Episode 12: Avoiding the Government with a Revocable Trust

Peter Klenk, estate planning lawyer,  uncovers the complexities of financial planning and the role of revocable trusts in preserving wealth and autonomy. This isn't just about avoiding taxes; it's about empowering yourself to control your financial destiny. 

Transcript

Hi, everybody. Ready to talk a little bit more about death and taxes? Why not, right? So it's a fantastic subject. Let's start off with what we're discussing today: avoiding the government, most people's favorite topic. So, what we're going to discuss is revocable trusts and their role in avoiding government intervention. People often hear about revocable trusts, or Revocable Living Trusts, but where do they come from? Why do these things exist? You know, why are they around? In reality, all trusts, at their core, exist because people were trying to avoid government interference, and that's their primary purpose, though not the only one, as I've mentioned in my other podcasts.

People frequently call in, having heard about revocable trusts, and they're scratching their heads, having read some information but feeling confused. In this discussion, I'll draw from some points I've covered in my other podcasts because it makes sense to do so. We'll talk about what a revocable trust is and how it serves the purpose of evading government control, as viewing it from this perspective provides a clearer understanding. So, let's start at the beginning, where there were no trusts at all, and then they began to emerge within the British Empire. We have them because we were part of the British Empire. We may have parted ways with the British, but we retained some of their legal concepts, trusts being one of them.

Now, why the British? Why did they have trusts? Well, they had a system in place where everything would go to the eldest son upon a person's death. It was a great system for the king; it kept family fortunes together and prevented them from being divided among various heirs. This was in stark contrast to some other systems, like in the Polish Empire, where each child, daughter, son, and others got an equal share, which ultimately led to the downfall of the Polish Empire. The British system was designed to keep everything in order and ensure the eldest son would take over without chaos or fragmentation. It also provided the king with a steady supply of individuals for the military.

However, what happened when someone died, and their eldest son was a baby? The king couldn't have a baby ruling the estate or running the family business. So, they would send a representative to handle things, albeit with a hefty fee attached. This arrangement benefited the king and allowed him to maintain control over the assets and their management. Meanwhile, people wanted to avoid the king and started thinking about alternatives. They came up with the idea of creating a will to grant someone the power to manage the assets for the benefit of the son, thus bypassing the need for the king's intervention. This gave rise to the concept of a trust, with three key roles: the grantor, the trustee, and the beneficiary.

The grantor granted the power, the trustee was the trusted individual who managed the assets, and the beneficiary benefited from the arrangement. The trustee did not own the assets but was responsible for their management. Over time, the concept of a trust evolved, allowing trusts to own property, engage in transactions, and perform various functions. The trust became a legal entity, separate from the individuals involved. This provided protection, ensuring that assets in the trust remained unaffected by the personal issues of the trustee or the beneficiary.

However, what if a person died, and their eldest son was too young to take control? This presented a problem, as creditors or other issues could threaten the assets. The solution was to create perpetual trusts, ensuring that assets remained protected indefinitely. Some states, like Delaware, Pennsylvania, and New Jersey, still allow for perpetual trusts, while others do not. This allowed individuals to establish trusts that could benefit not only their children but also their grandchildren and beyond, maintaining the security of the assets.

People further realized that if the trustee was a different person and the assets were held in a trust, the assets would remain secure even if the beneficiary encountered financial troubles or faced legal issues. This system provided a level of protection and allowed assets to be passed down through generations while preserving their integrity. However, these trusts were irrevocable, meaning that they couldn't be altered or revoked once established.

As the United States was formed, the powers to handle the probate system, which determined the distribution of assets after a person's death, were delegated to the states. Each state developed its own system, leading to variations in probate processes and costs. Some states had efficient systems, while others, like California, New York, and Florida, were known for complex and expensive probate procedures. The probate system, in essence, has existed for as long as humans have had assets to pass on, determining how assets should be distributed upon a person's death.

Now, let's fast forward to the creation of revocable trusts, the main topic of our discussion. These other trusts we've discussed so far were irrevocable trusts, meaning that they couldn't be altered or revoked after the grantor's death. But why revocable trusts? Well, the United States found itself with 13 colonies, all cooperating to fight the British but wary of each other when it came to other matters. They agreed that the power to handle probate matters should be in the hands of the states. Consequently, there were 50 different systems for determining asset distribution upon a person's death, some more efficient than others. California, New York, and Florida were often criticized for their costly and complex probate systems.

Now, let's imagine a scenario in California where an attorney is explaining to a client why probate is expensive for his father's will. The attorney is at a loss, saying that it's just the way it is in California, a lot of work and fees. After work, the attorney may have been sitting back with a glass of bourbon, fanning himself and thinking, "If only there was a way to avoid probate, if only there was a way to avoid the government, if only there was a way to avoid the king." The attorney's revelation was to create a revocable trust, where he, as the grantor, trustee, and beneficiary, granted himself the power to hold his assets for himself. Unlike irrevocable trusts, he had control and could modify or revoke the trust whenever he wished. The trust owned the assets, and he moved everything into it, making himself the beneficiary while retaining control. The key advantage emerged when he passed away; his successor trustee, his son, could take over without going through the probate process, simply by presenting a death certificate.

In essence, revocable trusts were created to avoid the complex and costly probate systems, particularly in states like California, New York, and Florida. They offered a way to bypass the king, or government, when it came to asset distribution upon death. Revocable trusts granted individuals control during their lifetime and a seamless transition to their chosen successor trustee after their passing. This way, they could ensure their assets were handled as they intended without the need for costly legal proceedings and government involvement. So, I hope you found this discussion informative and insightful, shedding light on why revocable trusts were created and why they are valuable tools in estate planning, particularly in states with challenging probate systems. If you are in Pennsylvania or New Jersey and would like to discuss your estate planning needs, please feel free to contact me. Estate planning is our specialty, and we are here to help you. Take care.