning and just, how long you’ve been doing it, so forth and so on.

Matthew Karr: Sure. Well, I’m Matthew Karr, estate planning attorney. I’m founder and owner of the Heritage Law Center here in Woburn. Like you said, we have offices right with the SHP family up here. So, we work together quite closely for many clients who need both types of services, kind of creates a seamless transition for a lot of people who are looking for that. I started the firm in 2011. Prior to that, I had worked at some large firms in Boston since 2008. I’m a BC law grad, born and raised in Beverly, currently live up in Newburyport, so went a little further north. But I’m licensed in New Hampshire as well as Massachusetts, again, creating that kind of seamless service for clients who have interests up north.

Matthew Peck: Well, it is just 2011, so you’re almost pushing your 15-year anniversary, specifically, in law or estate planning, in general.

Matthew Karr: Well, that was when I started the Heritage Law Center. So, I’m an ‘08 grad of BC Law. So, yeah, oh, 15 years is coming out for Heritage, so we’ll have to have a good anniversary party, I think. But during that time, our specialty and our focus has always been estate planning, so that’s the core focus of our firm. We do estate planning, probate, and elder law and find that being able to focus in a particular practice area allows us to keep up with the changes in the law and really helps specialize for clients who need that service rather than dabbling in a bunch of different areas. We are able to kind of drill down in our niche and really focus for our clients.

Matthew Peck: Well, let’s actually pick that up then, because like how much has changed? I mean, if you had a time machine or whatever and you went back to 2011, dramatically, has estate planning in general, has it been dramatic, has it gone through dramatic changes? Or is law itself just kind of slowly but surely changes and then you have this big event maybe once every 10 years and changes in the law? I mean, I guess, long story short, how much has it changed? Is it recognizable to what it was in 2011 or no, no, no, it is really only world?

Matthew Karr: I’d say it’s definitely recognizable. There are big changes that happen now and again, but then it’s usually slow, incremental change. For example, the two big changes since I started my practice was in about 2010. We started the Uniform Probate Code in Massachusetts. Before that, Massachusetts had its own set of laws on how the probate process worked. The Uniform Code is being adopted slowly throughout the 50 states. I think right now, about 40 out of the 50 states use the same set of laws that they’ve added to or codified into their own legal system. So, that gives some ease of access between state lines and kind of certitude on where things will last. If you have a plan in Massachusetts, will it work if you are in Colorado? And more often than not, the answer is yes, although there are some state-specific differences.

And then the tax side, the estate tax change, this is only a couple years ago, but we had a $1 million exemption from estate taxes for a very long time. And I think just with the changes in the economy, a million dollars isn’t what it once was. You can have a house and a reasonably small retirement account and there you are at a million dollars, not feeling like you have much wiggle room. So, they bumped it up to $2 million, and we’ll talk a little bit more about how that works, but that was a big change in how we kind of plan for clients as well.

Matthew Peck: Now, before we do and talk about like kind of getting modern, if you will, of 2025 planning techniques or at least where we are, where do those pushes come from? I mean, I imagine with democracy and the will of the voter, et cetera, we demand change and as protestors and we say, okay, hey, we need to change this law, or we need to do this or do that to the tax code. I’m just trying to think of like, when it came to those two big ones that that did happen that you’d mentioned, whether it was a uniform code or bringing the estate tax, Massachusetts specifically into a little bit closer alignment with modern values, economic values that as– where do those pushes come from? Did they come from attorneys themselves? Or is it legislators that were attorneys originally and they say, you know what, this is something that was always my pet peeve?

Matthew Karr: It’s a combination of factors. I’d say, certainly, there’s a strong estate planning and elder law lobby in Massachusetts that does advise the legislature on how to make changes that would benefit the public at large. I know for the probate code change, that was a long process of people and committees in legislature with attorneys as advocates and counsels kind of going through line by line, what changes made sense for Massachusetts specifically and how that system would look after the overhaul.

On the tax side, yeah, I think it comes more from the people, from the constituency just saying, listen, a million dollars, I’m being taxed for having anything more than that. That’s not right given the state of assets today and the state of liquidity of the general state treasury. So, let’s look at that and eventually, the legislature moved.

Matthew Peck: And so, okay, this is sort of half-joking, half-serious. So, you mentioned the first part about going line item by line item and sort of then eventually making changes. Is that sort of why attorneys in the wheels of justice sort of churn, move slower? Sometimes, like I have other attorney buddies and it’s like, oh, yeah, well, we’ll get to that. And they eventually do, but it seems like the law moves a little bit slower than finance, because we’re always buying, selling, there’s all this action and all that stuff, and then law’s like, okay, we’ve finally arrived and now, we’re here. It took us five years to get here, but we’re here, right? And is that unfair of me to assume that attorneys and judges and that whole world move at a slower pace than sort of the rest of us humans?

Matthew Karr: No. I think the wheels of justice move slowly. That’s the truth. And I don’t deal specifically in the legislature, but I know there’s a lot of red tape around the whole process of getting a bill into law. And so, the movement does take a lot of time, I think, on the financial side. The same could be said as far as big structural changes through the law, but a lot of the changes that happen more quickly or as a result of some major wrongdoing that needs to be corrected, and so, that usually lights a fire.

Matthew Peck: Yeah, right. They will get people motivated at that point. All right. So, Matt, yeah, so thanks for sort of walking us through a little bit about the background. And before we get into what I would call sort of like estate planning 2.0 or sort of some of my questions that might be a little bit more in depth then, sort of our average listener, go ahead and walk us through just general estate planning, right, different kind of will, trust, important documents, questions that all of our listeners should know, or documents that they should really have at this point in time, knowing that we’re giving general advice and not anything specific.

Matthew Karr: Sure. Well, your most basic estate plan is going to take one of two courses, where either you have a will that’s the foundational document or you have a trust for that role. Either path, you would usually have some ancillary documents, we call them, that basically compliment that document and create the holistic full picture that you would need to have people empowered to help you if you ever needed it and direct your wishes to occur.

So, there’s the foundational document, either a will or a trust. Then there’s usually a durable power of attorney, which is where you can name somebody who’s able to legally assist you in managing your finances if you’re not able to do so, so things like going to the bank, accessing accounts, writing checks, signing contracts or lawsuits, all those things without having to go and get a judge’s permission. So, a lot of what we do in estate planning is try to make things easier on your family.

If you’re in an emergency and need assistance, do you want your loved one who’s already concerned with that situation having to go through the whole court process? And again, seeing those wheels of justice move quite slowly. There’s also expenses involved in every step of the legal process. So, we try to avoid that scenario for our clients. And so, a durable power of attorney puts someone in the driver’s seat where if you need help, they step right in.

A health proxy is the same kind of idea, except directing your medical care. If you can’t tell the doctors what to do, they need to ask somebody next in charge. And so, without naming that person, that again can end up in the court system. A living will tells your healthcare proxy how you would want them to handle a specific end-of-life scenario. And so, it’s really you expressing your preferences to alleviate the burden on them and to avoid any potential conflicts from people that have differing viewpoints.

But back to the will or trust, both direct how things should be distributed after your passing, but one key detail or difference rather is that a will is made for probate. A lot of people don’t realize that. You can’t bring a will to the bank and access mom or dad’s account. That bank doesn’t deal with wills and they don’t want the liability of trying to guess if this will is done correctly. So, you need to file that will with the court along with a bunch of other documents, usually, an attorney is helping prepare, and then go through that system, which again, moves quite slowly. You have to wait 30 days after death to file probate. Once you file, the goal is to get appointed as the executor or what we call now a personal representative. And that process generally takes about three to six months.

Once you are appointed, the estate in Massachusetts needs to remain open for at least a year, which is called the creditor claims period. Again, a long timeline because at the bottom of it, probate is all about the state providing our creditors and opportunity to present any claims they may have against us. And so, they set that timeline and they also make sure everything is public. So, in probate, your will, your list of assets, your beneficiaries, that all becomes a public record. You can go online and look up someone’s will that’s been filed in the probate court right now. Notices need to go out to your living relatives, any known creditors, and in your local newspaper, again, to let the world know now is your chance. And it’s almost an invitation for creditors or people who want to argue about something to come forward.

So, a trust is also a legal document that says who gets what, when, and how. But a key difference between a will and a trust is that a trust can actually own things. A trust is another way to hold title. So, if you have a house and you own it by yourself, when you pass, that house is still in your name, and therefore, no one in the world has the ability to do anything with it. And since you’re not here anymore, we need to go to probate court to get the judge’s approval to let our children or our loved ones take over.

And so, with a trust, the idea is we set the document up with the rules that we want to apply as to how things should be managed while we’re alive if we’re ever incapacitated and then after we pass away. The next step is funding the trust, which means we coordinate our assets with this document. So, for real estate, that would mean creating a new deed where you would transfer the property from your name to the name of your trust. Beneficiaries on accounts can be changed to be the trust. The goal is that when you pass, these assets are not stuck in your name. They’re still in the name of your trust. And the trust document then says who steps in to be in charge, the trustee, and outlines what they’re to do, the rules that they’re to follow for the benefit of your beneficiary.

And so, usually, the idea is we have someone step into that management role, paying bills and taxes, accessing assets, all without any delay, public process or going into court, and then they distribute out the assets to beneficiaries. A trust, however, can also last as long as you need it to in many cases. So, whereas a will is kind of a point in time, I’m gone, here it is, a trust can last longer, if a beneficiary doesn’t want to receive money in their name because of a creditor issue or something else in their life where they want to protect their inheritance or if there’s a minor who might be inheriting or someone with disabilities that we want to protect their benefits from. The trust can be structured that, instead of just giving the money out to this person, it’s going to stay in the trust and be managed for their wellbeing. The money can usually be used for them, but under the control of a trustee. And so, this gives the benefit of the money but not the ownership. And so, we have that oversight lasting as long as we need.

People commonly do this when they’re planning for their children. We say, God forbid if something happened to me when my kids are still young, the money shouldn’t go into their name. In fact, if they’re under 18, the money can’t legally go into their name, and so, we’re going to have the money in the trust and we’re going to have my chosen person as the trustee. Their job is to manage the money for my loved ones, and then when they reach a certain age that I would choose, they can come and make that withdrawal and the trustee can end.

So, a lot of people choose 25 as a starting point there. Kids are a little bit more mature. They’re usually out of financial aid territory, all of which can have an impact. And that can be all at one time, or it can be staggered over many different milestones depending on how people want their trust structure.

Matthew Peck: Excellent, yeah, and I certainly want to get to that. I want to get to the sort of next generation and protection from creditors and distribution of assets, but let me go back to, because I have a number of questions and snarky comments, so some educational, some silly. The first stuff is when the documents are created, where should they be stored? I mean, is it paper documents? Let’s say they’re going to a bank, let’s say the power of attorney, or even at the hospital, is electronic copy okay? Or what happens with the documents themselves?

Matthew Karr: That’s a good question. The most important document is the signed original. That’s what banks typically want to see. If you’re coming in to do a transaction, they want to know that everything is just so. Some law firms keep the original documents in their vault, and you have to come back to them when you need them. I think generally, the goal there is to say, your loved ones are going to have to come to us to deal with your estate after you pass, and we want that business, which is fair, not a bad model.

What we do though at the Heritage Law Center, we give clients the original documents. We keep a scanned copy in our digital electronic file, so that if they need it sent to someone, we always have that, or if they have questions, we can always reference it. But a portfolio would generally be made, has all the original documents, a lot of explanatory materials, and also a thumb drive that would have that digital copy in case they want to share it.

Storing the originals, I usually say you want it to be somewhere safe but also accessible. A bank vault that your son or daughter doesn’t have a key to is usually not a great spot. I’ve had situations where people need to file for probate just to get into the bank vault so that they can get at the estate plan. And so, usually somewhere at home where you keep your important documents, they sell fireproof boxes on Amazon for, I think, about $40. That can be a good choice, but always want to let your loved ones who’s next in line know where the documents can be found in a pitch.

Matthew Peck: That’s a quick plug for SHP, although we do not hold the physical documents with our SHP vaults, with the vault that we create and share with the client. We do back up and save all of their important documents as well. So, shameless plug for SHPs, but all seriousness, I certainly hope if you are working with a separate financial advisor, having things like a vault, having an online safety deposit box is a good value-add that I believe, obviously, that financial advisors should be offering to their client to back up important documents such as healthcare proxies and insurance documents and deeds and whatever. If it can be scanned, let’s back it up.

Matthew Karr: Yeah, I think that’s a great practice. The more fiduciaries who are holding your important data, the better. I think people are often surprised when someone passes that there’s no system in place where you can put in their Social Security number and see where all their stuff is. And so, you do end up with people waiting for the mail to arrive month after month or digging through the house to find the statements to see where their accounts are. So, really, being organized and creating that opportunity for access is very important.

Matthew Peck: Okay. So, now, a question that may or may not stump you only because it did come up this past month. I was talking to a gentleman up in New Hampshire and was talking about end of life, was talking about, which still sort of chokes up to say it, but like assisted suicide, right? In the sense of like, hey, I don’t want to go to a nursing home. I want to take the black pill. How does that work? And I know Vermont has a little bit of that type of program. So, it was just interesting and I guess somewhat topical conversation that I had recently. Any experience with that? Have you seen that come up? I mean, is that something that Massachusetts hasn’t allowed yet? So, since it hasn’t, this is sort of a non-starter for you.

Matthew Karr: To a certain degree, I’ve certainly had clients raise that issue and as you said, Massachusetts doesn’t allow for it. And so, it’s really nothing that we could put into a document directing somebody to do something. Certainly, a personal letter expressing wishes to a loved one can be an effective way to kind of share those desires, but there’s nothing legally binding that we could put behind that.

So, there are states, I think, like you said, Vermont, I believe Oregon, I know Switzerland there that allow death with dignity, they call it, or assisted suicide. And so, it’s becoming, I think, more of a trend. We’ll see where that goes, but for now, I think the best course for people is to let your loved ones know where you stand on these issues and what you would want them to do if they found you in a particular situation where you don’t have that control, because that’s often the scenario. Now, no one wants to go to a nursing home, but if you have an issue like dementia where you’re physically healthy, but mentally unable to manage your affairs, what then? You, really, at that point, if your loved ones haven’t been given some pretty good instructions from you, they’re going to be winging it. And so, I always say document as much as you can, whether it’s legally or not, it’s all helpful information for your loved ones to have.

Matthew Peck: So then, final two questions before we go on to more about the trust and gifting in other areas. Do you want to the snarky one or do you want the more just standard question?

Matthew Karr: Hey, your choice, dealer’s call.

Matthew Peck: All right. I’ll do the snarky one first, because I was talking about the whole idea of courts and everything just taking forever, but that’s just the normal timeline. Why do you have to wait 30 days after someone passes to begin the process? I mean, is this some old English law that, oh, well, that guy actually, he wasn’t dead and he came back 29 days afterwards, so we got to make sure that he’s actually dead before we start this process?

Matthew Karr: Good question. I don’t think the issue is certifying that someone is actually dead, although that probably should be done. I think it’s more getting certitude on the heirs. We have a lot of situations that we contemplate in our trust, that someone needs to survive you by at least 30 days in order to inherit, because otherwise, imagine you pass away, maybe you’re in an accident with a friend, they outlast you by a week, but without this kind of pause, your assets could end up in their estate, and then if you name them as a beneficiary, but they’re only alive for a week, that money is just going to follow their plan, which might go to someone you had never intended. So, I think it’s to give a little clarity on the general field of beneficiaries and assets, and so that we don’t have those simultaneous distributions.

Matthew Peck: Got it. Okay, I was curious about that because you mentioned that, about that 30 days, and then…

Matthew Karr: It wasn’t that snarky, Matt? You knew better.

Matthew Peck: True. Very, very true. But I’ll just say too, now, more on the kind of like nuts and bolts, what about like credit card bills, medical bills? So, here’s the person, they rack up bills one way or the other, right? Whether it’s through– well, let’s just say it was end of life and they were spending all this money and whatever that may be, and now they pass away with medical bills and/or credit card bills. Do they just go poof? Or do they have a claim against the estate? How does that work?

Matthew Karr: Yeah. So, creditors like that, like credit cards, even some medical bills are unsecured creditors, meaning unlike the mortgage where they have a recorded lien against your house, there’s no contract for repayment. And so, they do have a claim against your estate, which is usually filed through the probate process. If you don’t have enough assets in your estate to pay those debts, they do go away. It doesn’t become the obligation of your loved ones. Oftentimes, those debts can be negotiated as well. They’re happy to get some payment rather than no payment.

So, for people that find themselves getting those bills, there’s often an opportunity to kind of negotiate down. When you have a trust plan, you’re not going through the probate’s process, so there’s less opportunity for those creditors to present a claim. Now, the trustee and the trust is directed to pay off just debts and taxes. And so, there is the ability to pay those claims, but as far as creditors making claims against your estate, they have much less leverage there.

Matthew Peck: Which I think is a good sort of segue because I think very often, whether it’s yourself and I’ve heard you during meetings, or other attorneys I talk with, they say, okay, you should do a trust because it offers protection against lawsuits and creditors and divorces. And maybe they’re all part of the same category, not sure, but just explain, unpack that a little bit as to how do trust or a good estate plan offer that protection against lawsuits, creditors, and then divorces.

Matthew Karr: There are certainly ways to protect against creditors and divorces using trust. I think sometimes, advice in that realm is given with a little– it’s a little dubious, some of the claims, because most people when they’re starting out or in their middle life, will have a revocable living trust, which means that you control all of the assets in the trust and you can take them out whenever you like. That type of trust generally does not protect from creditors or divorce because at the end of the day, if you have control of all the funds, your creditors can say, give it to us, just like it wasn’t in the trust. So, really, there are two types of trusts that provide that type of protection. One is an irrevocable trust, where you give up access and control to the money to benefit someone else. If I have a child and I want to put some money towards their lifestyle, but I don’t want to give it to them outright, I want to put some controls, maybe timing of when they get access to the money, that would be an irrevocable trust where I say, this money is no longer mine. I’m putting it on the shelf in this trust for my child and there are rules about how they can get it, but by taking that action and taking the money out of your control, it would be protected against third parties.

There are also what are called asset protection trusts that usually is for your own benefit, but the money is in control of a trustee who can use their discretion on whether to give you money or not. That can also protect you from creditors because if I have a creditor after me, my trustee would say, no, I’m not giving you any money right now. Unfortunately, that type of trust doesn’t exist yet in Massachusetts. So, there’s about 14 states that allow asset protection trusts. New Hampshire is one, Wyoming, Virginia, Hawaii, Ohio. So, there’s a smattering of different states out there. But for someone who has high liability concerns, that can be an option.

Divorce proofing is also tough because at least in Massachusetts, we’re not a community property state, which means when a divorce happens, it’s not automatically 50/50. The court looks at fairness and assets, who brought what, who supported who when making a determination. And again, a revocable trust is part of your assets, and so, that would be something that they would look at. A lot of clients want to protect from divorce of their children.

Matthew Peck: Well, as I say because, and just to pause there, Matt, because I think what I was asking there, I think, and maybe I should have been more clear, I’m thinking in terms of, but you certainly helped set me straight in the sense of, okay, when we talk about lawsuits and divorces and creditors, it’s not necessarily the people that create the trust, but is there for the beneficiaries of the trust or for all three of those?

Matthew Karr: Got it, yeah. So, that’s a little easier done, although not with its own hiccups. So, a trust can protect for your heirs because they don’t own the money yet until it comes out of the trust. Okay? If I have a trust holding money for my children and I have a trustee who’s directed to distribute them money in the trustee’s discretion over a period of time, and one of those children has a divorce or a creditor, again, my trustee can close the gate. We’re not going to distribute at this time. And so, that’s the protection model most commonly used.

The problem is once the money comes out of the trust and goes to your children, the trust loses control. There’s no more protection that we can exert. So, we need to find a balance between, we want to protect the money, but we also want our children to have some control. Maybe we don’t want our trustee to be in that job forever. There are costs and administrative burdens in having a long-term trustee. So, those are all factors that need to be weighed when deciding how long a trust should own the assets. A prenup is the other way to go. If your kids are going to inherit good money from you, you might do a combination and say, the trust is going to hold your assets until your midlife, and at that point, you’re in control and you should get a prenup when you get married to further protect yourself.

Matthew Peck: Now, is that something that literally gets written into the trust to say, I mean, the distribution cease or distribution will not happen unless a prenup has been signed for any named beneficiary, or…

Matthew Karr: It could be written in there. I haven’t done one like that myself. I think, more commonly, although people have that natural divorce concern, they usually end up leaning towards letting my children work that out on their own. Certainly, if you want to make it ironclad, there are ways to do that, but again, it removes control and access potentially to your own children. If they decide they really don’t want to prenup, do you want to say that they’re out of the will? Or is that something that you’re going to let them decide? All these things are very personal from family to family.

Matthew Peck: But that might answer the question though, too, that I had about sort of like the longevity of trusts, because– so if what you’re saying that, in general or predominantly, trust will avoid probate, et cetera, all the wonderful things that we just talked about, right? Keep things private and make sure things distributed, make sure that the kids can step in and sort of assume responsibility of ownership and start the sale process of a property. So, there’s plenty of benefits to it. But then, let’s say that the original person, the deceased, said, “Okay, yeah, I want all of those things. And after I die, the trust is then just distributed.” So then, once the trust is gone, let’s say it’s a year after the person passes away, then all those protections that may have been in there are no longer valid. Is that correct, and again, just in general?

Matthew Karr: That’s right. Once the trust distributes money to the beneficiaries, the trust is done. It doesn’t offer any protection and really, it ceases to exist once it doesn’t own anything.

Matthew Peck: Okay. But then, on the other hand, as you said, although there are some administrative costs to it, you can have a trust live for 5 years after death, 10 years after death. I mean, well, what’s the maximum amount? I mean, can a trust live for 100 years, 50 years? With costs, as you said, I mean, whoever that trustee, whoever’s controlling it is being paid. And obviously, if these financial advisors behind the management, they’re being paid. So, people get paid to sort of administer trusts. But how long? What options do clients have in regards to the length and longevity of these things?

Matthew Karr: So, that depends a little bit on state law. Massachusetts doesn’t allow forever trusts, which are often called dynasty trusts. There has to be an end date, but the end date is pretty generous. The end date for us is 21 years after the last to die of the persons creating the trust and all of their lineal descendants, so children, grandchildren, whoever is alive at the time of creating the trust, after their life, plus 21 years. So, that takes us out pretty long and see who live for 100 years.

Matthew Peck: Just to pause, sorry, Matt, just so I get that wrapped in my mind. Okay, so right now, I’m 70 years old and my youngest grandchild who exists at the time of creation is four years old. I have that, we’ll call him Charlie. So, I have Charlie’s entire life plus 21.

Matthew Karr: Exactly. Wow.

Matthew Peck: So, I mean, that could be 100, 120 years if someone, and that’s just in Massachusetts, much less these dynasty ones.

Matthew Karr: Yeah, that’s called the rule against perpetuities, and it basically sets a certain date for ending, but it punts it out pretty far. So, as a rule, in all the trusts we create, we use that as the end date of the trust, just because we want to give clients as much flexibility as possible. Certainly, they can end the trust before then, but that’s the last point in time the trust could exist. And for most people, that’s going to be fine. That’s going to cover you, your children, your grandchildren, maybe even your great-grandchildren.

For people that want the dynasty trust, they’re really thinking like, I want to create a system where money is held forever and it’s a self-perpetuating trust. I think you mentioned before the Rockefellers, when we were talking off camera, and it’s kind of, they have a big investment fund that creates income and that income is distributed out to beneficiaries, generation by generation. But the principal or at least a large majority of it always stays in the trust. That certainly is a good way to create large generational wealth, but most people’s assets aren’t at that level, and it’s better to let the beneficiaries enjoy it and build their own structure for wealth of their family than to try to control too much, in my opinion.

Matthew Peck: Right. Again, but I like the idea that, and I think you said it earlier, that most trusts will have the ability to say, hey, if you want to close it out in a year, you can. And if you don’t, you don’t have to, right? And so, that’s sort of– is that relatively standard that people, you’ll give that option in the trust that you create?

Matthew Karr: Yeah. So, very standard, we say, when I pass, these are my beneficiaries. And I might say, you have the immediate right to take the funds and end the trust, but you don’t have to, and that’s to give them the option for creditor protection. What if, at the time of my passing, my heir is going through a divorce or a lawsuit or a creditor claim or a financial aid application for their child? I’d rather not take all this money into my name when this report is pending. And so, you can delay taking it as long as you like. Again, that could be your lifetime because we have that 21 years, plus lifetime limit. Certainly, there’s always rules put in place for if a minor is to inherit and we put an age there.

A benefit of a trust is the ability to have cascading contingency plans. A lot of times, the Plan A is me and my wife and Plan B are our kids, but Plan C usually involves the grandkids. Sometimes they don’t even exist. We’re planning– if I have a child who’s eight, certainly, there’s no grandchildren in the picture, but there might be someday, and so we can put that contingency plan into the trust just to cover that if that someday comes to pass.

Matthew Peck: All right. So, I know I’ve already used a lot of your time already. Now, let’s go back to estate taxes very quickly because that’s really important. And so, regardless, because even though it was $1 million, I believe it’s only $2 million. So, we might not be talking about Rockefeller money for a lot of people listening, but there probably are a lot of people listening that are going to be caught or might have more than $2 million and could be subject to Massachusetts estate tax. So, walk our listeners through that. How does that work? And what’s some of the more popular remedies for the estate tax issues?

Matthew Karr: Yeah. So, we certainly had an increase, a doubling really, of the state exemption, but it’s still not terribly generous. The federal estate tax, there’s actually two tax regimes on an estate, federal tax and estate tax. The federal exemption currently is $13 million per person and automatically 26 per couple. So, most of us don’t have that concern. Massachusetts, we have this $2 million exemption. And technically, both spouses, if you’re married, have this exemption. But usually, without proper planning, only one of them gets realized.

And that’s because if a married couple are planning for each other and we say, when I die, she gets everything, when she dies, I get everything. Pretty common. Well, what happens when one spouse passes is that there’s never any taxes due because we have what’s called an unlimited marital deduction in the tax code. You can leave your spouse as much as you like, not pay any taxes. But the result of that is the exemption of that first spouse is now gone. We have the surviving spouse with all of our assets and only their own $2 million exemption. So, if the assets are over 2, the big tax bill comes due when that second spouse passes reducing what goes to the heirs.

And so, a very common plan is using what’s called a credit shelter trust, or sometimes it’s called an A-B trust because really, within the trust structure, we create a pot for each spouse, Pot A for Spouse A, Pot B for Spouse B. And we say, when one of us passes, our trust can be split into two distinct shares, Pot A and Pot B. Now, Pot A for the first spouse who passes away can hold up to the maximum exemption amount. So, today, that would mean up to $2 million could go into that first pot. The rest of the assets would go into the second pot, Pot B.

Now, the surviving spouse, who oftentimes is the trustee, still has access to all the money. Okay? So, we’re not taking anything away. But in terms of the IRS looking at your estate, you’re only responsible for your own pot. So, now, we have Pot A with up to $2 million that’s going to pass to the heirs tax free at the death of that second spouse. The second spouse also has their own $2 million exemption. So, they would pay estate taxes only what’s above 2 on their Pot B. Okay? So, we have the ability to pass on $4 million without having it subject to estate tax.

Matthew Peck: Excellent. So, okay, which is basically doubling, right? So, as we take that $2 million exemption with the credit shelter trust, we’ve been able to double that to $4 million. So, you kind of 2x your tax protection at that point.

Matthew Karr: Right. Huge savings that can be tens, if not hundreds of thousands, depending on the tax rate and the assets involved.

Matthew Peck: Which is huge. I mean, again, real quick plug for SHP, but that’s why tax planning is such, and obviously, the work that that we do together is just so manageable, right? I mean, I know, obviously, you can’t eliminate them. I mean, sometimes you can, if they’re less than $4 million and specifically talking about the estate tax now. But just more so the idea that this is concrete ground we’re talking on. I mean, I love talking about tax planning and estate planning because it takes acts of Congress, it takes legislation, it takes law changes for it to change. So, knowing the rules of the road, knowing the laws of the land, and being able to apply them on behalf of the client, for advisors that aren’t doing that or working with attorneys, it’s just lazy, in my opinion. And it can make a significant difference, like you said, Matt. I mean, it could be hundreds of thousands of dollars.

Matthew Karr: Yeah. Writing that check to the tax man after your loved one passed is not something anyone really enjoys doing, I’m sure.

Matthew Peck: Now, let me ask something too, just because you mentioned about like Pot A and Pot B, on the splitting of it, because sometimes we work together and it’s, okay, try to measure a client’s assets and go half into the husband’s trust and half into the wife’s trust. Now, I know that’s proper trust funding where sort of while living, you sort of try to divide them up as best as possible. But is that something that has to happen before the first spouse passes, or is there any leeway to…? Let’s say you created one and then it was never properly funded, and then one of the spouses passes away. I mean, basically, if it’s not funded, they’re SOL or they’re out of luck? Or is it, no, there’s some grace after the first spouse passes? It’s not fun, but you can sort of do some of the splitting after the fact.

Matthew Karr: So, that kind of depends on how the assets were titled. If we have your well-structured estate plan, which usually has the trust and also has a will, which usually says anything that I haven’t put in my trust is going to be added to my trust after my passing. So, in order for the trust to take the exemptions, it needs to either own the assets at the time of your passing or inherit the assets when you pass. That could be through that pour-over will, we call it, or it could be through a beneficiary designation where you make the trust the beneficiary, but the trust at some near point after your passing has to be the person who receives the assets.

I just had a client recently who unfortunately one spouse died fairly young and while she was sick, they went through and made this type of credit shelter trust, but it never got funded. And all their assets were held jointly, which means they avoided probate, which is a nice thing, but none of the assets ever went to her trust at her passing. And so, they were out of luck in terms of the tax planning. There’s no ability to make the trust take that exemption if it doesn’t own anything. And the survivor, once they’re the owner, they don’t have that option to say, “I’m not the owner. I’m going to put it in the trust.”

Matthew Peck: Okay. I see. Yeah.

Matthew Karr: Preplanning is crucial. Funding is crucial.

Matthew Peck: Yeah. Okay, which I think is a good spot to kind of pause because we talked offline about at some points and maybe we can give a little like teaser in a sense of us wanting to talk about gifting strategies and then irrevocable trusts. And so, I guess in the time that we have left, talk a little bit about, in broad strokes, about some of the other things to consider if and when a credit shelter trust isn’t the only option or at least you need to build on that.

Matthew Karr: Yeah. Well, in addition to the credit shelter trust which maximizes use of exemptions, the other way to avoid the estate tax is either reducing the size of your estate or creating non-taxable assets that can pay a tax. And so, those are two different strategies. The credit shelter trust is only made for married couples because the goal is to use both of your exemptions. If you’re a single person, unfortunately, you’re stuck with just your own exemption so we don’t have that same option. So, for single persons or for couples whose net worth is above that $4 million access point, one option is gifting. And so, this is where you’re giving away assets during your lifetime, thereby reducing the value of your estate that’s going to be taxed.

And sometimes this is done through a trust because, again, people don’t want to necessarily give over all of their money directly to their heirs. They want to plan for them. And so, we have what’s called an irrevocable gifting trust, where we say, “This money is no longer mine. I’m putting it in the trust subject to these rules that I’ve created.” So, you get to decide who the manager of the trust is, when and how the beneficiaries will receive the funds, and that provides maximum creditor protection for them. It also gives you some ability to plan for contingencies. Again, if I want my son to receive a million dollars, but if he passes, what then? My trust can be set up to redirect where that money goes, not necessarily leaving it up to his plan on where it goes.

Another option is using life insurance as kind of a hedge against estate taxes. So, a lot of people don’t realize that when you own life insurance, the value of that policy is actually part of your estate.

Matthew Peck: Which adds up. Sorry to interrupt. Which adds up to $2 million or $4 million exemption whether you’re single or married.

Matthew Karr: Exactly. So, if I think I am $1.5 million in assets, but I also have this $1 million life insurance policy, I’m actually a $2.5-million-dollar person in the eyes of the state. And so, what you can do with life insurance is kind of a fun strategy where you gift away the policy. You put it into its own trust. And this is also an irrevocable trust designed solely to own life insurance. It’s often called an Irrevocable Life Insurance Trust or an ILIT. So, I transfer ownership to this trust, so it’s no longer part of my estate, no longer going to be taxed to me. That’s one benefit. I just reduced the value of my estate.

The second benefit is I’m going to continue to pay the premiums on this policy. So, it’s going to stay in force and when I pass, it’s going to pay out to the trust. But it’s all happening tax-free now. So, I’ve created a tax-free pool of liquidity to the side of my estate. So, let’s say I’m a single person with $3 million. I’m going to owe taxes on $1 million. Well, let’s say that’s $100,000. If I need to pay that tax out of my estate assets, I’m writing the government a check for $100,000. But if I’m able to use life insurance proceeds, let’s say I had a $100,000 life insurance policy, you’re typically not paying $100,000 for that life insurance. You’re paying whatever your premiums might add up to.

So, now I’m buying $100,000 but not paying $100,000. I’m able to pay the tax man with that insurance money. So, I’m actually paying them at a discount, saving my heirs the bulk of my assets.

Matthew Peck: I mean, which is great. I mean, talk about just the way of leveraging the different tools and minimizing taxes and/or at least creating that liquidity. Because I think that very often, especially with the ILITs and people will do that because that tax bill is due nine months after the second spouse or the single individual passes away. And you don’t want to be in a fire sale situation. You don’t want to have to liquidate a property or sell a stock or whatever it may be just to settle up with the Department of Revenue or Mass DOR.

Matthew Karr: Yeah. The worst I’ve seen in that regard is when there’s a lot of real estate. You’re property rich, but you’re not very liquid. Something’s going to need to be sold to pay that bill, and that can hurt.

Matthew Peck: Yeah. Again, avoiding those fire sales. And, Matt, I think we’ll sort of pause there because I would love to have a different session because I think we covered in great depth of the revocable trusts and credit shelter trusts and why that’s just sort of standard or really it is, I can’t say universal because everyone’s unique as you said at the beginning. But that’s sort of like the foundational piece in a lot of good estate planning. But then we have the gifting and the irrevocable trust, in that whole universe of gifting via trust, gifting individually, ILITs, you mentioned mostly like Medicaid planning and some of the irrevocable trust that happened there and look-back periods.

So, I would love to have you back on and we can start drilling down into or back into a little bit kind of pick up where we left off here to talk about irrevocable trust and when people use this tool, how it’s combined with either their established trust or sort of standalone at that point.

Matthew Karr: Yeah. Happy to do that.

Matthew Peck: And I would say then the last but not least, Matt, how do you bring a 5-year-old girl with you when you travel? Because I imagine that she… Because I just want all of our listeners know, so Matt and his wife and his daughter, they’re world travelers and they love travel, and I’m a travel bug myself but he brings his little one with him. And it’s like, I couldn’t imagine her running up and down the planes. So, what’s the secret? Is it Valium? Do you kind of crush up a pill and give it to her? Any lucky charms?

Matthew Karr: No, nothing like that. Now, we’re blessed that my daughter is a fantastic traveler, maybe because we got her started so early, but she’s really never been a problem on an airplane. I think she’s excited to be able to have some lengthy screen time, which usually isn’t the case at home. So, she plugs in those earphones and watches her movies through her heart’s content. We always have some games and some snacks there, but really, you’d be surprised. She kind of arrives at the destination and that was it. Okay, no problem.

Matthew Peck: Does jet lag play a role or no? No real issue with jet lag either?

Matthew Karr: Yeah. Jet lag can be a problem for all of us, frankly. What we started doing when we travel, we used to do the night flights and get there in the morning time and try to push through that day. That can be tough. What we tend to do now is kind of go a little earlier in our departure and book a hotel for the night before, like the night we’re flying. So, if we arrive somewhere at like 4 in the morning, we just check right into our hotel room and then sleep until noon. And then we’ll go out that afternoon and feel fine, but it’ll be a shorter day. That seems to work for us.

Matthew Peck: That works. Yeah. So, the idea of like, even though you’re arriving normally, check-in would be 2:00 PM the day before, but you’re checking in the morning but it does give you a chance to actually have a nice soft bed to crash into and get regenerated for the trip. Excellent. Well, yeah, and that’ll be a whole separate podcast, traveling with little ones, which would be interesting.

Matthew Karr: Yeah. I know we need to get her like a TikTok account or something like that. She’s got some good stamps on the passport now.

Matthew Peck: Right. Absolutely. She’s probably been more places than me. I know that much, A good challenge and a good thing to have. But, Matt, thank you so much for sharing all of your great information. It really helps round out, as I said, the five areas we talk about. I’ve been sort of honored to work together. Love the work you’ve done with our existing clients and to many here in the future. So, thank you so much for your time. And then here to all of our listeners, thanks so much for lending us your ears for the 45 minutes to an hour, however long that may be. And I look forward to talking more about this. His legacy plan, as you can see, is so much to consider. It’s not just your own wishes. It’s your kid’s situation. It’s the length of it. Do we want to make it revocable versus irrevocable? But these are also unique to each individual desires, wishes, and family situations.

And that’s the fun part. That’s the fun part is taking this information that we have, all the tools that we have, and the partners that we have like Attorney Karr in creating something a truly tailored and customized financial plan to you. So, enjoy that every day. And as you can see, these types of podcasts are just a step in that direction. So, thank you again for your time. And be well.

Matthew Karr: Thanks, Matt. Glad to be a resource to you and your clients.