Welcome and Introduction
Michelle Dexter: Hi everyone, it’s Michelle Dexter with Keystone Law Firm. I hope you all are having a great afternoon, and I appreciate you for joining me here today. Hopefully, everybody can hear me okay. Um, I have muted a few of you who had your microphones still on so that everybody can’t hear the conversations you’re having in your home.
00:06:07
Michelle Dexter: So, I just wanted to give you the heads-up about that. Uh, today’s webinar is about leaving too much money to an heir. Okay. Uh, I am an attorney here with Keystone Law Firm, but this information is really intended for educational purposes only. It’s not intended as specific legal advice to any specific one of you. Definitely, if something with this matter or with this webinar today triggers something for you, or you have further questions—if you’re already a Keystone client, give us a call and schedule an appointment. If you’re not a Keystone client, but you’d like to reach out and find out more about our services, uh, Alexis will be on a little bit later to help with not only future webinars, but also how you can reach out to us and get something scheduled if that’s something that you need. So, I’m going to go ahead and get started because you guys were on time, and I appreciate that. So, I want to go ahead and get moving with this. Right. So, leaving too much money to an heir.
Unintended Consequences of Leaving Too Much Money
Michelle Dexter: Oftentimes, people say, “Is that really even possible? How can it be too much money?” Right? So, first of all, money to minors. If you have a beneficiary who is under the age of 18 and you have not properly set up how to distribute assets to them, your beneficiary can end up needing a conservatorship, which is a court-appointed person to make financial decisions for them. So, if your minor beneficiaries are listed directly on a 401(k), an IRA, a life insurance policy, or anything like that, understand that those companies are going to require that those funds be sent to a conservator if the beneficiary is under the age of 18. Okay? So, there are some different strategies you can do when you want to benefit a minor beneficiary—somebody who’s under the age of 18. But doing that directly on a beneficiary form can be problematic. It can result in that need for a conservatorship. Okay.
When we’re talking about too much money for young adults, sometimes when we’ve got young adults that don’t understand money yet, I’ve had clients that have said to me, “If my kids or if this beneficiary received this amount of money, they might be in trouble in a couple of weeks.
00:08:20
Michelle Dexter: They might go out and spend it on drugs, or spend it on a weekend in Vegas, or spend it on something that they don’t understand.” You’ve also got people that receive a large amount of money and they think to themselves, I’m set for the rest of my life. I don’t ever have to work again. But those of us who have been working for a number of years understand that the dollar amount isn’t always going to last us as long as we anticipate. And so, making sure that your young adult beneficiaries understand what it is they’re receiving and how that’s going to affect them is really important. Right?
Then you’ve got your beneficiaries that are working. Maybe they’re at a midpoint or a high point in their career. They’re in high tax brackets, and by giving them an inheritance that might trigger some taxes, you’re not doing them any favors because more money is going to go to taxes than what you were projecting or what you were planning for. Okay.
We’re also going to talk a little bit about, you know, if your beneficiaries are retired—you know, maybe you don’t have children, maybe you’re giving it to your siblings.
00:09:21
Michelle Dexter: We want to make sure that we’re aware of, cognizant of, and paying attention to any long-term care needs and planning that they may be doing for themselves, because they may be structuring their plan in a way that they might qualify for Medicaid benefits in the future, and by inheriting from you, that might end up disrupting that plan. Okay.
And finally, you want to be cognizant of special needs beneficiaries—anybody who is receiving government benefits that are based off of what their resources are. Okay. A lot of times here in Arizona, we might call that our ALTCS, Arizona Long Term Care System. AHCCCS is also a program here in Arizona that may provide some benefits because the beneficiary has a low amount of income and has a low amount of resources that allow them to qualify for that. By inheriting from you, that may disqualify them from that plan. They then spend down that money and have to try to re-qualify. And if we haven’t set up your distributions and your estate plan properly to account for some of that, this is where it’s too much money for them to receive.
00:10:33
Michelle Dexter: And honestly, I’ve had a number of those clients where their parents had an estate plan, they left something to a sibling, and that sibling is now receiving those types of government benefits. The sibling doesn’t want the money because they need the benefits. They don’t want the money; they want to disclaim the money. But guess what? You can’t do that. And so, only the parents could have made changes to their estate plan that would have accommodated for that and accounted for those government benefits. But because that wasn’t done, we now have to figure out what other options are available to those beneficiaries so they don’t lose their benefits. Okay.
Defining Your “Why” and Structuring Your Goals
Michelle Dexter: One thing that is really important when you are determining not only your beneficiaries but what your estate plan is going to look like is: what is your why? You know, why? You’ve saved this money. You’ve built a nest egg. You’ve got specific beneficiaries. Why do you want them to have that? What are your goals?
00:11:30
Michelle Dexter: Right? Leaving money to a family can build a powerful legacy. It can provide a safety net for higher education funds. It can jumpstart careers or a business. It can secure homeownership for a lot of future generations. Or it may be that your intention is to help secure their retirement. Okay? So, understanding what it is that you’re trying to accomplish with this money for your beneficiaries can be really important to helping you structure how they’re going to receive that and how you’re going to best benefit them.
Passing down assets to them without a deliberate, structured plan can really, unintentionally do more harm than good. And we do see that periodically. You know, for example, I just mentioned the beneficiary that’s receiving benefits, right? Or if we have a beneficiary that now needs a conservator put in place because they’re too young or they’re incapacitated themselves and they can’t receive that, that ends up potentially being a bit more of an expense and doesn’t provide as much good as what you’re intending.
00:12:32
Michelle Dexter: So, understanding your goals can be beneficial to creating the legacy that reflects your intentions and doesn’t result in unintended consequences. So again, make sure that you understand what is your why. A lot of times for us, we want to leave it to our children. Then we start to have grandchildren, and maybe our why shifts a little bit from “our kids are doing fine” to “how do we set up for the grandkids to make sure that they’re in a good position in the future?” Okay.
Things I want you to consider—and we’re going to go through each of these in a little bit more detail: tax planning, estate planning, the financial literacy of your beneficiaries, your beneficiaries’ ability to be self-sufficient, the idea of supplementing your beneficiaries versus replacing things for your beneficiaries (we’ll talk a little bit about that), and also, we’re going to talk a little bit about management of the distributions and how things go to your beneficiaries, okay? Because these are all important things to consider when we’re trying to figure out how we’re reaching your goals and accomplishing your why.
00:13:34
Tax Planning and Asset Types
Michelle Dexter: All right, let’s start with tax planning. So, first of all, our federal estate tax exemption amount is roughly $15 million per person. So, most of us are not going to have a federal estate tax bill when we pass. If you have one, good for you! But most of us aren’t going to have that. Here in Arizona, we don’t have a state-level estate tax. So again, no taxes there, right?
However, there are going to potentially be some taxable items for your beneficiaries. And so, even though there’s not an estate tax due at your passing, if you’ve got retirement income that you pay taxes on when you get your RMDs or you take distributions, your beneficiaries are also going to have those taxes on those same RMDs or on distributions they take from those retirement accounts. So, your traditional IRA, your traditional 401(k)s—your Roth accounts don’t have a tax burden, so your beneficiaries won’t have a tax burden, but your traditional retirement accounts are going to have that. Okay?
00:14:43
Michelle Dexter: Your real property is going to get what they call a stepped-up basis. Okay? So, if you were to sell your property today, they would take the current value less what you paid for it. And that difference is what capital gains would be based off of. Okay? Now, there are some exemptions for it being your primary house and you living in it for two out of the last five years; that won’t necessarily apply to your beneficiaries. Okay?
When it comes to your beneficiaries, though, they’re going to get a stepped-up basis. So, instead of it being the value of the house less what you purchased it for, it’s going to be the value of the house less what the value was at the time of your death. Okay? If they sell the property within about 6 months of your passing, that’s considered a wash. Okay? We’re not worried about that. If they’re going to keep the house past that six-month period, I generally recommend that they get an appraisal done of the property so they know what the value was—what that basis was—at the time of your passing.
00:15:41
Michelle Dexter: And then there’s the potential for capital gains when they sell it in the future. Okay? And so, those are the types of things that you want to be cognizant of.
Most liquid assets won’t have any kind of tax complication—your checking accounts, your savings accounts. But if those are in brokerage accounts where they are held in stock, again, that stock may get a stepped-up basis. But if the value of that stock has gone up, there may be some capital gains. And so, a lot of times when we’re looking at a brokerage account, we may be looking at doing what we call in-kind transfers. So, instead of saying, “We have five shares of stock and we’re going to sell it and then give you the money, and then you can buy five shares of stock,” we’re going to say, “We’re going to transfer these five shares from the decedent’s account into the beneficiary’s account.” They get that stepped-up basis, and then whenever they’re ready to sell that stock, they’re going to have to pay the capital gain, assuming that it gains money between the time that they receive it and the time that they sell it.
00:16:47
Michelle Dexter: But so, those are some of the taxable things that you want to take into consideration. There are times that people will know that there are certain taxes that are going to come along, and they may acquire life insurance policies to help pay for that or those types of things. Okay? So, just understanding what are the tax consequences of the assets that you have and that will be distributed to your beneficiaries. Okay.
That is important because at certain stages of people’s lives, they may be in a higher tax bracket, and so we want to be cognizant of what taxes they may have to pay, as well as what tax bracket they may be in at that time. Because most of us have worked our whole lives to minimize our taxes; we don’t want our beneficiaries to inherit and have to pay higher taxes on all of it because they’re already at a higher stage of their life tax bracket-wise. Okay.
You want to take into consideration: who are your beneficiaries? Are they your children?
00:17:49
Michelle Dexter: Are they grandchildren? Again, keeping in mind, are those grandchildren minors or adults? Are we giving it to siblings? Are we giving it to parents? Those are all people with different tax brackets and different tax possibilities. And so, we want to make sure that we’re cognizant of how each of their stages of life play into the tax planning. Okay.
And then, of course, what is your beneficiary’s current stage? Are they employed? Are they retired? Are they students? Um, you know, that’s going to help you also gauge what tax bracket might they be in. The tax bracket is important because, again, that retirement income is going to be taxed. There may be other taxes that they do end up paying for receiving assets and ultimately selling those later on. So, you want to make sure that you are at least thinking about that. It may not be the end-all-be-all, but sometimes when people have a lot of retirement income—for example, they have a large IRA or a 401(k), especially now since the SECURE Act—it says that the majority of your children who receive from those retirement accounts are going to have to receive that money over a 10-year period.
00:18:59
Michelle Dexter: Okay? There are some exceptions, of course, but if you figure your kids are going to have to take those retirement accounts over a 10-year period, and that’s a large account and they’re at the height of their career, that may be a lot of tax being paid on those retirement payments. So, we want to make sure that we’re being cognizant of that and then looking at, Hey, does it make sense to diversify that among more beneficiaries so that we’re still benefiting the people that we want to benefit, but we’re not having as large of a tax bill? Because maybe some of our grandchildren, who are young adults and in a lower tax bracket, can receive some of those funds, as well as their parents who are at a higher tax bracket. But we’re not putting all of the money to the parents and having a really high tax bracket being paid on those additional distributions from retirement accounts.
So, those are sometimes some of the things that we want to do. I know sometimes people with their retirement income will look at pulling out more money so that it’s being taxed at their personal tax rate versus what their kids’ tax rate is.
00:20:03
Michelle Dexter: They may be looking at converting some of that retirement income into Roth accounts, again to help minimize the taxes that are going to be due after they pass. So, just something to kind of consider and take into consideration with your own personal situation, right?
Estate Planning and Asset Protection
Michelle Dexter: The next thing you really want to do is make sure that you are doing your estate plan. Okay. Obviously, I’m an estate planning attorney. Maybe not obviously—maybe I didn’t introduce myself that way—but I am an estate planning attorney. We handle probates, trust administration, guardianships, and conservatorships here in this office. So, trust me when I say we see it all. Okay?
Avoiding probate, including avoiding conservatorships, is a primary goal of our estate plan, right? We do not want those things having to go through court. Court can be long. It can be expensive. It can be public. And so, those are things that generally here in Arizona we’re looking to avoid. I was talking to a client earlier who’s got a probate for her sibling out of state and was saying how there’s several stages of going to court that this other probate court has to do, which is a little different than what we do here in Arizona, but each state has their own set of rules and some can be
00:21:16
Michelle Dexter: easier and some can be more difficult. So, to the extent generally, we say we want to avoid probate. A lot of times we’re able to do that with having a trust in place. Right?
Then you want to look at things in your estate plan to make sure that, again, you’re protecting your beneficiaries. Okay. The first thing may be spousal protections. If you have a spouse who is incapacitated, who may need long-term care, um, those are things that we want to make sure that we’re setting up the assets in a way that if they ultimately need to qualify for some kind of government benefits, maybe we aren’t spending down everything in order to accomplish that. And that we’re setting it up so that your spouse doesn’t need a conservator—that somebody’s taking care of everything and we’re taking care of that and making sure, again, if your spouse is receiving some kind of government-based benefits for their long-term care, that we have not disrupted that system by the healthy spouse passing first, which can often happen.
00:22:15
Michelle Dexter: Okay. And the second thing is what we call beneficiary protections. And beneficiary protections are kind of a wide range of everything, from “I don’t have any specific concerns, but I like the idea that those funds are then protected from the beneficiary’s dissolution of marriage or creditors, any liabilities they may have,” all the way over to “I actually don’t trust their ability to manage money, and I need somebody else to help them with that, and I want certain criteria to be met.” Sometimes that’s drug testing; sometimes that is job requirements. There can be a whole range, and it really varies from person to person.
Some families like to do what they call dynasty trusts. And a dynasty trust is a little bit more complicated, but it basically is saying instead of me giving it to my three children, I’m going to set it up in a pot that’s designated for the benefit of my children, my future grandchildren, my future great-grandchildren, right? And so, sometimes people will do that dynasty trust to make sure that they’ve got that longevity of their legacy.
00:23:16
Michelle Dexter: So again, being intentional about what their why is. Their why is they are saving all this money, they’re earning all this money for their future generations, not just their immediate children. Okay.
People will look at life insurance, as I mentioned earlier—life insurance to help pay either immediate costs or to help pay taxes that they’re projecting. You know, they don’t want the kids to have to get stuck with a big tax bill. So, they’ve added life insurance in there, which is not taxed, to help cover that tax bill for them.
Um, also structuring distributions. Okay, so that can be really important for beneficiaries that we have concerns about. That may be anywhere from, you know, limiting when they can directly access that. A lot of times our trust will say that until a beneficiary is at least 25, they are not having any kind of direct access to the money. Sometimes people like to say, um, you know, maybe at 25 they can start having some direct access, but they really aren’t being their own trustee or they aren’t getting it all out completely until they’re 30 or 35. I’ve had clients that want to save the money for their children’s retirement, and so they’re really pushing off when it is that the kids will receive those funds.
00:24:31
Michelle Dexter: And so, there’s some different things that you can do to meet those guidelines. I hesitate sometimes with some of those; I don’t want to get too specific or too concrete about some of that because I want the trustee to have the flexibility. I don’t have the crystal ball to know what types of challenges your beneficiaries may be facing in the future. And so, we want the trustee to have some guidelines that they can be flexible with based off of whatever the circumstances are, in the event that you trust your trustee to do the right thing for your beneficiaries. Okay.
And then the final thing in your estate plan is definitely considering if any of your beneficiaries need special needs planning. That is where we are setting up a special needs or a supplemental needs trust for the benefit of those beneficiaries that are receiving government benefits. If you have a grandchild that has some kind of special needs diagnosis and there’s a good possibility that after they turn 18, they may qualify for certain government benefits, you may want to be setting it up now so that if any of your estate goes to them in the future, that supplemental needs or special needs language is already in your trust.
00:25:44
Michelle Dexter: But also, you want to be reviewing your estate plan periodically, especially as your children get older. Because again, I’ve had a number of situations where we’ve gone through a trust administration or gone through a probate where the parents didn’t update their documents, even though they knew their child now had some kind of disability or some kind of health condition that was qualifying them for these means-based or resource-based government benefits. And by receiving this inheritance, they were now going to be disqualified from those benefits. The families could have corrected that prior to the parents passing, but because they didn’t, it really puts the beneficiary in a tough position between their benefits and the money they’re going to receive.
From the government’s standpoint, they want them to spend down that money. And it’s not necessarily that the beneficiaries are opposed to spending down the money. The problem is sometimes it can take six, nine, 12 months or longer to get qualified for those benefits. And so, the beneficiaries typically are worried about a gap in coverage. And so, they’re afraid to lose their benefits because they understand how difficult it is to get back on the benefits.
00:26:55
Michelle Dexter: And now they’ve got some money that is paying for things, but they’re going to have to account for all of that again when they re-qualify and reapply for those benefits. And so, it can be really burdensome and it makes the beneficiaries nervous. But there are ways to avoid that by updating your estate plan in advance. So, things to consider, and when you’re reviewing your documents annually, just take some of those things into consideration. Do we have any grandkids that may qualify for benefits? Do we have any children that are suffering some kind of health issues? I know a lot of times clients don’t want to talk to their kids—they feel like it’s a little bit personal to ask them if they’re going to qualify for government benefits—but it’s really an important aspect of your own estate plan to know where your beneficiaries are in those situations. Okay.
Financial Literacy of Beneficiaries
Michelle Dexter: The next part is financial literacy. Right? There are oftentimes that as parents, we take on the burden of our children and their financial literacy.
00:27:59
Michelle Dexter: And if we haven’t properly prepared them to be receiving a large sum of money, they may not know how to react. Right? So, if your beneficiaries aren’t educated in how to live with a higher level of resources, we may be concerned about how they’re going to spend it. Right? I’ve had clients that say to me, “Yeah, they get this kind of money, they’re going to go out and they’re going to buy a Lamborghini, or they’re going to go to Vegas for a weekend, or maybe we’re concerned about some of their friends, right?” And so, we want to kind of evaluate our beneficiaries.
Now, this may also be a maturity thing, right? Where my 20-year-old is and where he will be when he’s 30 and 35 and 40, I expect will be slightly different, right? I have some clients that come in and they say, “My 21-year-old is more mature than any adult I know, and they can handle money and they feel good about it.” And other people are like, they’re in their 30s and they feel like they still haven’t really gotten a
00:28:59
Michelle Dexter: grasp of how to save money and how to, you know, keep themselves out of debt type of thing. So, you want to evaluate: are they naturally spenders or savers? And if they’re one or the other, do you need to take some action? Are you feeling the need to protect your money in some way that sets them up for more financial success and fewer failures? Okay.
Also, if you’re leaving them a significant amount of money, will they take the advice of a financial planner? Right. A lot of you have a really good, trusted financial planner. Sometimes they have their own financial planner and you feel a little comfort in knowing that that money is going to continue to grow with this financial advisor because you trust them. The question becomes: will your beneficiary trust them and take their advice? Right? Because if they’re not going to, then we may need to evaluate: are they the right person to be managing the money if they’re not going to take the advice of a good financial planner and try to make that money grow?
00:30:00
Michelle Dexter: Okay. Another thing to consider is: are your beneficiaries easily influenced by third parties that will see this inheritance as an opportunity for themselves? Right? Sometimes it’s a spouse; sometimes with the younger children, it’s a former spouse or that child’s parent. Um, I’ve seen siblings that have come in and tried to take advantage of incapacitated beneficiaries. So, we want to make sure that, you know, they are able to protect themselves, and if they are not able to protect themselves and you want to protect them, that you are setting them up to be protected. Okay.
We also want to take into consideration: do the beneficiaries understand the expenses tied to things like keeping the home versus selling it? Okay. Uh, sometimes I get clients that come in and they’re very adamant that they want the kids to get the home because they’ll never be able to afford a home in the neighborhood where they are now, and you know, they want to be able to pass that on. But I often have to ask: can they afford to live there?
00:31:03
Michelle Dexter: You know, can they afford the utilities? Can they afford the taxes and the insurance? Can they afford it if we need to replace the roof? Right? Because sometimes we aren’t setting them up for success if we’re putting them in a position where they’re house-rich and cash-poor, if that makes sense. So, you want to make sure that you’re kind of evaluating all of those different types of things. I don’t tend to put specific directions about “sell the house” or “don’t sell the house,” but there are times that people are like, “I want to leave the house to this beneficiary,” and I just want to make sure that you’re thinking it through. Do they have the ability to manage and maintain that house and afford it? Okay. So, financial literacy for your beneficiaries is definitely an important aspect to making sure that the amount of money that they’re receiving is going to be well-handled on their end.
Self-Sufficiency: Supplement vs. Replace
Michelle Dexter: All right, self-sufficiency. So, will the inheritance be helpful or hurtful? Right?
00:32:01
Michelle Dexter: Evaluating the beneficiaries is an important part of your estate plan. Are they handling the money well? Is their marriage stable? Do they have significant debt? Right? Those beneficiary protections can put some things in place when we have some of those concerns. Okay. But as I mentioned, we also want to concern ourselves with what are they going to do with the money if they were to receive it now? Are they going to buy a Lamborghini or are they going to save it? Right? Would they retire early or would they continue working?
You know, we had a client not too long ago. His mom passed away. He and his brother were college students. They thought the amount of money that they were going to receive was basically going to last them forever. It’s not, you know? And if they defer their education, if they defer the start of their career, they’re not adding to their own retirement. They’re not building, um, you know, getting promotions and building their career.
00:32:57
Michelle Dexter: They could be at a point where they’re in their 30s or even 40s and run out of money, and then realize they haven’t created a life to make them self-sustaining. So, we want to make sure that they’ve got the ability to manage this money, but also not have the mindset of I don’t have to work anymore or I don’t have to go to college because I’ve got, you know, $5 million and that’s going to last me the rest of my life. When the rest of us know that isn’t going to last you the rest of your life if you’re in your 20s. That seems like a really big amount of money, but the reality is that it may be very difficult for that to last your entire lifetime.
So, what is their mindset about money? If they believe that this money is going to set them up for life, are they right or wrong? And if you think they’re wrong, you may need to take some steps to make sure that they’re not going to hurt themselves in the process of receiving this money and stopping their trajectory to being self-sufficient.
00:33:56
Michelle Dexter: Okay. Uh, supplement versus replace. This is a conversation that I’ve had with a number of clients—that they want this money to supplement the lifestyle, not to replace their current income. Okay? And so, that is a distinction for some people, especially again going back to those people that don’t have the mindset. They don’t understand what it is to have this type of money and how long it’s actually going to work.
So, sometimes people will intentionally put language in their estate plan as guidance to the trustees that this is intended to supplement their lifestyle, not to replace their income. The expectation is they’re going to continue to work. They’re going to continue to build their own career. And this is going to allow them to go maybe on a little bit of a nicer vacation than they could afford on their own, right?
Do you want them to be limited in what they can access each year? I’ve also had clients that have said, you know, if they’re receiving so much income off of the assets that they’ve received—so they inherit an account, that account is generating a certain amount of income every year, and that income’s coming through to them—
00:35:06
Michelle Dexter: do they really need to be accessing additional money from the account? Right? And so, that is the type of thing that sometimes we will have clients say, “I don’t want them to receive, you know, if they’re receiving so much income, I don’t want them to be receiving more than that. And if they’re not receiving that much income, then they can access these things.” Or if their income combined with this, maybe you want to limit how much they are directly having access to. Okay? If you’re concerned about them spending it all and not having other resources available to them, you definitely want to take some steps to make sure that you’re protecting them from themselves.
All right. Um, and then consider, you know, are you wanting them to protect some of this money for future generations, right? Because if they think, It’s just all my money, and yeah, if I don’t use it all, it does go to my kids, but if I use it all, it’s just mine,
00:36:00
Michelle Dexter: there may be some conversations and some language within the trust that says, “Look, the goal is to preserve some of this for future generations.” And maybe, you know, your grandkids are young—you’re not wanting to name them right off the bat, but the goal is that some of this money is going to be preserved for their benefit. We can put language in that makes it a little bit more conservative in terms of the distributions to the beneficiaries. We can do some things to kind of help make sure that unless the beneficiary really needs it for their health, education, maintenance, or support, some of that money is being protected for that future generation.
So again, going back to your why: why are you distributing to this beneficiary? What are your accomplishments that you want to try to achieve with this? And who do you want to be the ultimate beneficiary of it? So, understanding some of those things and considering those will help you better direct what you want your estate plan to look like. All right.
00:37:01
Management of Trust Distributions
Michelle Dexter: Management. So, management of the funds that your beneficiaries are going to be receiving, right? Your beneficiary may be the trustee of the trust, right? In some cases, trusts just distribute outright to the beneficiary; they’ve got full control, they can do whatever they want. Sometimes it comes in a beneficiary-protected sub-trust where we name a trustee, right? And so, that’s kind of what we’re talking about here. If it’s going outright to them, it’s done. We don’t have any further control; the trust doesn’t control it any further. But if we’re saying they’re going to receive their share in a beneficiary-protected sub-trust, then we’ve got a couple of options, right?
The first option is: are we going to name the beneficiary as their own trustee? And that, again, may go back to a certain age, a certain timeframe, you know, those types of things. Sometimes they’re their own trustee right off the bat. Sometimes they’re a co-trustee with somebody. And so, you can consider some of those things.
00:37:56
Michelle Dexter: If they are their own trustee, they’ve got full control. And while the trust may have some language in it to try to minimize distributions, especially if there’s a creditor issue or if there’s a dissolution of marriage issue, um, that language is intended for that. But the reality is that the beneficiary has pretty much full control over it and no real limits. Okay. The benefit is there’s no cost—they’re not going to be charging themselves to be administering this trust—and so that can be an important aspect of it.
This is really only appropriate if you have minimal worries. And what I say to beneficiaries is, “Look, if something changes and you now have a significant debt or you’re going through a dissolution of marriage, then I would encourage you to step away from being your own trustee and let somebody else do it.” Okay? Um, but as long as we don’t have any real worries, generally then it’s okay for the beneficiary to be their own trustee.
Sometimes we have situations where we’re going to choose another family member to be trustee for a beneficiary.
00:38:57
Michelle Dexter: So, they’re not doing it for themselves; they’re doing it for another family member, right? This can limit what the beneficiary has access to, which may achieve the goal, right? What you want to be careful of is the potential strain on their relationship. Sometimes one sibling doesn’t want the other sibling to be managing the money, or they don’t want to be managing it for them, right? Sometimes, um, you know, that is just going to put an additional strain on that relationship. And so, you want to make sure that you’re kind of talking certainly to the trustee to make sure that they’re comfortable with that position. And depending on the beneficiary, you may also have the conversation with them around your why behind why you would want somebody else to be that trustee and what your concerns are. Okay? You can also put language in there that says at a certain age or a certain accomplishment, maybe they can become their own trustee, but that’s completely up to you. Okay.
A lot of times when we’ve got a family member being a trustee for somebody else, there may be a potential cost.
00:39:58
Michelle Dexter: It’s not going to be as much as a third-party fiduciary, and it’s kind of up to the trustee whether or not and how much they charge. They do have to be reasonable in what they charge. So, when I say it’s up to the trustee what they charge, I don’t mean it from a “they can charge $1,000 an hour” standpoint. I just mean they decide like, Do I—I just sent out a letter or I just answered a phone call—am I logging that time as part of what I’m getting paid for, or am I just writing that off because it wasn’t such a big deal and this is family? Okay.
When you move to a third-party fiduciary, um, there are some companies here in Arizona that act in that capacity. Your limits are going to be much stricter. Okay. They are going to follow the letter of the trust and stay pretty tight in that because they don’t want any liability for giving money away that they shouldn’t have. Okay? It does become much more of a business relationship, right?
00:40:51
Michelle Dexter: So, there are no hard feelings between family members; there are no sensitivities like that. If they’re mad at the third-party trustee because they won’t make a distribution, the third-party trustee is pretty used to people being mad at them because they’re managing their money, right? But when we’ve got real concerns and we’re trying to protect a beneficiary from themselves, a third-party trustee may be the right way to go. Okay? It can be expensive, right? You’ve got somebody that is working with your family member monthly to make sure that their needs are being met, to make sure expenses are being paid, to help those things.
Most third-party fiduciaries will do an annual budget. And so, that will be part of the program—they do an annual budget of what the expenses are, and then they’ll, you know, meet periodically unless the beneficiary has some kind of an emergency coming up and makes them come back and re-evaluate that. So, those are just some of the things that you’ll want to kind of take into consideration when you’re looking at that trustee.
00:41:49
Michelle Dexter: An alternative is naming a family member as a co-trustee to act with the beneficiary, right? They’ve got a little bit of ability to have some oversight, know what’s going on, and they can provide some guidance in terms of right decisions, those types of things. They may be a little bit more limited in their control—they’re not going to necessarily be able to stop the beneficiary from taking something out of an account, but they can be more aware of it and maybe have the ability to have a better influence knowing that something’s happening right now versus learning a couple of years later that all the money’s gone because they’ve been doing these bad-habit type of things. Okay.
When we’ve got older beneficiaries or we’re choosing to let the beneficiary be the trustee at a later age, a lot of times they’ve got more financial maturity and we’ve got a little less concern about how their money is being spent, because we’re not worried about them quitting their job or we’re not worried about them doing other improper things with the money.
Conclusion and Final Review
Michelle Dexter: And so, we want to make sure that as part of the management aspect of your estate plan, we’re taking into consideration who’s going to be managing that money. Because if the beneficiary—especially if the beneficiary isn’t in a position to really manage that money smartly—we want to make sure we’re considering what some of our other options are to make sure that the money that they’re receiving is not going to be something that becomes a problem for them.
So, remember to consider your assets, consider your beneficiaries. I encourage you to evaluate the situation honestly. It’s often very difficult for us to look at our kids or look at our beneficiaries and understand truly what they’re going through. Sometimes it’s hard to have those conversations with them. But it’s really important for you to understand how your money is going to be treated once you’re gone and how it’s going to benefit or not benefit them. And so, understanding some of those things can be really important. And so, you’re going to have to have those conversations with some of those beneficiaries to make sure that you’re not setting them up for failure.
00:44:02
Michelle Dexter: Okay? And then plan accordingly, having that estate plan that sets it out. Review that periodically, update it as needed. It’s really a critical aspect to making sure that it all works. Because Andrea, who does a lot of my after-death matters, and I see a lot of cases where parents haven’t updated their trust for 20 years, and it just doesn’t make sense anymore. The trustees aren’t alive anymore, the beneficiaries have had certain life changes that it just doesn’t make sense, and it’s not as beneficial as we had hoped—or as the parents had hoped—and now suddenly we’re having to jump through more hoops to make it really be a plan that’s as close to what they were hoping to achieve as possible. Okay, that’s the end of what I have for the moment. Okay.
Q&A and Closing Remarks
Michelle Dexter: Uh, I really appreciate everybody being here. There is a chat feature at the bottom of your screen. It kind of looks like a little square bubble like you would see on a cartoon of somebody saying something.
00:45:10
Michelle Dexter: And I am happy to answer questions. I do recommend that if you ask a question, keep in mind that this is a public forum and this will be on our YouTube channel in the future. So, try not to give away any kind of private information in your question. If you can keep it more generic, uh, I would be happy to take questions and answer. You may also be able to unmute yourself; I am not sure if that’s a possibility at this point in time.
In addition, in the chat feature, I believe Alexis has already included information for upcoming events and how to book a free discovery call for any potential new clients out there. So, we want to make sure that we are um answering any questions, getting you guys informed about how to look at our upcoming events. As I mentioned, we’ll be putting this on our YouTube channel in the next couple of weeks, so that will be accessible there if you want to rewatch that or see any of our other YouTube webinars.
00:46:12
Michelle Dexter: Francisco, the founder of Keystone Law Firm, and I switch off doing these, as well as Carie Guzman, who is a financial planner with Lifestyle Planning—he also does some webinars. So, if you check out that YouTube channel, just Google “YouTube Keystone Law Firm” and that will come up with a whole history of our webinars. We work trying really hard to educate the community on things. So, um, anybody that has questions, I’m happy to answer them. And if not, I really appreciate your guys’ time today. It’s been really great allowing me to share some of this information and share some of our experiences so that people can understand the importance of some of this evaluation, understanding what your goals are, understanding how your assets work, as well as understanding how your estate plan works.
Okay, I’ll give it one more shot. If anybody’s got questions or if you want to raise your hand, I can see if I can unmute you. You’re welcome, Diane. All right. You’re welcome, Ena. Good to see you. All right, it doesn’t seem like anybody’s got questions, so I will let you all go. Again, really appreciate your time today. Have a fantastic week. Uh, if you’re here in Arizona, try to stay cool—it’s a warm one out there. And we will see you at our next webinar. Have a great day, everyone.
Transcription ended after 00:58:36
