Understanding Trusts: Types, Functions, and Importance

Trusts empower individuals to manage their assets according to specific instructions, ensuring control and clarity for future planning.

### Understanding Trusts: Types, Functions, and Importance in Estate Planning
* 💼  Trusts are legal entities that hold assets for the benefit of individuals or organizations, with different types offering **varying levels of control and tax treatment**.
* 🔄  Revocable trusts allow the grantor to **maintain control and make changes**, while irrevocable trusts are separate tax entities with **less grantor control**.
* 📄  The trust document serves as the "**manual**" for how the trust operates, defining **asset management and distribution instructions**.
* 🏠  Trusts can hold various assets, such as investments and real estate, which then operate according to the **trust's guidelines**.
* 🤖  Analogies like "**trusts as robots**" can help explain how these legal structures work, emphasizing the **importance of understanding their purpose and maintenance**.
* 🔍  It's crucial to have a clear "**why**" for setting up a trust, ensuring it aligns with your goals and isn't **unnecessarily complex**.
* 💡  Trusts can be simple or complex, tailored to individual needs, such as **managing assets in multiple states** or **navigating specific estate laws**.

[Music] Flaming June has a question next. It says, How do trusts actually work? I get the concept, but is there a special trust account that assets go into? What else should she know? Oh man, you know, but because here's the thing I let you funny. The answer is, well, this trust is a broad, broad term because think about this. There are even, even when you talk about trust, there's what's called revocable trust, which means you get to keep a lot of strings and you really still have a lot of control, but they still have a lot of power and letting you speak when maybe you're not able to speak for yourself. But they still, like I said, you have some strings, um, and the government treats you differently. The taxability is treated differently, um, because of that. And then there's what's called irrevocable trust where these things, they almost are like their, they are, it's not almost, they are their own individual tax entities that to file their own tax returns, and they do, and

now all your strings are you're you basically you don't have control of this money anymore, and the government treats you a little different from that. So you can quickly see by very simple. I did not even go into all the different names of trust because there's. We could spend um pretty much. We could fill hours full of all and all the cool little acronyms that the state planners and estate attorneys have come up with for you to know how they are. But that's the outlining structure is that these things are set up so you know you can to speak when you can't speak for yourself or to help you with estate planning. What else would you add to this? Yeah, I was thinking through an analogy. This one sucks, but I'm going to give it to anyways. A trust is kind of like a robot, right? Like it's this robot that robot. It's like this robot that you come up with, and you're going to define exactly what the robot does and how it.

behaves and the things it can do, and the things that it can do, and they're different types. So, like, a revocable trust would be like a robot where you can continue to change the inputs, like you can alter what it does, and it can change through time. An irrevocable trust is a robot that you build, but when you build it and you set it in, you can't go back and change the programming. It's going to operate the way that you describe it to operate. And so, what this robot does is that if you remove yourself from the equation, the robot knows exactly what it can do with the money that it has, how it can spend it, who it can give it to, where it's going to go, what the implications, the decisions that it makes are. You get to design that. So, you sit down with an attorney, and you formulate a trust document, and that document is going to be the manual through which that trust operates. So, you define how all of that stuff is going to happen. Well, then what

you can do is once you have that document that establishes the trust. The really interesting thing is you can put all kinds of stuff inside the trust. You can go open up a brokerage account and have like your investment assets sit inside the trust. It's just an account at Fidelity or an account at Vanguard. You can actually have real estate that sits inside the trust, and once you move it inside that trust structure, it begins to operate according to that like program, that manual, that instruction manual that you've designed. So, it allows you to create a separate entity outside of yourself that can follow your directions either now while you're living or later on even past your death. Well, you know, I'll lean into this um crazy analogy robots, which is so weird with the artificial intelligence APIs and all the other things you could. You went with old school George Jetson robots, but I want to lean into Johnny. I want to lean into it um because I think this is something you have to have a why for these robots because I one of the things that I get

When I, as a financial planner, and when we review estate plans and structures, sometimes I see these estate attorneys that churn out these document farms where I think it's very complicated, it's very thick, and if you go with B's visual, they're essentially creating a bunch of robots that are sitting out back just waiting to be used. You don't know why they're sitting out there, you have, there's no purpose for them whatsoever, and the problem with robots that are unused or without purpose that you at least understand is that they require maintenance. You got to go out there and put a little oil on the hinges, you know, to make sure that your robot, you got to go do updates 'cause they don't have over-the-air, you go out the old version that doesn't have over-the-air updates, you have to go manually plug in and do those updates. And so, if you have an estate attorney that's set up something that is so complex that you don't know the why.

you don't know how it works, and you don't really. It's not serving the purposes. Then that robot isn't doing you any good. That's a dangerous situation. So, I think that there is some merit to your analogy of robots, and they're very valuable, but you've got to know the why. You've got to know what the purpose is for these trusts that you're setting up for your financial life, 'cause they can be very powerful, very effective for you planning for the future when you can't speak for yourself. But you've got to make sure that it's structured appropriately and reflects what your goals and what your why is, not just because you went to a seminar, and they sent you out with a six-pound folder with all these documents, and you don't even know what this means, and all you've done is created a lot of complexity, a lot of robots for your relatives to take care of after you even pass away. Now, the good news is they don't have to be complicated. They can be simple trusts.

can be very like if you're someone who owns like real estate and multiple states. It's not crazy like a trust is like a great solution or certain states have unique estate laws. It doesn't have to be super complicated. You just want, and you said it perfectly, you want to make sure you have something that fits you, not just something that you think you need or you avoid it because you think it's going to be more complicated.

How Trusts Work

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Trusts come in two main types: revocable, which allows the individual to retain control, and irrevocable, which operates as its own tax entity and removes control from the individual.

Trusts are set up to manage assets and provide support when the individual cannot speak for themselves, playing a crucial role in estate planning.

The government treats revocable and irrevocable trusts differently, impacting their taxability and the individual's control over the assets.

Trusts can be revocable or irrevocable, with revocable trusts allowing for changes over time and irrevocable trusts having a fixed operation.

The trust document serves as a manual, outlining how the trust will operate and allowing for the inclusion of assets like brokerage accounts and real estate.

This structure creates a separate entity that can follow the individual's directions during their lifetime and even after their death.

The Importance of Purposeful Estate Planning

Estate attorneys sometimes create overly complex and unnecessary estate plans, likened to robots waiting for a purpose.

These complex structures require maintenance and updates, leading to confusion and inefficiency.

It's crucial to understand the purpose of trusts and ensure they align with your goals, as they can be powerful tools for future planning.

Simple trusts can be just as effective without the added complexity.

The Importance of Tailored Estate Planning

Estate planning doesn't have to be complicated, especially for real estate owners with properties in multiple states.

Trusts can be a great solution, and unique state laws may offer additional options.

The key is to find an estate plan that fits your individual needs, rather than avoiding it out of fear of complexity.