Gary Gamma: Hi, I’m Gary Gamma. Welcome to today’s live webcast on estate planning. Who needs an estate plan? Many people believe that you only need an estate plan if you’re wealthy. In reality, everyone should have one to make sure your wishes are carried out when you can no longer manage your affairs. Having an estate plan can also help your heirs pay substantially less in taxes, fees, and court costs.
Joining us today to discuss this important topic are Alisa Shin and Sara Price of Vanguard Personal Advisor Services® and Jane Greenfield of Vanguard Charitable. They’ll discuss the benefits of having an estate plan and a strategy for charitable giving. Welcome, ladies.
Group: Thank you.
Gary Gamma: Now, if you’ve been to a webcast before, you know we’ll spend most of our time today answering your questions. We’ve already got a lot of them, but we’d love for you to submit more throughout our session today. There’s a question box on the screen in front of you, and right below the question box are a couple of widgets.
The blue widget on the left will allow you to access technical help. And if you would like to read some of Vanguard’s thought leadership material that relates to today’s topic, click on the green resource list widget to the far right. How’s that sound? Ready to go?
Jane Greenfield: Absolutely.
Alisa Shin: Yes.
Gary Gamma: Now, we’re going to get started today going right to some of the questions that we’ve already received. So, it’s kind of a broad question. “What are the primary reasons why an estate plan is important?” Alisa, you’re closest; how about we start with you?
Alisa Shin: Well, I think some of the same reasons that you just mentioned in your introduction to comments. One of the biggest reasons is to make sure that your assets go to the people that you would like them to go. If you die without a will, that intestate law through your state law will determine who should receive your assets. So, that’s one.
Another reason is for you to determine who should make decisions on your behalf if you’re unable to do so. So, one role is as your agent of your power of attorney and who’s going to make those financial decisions for you if you’re incapacitated and who’s going to make decisions for you regarding your healthcare, medical decisions, and end of life decisions. Those are all really important things and really why everybody needs some kind of estate plan in place.
Gary Gamma: Do you want to add to that?
Sarah Price: No, I would just emphasize what Alisa said, which is really—It’s important to carry out your goals with your planning, and if you don’t have documents in place to do that and set forth what your real wishes and desires are, you’re reliant on state statute like Alisa mentioned, and that most likely is not what you want to happen with your assets, nor may be the people you want making decisions on your behalf.
Gary Gamma: The next question came from Michael in Ohio, getting a little more specific here. “What is the amount of the federal estate tax exemption, and is it indexed?”
Sarah Price: Yes, so we finally got some permanency with the federal state tax exemption in 2012. It is indexed for inflation annually, so for this calendar year, 2016, we’re at $5,450,000 for the exemption per person. Next year, that will go up slightly due to the inflationary increase. But planning for now, you want to plan for 2016 and that’s what’s available for this year.
Gary Gamma: Okay. Well, why don’t we go to a poll questionnaire? On the screen in front of you now, you should see the question, “Is charitable giving part of your estate plan?” So, you can answer, “Yes,” “No,” or, “I don’t have an estate plan.” Take a minute, think about that, respond, and we’ll get to your answers in a couple of minutes.
Next question comes from Susan in California. “Please review the steps to minimizing estate tax without incurring complex, expensive costs.”
Alisa Shin: There’s a lot of different things that you can do that are relatively simple. One is making sure that your will or your revocable trust is set up to minimize those taxes. So, there’s a lot of different techniques that you can use at your death to help pass assets in a tax-efficient way. Some of those things are using a disclaimer trust or using a credit shelter trust or a bypass trust. These types of trusts are designed so that a beneficiary, usually a surviving spouse, will have access to the money. But the money is sheltered from future taxes at the surviving spouse or the beneficiary’s later passing.
Congress has also given us back in 2012 a law that Sarah had mentioned, a new tool called “Portability.” And portability allows a spouse to essentially inherit their deceased spouse’s unused estate tax exemption, that $5.45 million number that Sarah mentioned, if it’s unused at the decedent’s death. So, portability is a very simple tool to use. There’s a lot of details on how portability gets given, how portability is utilized. So, it’s really important that you meet with your attorney to understand what the pros and cons of using portability is.
The second group that I would go to from an easy way to reduce taxes beyond making sure that your will and your basic estate plan is in place and it’s in a tax-minimized mode, is to consider making gifts during your lifetime. In addition to that $5.45 million lifetime exemption that the government has given us, each person can also give up to $14,000 every year to any number of individuals free of the gift tax and the estate tax. That’s often called the “Annual Exclusion Gift.” A lot of people remember that as a $10,000 gift, but it is indexed from inflation, so that’s how we’ve gotten to $14,000.
The other very simple way to help minimize taxes is that if you have a beneficiary or somebody that you would like to help out and they need help with either medical or tuition expenses, the IRS allows citizens, taxpayers, to make payments of those types of expenses. Again, it’s tuition and medical expenses. And as long as those payments are made directly to the provider, the private school, the high school, college, the doctor, the hospital, the dentist, and so forth, the IRS actually does not consider that to be a gift and there is no ceiling. There’s no limit on how much of that you can do each year.
So, making direct payments of medical and tuition expenses are a very tax-efficient way to help other people out while also reducing the state tax liability your family might have to face at your passing.
Sarah Price: And one other thing too, remember when we’re talking about this, we’re talking about the federal estate tax. There are still states that have an estate or inheritance tax in place, so it’s important to look at your state of residence to determine if there is an estate tax that may apply to you and if they have an exemption, that you should do some planning with to take advantage of.
Gary Gamma: So another reason, as Alisa said, you should speak with somebody that knows the laws, the federal and the state?
Sarah Price: Exactly.
Gary Gamma: Well, let’s go ahead and take a look at how the audience responded to the first poll question. Again, it was, “Is charitable giving a part of your estate plan?” About 26% of the individuals that said, “Yes,” about 42% said, “No,” and another 32% said, “I don’t have an estate plan.”
Anything there that you would suggest to any of those groups?
Jane Greenfield: Well, I personally think we should talk about charitable giving.
Gary Gamma: Yes, well then that’s a great segue. Jane, let’s move to the next question. “How should we determine how much of our assets should go to charity, and what options through Vanguard are available for long-term charitable funding?” That came from James, out in California.
Jane Greenfield: Okay, well, I’ll start with the first part of James’s question which is, “How do you determine how much should be given to charity out of your estate plan?” And I would say that really—That the answer to that differs by person. The way we like to talk to our clients to figure out that answer is by asking a different question and that is, “What is the purpose of your wealth?”
We find that when clients really step back and try to think about what the purpose of their wealth is, they have a better chance of attacking that. So, for example, there’s really three places that your wealth ends up going to: heirs, to charity, and to the government via taxes. So, we’ve seen a variety of different answers to that question, “What is the purpose of your wealth?”
For example, some people may say, “I’ve been very lucky, I’ve amassed wealth, and I really want my kids to get most of it. I want them to really benefit and a smaller amount to charity.” Other people would say the exact opposite. In fact, I met with a client yesterday who has one daughter who he, by the way, loves this daughter. But he said, “I want her to get nothing. I want her to get zero because I want her to really make her own wealth and the purpose of my wealth is to support the causes that are important to me.”
He’s very focused on kindergarten K through 12, and that’s his purpose. I have never met anyone who said “the government” is the purpose of their wealth. No one’s in it for paying the taxes. So, that obviously is an informing element. But I think if you stepped back and answered that question, then you’re in good shape to talk to your planner and figure out what to do.
And I guess, the second part of the question is, “What options does Vanguard have?” Is that for long-term charitable giving?
Gary Gamma: Exactly.
Jane Greenfield: So, I’ll start by talking about donor-advised funds. So, Vanguard Charitable is actually separate from Vanguard, but we work with Vanguard quite a bit because 80% of our clients are shared clients. I’ll start by telling you what donor-advised fund is because that’s what Vanguard Charitable is. A donor-advised fund is basically a longer-term charitable giving vehicle that is administered by a public charity on behalf of individuals, families, and organizations.
And this is the way it works. You give a donation to your donor-advised fund [at] Vanguard Charitable and that donation could be cash, it could be securities, noncash assets, and because we’re a charity, you get a tax deduction. You give up ownership of your assets, but you retain some advising privileges. So, therefore, you can advise how you invest those assets, you choose the investments, you advise how to donate, and where to donate. You can even tell us whether you want to donate anonymously and you can also set up who your successors to the account might be so that you can start kind of a process of giving with your heirs. So, that would certainly be one vehicle to leverage.
Alisa Shin: Another way that Vanguard can help with a long-term charitable giving is through its trust services that we have. And so, a number of our clients will either use charitable lead trusts or charitable remainder trusts as a way to kind of leverage their exemption, but also take advantage of income tax deduction for the charitable giving. But also more importantly, for a lot of our clients is creating that pot, so to speak, of legacy charitable giving for their family.
And so, in that regard, Vanguard does have several services where we can either help manage those charitable dollars in the trust or even in the family’s private foundation as well as serving as trustee of these types of trusts that are involved and helping families make decisions about distributions, charities, and so forth.
Gary Gamma: I believe there’s also a link to Vanguard Charitable in our resource widget link that I talked about earlier. So, you can take a look at that. We’d like to get to another poll question now and this one is, “Have you communicated your estate plan to your family?” A couple of meaty answers here. You can choose from “Yes, my family knows there’s an estate plan but may not know the details,” “No, I don’t know how to engage with my family about my estate plan,” “No, I don’t want my family to know I have an estate plan,” finally, “I don’t have an estate plan.”
So again, think about that for a second, respond, and we’ll get to your answers after the next question. So, the next question comes from John in Colorado. It says, “Can you discuss donor-advised gifting versus direct charitable giving?”
Maybe another question for you, Jane. Can you kind of define those two things, differentiate between them?
Jane Greenfield: Sure. So, all giving is good. I’ll start with that. Direct giving to charities is a great way to go if you are making smaller donations or your— You have a smaller wealth that’s earmarked for charity. But if you are interested in not only giving larger amounts or giving over the long term, I think a donor-advised fund has a few advantages over direct giving.
So, for example, you can donate in addition to cash, you can donate appreciated securities, noncash items. Most charities really don’t have the ability to accept those types of donations. You know, second, you can separate the timing of your tax deduction from the timing of your granting or donating activity. And for some individuals, that can be a really important element.
So, for example, I was talking to a client the other day who sold their business. And so, with that sale, they got a lot more money in one year than they had in past years. They certainly wanted the tax deduction and they knew that they were going to earmark a substantial amount of those proceeds to charitable giving. But they didn’t quite know where they wanted to give yet.
So, they were able to put it in a donor-advised fund, get the tax deduction, and be more thoughtful and mindful about where they were going to give in the future. You can also donate anonymously through a donor-advised fund, and while you can donate anonymously directly, the individuals within the development office of that charity will still know who you are. So, for the most anonymous donating, I think it’s a great idea to come to a donor-advised fund.
You can also, when you invest the assets at the donor-advised fund, those investments grow tax-free because they are a charity, and finally, you can set up really a legacy of giving. It’s, I think, a little bit more difficult to involve your kids, for example, in charitable giving when you’re writing checks. When you set up a donor-advised fund, you can not only have successors to the account, but you can also have them as advisors alongside of you.
We have a lot of our clients who have family meetings every year. They sit around and they talk about the causes they’re going to donate to. They may say each child has a certain amount that they should donate this year, and it really gets kids involved in not only the process of donating, but thinking through what their charitable passions might be.
Gary Gamma: Pass along your values as well as your money. There’s a related question, but before we do that, I wanted to get to the poll results from the audience. So again, we asked, “Have you communicated your estate plan to your family?” The majority, about 53% said, “Yes, the family knows there is an estate plan, but they might not know the details.” About 40% said they don’t have an estate plan, and then a smaller amount, 5 and 2% said, “No, I don’t know how to talk to my family,” or, “No, I don’t want them to know.” Anything surprising here?
Jane Greenfield: It’s great to hear.
Sarah Price: Yes, that is.
Alisa Shin: That many people have had that conversation because we really find that communication is really key to the end result being to reach your goal of successfully transferring your wealth to your family. Getting a plan in place is only step one, so it’s good to hear that other people are doing that.
Sarah Price: Right, it sounds like they’re Vanguard clients.
Gary Gamma: So the somewhat related question came from Katrina. This is a live question, and she says, “Please talk about what types of instruments might be most beneficial for specific recipients, Roth IRA versus 401(k), stocks.”
Jane Greenfield: So, for charitable giving?
Gary Gamma: Yes.
Jane Greenfield: So, while you’re alive, there are abilities to donate, for example, from an IRA to a charitable organization. There’s a regulation that indicates if you’re above age 70 1/2, you can make that distribution directly to a charity, and the only problem is for a donor-advised fund, donor-advised funds are actually and private foundations are excluded from that.
Having said that, when you’re thinking about planning for after your life, you can certainly name a donor-advised fund and a private foundation and other vehicles as beneficiaries or name them in your will.
I think there are some advantages to having conversations with heirs, and we can talk more about that, but I’m not surprised by the poll results.
Alisa Shin: Yeah. And I’m pleasantly surprised, actually, that so many people actually have done it or are considering doing it. I agree with Beth; I think there are a lot of good reasons not to have the conversation, but as long as people understand the pros and cons of having that conversation and make an informed decision, I completely agree with that.
Sarah Price: And I think one thing to consider when you’re looking at retirement assets, I think the question included IRAs in there, is the tax consequences of that asset that when you pass it onto your heirs. And so, if it’s a Roth IRA and you think there may potentially not be income tax consequences, that’s a different result for your heir to receive than if they’re receiving a traditional IRA where there are going to be income tax consequences.
And so, that type of asset may be a better choice to leave to a charity rather than to an heir if the income tax consequence of receiving that asset may have an impact on your beneficiary.
Alisa Shin: I’ll just take that one step further. So, another way of saying that is at your death, it generally is better to give assets that have an income tax liability attached to it, whether that’s an IRA or 401(k) or 403(b) or an annuity for instance versus what we call at Vanguard, your “taxable assets,” just your savings accounts, your brokerage accounts. Because at your death, your beneficiaries will get a step-up in basis so that if they turn around and sell that mutual fund, they won’t very likely have to pay little capital gains tax depending on the timing of the sale.
The other thing I might mention is also, during life, you can certainly use what Jane had mentioned, that qualified charitable distribution, QCD, from your IRA if you’re over 70 1/2. That’s up to $100,000 each year. In addition to that, though, I think you need to look at how much you want to give your own personal income tax situation and think about, is it better for you to give an asset that you have low basis in because if you give it to a charity, whether it’s a donor-advised fund or directly to a charitable organization, you do not have to recognize that gain.
So, using low-basis stocks, securities, mutual funds is usually better than using your higher basis during your lifetime. The other thing I’ll mention is if you need a larger charitable deduction on your income tax return, depending on what asset you’re giving, you might have more limitations from the AGI perspective as to how much your deduction can be each year, although there is a carry-forward that you could take advantage of.
So, if you are doing larger gift giving or more systematic gift giving, we would really encourage you to meet with your advisors, your accountants, your lawyers and be thoughtful about how you’re doing it. I think the only other rule of thumb I would offer to our viewers is it’s generally better for you to make a charitable gift during your lifetime than it is at your death, just at least from a tax perspective, because during your lifetime, you do get an income tax deduction.
But if you give it at your death, your estate will get an estate tax deduction but your beneficiaries and your estate loses out on that income tax deduction.
Gary Gamma: So, here’s another live question and because you talked about donor-advisor funds, this is a pretty specific question. So, I don’t want to put you on the spot, but we’ll put your chops out here. Steve asks, “Currently, the IRS allows someone to donate up to $100,000 from an IRA and not count it as part of your taxable RMD, required minimum distribution (for our audience). Is a donation from an IRA, an RMD, to a donor-advised fund treated as a tax-free event?”
Jane Greenfield: It’s not today. It’s not today. It has actually been discussed as to whether it should be included going forward. So, I’d say that’s one of the things to stay tuned on but as of right now, no.
Gary Gamma: We also have another question here from Ronald. “If you have a good will, do you still need an estate plan? If so, why?” You want to deconstruct that a little bit?
Sarah Price: Sure, well a will is part of your estate plan. I think certainly a place to start is having a good will. Depending on your state of residence and the probated administration process in the state you live in, may determine whether you want to include additional types of planning within your estate plan outside of your will. So, a will is certainly the simplest way to go about it. You can certainly, obviously name your beneficiaries, your decision makers through that instrument.
But generally, you will be required to go through a probate administration process to effectuate the transfer of the assets through the estate to those beneficiaries you have named in the will. Every state has a variation in their probate process, and so, I would encourage you to check the process in your local state of residence with an estate planning attorney who would know the process.
Some states, it’s very simple and a will works just fine to move assets along. Other states, it may be a more cumbersome process or a more expensive process and that’s when you see clients start to move towards creating living trusts as the vehicle and the instrument that they use to actually transfer their assets on it at death.
Alisa Shin: I might also add that—So, what’s an estate plan? What is an estate plan, right? That differs for clients depending on what their goals and their concerns are, and even their net worth. Sarah mentioned what state they live in. But I would say at a probably common, very basic level, an estate plan usually includes a will, and then a healthcare power of attorney, a general power of attorney, and a living will.
A living will also has become more commonly known as an “advanced directive for healthcare.” So, I’d say if you only have a will, you’ll probably want to get these other three ancillary documents put in place because those three documents are very important in the event that you become incapacitated or you find yourself at an end stage of your life where there’s no hope of recovery and you have certain wishes that you would want to express.
So, those things I think are really important to make sure you have in addition to your will.
Sarah Price: Yes, as we stated at the beginning, I think Alisa mentioned the intestate statutes that are relied on if you don’t have a will. The same course of action happens if you don’t have these power of attorney documents or medical directives that she mentioned. You’re reliant on what the state statute says as to who will be appointed as a guardian or a conservator to act on your behalf for financial and medical decision-making.
Gary Gamma: So, we talked a lot about a will. There’s a follow-up question here, which I think was maybe at the heart of the previous question, too, which is, “What factor should be considered to know if a trust is right for you?” So, when is the will versus the trust the appropriate mechanism? Do you have anything that you can throw out that helps people understand when they might want to consider one or the other?
Alisa Shin: So, I think when we talk about trust, we need to talk about two different types of categories of trust. One is a revocable trust and it sounds exactly what it means. You can revoke the document, you can get rid of it, you can change it, you can make—Amend it. You can make a lot of different—Change it in any way that you want from time to time.
The other type of trust that we have are irrevocable trusts and so, let’s talk a little bit about the first one. A revocable trust is one in which you would have to talk about what Sarah was talking about, to avoid probate. That’s typically why a revocable trust would be used, that you want to avoid probate because you live in a state that the probate process is very cumbersome or expensive and your attorneys would likely have you have a revocable trust.
If you own real estate in multiple states, you would also likely have a revocable trust to avoid having to raise an ancillary probate in each of those states that you own real estate in.
The third reason for a revocable trust is to plan for your incapacity. In many cases, it’s a much more streamlined process transition if you become incapacitated and can no longer take care of your financial affairs. Revocable trusts really set forth what should happen in that instance versus relying on a power of attorney.
But if you’re thinking about an irrevocable trust, then usually those trusts are trusts that are for the benefit of somebody else. There are probably four main reasons why clients might create an irrevocable trust for their beneficiary either during their lifetime or at their death. One is if you have concerns about how the beneficiary might manage or spend money. A lot of those instances, when your beneficiaries are in younger years.
Secondly, is if you have concerns about future creditor issues that your beneficiary might have. And that includes a divorcing spouse. A lot of times, trusts can be designed to protect those assets from a divorcing spouse or a future creditor. If you have a beneficiary for instance who’s a doctor and sued, and their malpractice insurance is not sufficient, it’ll make it really difficult to— For that creditor to get any of the inherited assets.
The third reason is to protect the assets from future taxation. Again, like we had mentioned earlier in the show, trusts can be designed in such a way that a beneficiary could have— Could benefit in large part from those assets but at the beneficiary’s death, whatever remains in those trusts can pass tax-free to the next generation of beneficiaries.
And the last reason really is if you know or have very strong feelings about who should receive the money after your primary beneficiary has passed away, a trust is a great way to set that structure up to ensure that the people that you want to benefit or the charities that you want to benefit that will in fact benefit at the primary beneficiary’s passing.
Gary Gamma: As I’m sure we always remind clients again, speak with a professional advisor and they can review all these things at your specific level. Okay, back to the questions here. Igor, right down the street here in Bryn Mawr, Pennsylvania, “How do you engage a spouse in the process of estate planning, if the spouse is understanding of estate planning issues, it’s very minimal. Are there education resources for beginners?”
Alisa Shin: Do you want to go first?
Jane Greenfield: Well, I can talk about the charitable giving process. We have a lot of donors, a lot of clients who want to engage not only their spouse, but also their kids. They want the whole family to be involved in the charitable giving piece of their estate plan. And they may be more comfortable with the causes that they want to support or the charitable organizations that they want to support.
So, we work a lot with our donors to give them access to information that can help them along the way. We have a great resource tab on vanguardcharitable.org, and on that tab, we have links to different pages from GiveWell, or from, Guidestar if you know the cause you are interested in but are looking for information on specific charities.
We also have organizations, Find to Fund, and Universal Giving. They give you a chance to—If you don’t really know the cause you’re passionate about, they can give you insight into, you know, some initiatives that are out there and you can see what kind of mix you—Kind of ignites the fire.
We even have a link to an organization that matches you up with volunteer opportunities because we find a lot of our donors, their charitable passions are really personal, either because of something that’s happened in their life or an experience that they’ve had with an organization or a cause. So, we have a lot of different resources that can help you engage your whole family and make them more comfortable on the charitable giving side.
Sarah Price: I would say on the estate planning side, one thing to keep in mind is that the planning process doesn’t have to be sophisticated. It can be very basic and so, if there’s concern that a spouse doesn’t want to get involved in the discussion because it’s too complex or too complicated, I would encourage you to find an attorney to meet with, to talk about simple and basic estate planning. It doesn’t have to be sophisticated and in fact, I would say if it is sophisticated to the point that you don’t understand it or your spouse doesn’t understand it, it’s not the right—It may not be the right plan for you.
We talk to a lot of clients who tell us, “I have an estate plan, but I don’t know what it means and I don’t know what it does for me. Can you help me understand it?” And so, the most important thing is even if you feel that you personally are starting at a very basic level of understanding, is to start there and it’s okay to have a basic plan to start with. It may exactly fit your needs and your goals.
If you need to alter that plan in the future and go to a more sophisticated planning structure, you always can do that but it’s okay to start at a simplified structure and put the basic will in place. Put the basic power of attorney in place, the medical directives, and start there. And that’s a fairly straightforward and easy discussion when you start at that level of who are our intended beneficiaries, who am I comfortable making decisions for me if I’m in capacitated. Who would I want to manage my affairs if I pass away? It can start at that simple level, I would say.
Alisa Shin: I think what’s really important to understand is why the spouse doesn’t want to get engaged or be part of the discussion, and what I think often gets overlooked is estate planning is not just about taxes and saving money. It’s not just about investments. There’s actually a lot of what I’ll call “softer questions,” that are really important for both spouses to be involved in when talking about distributing wealth.
And that might be something that depending on the reason why a spouse doesn’t want to engage, could be more interesting. That’s what we often find with our clients. So, questions about how much are you worried about your children inheriting? Are you worried about is there a third party whether it’s a spouse, a boyfriend, girlfriend, or just friends, who have a lot of influence over your child or beneficiary? And, are we concerned about that and what things should we do and put in place to kind of safeguard against that? Are there specific reasons that you want the money to be used for? Those softer-type questions, I actually find with our clients, really start getting engaged with both spouses, both parents in that conversation.
The second thing that I’ll echo with Sarah is really to make sure that you find an attorney that you’re comfortable with. There are attorneys out there who can talk in plain English about the estate planning that helps. If you don’t have that, I would really encourage you to reach out to your other advisors like your investment advisors. A lot of investment advisors have resources, have people on their staff who can sit down and talk with you and your family about your estate plan.
A lot of them will do it in plain English, and a lot of them will not charge you on “the every-six-minute kind of increments” that lawyers tend to do. So, really broaden your thought process in terms of who you can outreach to, who your support system is in terms of having these conversations. I think it’s really key to understanding what’s causing—What’s that roadblock to getting both of you involved.
Sarah Price: And another point I think to make that sometimes comes up in our conversations is the hesitancy to put the plan in place because they’re afraid that what they want to put in place is going to rub someone the wrong way, you know, after they pass away. They’re not going to like how the plan was set up or what Mom and Dad did with the assets. And going back to our polling question we had about, “Do you talk to your family about your estate plan?” I think it’s important to note that you don’t have to go into deep detail of the finances for example, involved in the estate planning.
You don’t have to talk about account balances. You can start that conversation with the family, very general about what your goals are with the planning so that hopefully in doing that, there’s not the hesitancy to put the plan in place because you’re afraid you’re going to offend someone. It’s your plan, it can be private for you and when you start that discussion, you can gauge the level that you want to take that discussion.
Jane Greenfield: It’s actually helpful for you to have these discussions before you die because it can be really unsettling to your heirs if they’ve made assumptions along the way. So, for example, the gentleman I met with yesterday who loves his daughter but plans to leave nothing to her. She’s really glad she knows that, I’m sure, because she knows that she really needs to think about how she’s going to create her own wealth. She’s not sitting there thinking that someday, all this will be mine and then finding it’s actually going to fund charities that are her father’s passion.
Sarah Price: Right, and it probably helped that conversation between the two of them as to what her dad’s passions are and what the purpose is for his wealth and why he set it up that way.
Jane Greenfield: Exactly, it’s kind of igniting passions of hers like along that same vein as well, which is nice.
Gary Gamma: People that don’t have a lot of knowledge, it sounds like talking about charitable giving is a great way to enter into the estate planning process.
Jane Greenfield: And it actually can be a nice first step. It’s a little safer ground sometimes talking about what you care about what are some of the problems in the world you’d like to help to solve and then it can—It’s a little safer ground that can then be broadened over time into the broader wealth discussion and wealth transfer discussions.
Gary Gamma: And for our audience, remember you can always go to vanguard.com for more information, but we have placed links to charitable giving and estate planning in the resource widget link at the bottom right of the screen.
So, a couple of questions, a live one and one that we already have here that are sort of related, and I know that you already talked a little bit about wills versus trusts, but this one’s kind of reverse engineered. “What are the disadvantages of a trust versus only having a will?” Are there things you can talk about there?
Alisa Shin: The disadvantages—So, for a revocable trust, I don’t know that there’s a lot of disadvantages compared to a will.
Gary Gamma: Is there a cost difference?
Alisa Shin: There might be a slight cost difference.
Gary Gamma: And some effort involved, too?
Alisa Shin: Yes, with a lawyer, that might be done. The other disadvantage if I could call it that that I hear from some clients is just psychologically and emotionally understanding that now your assets, to be able to effectuate the purposes of your revocable trust, your assets will now be titled in your revocable trust’s name versus your own name.
It’s completely revocable, so it really is your money and typically the grantor, the person who created the revocable trust, is the trustee. But for some clients, there’s just a psychological, emotional barrier being like, “It’s not in my name. It’s in a trust name.”
On the irrevocable side, I would say the disadvantage is—There are usually costs incurred with that. An irrevocable trust is a taxpayer itself. So, at the very least, there tends to be accounting costs; it has to—The trust will have to file income tax returns at the federal and possibly the state level each year. So that additional cost, depending on who your trustee is, there may be trustee commissions along the same lines.
It—Depending on your trustee and the trustee’s sophistication, the trustee might hire outside advisors to help the trustee do his or her job, meaning an investment advisor or an accountant or a lawyer. So, you’ll have those additional costs.
And for some clients, it’s just pure complexity. It is, instead of having one or two accounts in husband or spouse and spouse’s name, I should say, or a joint account, you will have an additional account that’s in an irrevocable trust or for your children, you don’t have to have— Just the child’s saving account. The child will not have another account they have to pay attention to.
So, that’s really why back to what Jane said earlier, understanding what the purpose of your wealth is, what your goals and objectives are, are really important and part of that is understanding how much complexity you can tolerate and how much complexity your family can tolerate. The answer to those two questions might be very different.
Jane Greenfield: Yes, actually there’s a lot of clients who decide to open a donor-advised fund as opposed to say a private foundation because the donor-advised fund is flexible, low-cost, honestly, easier to administer, at times, less complex than a private foundation. And so, some of our clients actually have both, they have a private foundation and a donor-advised fund. But many are making the decision to go the less complex route. It’s not just for themselves, but really for their heirs as well.
Gary Gamma: And cost is probably what’s driving this question we got from Amy that says, “Do you have to have an attorney set up an estate plan for you or can you do it yourself?” I don’t know if you can go to wills.com these days, but I assume because of the complexities we cited in all these areas, it’s probably wise—You would want to some degree, to have a lawyer involved.
Sarah Price: Yes, strongly encourage that you meet with an estate planning attorney, someone who specialized in that field in your state of residence. Because every state is a little different and documents you may buy at a store or get online are not necessarily state-specific to where you live. So, it is important to meet with an estate planning attorney that can counsel you on all of the related issues that might impact how your estate plan is structured.
Gary Gamma: Do we have any resources to provide to help people try to find that individual?
Sarah Price: An attorney?
Gary Gamma: Yes.
Sarah Price: We use—Of course, you can go to the local state bar where in the state where you reside and they can provide you with some names. We also use an organization called Act Tech; it’s acttech.org is their website and you can search by state. And it’s a counsel of estate planning and trust attorneys that will have that specific knowledge and expertise in that area and be able to help you.
Gary Gamma: Okay, this question, I think, we’ve covered a lot of this, but maybe we’ll just rethink it, see if there’s anything left we want to talk about there. This comes from John in Wisconsin. “Please explain the differences between revocable and irrevocable trusts and the benefits and/or drawbacks of each.” I know we’ve covered a lot of that, but—
Sarah Price: Well, as kind of piggybacking what Alisa said earlier, the revocable trust is just that. It’s very flexible, it’s completely amendable, changeable during your lifetime, which is why a lot of people are drawn to that, I would say. If you can move assets in and out of it freely, even though as she said they’re titled now, the name of the trust, there’s not a tax consequence for moving that into a revocable trust. You still own it, you still have those ownership powers over the asset to sell it, to buy new assets, in the name of the trust.
And that’s generally why people go in that direction in addition to the benefits she mentioned before, avoiding probate, allowing planning for incapacity purposes. Maybe if you own real property, in more than one state, it offers privacy. Some people have an interest in the estate administration being a private matter, and that generally happens with a trust administration.
On the irrevocable side, you don’t have the flexibility of being able to change the trust. So, after it’s in place, it’s in place. And with a few exceptions, state-specific exceptions, you may be able to make slight tweaks to it, I would say, but you should think of it as not being amendable. It’s not changeable.
It does allow you to move assets into the trust that are then removed from your taxable estate. Because it is a standalone entity, it does file its own tax return, has its own taxpayer ID number. So, it is a bit more, I would say, complex, complicated than establishing a revocable trust.
Gary Gamma: In terms of revocable trust, as well as a will, the question from Greg, “Should a good will,” or I assume a revocable trust, “and an advanced directive be renewed every so often or are they valid indefinitely?” So, unless the cast members change in some of these things, beneficiaries and executors, do you need to make adjustments from time to time?
Alisa Shin: So, they are valid indefinitely, I guess. There are just some good rule of thumbs, though. What I would say is a general rule of thumb is it’s always good to pull those documents off the shelf so to speak, dust it off every three to five years, just to kind of make sure that it’s doing what you want it to do, that your assets are going to the people that you want it to go to, that you’ve named the people that you want to make decisions on your behalf if those people are still living, and still capable of making those decisions for you.
The second time to do it is really if you have a life event, so like a birth of a new family member, a marriage, a divorce, a death—Those are all good times just to kind of look.
The other thing I would say, this is really—There’s nothing legal about this answer, it’s more practical. I always feel it’s best practice especially with your healthcare document, especially with your living will or advanced directive, is even if your thoughts haven’t changed, to just update it every—I don’t know if it’s five years or ten years.
But every now and then update it because I always worry that if you have an advanced directive that’s 20 years old, you get in a car accident, you’re at an end-life decision, and if it’s been more recently updated, there’s less questions about whether or not those are still currently your wishes. There’s nothing legal about that answer, it’s just kind of best practice giving people comfort around what you want done.
Sarah Price: Yes, and I think you see that with a general durable power of attorney also, for example, if you’re dealing with the local bank, not that there’s anything wrong with the document. But they understand it and are more comfortable with it if it’s a more recent version rather than they’re looking at a power of attorney that’s 20 years old.
Jane Greenfield: So, then you’re proactively making those same choices.
Sarah Price: And even if you don’t change anything, it’s such a good idea to take it out and look at it and make sure the assets are still going where you want them to go. I mean your goals do change throughout your life span and your estate plan needs to adjust to accommodate those changes with your goals and your changes in your family, the changes of the type of assets that you own. The estate plan is flexible to do that and so, you need to be conscious about doing that every so often.
Gary Gamma: There’s a pretty specific question here from Dwayne in Minnesota. “Please cover special needs trusts.” Want to take that one?
Alisa Shin: I could take that one. Sarah can chime in if she wants. So special-needs trusts is a type— Is a very specific type of trust that’s typically used for beneficiaries who have some kind of disability and often used, more specifically, if you have a beneficiary who either is already getting government assistance or might need to get government assistance in the future.
And so, the way a special-needs trust generally works, is that if it’s correctly designed, and there is a very specific way to do it. So, in that case, I really encourage you to work with an estate planning attorney to get that guidance and have them design it for you. But if it’s designed correctly, then what the government’s going to do is not consider this trust assets, to be what they call “available assets” for purposes of qualifying for government assistance when the government assistance is need-based.
If it was not a special-needs trust or this trust did not qualify as a special-needs trust, then typically, the beneficiary, despite the degree of disability, will be required to spend down those trust assets first before they can take advantage of the government assistance.
So, the way that a lot of families look at this and actually, a lot of planners look at this, using special-needs trusts is a way to allow government assistance to take care of the beneficiary’s basic needs; their food, their clothing, their shelter, their medical needs, and a special-needs trust really supplements that; it allows for the greater degree of therapy, of different activities to help enhance that disabled person’s lifetime that government assistance usually typically doesn’t allow or doesn’t—Can’t afford to do.
Sarah Price: The only thing I would add to that is they can be created either during lifetime or at death, and that’s completely a personal decision for the family. But you can structure an estate plan so that the option exists within that estate plan for that beneficiary’s share of the estate to be placed into a special-needs trust. So, in other words, special-needs provisions can be switched on if you will, for that beneficiary for their share.
Gary Gamma: Alright, switching gears a little bit, I know on retirement accounts you can establish beneficiaries; some of the nonretirement accounts, you can establish beneficiaries. Frank in Illinois wants to know, “Do account beneficiary designations supersede wills and trusts?”
Alisa Shin: Technically, yes. So, account beneficiary designations, whether it’s for a retirement account or life insurance policy or annuities, or if you have a transfer on death account for a taxable account, your beneficiary designation can supersede your will unless you name your estate. So, it’s very important when you do your estate planning, that you talk with your advisors about what assets you have, what kind of accounts, how those accounts are titled, and what the beneficiaries are for all those different types of accounts and assets because unless your plan’s coordinated, one thing could supersede what your original wishes are in your will. So, it’s very important to make sure that things are coordinated and designated properly.
Gary Gamma: Alright, I think we have time for one more question here. We’ll go with, “How would I get started with Vanguard Charitable?” Jane, can you do the last question?
Jane Greenfield: That may be my favorite question. It’s actually very easy. If you go to vanguardcharitable.org, there’s a green button on the right hand that says, “Start giving.” Click that; everything can be done online. You can set up the account, you can fund the account, you can choose your investments. Once the account is set, you can grant online. Of course, while most of our donors do enjoy doing a lot of the activity online, if you ever want to talk to us, we’re just a phone call away. It’s quite easy.
Gary Gamma: Any kind of final thoughts since we’re on charitable giving? What’s the final thought from you?
Jane Greenfield: I just— I’ll say I have this wonderful opportunity to work with people around the country who are so passionate about giving back, and it’s a true privilege. And at Vanguard Charitable, we have as our mission to increase philanthropy, maximize its impact over time. And we’re very, very passionate about what we’re doing, so if anyone has a question, they would like to talk to anyone, please do reach out. Please do take a moment to go to vanguardcharitable.org. We think it’s a great site; we hear that from our clients. There’s a lot of insight into how to get started, what to consider, etc.
Gary Gamma: Sarah, Alisa: estate planning?
Sarah Price: Yes, I would just say it can be simple. It doesn’t have to be complex. Find an attorney, a tax advisor to assist you with the process, to ask questions to, and give some thought to your goals before you go into that conversation. As Jane was mentioning early on in our conversation, what portion of the estate do you want to go to your heirs? What portion do you want to go to charity? What portion do you want to go for taxes? And that may help focus you as to what type of structure will work for you to attain those goals for your planning.
Alisa Shin: I would just add, don’t get overwhelmed with this process. There is no one right answer. There’s only a right answer for you and your family. I could have two families who look exactly identical on paper in terms of net worth, family structure, family concerns. But I could almost guarantee it will come up with two different answers in terms of how the plan should be designed.
So, there is no one right answer. You always have time to review, assess, and change. Just keep it in doable bites, so to speak. Think about what happens in the next three to five years and what you would want to happen. Hopefully, you’ll look back again, make sure that’s right, and you can always improve it. But sometimes, it gets overwhelming thinking, “What should happen to my assets 30 years from now?” And while we have to think about that, there’s always opportunities to change it.
Sarah Price: And refine it.
Alisa Shin: And refine it, exactly.
Jane Greenfield: If you’re expecting perfection out of the gate, you may never get started.
Alisa Shin: Well, that’s exactly—Absolutely.
Jane Greenfield: The worst answer.
Alisa Shin: If nothing else, estate planning is not just for the wealthy. I know the estate tax exemption’s $5.45 million, which is quite high, but as Sarah alluded to, there are a lot of state estate taxes that are still in place. But hopefully, you heard from us through different answers that we gave—There’s just a lot of other things that happens with families, family dynamics, the charitable giving part regardless of your net worth that’s really important to take into consideration and be thoughtful about to make sure your plan is set up correctly.
Gary Gamma: Great. Well, thank you all for being here.
Group: Thank you.
Gary Gamma: Sarah, thanks for coming all the way from Arizona.
Sarah Price: Thank you.
Gary Gamma: Sorry, it couldn’t be a little cooler; that’ll teach you to come to Pennsylvania in July.
Sarah Price: I’m happy to leave the humidity here.
Gary Gamma: That’s right, and thanks to all of you for joining us. From all of us here at Vanguard have a great day.
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