Revocable vs Irrevocable Trusts | Which One Should You Choose? — Transcript

Full transcript

1. 0:00Have you ever wondered, do you need a revocable trust or an irrevocable trust?
2. 0:03Well, in this video,
3. 0:04I'm going to break down the difference between those two types of trusts
4. 0:08and when you should use one versus the other.
5. 0:11Okay. Let's get started.
6. 0:13All right.
7. 0:13So when it comes to trusts setting up
8. 0:15revocable versus irrevocable trust, there's a lot of confusion out there.
9. 0:19And there's a lot of information when it comes to trusts planning.
10. 0:23Well, what
11. 0:24I find many individuals fail to realize is that certain types of trusts, well,
12. 0:28they're just not great
13. 0:29for a lot of situations, and they should not even be considered
14. 0:32because of perceived benefits that come from these types of trusts
15. 0:35failed to materialize unless they're set up in a very specific way.
16. 0:39I'm going to really getting into there is the irrevocable trust.
17. 0:43So to talk about the two, I would want to just break it down for you
18. 0:46and give you a high level view of the differences between the two.
19. 0:49And then I'll show you
20. 0:49in which situations you should be using one versus the other.
21. 0:53Okay. So a revocable trust.
22. 0:56So a revocable trust is just that.
23. 0:58That means that you can cancel this trust at any time.
24. 1:03So if you have the ability as the trustor or the or the grantor the beneficiary
25. 1:07to revoke the trust and just throw it away at any point in time, distribute
26. 1:12all the assets to yourself.
27. 1:13Then in that scenario, then that type of trust does not offer any asset protection.
28. 1:19Now what is that?
29. 1:20Then why would someone set up this type of trust?
30. 1:22Well, there's lots of reasons why you would set up a revocable trust,
31. 1:25is that you want to make sure that, hey, I want these assets out of my name.
32. 1:30Okay.
33. 1:30For estate planning
34. 1:32purposes, for asset protection purposes or privacy, is what I'm getting out there.
35. 1:36But at the same time, I still want to maintain flexibility.
36. 1:39So you're not looking so much for the asset protection.
37. 1:42You're looking for the anonymity.
38. 1:43You look for the estate planning benefits of it.
39. 1:44You just kind of get it out of your name.
40. 1:46So what are some of those types of trust that I'm referring to here?
41. 1:49Well, the types of trust
42. 1:50that we're talking about here would be your living trust, right?
43. 1:54Your living
44. 1:54trust is always going to be revocable, because you wouldn't want to set it up
45. 1:58so that you could never change it, because things may happen in your life.
46. 2:01Maybe a child now
47. 2:02develops a bad drug habit, and you'd set up your trust
48. 2:05where they were to receive
49. 2:0650% of your estate and you did not enact a beneficiary control provision.
50. 2:10Or maybe you had one in there.
51. 2:12and now do you want the child with the drug abuse
52. 2:15problem being in control of 50% of your estate?
53. 2:18Probably not.
54. 2:20So you want to have that flexibility so you can change it at any time.
55. 2:23So that's why living trust is oftentimes revocable.
56. 2:25That is we don't know exactly what's going to happen with our beneficiary.
57. 2:29So I want to maintain that control until I've passed away.
58. 2:32Now another type of trust here that I often find as a revocable
59. 2:35trust is going to be that land trust.
60. 2:37And I talk about a lot on this channel
61. 2:39about using it for real estate investments,
62. 2:41for putting your real estate into the trust, and then having a ton
63. 2:44of flexibility over how that asset is handled once it's in that trust name.
64. 2:49Not to mention that it provides you anonymity.
65. 2:51That's why many people will also set up a residence trust.
66. 2:55A residence trust would be a revocable trust.
67. 2:58The difference between the residence trust and the land trust is that the residence
68. 3:02trust is a strategy that we use to provide anonymity
69. 3:05for your personal residence to protect that, from creditor attachment.
70. 3:10They get a judgment against you in the record, the judgment.
71. 3:12Then it will not stick to your house.
72. 3:14Maybe another one you might look at as a personal property trust.
73. 3:17I'm just going to put
74. 3:18here.
75. 3:19This is a great trust to use for a personal bank account.
76. 3:23I and some of my videos are referred to this as a monkey trust.
77. 3:26And people say, hey, well, I went to my attorney,
78. 3:28and he's never heard of the word monkey trust before.
79. 3:30Well, there is no such legal term is monkey trust.
80. 3:34What it is, is a personal property trust that's designed to take your personal
81. 3:38checking account and again, get it out of your name,
82. 3:41but at the same time give you complete flexibility
83. 3:43to pull money in and out at any point in time.
84. 3:45So we're not locking anything down.
85. 3:48So these are some common revocable trust.
86. 3:50They have a specific purpose but they have a lot of flexibility.
87. 3:54Now the irrevocable trust.
88. 3:57Now that's a different animal altogether.
89. 4:01So with the irrevocable trust these you know, they're set in stone.
90. 4:04You cannot
91. 4:07change after you've set it up.
92. 4:09So you have to make damn sure whatever you're putting into there
93. 4:12and who's going to receive those assets, you're fine with it
94. 4:15because once that's set up, it's locked down.
95. 4:18Now, when we set up irrevocable trust,
96. 4:21one of the benefits that comes from an irrevocable trust
97. 4:24that does not come from a revocable trust is asset protection.
98. 4:29Okay.
99. 4:29So what what am I saying there that the assets
100. 4:33held in an irrevocable trust for these beneficiaries,
101. 4:37the beneficiaries, creditors cannot gain access to those assets.
102. 4:41Those assets are beyond their reach.
103. 4:43That is, they can't break the trust
104. 4:45and get into there and take the assets out.
105. 4:47They can't force a distribution of the assets
106. 4:49to make sure that they get paid.
107. 4:51And that's why, if you're weighing,
108. 4:53the scales here, and we were to put various entities on a scale and say,
109. 4:57all right, so, so here's my, scale right here.
110. 5:01And, on this side, I have LLCs and corporations.
111. 5:05And then on this slide, I have an irrevocable, trust.
112. 5:08Right sitting over there.
113. 5:10This slide here is definitely going to be more weighted.
114. 5:13It actually would fall down to here, meaning it's
115. 5:15going to offer you more protection than these guys over here.
116. 5:18And just by the nature of the beast, it's a type of entity we're setting up.
117. 5:21And that's why I'm going to cover for you what type of trust
118. 5:25that you should consider if you want that type of protection.
119. 5:28But understand what the limitations are, you cannot change them.
120. 5:31And here's something else to consider.
121. 5:33You can have a trust over here like a living trust.
122. 5:35It can start in that quadrant as a revocable trust to begin with.
123. 5:38And then when you pass away, it can fall down here into this quadrant.
124. 5:42And that's what I was referring to
125. 5:43when I talked about a beneficiary controlled trust
126. 5:45that if you set up your living trust, the right way starts is revocable,
127. 5:49and then it becomes irrevocable and offers asset protection for your beneficiaries.
128. 5:54Okay. So back to the irrevocable trust.
129. 5:55So what are some common examples of irrevocable trust
130. 5:59that people will set up that provide asset protection.
131. 6:02Well number one maybe a life insurance trust.
132. 6:07So we
133. 6:07set up these types of trust to hold our life insurance policies.
134. 6:11And we do that because we want to make sure
135. 6:13that the policies the the the proceeds
136. 6:16we received when we pass those proceeds,
137. 6:20are going to be held in a trust and they're going to be protected
138. 6:22from the beneficiaries creditors, and they're protected from my creditors.
139. 6:25Maybe it's a whole life policy you have while you're alive,
140. 6:28but it's also set up to avoid a state tax on those assets
141. 6:32because it's considered to be a gift today.
142. 6:34So when you set up
143. 6:35an irrevocable life insurance trust, what you're doing is you're saying, hey,
144. 6:38I am putting my life insurance policy into this trust
145. 6:42for the benefit of the designated beneficiaries.
146. 6:44I'm gifting it to them now, and I have no more rights to that, that asset.
147. 6:47I've given it up and that makes that trust irrevocable.
148. 6:51So that that's a common strategy there.
149. 6:54Another one might be a qualified
150. 6:57personal residence trust.
151. 6:59I'm just create a party now that's different than the residence
152. 7:03trust I'm talking about up above, which is a revocable trust.
153. 7:06So you can create a residence trust that is irrevocable.
154. 7:10However, there are some some limitations or some requirements
155. 7:14that go with that, that many times people cannot satisfy.
156. 7:17Namely being that the house has to be free of a mortgage, it cannot be,
157. 7:21have any mortgage on it, or it makes this strategy difficult to implement.
158. 7:25And again, this is another estate planning free strategy.
159. 7:28But the most common strategy that people are interested
160. 7:31in, we talk about in irrevocable trust, is what we refer
161. 7:35to as an asset
162. 7:38protection
163. 7:40trust,
164. 7:42which is self settled.
165. 7:46Okay. Lot of words there to unpack.
166. 7:48What does that mean.
167. 7:50So when we talk about an asset protection self-styled trust,
168. 7:53what we're referring to is a scenario whereby
169. 7:57you are creating a trust here.
170. 8:00All right.
171. 8:00So you're setting up a trust and get this trust set up.
172. 8:06And you want to be the beneficiary okay.
173. 8:09So you want to be the beneficiary of the trust
174. 8:10because the other trusts
175. 8:11that are referring to the qualified personal residence trust
176. 8:14or an irrevocable life insurance trust, and there's other ones out
177. 8:17there, oftentimes you're not going to be the direct beneficiary.
178. 8:21You're not going to be the beneficiary at all of those types of trust.
179. 8:23You're transferring the assets to the to to another beneficiary.
180. 8:27But you're putting on controls and safeguards.
181. 8:30So you can you can control it while you're alive.
182. 8:32And they don't get the benefit until after you've passed.
183. 8:35But with the asset protection trust, when we say it's self settled,
184. 8:39what you're doing is you're setting up a trust where you're the beneficiary
185. 8:44and you're going to
186. 8:45take your assets, be it real estate,
187. 8:48cash savings, stocks,
188. 8:52and you irrevocably transfer them
189. 8:55into the trust name, you're going to transfer them over to this trust.
190. 8:59And when you transform into the trust, the purpose behind
191. 9:02this type of transfer is to put these assets.
192. 9:06Well, I can't say
193. 9:07this is the reason we're doing it, but I'll just tell you why people do it
194. 9:10beyond the reach of a creditor. Right?
195. 9:11I mean, that's that's what we're doing many times when we set up a trust.
196. 9:15I mean, obviously that's,
197. 9:16you know,
198. 9:16what you're going
199. 9:17to put in the trust agreement is that you've set up this trust
200. 9:19because you want to provide for the control and,
201. 9:21distribution of these assets for multiple generations in your,
202. 9:24in your centralizing that in the trust.
203. 9:26But that asset protection piece, I mean, come on, it's in the name of
204. 9:30the actual trust statute when you set it up.
205. 9:32So that is a reason for doing this.
206. 9:35So when you move these assets in,
207. 9:37when I say it's self settle, that means you created the trust for yourself.
208. 9:41Now here's what you have to understand about these types of trust
209. 9:46is that they're they are a creature of statute,
210. 9:49meaning not every state recognizes this type of trust arrangement.
211. 9:54So if you're looking for a trust structure that provides asset protection
212. 10:00and provides estate planning, because that's what this will do as well,
213. 10:04and you're willing to give up some things which I'll share with you.
214. 10:07Then you may want to consider utilizing an irrevocable trust
215. 10:11or a self settled asset protection trust.
216. 10:14Okay.
217. 10:14So what are the the issues associated with this when it comes to setting them up?
218. 10:19Well, you have to make sure that the state
219. 10:21where you're going to create this type of trust recognizes it.
220. 10:24For example, we set up our trust in Nevada.
221. 10:27So we like to use Nevada.
222. 10:29That is one of the states, Delaware
223. 10:32is another one.
224. 10:34Alaska.
225. 10:36And there's several there's about, I think, 18 states now that that recognize,
226. 10:41a North Dakota or South Dakota,
227. 10:43I believe, a asset protection trust.
228. 10:46And so the longstanding common law rule is that
229. 10:50the law did not recognize trusts
230. 10:53that were set up by individuals to protect their assets.
231. 10:56Meaning I couldn't just create a trust, put my assets into it,
232. 10:59and then my creditors couldn't
233. 11:01couldn't get into that trust and take my assets from me.
234. 11:04The law just said, hey, listen, if you set up a trust
235. 11:06where you're the beneficiary yourself of these assets,
236. 11:09then we're not going to recognize it as a separate legal structure.
237. 11:12And we're just going to assume that it's you.
238. 11:14Since you can you have access to it, we'll give your creditors access to it.
239. 11:19Well, what states have done is they've changed the laws.
240. 11:22They've said, all right, well, that might be the common law.
241. 11:24Well, the law of this state, takes a different approach.
242. 11:28So if you're looking for asset protection and you're thinking, hey,
243. 11:31I need to use this trust and I'll show you some ways
244. 11:33in which you can use it and some,
245. 11:35some ways in which we typically will set it up here.
246. 11:38if you want to set up this type of trust and use it in this manner,
247. 11:41then you have to establish it in one of the jurisdictions
248. 11:44that recognize it, otherwise it won't work.
249. 11:47For example, if you live in California,
250. 11:48you want to set one of these up in California. Won't happen.
251. 11:50You'll get zero asset protection.
252. 11:52A credit will blow through it.
253. 11:53And when you set up an asset protection trust that is irrevocable,
254. 11:57what you need to recognize is that you have to have an independent trustee.
255. 12:03You have to have a distribution trustee.
256. 12:07Distribution trustee that is not you.
257. 12:10Okay.
258. 12:10So this person here, this distribution trustee is
259. 12:13independent.
260. 12:17Oftentimes,
261. 12:18that person must be located in the state where you form the trust.
262. 12:22So we will form these trusts. As I stated in Nevada.
263. 12:24So we out of our Nevada office, we use one of our Nevada attorneys,
264. 12:28to be the trustee of our trust.
265. 12:31So now people are not comfortable
266. 12:34using or setting up this trust if they can't control the assets.
267. 12:38Right.
268. 12:38Do you know,
269. 12:39do you think an attorney knows how to trade crypto or stocks or real estate,
270. 12:43something that you're into and that you want to put into this trust?
271. 12:45Probably not.
272. 12:47unless they work for Anderson, of course.
273. 12:49So if you want to get asset protection or you want to actually,
274. 12:52control your assets that go into the trust,
275. 12:53then the way you set this trust up is that you name yourself.
276. 12:58Okay.
277. 12:59So this is you right here as the investment.
278. 13:05Trustee.
279. 13:08Okay.
280. 13:08So you were the investment trustee of your trust.
281. 13:11So so you decide how all of these assets that are held in the trust are invested.
282. 13:16The distribution trustee has no control.
283. 13:18The distribution trustee will make payments
284. 13:21to you distribute the assets to you.
285. 13:24Obviously you can ask the distribution trustee for it for distributions.
286. 13:28But you can't appear to control the distribution trustee.
287. 13:31You know, force them to make distributions.
288. 13:33So there's a very specific language that goes in here
289. 13:36because you have to create this appearance that the
290. 13:39your ability to receive funds from this trust is outside of your control.
291. 13:44Now this is essential to creating an irrevocable trust.
292. 13:49Now how do we go about then setting this up.
293. 13:52So we give you not only the control over the assets,
294. 13:55which is kind of baked in, but also give you some distribution control.
295. 13:58This is where the magic happens.
296. 14:00So if you're thinking about using
297. 14:01an irrevocable trust and this is where you'd want to,
298. 14:03how you typically would consider setting it up.
299. 14:06So what we like to do is we like to create a Wyoming limited liability company.
300. 14:11So we'll set up a Wyoming LLC.
301. 14:14And then we're going to create our irrevocable net,
302. 14:18asset protection trust down here.
303. 14:19So I'm just called a napped in Nevada asset protection trust.
304. 14:24You will be the beneficiary of this trust okay.
305. 14:27So you're going to be the beneficiary down here.
306. 14:29And then we're going to use that same trustee stuff again where
307. 14:32I'm going to I'm going to put an orange person right here.
308. 14:35Here's your distribution distribution trustee.
309. 14:38And then this is you.
310. 14:39You are the investment trustee
311. 14:43okay.
312. 14:44So you're set up there where you can invest the assets.
313. 14:46Now this Wyoming LLC.
314. 14:47What's going on with that?
315. 14:49Well, in the previous, example, what I showed you is you're transferring
316. 14:52your assets directly into the trust, and you could do that.
317. 14:54You could change the accounts all over to the trust name.
318. 14:56You could change title of the property over to the trust.
319. 14:58Name.
320. 14:59But what I would rather do instead is set up some LLCs.
321. 15:04Maybe it's more than one LLC because we don't want to mix cash.
322. 15:07If you're considering
323. 15:08putting cash stocks in liquid type investments, you know quadrant two assets.
324. 15:12If you've watched my videos about how to break up your your affairs, the safe stuff
325. 15:17you never want to put up with the real estate
326. 15:18so you could have a scenario where you have several LLCs
327. 15:21going into this trust based upon the types of assets, or holding.
328. 15:25Nevertheless, this is how you're going to do it.
329. 15:27So let's assume I was just going to put in a brokerage account investment account.
330. 15:31Why would set up a Wyoming LLC with my stocks?
331. 15:35Now I'm doing this again because I want asset protection.
332. 15:37I want a higher level of asset protection that I gain just with that LLC.
333. 15:42So I'll start off where I am.
334. 15:44The sole member of this limited liability company.
335. 15:47So I'm the only member.
336. 15:48And then I'm going to assign transfer
337. 15:52move my interest in the Wyoming LLC to this asset protection trust.
338. 15:58So rather than moving the actual accounts
339. 16:00themselves, the accounts stay in the name of the LLC.
340. 16:03I'm funding the asset protection trust with the LLC interest.
341. 16:08But here's the trick.
342. 16:10When you fund this trust with this
343. 16:12LLC, you're not putting 100% in.
344. 16:16You're putting in somewhere around typically 90, 80 to 90%.
345. 16:20You'll transfer into this trust and you will hold the remaining 10%.
346. 16:26In my example interest of that LLC.
347. 16:29And you were the manager of this LLC. Okay.
348. 16:31So you're the manager.
349. 16:33So what does that mean?
350. 16:35You control the limited liability company.
351. 16:37So all of the funds set up here, the only asset
352. 16:41that's held by this asset protection trust is an LLC interest.
353. 16:46That's it.
354. 16:46It does not hold the actual accounts.
355. 16:49So the distribution trustee
356. 16:52here, the attorney we appoint as your distribution trustee
357. 16:54and an asset protection trust, they can only distribute what they hold.
358. 16:58And in this case the only thing they hold is in an interest in a Wyoming LLC.
359. 17:03Now obviously I hold 10%.
360. 17:05I don't need the other 90%.
361. 17:07I'm going to leave it in my trust.
362. 17:09Now, if you were to take this asset here, this LLC, let's assume
363. 17:12that the LLC generated 200,000 this year and you were to kick out,
364. 17:1890% of that or 180,000 to your asset protection trust.
365. 17:23So you have a bank account distribute the money down in the asset protection trust.
366. 17:26Obviously, the distribution trustee can move money out to you.
367. 17:29Not a problem.
368. 17:30They can say here, here's 30 K, here's 50 K.
369. 17:32Whatever it is
370. 17:34I do that
371. 17:36C with the limited liability company.
372. 17:38Keep all your cash up here.
373. 17:40And this is what people will do when they set up these trusts.
374. 17:43Because they don't want to be working with the distribution trustee.
375. 17:46Now, maybe you do it on occasion, but by and large, what you can do
376. 17:50with your LLC to give you distribution powers
377. 17:55and the investment powers, right now you're getting both with this strategy.
378. 17:59You see, when I'm up here as the manager,
379. 18:02I have the ability because of the way we draft our operating agreements
380. 18:06for our Wyoming LLCs, that the distribution clause, this is critical.
381. 18:11You have to have the non pro-rata distribution
382. 18:13clause in your LLC to do exactly what I'm about to show you.
383. 18:17You can decide to distribute to yourself
384. 18:20as a distribution as a 10% member 180 K.
385. 18:25Now some of you are like wait a minute.
386. 18:26You only want 10% and you made 200 K.
387. 18:30I calculate your distribute amount B to comes up to 20 k.
388. 18:33How do you take 180 k out?
389. 18:36What's how you draft your operating.
390. 18:37You set up your operating agreement.
391. 18:39So distributions do not have to be based upon ownership percentages.
392. 18:43In fact, when you give yourself more money like this,
393. 18:46then it creates this debt you owe back to your LLC.
394. 18:50Now just you owe yourself money so it doesn't really matter.
395. 18:53But what we're doing there is we're even building up a greater creditor protection,
396. 18:58meaning that if someone did sue you and they did put a charging order
397. 19:01on your 10% interest, well, they're not going to get anything
398. 19:06because yet 10% interest
399. 19:09has an outstanding debt going back to the LLC.
400. 19:12So even if you did decide to take money out to down to this company,
401. 19:15you would never distribute yourself any money
402. 19:17because you have a charging order, and b you owe the company
403. 19:20a lot of money, meaning you've taken out more than you're entitled to.
404. 19:23So all future distributions will just run to this company here
405. 19:27and away from your creditor.
406. 19:29So setting up an irrevocable trust is a great strategy.
407. 19:33If you need that enhanced asset protection
408. 19:36and you want to lock things down for estate planning purposes,
409. 19:39because these can exist for multiple generations.
410. 19:43So oftentimes we find that physicians will want to set this up.
411. 19:45People are in a high risk profession.
412. 19:47And what they will do is they'll do the strategy I just showed you.
413. 19:50They create their nap and then we create a number of LLCs.
414. 19:54So maybe we have a cash or savings type LLC here.
415. 19:59We have a real estate LLC here that owns other red boxes.
416. 20:04Like you've seen me draw many times in my channel, and we will transfer
417. 20:0990% of the real estate, 90% of the cash LLC into here, and then the individual
418. 20:15will hold the 10% of this one and the 10% of this entity right here.
419. 20:21And so what this strategy allows you to do then is control it, as I stated,
420. 20:26and at the same time have the ultimate of asset protection.
421. 20:30Now the devil's in the details.
422. 20:32That's why if you want to set one of these things up,
423. 20:34I would highly encourage you to go into the show notes.
424. 20:36There's a link to set up a free strategy session
425. 20:39with an advisor in our firm, and we can walk you through
426. 20:42and make a determination as to whether or not
427. 20:43this is the right structure for you, for where you're at today.
428. 20:47And if it is, then you're going to find that if should you run into trouble,
429. 20:50into the future, well, you're going to have a plan
430. 20:52that makes it extremely difficult for any creditor to get after asset.
431. 20:56I hope you got a lot out of this video, and if you like it, be sure to smash
432. 21:00the like button. Take care.