Decision Vision Episode 131: Should I Set up a Trust? – An Interview with Richard Morgan, Morgan and DiSalvo, P.C.

Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.

Mike Blake: [00:00:22] Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.

Mike Blake: [00:00:42] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. Brady Ware is sponsoring this podcast which is being recorded in Atlanta per social distancing protocols. If you’d like to engage with me on social media for my Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. If you like this podcast, please subscribe on your favorite podcast aggregator, and please consider leaving a review of the podcast as well.

Mike Blake: [00:01:19] So, before we get started, I want to apologize to the audience. We’ve had some technical difficulties that prevent us from using our primary sound system. So, we’re doing this over telephone. But by the next time we publish an episode, we should be back to normal. And I’m sure it’ll be entirely audible. It just won’t have that same FM radio, NPR quality that I know that you guys are used to. But the content is going to be great, so hang in there.

Mike Blake: [00:01:47] And the topic for today is, Should I set up a trust? And the reason I’m bringing this topic up is, I think, trusts are not all that well understood. In fact, I’m pretty confident it’s all not well understood. And in light of the victory of the Democrats at the ballot box, at least at the Federal level in the 2020 election, there has been an increased interest in forming trusts as a mechanism for asset and wealth protection. Because there has been at least a prevailing feeling that taxes are on estates and gifts are going to increase above what they historically have been, certainly, in recent years. Whether that will actually happen, nobody can say. But people, I know they’re acting proactively in that regard.

Mike Blake: [00:02:54] But trust go a long way beyond or are a much wider topic than simply rich people stashing money away so they don’t have to pay as much estate and gift tax. There are numerous kinds of trusts available. And I think one of the things we’re going to learn about today is, although, maybe we associate trust with ultra high net worth individuals, and ultra high net worth individuals would be somebody with $20 million of net assets, something like that, because, you know, you don’t even start to have a taxable estate until you’re around $10-1/2 million dollars or so if you’re a married couple.

Mike Blake: [00:03:32] But I think we’re going to learn today that trust actually can be a very useful mechanism for many other different purposes beyond the blast of protection. And you may very well benefit if you don’t fall into that category of the ultra high net worth individual.

Mike Blake: [00:03:52] And joining us today to help us talk about this topic is Richard Morgan of Morgan & DiSalvo. Richard Morgan has been practicing law in Georgia since 1987. I just learned from our conversation prior to the show, he actually comes from Virginia and I got married in Virginia, which is actually a great town. I really enjoyed being there. I’d go back in a heartbeat. Richard founded the award-winning Alpharetta law firm of Morgan & DiSalvo, P.C. in 1995 to help individuals and families plan and prepare for the many changes that life brings.

Mike Blake: [00:04:21] Richard prides himself on bringing peace of mind to individuals and families by helping them prepare for significant life events. In addition to the primary practice areas of the firm, Richard also specializes in finding creative solutions for clients in the areas of estate and tax planning, estate and trust dispute resolution, business succession planning, planning for special needs beneficiaries, creditor protection, charitable gift planning, and tax controversies.

Mike Blake: [00:04:46] A leader in his field, Richard is past president of the Taxation Sections of both Georgia and Atlanta Bar Associations, the Estate Planning and Probate Section of the Atlanta Bar Association, the North Georgia Estate Planning Council, and the Georgia Planned Giving Council. Richard serves on the Executive, Legislative and Georgia Trust Code Revision Committees of the Fiduciary law section of the Georgia Bar Association. And he serves on a two member subcommittee of the Fiduciary Law Section to propose a Technical Corrections Bill to improve on the 2017 Georgia Uniform Power of Attorney Act.

Mike Blake: [00:05:20] Morgan & DiSalvo is recognized as a U.S. News and World Report and bestlawyers.com Best Law Firm of 2013. They’ve receive the highest Tier 1 rating in Trust and Estates Law, a distinction held by only 23 law firms in Georgia. Richard, welcome to the program.

Richard Morgan: [00:05:35] Thank you very much. Glad to be here.

Mike Blake: [00:05:38] So, Richard, let’s start at the very foundation. What is a trust?

Richard Morgan: [00:05:42] Great question. So, trusts are what estate planners use kind of like a Swiss Army knife. You can think about them in different ways. Legally, it’s a fiduciary relationship. Someone is in charge of assets and they follow the terms of the trust on behalf of the beneficiaries.

Richard Morgan: [00:06:08] What I think about it also is a three-party contract. You have one party can set this thing up. This entity, think like an LLC or other business entity, just a different kind of entity called a trust. So, you have someone set it up, and they’re the ones who put the assets into the trial. They actually give them to the person who will be in charge, who is called the trustee. The trustee is required to follow the terms of the trust on behalf of the third-party, who’s the beneficiaries.

Richard Morgan: [00:06:36] So, someone gives someone else assets, and they hold them, and handle them, and invest them, and take care of them all on behalf of the beneficiaries. And those three parties can all be the same person. They can all be different. You can mix and match. It’s all about what you’re trying to achieve. And, basically, we use this structure in different ways to achieve different benefits.

Mike Blake: [00:07:01] And, you know, I think when many of us think of trust, myself included, candidly, we think of a trust as a place where rich people stash money to protect them from taxes and sometimes creditors. But there are different kinds of trust and not necessarily for that purpose, aren’t there?

Richard Morgan: [00:07:20] Yes. So, the main trust that people will come across is as the primary estate planning document. The document says what happens to my stuff when I die. Also, it can handle or manage your affairs while you’re alive if you need assistance. And so, that type of trust is revocable. You can change it anytime you want. You can amend it anytime you want. You can move assets in and out of it. It has no tax implications. It uses your Social Security number as the tax ID number. But it serves as your primary estate planning document to say what happens if incapacity, death, that type of thing.

Richard Morgan: [00:07:58] The other types of trusts are primarily irrevocable. Irrevocable trusts are used for asset protection, for gifting. And for basic tax reasons, wealth transfer tax reasons, gift tax, estate tax, that kind of thing. Sometimes for income tax reasons at the state income tax level, like Georgia or wherever you live state tax level. But they don’t normally give you any significant income tax benefits at the federal level.

Mike Blake: [00:08:34] So, I like to bring up sort of current events here, because I think there’s an opportunity to make an important distinction. You know, I’m sure you’re familiar with the Britney Spears ongoing conservatorship battle. It looks like it may be finally having some kind of resolution. From afar, conservatorships like that appear to have some element, some things that look trust-like in nature. And I was hoping you kind of draw a distinction, if there is a distinction, maybe there’s not. Is there a distinction between the conservatorship and a trust? If so, what are the key differences?

Richard Morgan: [00:09:16] All right. That’s a great question. Let’s go through some basics. What is estate planning? Estate planning is the following: Right now, you control all aspects of your life. You can do whatever you want. As long as you don’t you hurt anyone else or break the law, do whatever you want. But what if you can’t? Incapacity or death. There is a court-based system for to deal with all those issues. The problem is that court-based system is not very pleasant.

Richard Morgan: [00:09:45] As you could see with the Britney Spears situation, which I’m really familiar with. And it kind of freaked me out about how this is working. It would not happen like that in Georgia. I can tell you that right now. But in, I believe, California or wherever she’s at, I guess their system is a little different. And it is state law based. But, basically, if you do not have your own estate plan, then the court-based process is what kicks in. If you become incapacitated, then there’s a conservatorship of your property. There is a guardian of the person. And then, when you die, there is a estate law will, which is the rules of intestacy.

Richard Morgan: [00:10:24] And all of those processes are basically set up under the assumption that the court needs to oversight. They need to appoint someone to be in-charge and then oversight them. Because you didn’t do it, the court did it. And they don’t know who all these people are. So, they’re going to figure out a way that they can court oversight, get accountings and returns. And have this court oversight a process that’s not very exciting. It’s not very pleasant.

Richard Morgan: [00:10:45] But what the law allows us to do is to privatize almost the entire thing. So, if you do your estate planning properly, there is no need for a guardianship, almost always. There is no need for conservatorship, almost always. There is no need for the intestacy process, almost always. What you do is you create, for example, everyone needs, what I would call, a estate plan, basic documents everyone needs. There are two agency documents. One is for financial matters. So, instead of having a conservatorship over your property, you have a financial power of attorney and you appoint an agent – you do, not the court – to handle your affairs for you if you need assistance.

Richard Morgan: [00:11:30] Then, you have – in Georgia it’s called – the advance directive for healthcare. In different states, it’s called different things. But you appoint an agent to assist you with medical related matters, and it’s your HIPAA representative, instead of a guardianship that the court-appointed. So, for everything the court would do, you can privatize it. And then, instead of having the intestacy process, if you have no will, you have your own will that says what happens to your property when you pass. And revoke the living trust based structure, it’s just a different way of handling your affairs during your life and at your passing.

Mike Blake: [00:12:05] So, you mentioned something about the differential between California and Georgia. And I’m curious about two things. Number one, which state is more representative nationwide? Is Georgia the outlier or is California the outlier, maybe both of them are outliers, to your knowledge?

Richard Morgan: [00:12:23] So, I am not a California lawyer, so I can only look from afar. There was a movie that came out recently – I don’t remember the name of it – where a woman was basically taking advantage of people getting them committed, and then she would then manage their affairs, and they couldn’t get out of it, didn’t have a lawyer representing their interests. I was cringing.

Richard Morgan: [00:12:43] In Georgia, it’s the opposite. In Georgia, the courts do not favor someone taking over your life involuntarily. So, they try to limit to what extent they take it over. So, I do not believe what is happening in California would happen in Georgia, because they tend away from doing it. In the first place, they need their own – let me give you an example.

Richard Morgan: [00:13:10] So, I have a client and my client is starting to suffer incapacity issues. And I can see they’re getting taken advantage of. Let’s say, the agent who they chose is not a good person and taking advantage of them. So, they need a court to come in and protect them. I can’t even do it. I have to get them a different lawyer because they need their own lawyer. The court needs some independent person. It’s a very protective process in Georgia. They don’t take lightly taking away people’s rights.

Richard Morgan: [00:13:46] Because when you do a conservatorship or guardianship, you are literally taking away their human rights, rights to their property, rights to their body. And they’re giving them to someone else. And then, the court oversights that other person. So, they just take it very seriously in Georgia. And I would say that in most states, they take it very seriously. Some states, they don’t take it as seriously or as protective. And I’m assuming California is like that, which is why it’s happening.

Mike Blake: [00:14:16] So, are trusts just for estate planning and wealth protection? Are there other reasons to set one up?

Richard Morgan: [00:14:28] I guess the question is, what else is there? If you give me an example of what you’re thinking about, I may be able to come up with a reason why.

Mike Blake: [00:14:35] So, are there trust that are set up, for example, to manage somebody’s health care? Right. For example, you just talked about somebody whose health is deteriorating. And over time, they may lose capacity. A trust might be set up for their benefit just to maintain their health care, for example. Is that a thing or not?

Richard Morgan: [00:14:57] I’ve never heard of that thing. So, basically, [inaudible] –

Mike Blake: [00:15:03] I might be wrong, I’m not a lawyer.

Richard Morgan: [00:15:03] The trust deals with property, asset, income. It deals with wealth, whether it’s a dollar or a billion. It deals with asset. Health care is a personal thing to your own body. And so, if you had someone who needed assistance or becoming incapacitated, the combination of a power of attorney with revocable trust is by far the best vehicle to help manage someone’s affairs with little hassle. It’s more powerful, less hassle that you can make someone’s life easier to help you.

Richard Morgan: [00:15:40] When it comes to the health care aspect, though, not the trustee or the power of attorney agent who’s dealing with that. You need to represent your body, your body right, your health care right. And that would be an agent under health care power of attorney or advanced directive health care. Or you go to the court system, which is the guardianship. There’s also a profession that exists – and I don’t remember the name off the top of my head – they will act as health care advocate so you can hire them like a service provider, like you hire an accountant or a lawyer. You can hire one of these health care advocates who will assist you with your health care on your behalf.

Mike Blake: [00:16:24] Okay. And so, how does a trust fit into an overall estate plan? For example, does it replace a will? Does it operate alongside a will? Is there other pieces of systems here? How does that fit within the overall jigsaw puzzle?

Richard Morgan: [00:16:42] So, the way I would say it is, your base plan includes the financial power of attorney, the health care document – what you call the Advance Directive for Health Care in Georgia – and then a will. You may or may not need a revocable living trust. If you have a revocable living trust as your main estate planning document, then you would still have a will.

Richard Morgan: [00:17:05] But instead of it being a big kind of all encompassing document that says what happens to your stuff when you die, it instead is just a coordinating document. It just says, appoint the executor to be in charge. And the executor to, please, transfer or pay my debts. And then, transfer any remaining assets over to my revocable trust, because that’s where my primary plan is located.

Richard Morgan: [00:17:28] So, either the will is your primary document or just a coordinating document, along with the revocable trust, which would be your primary document. And that revocable trust would say, “While I’m alive and I’m in good shape, I’m the trustee. I’ll take care of myself with the assets that can move assets in and out. I can do whatever I want. If I become incapacitated, my co-trustee or backup successor trustee will take over, and manage the assets for my benefit. And then, at my death, it acts like a will but outside the probate process.” It just says whatever you want it to happen at your death, that’s what will happen.

Mike Blake: [00:18:05] And I read recently that that’s actually a benefit of a trust. Is that trust – if I read correctly – generally, if there’s some kind of dispute or, generally, not handled the probate court but elsewhere. Is that right?

Richard Morgan: [00:18:17] Yeah. So, in a good number of states, we would call them bad probate states. We’re in Georgia, the closest state to us that is a bad probate state is the State of Florida. It’s a horror show. I don’t know what they’re doing, but lawyers changed the law and it’s really, really bad. And so, you’re required to hire a lawyer with the administration process, probate process. In Georgia, you do not have to, but you can. We recommend you do, you do not have to.

Richard Morgan: [00:18:51] In Florida, they have the lawyers compensation in the code, of which is a percentage of your estate, approximately three percent if I am correct. So, literally, Florida law requires you to make a lawyer a part of your estate. That is insane. So, everyone who has a decent lawyer, a decent amount of assets will put all their assets or all they can put into a revocable trust while they’re alive. So, they’ll set up a revocable trust, put all their assets into it which they can put into it without causing tax problems. And then, when they die, they don’t go to the probate process. They avoid those laws.

Richard Morgan: [00:19:30] And then, Florida went ahead and made other cockamamy laws. Because everyone was avoiding probate, they came up with all new stuff that augmented estates, all kinds of crazy stuff.

Richard Morgan: [00:19:40] Georgia is the polar opposite. And I would say most states are kind of between the two. Georgia is what I would call a simple probate state. It is purely administrative. You never see a judge. You purely go into the clerk, which is going like to the DMV, like driver’s license kind of stuff. It’s just administrative. You fill out some documents that are on the probate courts website. As long as everyone is an adult who is an heir or closest living relative, you file this document with the original will, the heirs all sign off saying, “Yep. That’s the original will. I have no problem with that.” It’s purely administrative.

Richard Morgan: [00:20:18] The clerk says, “Raise your right hand. Do you agree to follow the terms of the will?” The proposed executor says, “Yes, I do.” And then, the clerk gives the executor a document called Letters of Testamentary, it says they’re the executor, and they’re off. And if you have a good will – you need a good will – it waives everything else. You never go to the probate court again. So, in Georgia, it’s very simple. But in states like Florida, California, New York, New Jersey, Illinois, and others, it can be a pretty painful and expensive process that you’d like to avoid. Here, we just don’t care.

Mike Blake: [00:20:56] And are there restrictions in which state that you can set up a trust? For example, do I have to be a Georgia resident to set up a Georgia trust? Or can I do it from out of state and I want to have it set up under the laws of Georgia?

Richard Morgan: [00:21:07] Well, good question. Okay. So, why would you want to do that? Is the reason you would want to do that because you want the easier probate process? Is that what you’re asking?

Mike Blake: [00:21:20] Well, it could be for whatever reason. I like one state over the other. And one of the things that brings that to mind is that, I’ve noticed that in recent years, setting up certain kinds of trust in Wyoming have gained in popularity. And I’m pretty sure they don’t actually live in Wyoming.

Richard Morgan: [00:21:37] Got it. So, this came up beginning with the State of Alaska starting to make really creative trust law. And which then went to Delaware, Tennessee, Nevada, South Dakota, Wyoming. They have created more and more liberal, flexible trust law. And so, the question becomes, can someone who doesn’t live in those states – because pretty much all of those states, but Tennessee, is what I would call a low population density state. There aren’t many people who live in Delaware. There aren’t many people who live in Nevada, except for maybe going gambling. There aren’t that many people in these states with these really aggressive laws. They’re making their laws more beneficial, more liberal to get economic activity.

Richard Morgan: [00:22:31] So, the question is, most people in this country don’t live in those states. So, can they get the benefit of these more liberalized, potentially more beneficial trust law? And the answer is maybe. So, number one, you got to follow their law to get access to their law. That normally means you need to know a person, an individual in that state, a resident of that state to be the trustee. Or more likely, you will hire a trust company in the other states. That puts the stick in the dirt and gives you nexus to that state. But then, you have to do things like have some administration or some activities in that state trying to get you to have sufficient contact to that state to be able to use their law.

Richard Morgan: [00:23:18] And so, if you do that, we believe that you can get access to all of their law, except – there’s an exception. And this is the unknown. The exception is, is the law in that state against a strong public policy of the forum state where you live? And this came up, we’ve seen Con law in the last 10 years, the last 15, 20 years like crazy.

Richard Morgan: [00:23:46] So, if we saw same sex marriage – this happened in real time – you had states that allowed same sex marriage and you had some states that didn’t. Let’s say, Georgia did not. So, if someone leaves the State of Georgia – I think Nevada did – you went to Nevada, you got married, same sex marriage, you came back to Georgia. The question is, are you married in Georgia? And the answer was, they said, “No. You’re not married here because you got married in a state where it was allowed. That’s fine. But we don’t allow it because it’s against a strong public policy of our state.” Now, on that issue, Supreme Court came back and said, “You don’t have that choice. It’s a Federal Constitutional issue. You have no choice, same sex marriage is okay.” But we saw it in action.

Richard Morgan: [00:24:33] Now, go to what’s happening right now. You have what’s called self-settled, and that was the main reason people are going to these other states. And the main reason they’re going, is you can set up a trust for your own benefit and not have creditors get to it. And in theory, get the same estate planning or estate tax benefits as if you give up all the rights.

Richard Morgan: [00:25:01] So, normally, for you to have a completed gifting transfer to, say, the estate taxes and/or to avoid creditor claims with those assets, you have to cut away all the rights that you had in the property. So, you’re the person who sets the trust up. You give away the asset and put it into trust. You can have no rights. You have no technical right. You cannot be the trustee. You cannot be a beneficiary.

Richard Morgan: [00:25:28] In those states, they allow you to be a fully discretionary beneficiary with an independent trustee. So, you would put in a trust company, primarily, and then you could have other unrelated parties. But you cannot be a trustee. But you can be a beneficiary. So, if you ever need access to those assets, the trustee can make a distribution to you. You can’t do that in Georgia and get the benefits they’re trying to achieve, either asset protection, avoiding creditors, or getting state tax benefits, and the like. But in the other states, you can.

Richard Morgan: [00:26:02] So, the question is, can I be in a state that does not allow self-settled asset protection trust? Can I put a stick in the dirt in the other states? I hire a trust company, I set up a trust in another state, I follow their rules, can I use their rules in Georgia?

Richard Morgan: [00:26:20] And it comes up when someone wants to sue you. So, you owe money. And the creditor says, “Where are your assets?” “Well, I got some assets in a trust, but they’re not mine. I can’t touch them.” And that’s where the tire hits the road. Can the creditor get into that trust? And the answer is, if the other state law applies, the creditor cannot get in. If Georgia law applies, you can get in because Georgia law says, a self-settled trust is a trust where you put assets in, and retain a benefit, gives you zero asset protection. None. Which a creditor just slides right through it.

Richard Morgan: [00:26:58] So, the question was, what law applies? And the answer is, we don’t know. That’s the unknown. You have two camps. One says, “Yeah. It works.” One says, “We’re not sure it works. There haven’t been any good cases on point. All the ones that have been on point have been bad fact cases, and they all say it doesn’t work.” But the people that believe in it, believe when they get good facts it will work. And/or even if it doesn’t work, that the cost of breaking the trust is so high, it’s such a pain and so costly to go through the legal system to break it, that it will be protected just from creditors not wanting to go through the hassle factor.

Mike Blake: [00:27:46] So, in part then, I mean, what may govern the law then is many business contracts have some clause that indicate that this contract is to be subject to the laws of state X or state Y. And if you’re putting your trust in a protection-friendly state, then that probably needs to be part of an overall comprehensive strategy where whatever business agreements into which you are entering and you think you may want to have your assets protected from that for whatever reason, you want to make sure that agreement says it’s going to be governed by the laws of that state.

Richard Morgan: [00:28:26] Yeah. So, historically, business agreements, a lot of companies will incorporate – we don’t do that – in Delaware. Delaware is a very company-favorable state. So, they will incorporate there. Let’s say, if you have a dispute, you got to sue there, all that kind of stuff. That law is tried and true and it worked. It’s not against public policy. So, for business contracts, as long as there’s a nexus to that state and they get to Delaware because they incorporate in Delaware. So, there you are, they have nexus in Delaware. It’s all good from their perspective.

Richard Morgan: [00:29:04] On the trust world, not quite the same thing. There’s no, like, incorporation. You can set your trust up there. But the question is, what provisions of the state law are at issue? And if there is a particular state law, like this self-settled asset protection trust legislation, if it is not permissible in Georgia, and is permissible in the other state. If it is against a strong public policy in Georgia if they’re getting sued in Georgia. And that’s where the issue is. It’s not just in general. It’s on specific issues of concern.

Mike Blake: [00:29:44] Okay. So, let’s draw back a little bit here to a higher altitude in a broader perspective. Is there a minimum amount of assets in terms of monetary value that it makes sense to go to the trouble, the expense, et cetera, of setting up a trust? Or is a trust potentially a vehicle that almost anybody might want to use?

Richard Morgan: [00:30:09] So, let’s talk about what kind of trust, and then I’ll tell you about kind of where it makes sense. If we’re talking about an irrevocable trust, that is only normally done by wealthier individuals or families, usually, for tax purposes or they have more significant asset protection concerns. And then, it’s a whole another rabbit hole you go down on asset protection. So, that is for more significant assets. We’re trying to deal with taxes or added protection or combo.

Richard Morgan: [00:30:41] The revocable trust, that is a primary state planning document. And that one can be done by pretty much anyone. The way I look at it is this, from dealing with a lawyer and creating these documents, a will is less money and a little bit less hassle. They revoke the living trust pay structure, a little bit more money, a little bit more hassle. And so, the question is, well, why would I want to pay more money and have more hassle if I can just go with a will and a simple probate state like Georgia, assuming you’re in a state like Georgia? And the answer is, that only makes sense if the benefits of the revocable trust decently outweigh the cost and the hassle.

Richard Morgan: [00:31:28] We do a monthly newsletter in our law practice. And the last one I did, which was last month, a few weeks ago, was on that exact issue. Should you go with the will or revoke a living trust based structure? And when I ended up doing it, I came up with 11 different benefits that a revocable trust could provide. And so, the way I think about it, is, you kind of go through 11 benefits and you say, “Do I like these or not?” I don’t care about them. You just go with the will. Simple, at least if you’re in a state like Georgia. If you don’t really care about them, well, then revoke the will. If you care about them, then you go with revocable trust.

Richard Morgan: [00:32:04] And one of the benefits is, if you live in a bad probates state, like Florida, it is a must. But then, everything else against the other ten benefits are kind of like it all depends on you and do you care or not.

Mike Blake: [00:32:19] Okay. So, is there a limit as to the nature of assets that can go into a trust? For example, can I chug anything in there, stocks, securities, real estate, Bitcoin? Or are there limits to the kind of assets that can be placed into a trust?

Richard Morgan: [00:32:37] You can put in any asset you can fathom with the following exceptions: You do not want to transfer an IRA or a qualified retirement plan and, normally, you don’t really want to do annuities either into a trust while you’re alive. The annuities is a question, we’ll hold off on that one.

Richard Morgan: [00:32:59] IRAs and qualified plans, you can change them from one custodian to another, like a Fidelity to Schwab. You cannot change the title on the account. If you change the title on the account, it’s an income taxable event. So, if you go from yourself to your trust, you change title, we believe that that is an income taxable event, and that is a horror show. You do not want to do that. Whoever helped you do that, you’re going to be really upset when you get that massive tax bill. So, anything else you can put in the trust, but not that.

Richard Morgan: [00:33:33] The other exception would be – and, again, I’m not a Florida lawyer – under Florida law, there is something called homestead. And the question is whether or not you should put your primary residence in the revocable trust. And that’s something I will leave to Florida lawyers. So, those are the only two things that I would worry about.

Mike Blake: [00:33:58] Okay. Once you set a trust up and you get it going, do you have to do anything else? I mean, is it a fairly self-maintained thing or is there any ongoing maintenance that you have to perform to keep it active?

Richard Morgan: [00:34:12] Great question. All right. So, you’re the creator, while you’re alive, it is considered a grantor trust for income tax purposes. That means that the grantor, the creator, you, the creator are the taxpayer. The trust will use your Social Security number as its tax ID number. All of the income, deductions, all that stuff that happens inside the trust will be on your IRS Form 1040, your personal income tax return. It is not a separate taxpayer.

Richard Morgan: [00:34:47] So, while you’re alive, the only issues are title. You want to make sure that you want the assets in the trust. You need to put title in the trustee of the trust, and that puts it in the trust. Anything else happens, you can do whatever you want. You can access it and do whatever you want. So, while you’re alive, there isn’t a whole lot at all. Any assets you want, you got to own in the right name. Other than that, it’s all self-executing. Nothing else really needs to be done. You can just treat it like you own the asset. Invest it how you want, use it how you want, that kind of thing.

Richard Morgan: [00:35:24] However, after you die, after the grantor, the creator dies, it now becomes a non-grantor trust because the grantor is now deceased. He can’t be the taxpayer. So, now, the trust is a separate income taxpayer. So, there’s three things after death or a non-grantor trust – which, in theory, you could have a non-grantor trust while you’re alive. And that would normally be for income tax reasons. Most trusts that are non-grantor trusts are created after someone dies. Because the creator is now deceased.

Richard Morgan: [00:36:00] And that trust, because they separate income taxpayer, use a separate EIN number, Employee Identification Number or Tax ID number, and so you care about, one, you will file an annual income tax return. That’s additional hassle. Number two, you have to own the assets the right name. That’s just to set up the issue, just like while you’re alive, just get the title in the right name. That’s no big deal. And number three, there is usually a little – not a lot – income tax planning. And the reason is because you now have a choice as to who the taxpayer is going to be.

Richard Morgan: [00:36:37] If the assets were just in the name of the beneficiaries that you were choosing, your spouse, your kids, whoever, and it was in their name, they’re the taxpayer. There was no choice. If you put it in a trust for their benefit, now, who’s the choice? Basically, the tax return that is filed, the IRS Form 1041, it’s just an informational tax return. And it says how much income was earned during the year, how much expenses were incurred during the year, what’s the net taxable income.

Richard Morgan: [00:37:07] And then, it says this thing called Distributable Net Income or DNI – let’s not talk about that. It’s a little technical. But the fact is, it says who got the income. So, if the income is accumulated in the trust, the trust pays the tax on the income at its rate. If the income was distributed to a beneficiary, it carries out the taxable income with it, and the beneficiary will pay the tax. It doesn’t create income. It allocates income to whoever got it. So, that’s the hassle factor. Own assets to the right name, file annual income tax return. And you may have to have a little bit of tax planning to decide who you want to pay tax on the earnings that year.

Mike Blake: [00:37:53] Now, let’s say that this question may self-answer, but I’ll ask it anyway. And that is, if we’ve changed our mind and we don’t want to have the trust anymore, how easy are they to dissolve? And I guess I’m going to focus on the distinction between revocable versus irrevocable. When we’re saying irrevocable, how irrevocable is that?

Richard Morgan: [00:38:18] That’s a great question.

Mike Blake: [00:38:22] Is that impossible? Or is that really hard? Or what does that all mean?

Richard Morgan: [00:38:23] It used to be harder. So, let’s start with the easy one. Revocable trust, you can revoke them, change, and terminate anytime you want, take the assets in, take the assets out. If you want to get rid of it for good, you do a piece of paper and you say, “Based on the power given to me under this provision of the trust, I hereby terminate the agreement.” Sign it and date it and you’re done.

Richard Morgan: [00:38:47] Now, let’s go to irrevocable. With irrevocable, it is irrevocable. Which means, in general, you cannot change it. Now, a couple exceptions. Number one, you still can use the provisions in the trust. Hence, the reason to use a good trust agreement. Hence, you need a good attorney to draft a very flexible trust agreement because you have to live with this thing. You or your beneficiary have to live with this thing over, potentially, a long period of time. And you want it as flexible as possible. It’s legally possible because things will happen.

Richard Morgan: [00:39:28] So, a buddy of mine told me that decades ago – this probably could be ever since – he read it somewhere else and that is, the only thing constant in life is change. So, I just assumed everything is going to change. I know what the facts are today. I have no idea what they’re going to be tomorrow. I can make an educated guess. But beyond that, good luck.

Richard Morgan: [00:39:46] So, we want the trust to be as flexible as possible. So, you can actually use the terms of the trust to terminate it, to distribute assets, to distribute in further trust, do all kinds of stuff. So, the ability to change, for the most part, is built into the document itself. If you have an irrevocable trust that is not flexible, it’s inflexible, then that’s not a pleasant place to be.

Richard Morgan: [00:40:13] And I’ve had a lot of people come to my offices who are not happy with their trustee. The document doesn’t allow them to change them. They’re not happy with the terms. They’re to change them and they’re not happy. We don’t have those issues. Good lawyers don’t have those issues. They draft for maximum flexibility. Now, that’s the law that’s been around well-before I became a lawyer in 1987.

Richard Morgan: [00:40:38] The new law, which Georgia got as of July 1, 2018, and other states are starting to start to get through the country, is a new power. And the new power is the power to amend one way or another – there’s different ways to do it – an otherwise irrevocable trust. And so, that would include one of the following. Number one, a judicial court-based modification. That’s number one. They have to reach certain requirements, and you do it for certain reasons. Number two, you can have a trust distributed in further trust. So, if you want to change the terms – there are technical rules with it – you may be able to distribute the trust assets into another trust with desired changes to the terms.

Richard Morgan: [00:41:37] You can also do what’s called, at least in Georgia, a nonjudicial settlement. So, instead of filing a lawsuit, fighting it out, and then settling, agreeing to legitimate concern about the trust, you can now – within certain parameters, with certain parties involved and you got to follow all the rules – go to change the trust agreement by agreement of all the beneficiaries. And there’s different ways to get everyone to agree. And so, it’s still being fleshed out. It’s still a pretty new law. But, now, the big picture is we now have potential options to modify an otherwise irrevocable trust that did not exist before.

Mike Blake: [00:42:26] So, what are the risks involved with setting up a trust? What can go wrong? How could it cause harm?

Richard Morgan: [00:42:35] All right. This is the most obvious one. I’ll give you a real live example. 2012, more assets were gifted than in the history of Earth. And the reason was, the exemption from the estate tax was going to go from five million to one million on January 1, 2013, unless they changed the law. So, if you had a decent amount of wealth, you’re like, “Wait a second. Me and my wife or me and my spouse are going to lose $4 million of exemption each.”

Richard Morgan: [00:43:10] The exemption at that time was low, but, historically, 55 cents on the dollar. So, that’s, potentially for a married couple, $8 million; for a single person, $4 million, of exemption, potentially 50 plus percent rate. We’re talking millions of dollars of tax that could be avoided if we could somehow lock in that exemption before it went away on January 1, 2013.

Richard Morgan: [00:43:36] So, we had tried, a lot of advisers had tried, to get their clients to do taxable gifting to lock in this benefit. But, of course, to lock in the benefit, you’ve got to give assets away. If you give them outright, you literally gave them away. If you do a flexible trust, then you give legally, but not practically. But there is something you’re giving up. No matter how you slice it, you’re giving up some direct rights if you do a taxable gift to get the exemption locked in.

Richard Morgan: [00:44:10] So, the people that really didn’t want to do it, but had a lot of assets, waited until the last very minute. We, basically, balked and said we don’t have time, you need to go somewhere else. But a bunch of lawyers, at the last very minute, were just popping out these trusts with very few questions being asked, no analysis being done. So, they got all these trusts in the last very minute and then they put all these assets in. And then, within two weeks, Congress changes the law and makes the 2012 law potentially permanent, with a couple of exceptions. And that was the 2012 Tax Act that occurred beginning of 2013.

Richard Morgan: [00:44:49] So, guess what happened? Massive numbers of people who did those gifts in trust wanted their money back. We’ve never had that problem. We went through the analysis, properly drafted the document, very flexible, all that stuff. But they made a big mistake. They wanted their money back. It’s not so easy to get your money back. So, they went through a lot of angst about that. I don’t know how it went because we didn’t deal with any of those.

Richard Morgan: [00:45:17] But if you do revocable trust, you can undo it. It’s not a problem. But if you do irrevocable trust, you are actually doing something irrevocably. You need to go with your eyes wide open as to what you’re doing. You’re either okay with it or you’re not. If you’re not okay with it, don’t do it. Period. If you’re okay with it, fine. Move forward. But you need to think through it. And that’s what we help our clients go through. And make sure they understand when we draft for back to flexibility so they don’t ever have second thoughts about it. But the other is, we want to make sure their eyes are wide open as to what they’re actually doing and what it means.

Mike Blake: [00:45:53] One of the risks that a trust may be challenged and effectively dissolved without consent by either, say, a government entity or even a beneficiary that doesn’t like the way the terms are set up. How common an occurrence is that? Is that a real risk?

Richard Morgan: [00:46:18] I would say the bigger risk is the fight, so litigation. I think divorce but as bad or worse. So, when you get to a trust and estate dispute, it gets nasty, really nasty. There are no winners. It’s nasty. So, our goal, a good lawyer’s goal, is to avoid the fight from ever happening. And so, you do that in the following way.

Richard Morgan: [00:46:48] Well, let me back up. How could they challenge? So, they could challenge based on it was a forgery that really wasn’t your document. You didn’t sign it or didn’t sign it properly. Number two, it was direct. Someone had a gun to your head, undue influence. They were overtaking your mental state so much that it really wasn’t your desire. It was their desire that, you know, you could be losing your mental state, either incapacitated or you’re in that kind of transitional phase, you’re being taken advantage of.

Richard Morgan: [00:47:22] There’s all kinds of stuff in there where, yeah, this trust agreement exists. It’s not really what you wanted. That’s what someone else wanted and got you to do. Or they just came up with it from scratch. You don’t know anything about it because it’s a fraud. So, there’s those kinds of legal positions that could be taken. Claims could be made.

Richard Morgan: [00:47:42] And the goal is to think through the plan well and then make sure that it cannot be challenged. One of the ways that you can make sure it cannot be challenged is that the document will include an in terrorem clause. That is a provision. Not all states allow it. Georgia does. Florida does not, as far as I’m aware. I think California does not. There’s a theme: Florida and California.

Richard Morgan: [00:48:13] So, in Georgia, it absolutely works. And it basically says – and this is my kind of common way of talking about it – you spent a lot of time and a lot of money doing this plan. We want it to work and we don’t want to fight about it. And so, if you fight about it, you get nothing. So, technically, what it says is, if you do something to dispute the terms of the plan, not the administration of the plan, but the terms of the plan, then you can get nothing. And the only way – and this is a hot topic in Georgia – we know of not to have it apply in a state like Georgia is to be able to go to court and prove that the entire document is void.

Richard Morgan: [00:49:05] Actually, this is not good. There’s a Georgia Court of Appeals case that just came out, and this was sad and pathetic. And, basically, said that even though the jury held that the trust was obtained through undue influence, it should not be valid. They said the in terrorem clause still worked and the people who challenged it didn’t get anything. That is an insane analysis. It makes no sense.

Richard Morgan: [00:49:41] And so, the Supreme Court, hopefully, will take that up. This is brand new. It just came out. The Supreme Court of Georgia will, hopefully, take that up and overrule that decision, which is insane, my personal opinion and the position of many others. Otherwise, criminals will just take over. We don’t want criminals to take over.

Richard Morgan: [00:49:59] So, if you go about doing this properly, spend the time, the resources, do it properly, think through it, add an in terrorem clause, the chances of it being challenged is close to zero for normal estate planning documents. There is one exception, and that would be someone is defrauding someone else. And this is the asset protection arena where someone is avoiding the government, someone is avoiding a spouse, or someone is avoiding a creditor, and they are taking actions behind everyone’s back to basically do, what we refer to as, a fraudulent or voidable transfer. Which is a transfer with the intent to avoid, delay, or defeat a potential creditor claim.

Richard Morgan: [00:50:45] And those could be challenged because someone is trying to abuse somebody else. And their only way to get what they’re supposed to get is to fight about it. In that case, you’re not fighting with someone to do something good. You’re fighting with someone who is a bad actor, who’s trying to abuse somebody else. Assuming they were bad actors. Now, it could be everything is totally proper. And so, we’re just getting aggressive with them and they’re just doing the best they can. But I hope that answers your question.

Mike Blake: [00:51:19] It does. We’re talking with Richard Morgan. And the topic is, Should I set up a trust? Are there any restrictions on who the beneficiaries of a trust could be?

Richard Morgan: [00:51:33] They have to be human beings. So, any human being, anyone, can be beneficiaries.

Mike Blake: [00:51:40] So, the story of a millionaire making a cat a beneficiary, those are just that, a story.

Richard Morgan: [00:51:45] I was going to bring that one up. Well, it has to a human being. There is an exception if state law allows it. There is an exception for a pet trust. So, I think it was Leona Helmsley who went to jail for tax evasion. I believe it was her that she left millions of dollars, I think, or a huge amount of money in trust for her pet. You can now create a pet trust in Georgia. And the reason you do that is if there’s a lot of money involved, not normal money, but big money involved to take care of pets over the life of the pets. And you want to separate the person taking care of the pet from the one managing the money. But most people don’t do pet trusts. But, yes, that is an exception. Otherwise, it has to be human beings.

Mike Blake: [00:52:44] Okay. And what about selecting a trustee? Are there any restrictions as to who a trustee can or cannot be for a given trust?

Richard Morgan: [00:52:52] Yes. So, at least under Georgia law, State law specific, and the Georgia law and I think most states, it has to be an individual. If it’s a company, it has to be a trust company. There is one exception in Georgia and Georgia might be a little bit conservative on this stuff. I don’t know about other states. So, in Georgia, if an individual, a qualified trust company, or I think all of them are bank type trust companies, except one called Reliance Trust Company, which came in a few decades ago. Then, they changed the law on them so no one else could do it.

Richard Morgan: [00:53:34] But, also, a bunch of trust companies that work in Georgia that service Georgia clients, they actually come from Tennessee or other states, and they are able to do business in Georgia. And I don’t know that all of them are banks. So, some of them are just trust companies that are not banks.

Mike Blake: [00:53:55] Richard, this has been a great conversation. We’ve covered so much ground here and you’ve been so generous with your time and expertise. I think we’ve only scratched the surface of what there is for people to know about trust as they think about this decision. If there are questions that we either didn’t cover or we didn’t cover in enough depth for one of our listeners, can somebody contact you with a question? And if so, what’s the best way to do that?

Richard Morgan: [00:54:19] Yes. Thank you. So, I would say a couple things. Number one, our law firm has kind of a whole theme of education base. So, we are always happy to educate. And one of the ways we do that is to put out a monthly newsletter. Right now, we have, I think, 2,000 or 3,000 people on the newsletter and, probably, over half of them are professional advisers of some type.

Richard Morgan: [00:54:45] So, we kind of take it upon ourselves to educate, not only our clients, potential clients, other people in the community, but also other advisors, our peer lawyers, CPAs, financial advisors of all types, business appraisers, everyone out there. We’re happy for them to get educated. And so, we do monthly newsletters and news alerts, if something big comes out, tax law comes out, or something like that.

Richard Morgan: [00:55:10] If you go to our website www.morgan, M-O-R-G-A-N, disalvo, D-I-S-A-L-V-O, .com, on our website is all of the stuff that we put out. If you go to the top, put your cursor on the top – we talked about news and articles – the first dropdown menu right there will be, basically, our one-stop-shop. It makes you go to a page called the Estate Planning Journey or something like that. And it has a one-stop-shop of all of our newsletters done by different substantive areas.

Richard Morgan: [00:55:52] So, for example, should you use a will or irrevocable living trust? We have newsletters and videos and all that kind of stuff. So, all the issues that come up. So, if you want to learn, go to the website. We also offer a free estate planning meeting. We’re happy to help anyone who wants assistance. If they want to set that up, they just call our offices at 678-720-0750, and just ask to set up an initial estate planning meeting and we’ll go from there. Always happy to help.

Mike Blake: [00:56:25] That’s going to wrap it up for today’s program. I’d like to thank Richard Morgan so much for sharing his expertise with us.

Mike Blake: [00:56:31] We will be exploring a new topic each week. So, please tune is so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy this podcast, please consider leaving a review with your favorite podcast aggregator. That helps people find us so we can help them. If you would like to engage with me on social media with My Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. Once again, this is Mike Blake. And our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.