Transcript
Paul Winkler: And welcome to The Investor Coaching Show, Paul Winkler, where we talk about that financial thing. This hour you can have some fun, just do something a little different than I don’t normally do a whole lot. And every once in a while, I’ll bring a guest on. Usually it’s somebody else from one of the other offices this time, it’s somebody outside. Robert Pautienus is an attorney I’ve known for a long time. Let’s just put it this way. Gosh, we go back. How long now?
Robert Pautienus: I think it’s more than a decade.
Paul Winkler: Well, I don’t have a will. Well, yeah, you do. Yeah. It may not say what you want it to say, but you can.
Wills and Beneficiaries
Robert Pautienus: Yeah, no, there’s a definite default plan. I mean, if you do not have a will, there’s a default plan, which for some people fits great for other people. It’s not a great fit. Let’s start there. What is it in Tennessee? Yeah. So in the state of Tennessee, if you’re, well, I guess there’s a couple of different scenarios. If you’re married and you have no, no children and you die and you have no will then everything passes to your spouse. Now, when we say everything, we’re talking about items that do not have beneficiary designations on it. Right.
Paul Winkler: Right, right. So if you, in other words, you have an IRA, you got a 401(k), you got a life insurance policy, or God forbid an annuity. Now this is very limited circumstances where annuities make sense, but very limited, but then you’ll have a beneficiary in those things. And they pass outside of the will. You know? So they have a beneficiary on your IRA. It goes to whoever the beneficiary is. It doesn’t look at what your will says.
Robert Pautienus: Yeah. Which means even outside of not having will, you need to be very careful in looking at who your beneficiaries are on those.
Paul Winkler: And one time where the guy has passed away and his ex-girlfriend gets it. Yes. Yeah.
Robert Pautienus: Or even worse, an ex-wife gets it or an ex-spouse. Yeah. Yeah. So, but yeah, if you, if you do not have a will and you’re married and you have no children, it’s all going to pass to your spouse where it starts to get tricky is if you have say one child and you’re married, that means your wife gets 50% of everything. And the one child, even if they’re one, you know, one year old, they get 50% of everything. If you have two children, it’s a third to the spouse. Two thirds split between the two children where it starts to get tricky is if you have more than two children, the spouse never gets less than a third.
I think a lot of times it works fine. I’ll have clients that’ll come to me. That will say, you know, I’m not married. I don’t have any kids. I’m in my forties. You know, if I pass away, I want everything to go to my parents. Well, if you pass away and you’re not married, you don’t have kids. By default things are going to go to your parents. And so, you know, there are certain circumstances where it makes sense, but for the most part, if you have children, the default plan doesn’t make any sense.
Paul Winkler: And then if your parents are no longer around and then go to your siblings.
Robert Pautienus: And then nephews and nieces, it would just sort of work. Yeah. Work its way out. Which does happen. It does. So I’ve had it happen a few times. Yeah. Yeah. I mean, within the last 20 years, I’m going into my 21st year of practicing. I know we’ve had at least one case where the individual who passed, passed away, immediate family was gone and it passed out eventually to is like 27 different people, all got different portions. Wow. That, and some of the people didn’t even know who this aunt was, but they still inherited funds. So yeah. It’s my new favorite aunt.
Paul Winkler: Number one, one of the things thinking about when you’re dealing will often questions come up. Well, do I do a will or do I do a living trust? Let’s talk a little bit about that. Yeah.
What Is a Trust?
Robert Pautienus: I mean, wills are obviously more simplistic in general than a trust. I mean, when you create a trust, if you think of it as an entity, you’re actually creating an entity, that’s going to own your assets. And there’s lots of different types of trusts. But when you do a will, it’s more like you’re putting on paper, what your directions are at your death and then a court, which is where the probate process comes in. And I think one thing that I need to be clear on, because I get asked this a lot, some people are confused. Think if you have a will, you don’t have to go through probate right now, which is not true. You don’t have a will; you have to go through probate for the will to be effective. You’re proving the will. Yes. And the court enters a court order, which gives your executor the authority to do what your directions say are supposed to be done.
So, but yeah, I mean the difference between both of them, really, from my standpoint, I mean, a lot of people who have trust, who don’t understand them, they’ve spent a lot of money on setting them up and they probably are not going to benefit from them. You know, I think there are, there are specific circumstances where I think it makes sense to have a trust, but for most people, you know, I’m more of a believer in probably doing a simple will or a little more of a complex. Yeah.
Paul Winkler: And some people that maybe lists people come from other states where they’re like, well, you all have them in the state that I came from, I came here from California and we all had them, or I came here from New York and we all had them. And, and you know, the reality of it is, is that people hear well, you know, the probate process is really, really expensive.
Robert Pautienus: Yeah. Which is, which is true. You mentioned California. A lot of my clients that come in from California either already have a trust or they’ll make reference to everybody as a trust. Yeah. Here in Tennessee, as far as, as far as I’m aware, there’s not any county that allows you to take a percentage of the total assets, which I think some other jurisdictions outside of Tennessee did the attorney. Yes.
Paul Winkler: I want to make sure that people understand what you’re saying because people, that’s where they say, well, it’s really, really expensive when the attorney probates the estate in California, it costs X percent of the estate, which then went to the attorney.
Robert Pautienus: Right. Yeah. I mean, if it’s, if it’s a jurisdiction outside of Tennessee that says, you know, 5% goes to the attorney, but I can see if you have a million dollars, that’s $50,000 attorney fee, right? Yeah. In the state of Tennessee, the attorney’s fees are based on the actual work done. I mean, you, you, you track your time, you submit it. Either the family signs off that they’re okay with the amount of time or you submit it to the judge and the judge approves it. And then the judges I’ve been in front of over the years do an exceptional job of looking at the amount of time and making sure that it’s a legitimate amount of time and it’s, you know, nothing’s added to it. Right. And so, you know, your average probate fee is in the thousands, but it’s not tens of thousands.
You know? I mean, I would, you know, venturing out a little bit here, but you know, I mean, the typical probate fee may be $3,500, $5,000.
Paul Winkler: So it’s for most people, a lot of times that regular will works just fine versus setting up a living trust and the expense of doing it. Cause it’s a lot less expensive to do a will than it is to go and set up a trust.
Robert Pautienus: Yeah, no, doing a, yeah. Doing a will is generally more cost-effective and there’s also my own look on it, but it’s, there’s a lot less hassle. I mean, you, you set up the will when you’re essentially done, you just need to pull it out every so often and read through it to make sure what you want done.
Paul Winkler: Sure. And as now, so the times that a living trust is more typically, then we’re just being real general here because you know, it really, you want to make sure that you actually get to have somebody look at your situation to determine whether one makes sense versus the other. But in essence, let’s say somebody has property in multiple states. Talk a little bit about that and the use of a living trust for that particular purpose.
Robert Pautienus: So, and I’ll just clarify one of the words that you use. Cause I, you know, a lot of times attorneys use these terms and people may not totally understand what the term is and when, when, when we say living trust or revocable trust.
Paul Winkler: Yeah. Revocable or irrevocable living trust. Yes. Thank you.
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When It Makes Sense to Set Up a Trust
Robert Pautienus: Okay. So, yeah, I mean, from my standpoint, if you own land, let’s say you own a piece of property here. You’ve got your house here and let’s say, you’ve got a beach house or you inherited property in Alabama. That property outside of Tennessee would require the probating of the will in Alabama or in Florida. So now you’re doubling up or tripling up the amount of attorney’s fees. You got more work going on and you’re potentially in other jurisdictions that may have different ways that they calculate attorney’s fees also. So in those cases, it makes more sense to have the trust, the entity just owns all these properties. And that way you don’t have to probate in any, any of those jurisdictions.
Paul Winkler: So if I were setting up some kind of a, you know, a trust, it’s kind of like a way I like to look at it. It’s kind of like setting up a beneficiary for your stuff in a way, you know, that you actually do that. And some people will say, well, I like it because it makes everything private. Right. And the reality of it is how many people, unless you’re somebody famous, aren’t going to go and dig in your stuff and see who got what? And most people don’t care. You know, it’s, I don’t, I don’t mean to be harsh, but they don’t care. Right. And unless you’re a huge country star or something like that, or a huge football player, then they’re going to dig through because it makes a good news story. So when, okay, so another type of trust that we probably ought to talk about is when you set up trust inside your will. Yes. You know, talk a little bit about that.
Robert Pautienus: Yeah. So, you know, I mentioned earlier, if we talk about doing, or if you talk about intestate, meaning you don’t have a will and you have children, there’s there’s issues that come up, especially if the children are say below the age of 18, so you can set up trust for minor children, really trust for anybody through a will. So you can have a will that gives directions to set up a trust at your death, or if certain criteria are met, which are called testamentary trust. Yeah. Yeah. And to me, those are more, more effective because if you’re, if your only concern is, well, if my child’s below the age of 25, I don’t want them to inherit the money. Then we can put that language in. But if you pass away and your child’s 35 or 40, you don’t ever have to set up the trust.
Paul Winkler: Okay. Yeah. That’s an interesting point. So let’s say that you’re a real control freak and you really, I, you know, I probably ought to just how, how creative can you get with these trusts really? And what, and what are the negatives of getting really creative? Let’s do those two parts.
Robert Pautienus: Tennessee is maybe a little bit unique in this circumstance. They allow you to set up a trust that will run up to 360 years. So if I wanted to, you know, hypothetically, I could set up a trust, obviously you’d want to have enough money to fund it, but you can set up a trust that will run for 360 years. So you can, you can definitely control things from the grave, but, but you can, I mean, you can get very, very creative. I’ve got clients that will set up trust and, you know, leave it in there until the child is 40, but they’ll match income. They will pay for the first house. They’ll hatch a wedding.
Paul Winkler: I had heard of that, probably something like 20 years ago. And I thought that was so unique. So if you don’t go to work kid, you don’t get any money out of the trust is really the idea behind it. So that’s, you know, incentivizing the child to go and be productive. Yup. Yup. All right. You are listening to The Investor Coaching Show. I’m here with RobertPautienus. We’re talking about the world of estate planning and wills and trusts, things that you ought to be thinking about.
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