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Gary Gamma: Hi, I’m Gary Gamma. Welcome to our live webcast on “Taxes, trusts, and your estate plan.” Over the next hour, we’ll cover how a trust can benefit you and your heirs, tax and nontax reasons to use trusts, and how to choose a trustee and build flexibility into your trust.

Joining us today to discuss these important topics are Ryan Gager, trust department head for Vanguard National Trust Company; Erin Zavislak, a senior trust administrator with Vanguard National Trust Company; and Alisa Shin, a senior wealth planner with Vanguard Personal Advisor Services®. Welcome to all three of you.

All: Thank you.

Gary Gamma: We’ll spend most of our time today answering questions that many of you have already sent us, but you can also submit live questions throughout the session. While we can’t answer questions of a personal nature in this live event, we encourage you to reach out to your Vanguard advisor if you want to discuss your situation in more detail.

Two other items I’d like to point out: There’s a blue widget on the bottom left of your screen to use if you need technical help during our webcast, and the green widget on the bottom right will allow you to access some of Vanguard’s thought leadership material on today’s topic. Everybody ready?

Alisa Shin: Yes.

Ryan Gager: Absolutely.

Gary Gamma: All right, excellent. Now I’d like to point out that today’s webcast is the second of four sessions devoted to the six pillars of the Flagship Select Wealth Management offer. Ryan, can you tell the audience a little bit about the role that trust services plays in that offer?

Ryan Gager: I’d be glad to. Hopefully, the audience can see the six pillars on the screen right now, and, I’ll admit, I’m probably a little bit biased, but I do love the trust services pillar. I think it’s not only a key component to the Flagship Select offer but also to our advice offer in the Personal Advisor Services.

And I think there’s a real obvious and simple reason for that. It’s important and key to those offers for Vanguard, simply because it’s important to our clients. I think the three of us see all the time when we talk to clients, I certainly saw when I was in practice as an attorney, and I think we see from the response to this webcast that clients care about this topic.

We know that clients find trust services to be a useful tool in their wealth and estate plan. Now, clients have different reasons why they are interested in trust, why they find it to be useful. For some clients, it’s because trusts help make it easier for them to administer their assets, whether as an alternative to probate after their death or an alternative to guardianship while they’re still alive but no longer have the ability to manage their assets, or even just for inexperienced money managers. Sometimes, after a spouse who has always run the finances before has passed away and the surviving spouse is left to manage things, if they’re not used to managing assets, trusts can be the vehicle to help them do that.

For other clients, it’s not about administration, but it’s about asset protection. Whether we’re talking about concerns for beneficiaries who might be spendthrifts, don’t know how to use and spend money, or concerns over divorcing spouses that could cause problems for someone, or even just having beneficiaries that are in high-risk professions that could be targets for lawsuits, trusts can be a way to provide some asset protection for those beneficiaries.

And then still for other clients, it’s really about influencing the future. It’s a way to carry on your legacy after you’ve passed on. And that legacy can take different forms. Some clients are really interested in making sure that their children, grandchildren, and future generations have money to go to college, so education’s really important to them. They want something in place to make sure that that legacy of education carries on.

And still for others, it’s about fulfilling charitable pledges and making sure that happens, so trusts are very flexible to meet those types of goals.

And then finally, for some clients, it’s about saving tax dollars. There’s a number of techniques that clients can use with a trust to make sure they minimize the taxes that are paid. So when you think about those different goals that trusts help clients accomplish, it’s no surprise that it’s important to them and, therefore, it’s important to Vanguard.

Gary Gamma: Great; well, you’re right. We do know clients care about this because they send us a lot of questions, so let’s move towards that.

Before we do, let’s ask the audience a poll question. On your screen now, you should see the question: “If you have a trust account, which of the following best describes your designated trustee? Is it an accountant or attorney, a corporate trustee, a family member, a friend, or I don’t have a trust?” Please respond now, and we’ll share those results in a moment.

And, Alisa, while we’re waiting for these results, how about we get to the first question.

Alisa Shin: Sure.

Gary Gamma: So, we have this from Bob in Florida. It gives us a great starting question here. Basically, why do I need a trust versus an estate plan?

Alisa Shin: It’s a great question. There’s a lot of confusion sometimes when people hear trusts and estate plan.

Basically, a trust is usually a part of clients’ estate plan if it’s appropriate. Your estate plan is that bigger plan, that bigger map where you kind of decided who’s going to get your assets, who are going to make decisions for you, and so forth. And one of the techniques that you might use to get to your end goal or your end objective is a trust, and that trust, in that, you’ll set forth the details as to how that plan should be executed. But somebody’s estate plan is bigger than the trust itself. It typically includes a will, a general power of attorney, a health care power of attorney, and an advanced directive for health care. Clients might hear more commonly that referred to as a living will.

Gary Gamma: Okay. Steven in New York says, “What’s the difference between a revocable and an irrevocable trust?” Erin, you want to take that one?

Erin Zavislak: Of course I do. It’s a common question, but it’s really essential to understanding, I think, the world of trust for a client.

Very simply, a revocable trust is one that can be revoked or canceled. The determination of whether or not a revocable trust or an irrevocable trust is appropriate for you is really dependent on what your objectives are, and your planner can help you determine what is the best course of action.

Alisa Shin: If I could just jump in there—

Gary Gamma: Please.

Alisa Shin: —because Erin mentioned a planner. So a lot of times, Erin, to write a revocable trust is one in which you can revoke or make changes to. An irrevocable trust, on the other hand, as it might sound, is irrevocable. But irrevocable, in the modern trust world, doesn’t necessarily mean that what you put in place has to stay in place. Irrevocable typically is a reference to a tax-planning strategy by which people put assets in it, and the grantor or the person who gave the money typically does not retain any ability to access or use that money. And so it’s irrevocable in terms of the grantor’s ability to get that money back. Irrevocable does not mean that you’re making a decision today or you’re making a decision for your family today that can’t be changed in the future. There will be ways that you can build in flexibility into those trust documents.

Gary Gamma: Okay.

Ryan Gager: So, Alisa, when I hear that concept about revocable, irrevocable, I value flexibility. Why wouldn’t I want everything to be irrevocable? Why would I want to lock myself in even at all and select an irrevocable trust?

Alisa Shin: For some clients, it really is really around tax planning. For the clients who have assets that are worth more than the federal estate tax exemption, which in 2017 is $5.49 million. If your assets are worth more than that, some clients, to mitigate the taxes or at least minimize how much taxes have to be paid, might transfer assets into an irrevocable trust. And by doing so, if the trust was properly designed, the assets that are in the trust and the growth of those assets during your beneficiary’s lifetime could be protected from future taxation.

So by doing that, you have reduced your estate, so you’ve gotten $5.49 million or more out of your estate, how much ever you give into that trust. And then you’ll also get that future appreciation out as well.

Gary Gamma: Okay, so keeping that in mind, Michael from Michigan writes, “When should a trust be created and how to minimize taxes?”

Alisa Shin: Okay. So when should a trust be created? That’s really dependent upon what your goals and objectives are and how concerned you are about losing access and control over the assets.

So as Erin had talked about a revocable trust, for clients who live in a state where the probate process is difficult or they own real estate in multiple states, and then or clients who want to do some incapacity or incompetency planning, and they will probably at some point during their lifetime create a revocable trust rather than relying solely on a will.

The question of using an irrevocable trust, though, really is dependent upon how certain they are about having to pay estate taxes. If they’re ready to part with some assets, because once you give it to an irrevocable trust, the grantor, the person giving it would not be able to receive those assets back. It will be in trust forever, according to whomever you’ve designated is going to get it.

Or, you know, and how concerned you are about what your beneficiaries will do once they know a trust is created and has assets into it. So the timing question is really difficult for clients, and it’s really taking a step back and thinking about what your objectives are, what it is that you’re trying to accomplish, and probably just as important, how concerned are you about making sure that you have enough assets to live in your retirement years.

Gary Gamma: Okay.

Ryan Gager: Yes, I think one of the real key points that Alisa was making there is that clients should start with the goal. Right, the goal should never be I need to have a trust, just so I can check a box off for one of my life goals, right? Oh, if only I had a trust. Right, no. You should start with what you’re trying to accomplish, and hopefully that’s the type of conversation you’re having with your attorney or your advisor, and that leads to having a trust. So I think that approach is the right one.

Gary Gamma: Okay. Well, let’s go ahead and call up the results of that polling question that we asked. So, again, we said, “Which of the following best describes your designated trustee?” Looks like the largest majority, almost 50%, said they don’t have a trust at this time. As it pertains to the actual trustee, it looks like the vast majority, 41%, said family member, and then small, 3 to 4% amounts, for the accountant or attorney, the corporate trustee or the friend.

What would we say about that? I know, actually, there’s a question here from James in North Carolina, Ryan, about how to select a good trustee. So that question, plus the results, what would you say about that?

Ryan Gager: Yes, so I think for me, and I don’t know how you guys feel, those results don’t shock me. I don’t think a trust is right for everybody at every stage in their life, and I’m sure we have a wide range in our audience.

I think for a lot of clients when they start to really drill down into doing some wealth and estate planning, for a lot of people, they will end up with a trust at some point. But many of those trusts aren’t during lifetime. There may be a trust built into their will, whether a client knows it or not. The attorney may have one in there, but it may not be time right now.

Is that consistent with what you guys have seen and—?

Alisa Shin: Yes, I think that’s right, and I think also that for our Vanguard clients who are using trusts, I mean a lot of Vanguard clients are really true and tried Vanguard clients, in the sense that they have taught themselves or learned from Vanguard’s thought leadership in terms of how to handle inves

tments, and they’re transitioning that knowledge over to their kids. So the fact that there’s so many who’ve used family members as trustees isn’t so surprising to me.

Erin Zavislak: I do find that in the beginning stages of a client’s plan, it’s, you know, kind of easy to figure I’m going to use a family member or I’m going to use my accountant because you know those people. But if your trust is going to last for longer, that decision on who’s going to be trustee becomes harder.

Ryan Gager: Yes, I agree, and maybe that’s a good place for me to sort of jump in and talk about how to select a trustee—

Gary Gamma: Yes.

Ryan Gager: —because it is a very difficult decision sometimes. And, in fact, many clients may have had the experience where they’ve gone and met with their attorney and you kind of blow through all the decisions that need to be made, and then those tough questions start getting asked. Who’s going to be your executor? Who’s going to be your trustee? Who’s going to be your agent? Those are very personal and challenging decisions for clients a lot of times.

I think it’s helpful to think about the types of qualities that you want in your trustee. I would start with a time, willingness, and ability analysis. It’s actually very similar to the way we think about when clients need investment advice, right, if they’re going to come to Vanguard for our Personal Advisor Services. Do they have the time, willingness, and ability to manage their own assets? If they don’t, they might need some advice. And I think the same thing is true for trustees as well.

If you’re looking at a potential trustee, and they don’t have the time to devote to this very important job, it’s probably not a good choice. If they don’t have the willingness. If you’re naming somebody as a trustee under a document, you should probably talk to that person first. You don’t want to surprise someone with being named as the trustee.

And then, finally, they have to have the ability. It’s not always easy. There’s a lot of duties that have to be discharged. There’s state law to think about, taxes that have to be filed. Many people might sympathize with the story of a husband and wife who go into their estate planner, and they’re ready to put their documents together, and they had talked ahead of time: “Oh, who do you think we should name as our executor and trustee?” And they say, “Oh, it’s our favorite child. That’s the one to really choose.” And then they talk to the attorney, and the attorney lists the dozens of things that this poor person will have to do, and they say, “Maybe our least-favorite child should have these responsibilities.”

My point is it’s a tough job. It really is. And so if you don’t have someone with that time, willingness, or ability, it’s probably not the right choice.

Gary Gamma: Okay.

Ryan Gager: The other things I look for are in your trust, do you need somebody who’s neutral? Right, and this is what often leads you down the road of having a corporate trustee. If decisions have to be made about making distributions from a trust among maybe siblings— Right, I have a brother, and we get along very, very well, but I don’t know that it would be appropriate for me to make decisions about distributions going to him. And I don’t know if it would be appropriate for him to make decisions about distributions that might come to me. We might get along better if we had a neutral person to do that, and so one thing I look for is do we need neutrality.

And then, finally, it’s this question of availability and permanence. Erin referenced it earlier. Some trusts are meant to go on for a long period of time, maybe beyond any reasonable person’s lifetime. It’s very hard to see into the future and be able to predict who’s going to live until when.

In those circumstances, you might want a corporate trustee who you can trust who’s going to be around, who’s going to be around for dozens and dozens of years. So those are the types of categories I would look at in helping to pick out a trustee. I don’t know if you guys have found that to be a helpful way to look at it.

Alisa Shin: No, I think that’s absolutely right. Those are all good factors. I usually use a pretty simple role with our clients when we talk to them about selecting trustees. You know, don’t feel like you need to pick a trustee who knows how to do everything, who knows to understand the investment, who understands all the trust stuff, and how to read a document. But what they do need to be is they need to be smart enough to know when to go get help and where to go to get that help.

And please don’t think that you always can only pick just one trustee. A lot of times for our clients what works the best for them is having a collaboration with a corporate trustee like Vanguard and with a family member because often the corporate trustee can provide that neutrality that Ryan was referring to, but the family trustee, the co-trustee with Vanguard can help provide that personal touch. They’re the ones who know the family better. They knew you better, arguably, and they understand what you’re trying to do. And they can help Vanguard make decisions on your behalf.

Gary Gamma: Okay, well, Ryan’s now going to make me wonder whether I’m my parents’ favorite or least favorite, so thanks for that.

I would like to ask another poll question, so if you take a look at the screen. We’re asking, “If you have a trust account, which of the following best describes the reason you opened the account? Was it tax considerations, creditor or asset protection, investment management, beneficiary designation, or I don’t have a trust?” Don’t feel like you’ve got to tell us you don’t have a trust since we asked that in the first poll. So go ahead and give us the answer there, and we’ll keep moving along here.

So Nancy from New York says, “Who monitors the trustee to be sure the trust provisions are property executed?” So that’s kind of a good follow-up question to this whole trustee, yes.

Ryan Gager: That’s a great question.

Erin Zavislak: Well, my role here at Vanguard as a trust administrator is primarily after the plan is in place and the trust has been funded to follow the directives that are in the governing document.

So every decision that I make as a trust administrator, I want to have in mind that I’m making the decision that the grantor would have made had they been able to make it. As a trustee, you’re a fiduciary, and so you have several different duties that you’re subjected to. A corporate fiduciary, like Vanguard National Trust Company, is also subjected to regulatory oversight by our governing body.

So I think the governing principle in everything that we’re doing as far as administrators is what is the purpose and intent of the governing document? Are we making our decisions and compliance with that? We’re being looked at as corporate fiduciaries by third-party governmental agencies who are ensuring that we’re administering our documents correctly.

Also, beneficiaries, there’s a lot of transparency with regard to the administration. They’re privy to things such as assets and transactions. They’re able to attend meetings with the trustee and ask questions as far as investment decisions that are being made as well as distributions and taxes, so that’s another level of oversight.

I like the fact that when you’re dealing with a corporate trustee, you’re also looking at having the flexibility of the trust administrator, being able to do what he or she needs to do under the document, but have different levels of oversight within the company and expertise. So there’s a lot of people involved in monitoring a trustee’s duties.

Ryan Gager: Yes, and I want to call back to something that Alisa had said too to sort of add to that. I agree with Erin that there’s a lot of oversight, particularly for corporate fiduciaries, but I think for some clients that have named a family member, this is where having two people, more than one person, serve as trustee, can be helpful sometimes. Whether that’s two individuals or you are pairing a professional with an individual, there’s, a lot of times, the client would like to have that kind of division of power, if you will. Some of our clients may even have a concept of a trust protector in their language. It’s an additional fiduciary position, somebody who’s just kind of minding the store, making sure everything is going according to plan, and has some powers to either remove a trustee who no longer is doing what the trust protector thinks the person should have done.

And then, as Erin pointed out, the beneficiaries themselves often look at this. I know whenever, even when Vanguard’s being named as a trustee, I always look for the ability for beneficiaries to remove and replace a trustee, because I think it’s just a good check on power, to make sure that this still fits. It still makes sense for a family. And even if you’re naming individuals, I think it’s a good idea to have that kind of escape valve where you can get out of a situation like that.

Gary Gamma: Yes.

Alisa Shin: I think absolutely. Everything that Ryan, Erin said is true. But what we encourage clients to do in the planning stages is to really think about what’s the best way to mitigate those risks if your trustee’s not going to do something right or what you want them to do? So the biggest question, one, is making sure that you’re picking people or entities to be trustees who you trust and who understand what it is that you want done. So there are certain language in the trust document that kind of gives us a guideline, a map in terms of how to administer the assets, how to make distribution decisions, how to invest those assets. But often it is because we want it to be a flexible-enough document. Things change in the future. We typically are not too specific in it.

So getting to know your trustee, whether it’s a corporate trustee or an individual trustee that you name, letting that trustee get to know you, what your values are, what you’re trying to accomplish, and even leaving some kind of letter of instruction or letter of wishes, it won’t be a legally binding document, but often many trustees will use that as a road map and will also help your beneficiaries understand how you hope that they use this money or, in the converse, how you hope they don’t use the money.

Gary Gamma: Right. Well, let’s close out the poll here, and then we also have some live questions coming in. So, “Which of the following best describes the reason for your trust?” Again, we know a lot of our audience do not have a trust right now, but the largest answer was about 27% did it for tax considerations. Betting that you knew that would be the answer. Twenty-two percent beneficiary designation, and then smaller amounts for the other two. Any surprises there?

Erin Zavislak: The tax consideration is definitely not a surprise, and I think that’s one of the reasons why we chose the topic that we did for our webcast. In the environment where we’re not sure exactly what will happen with taxes down the road, we really want to remind clients that it’s important to think about the nontax reasons for a trust as well. Sort of “don’t throw the baby out with the bath water.”

Gary Gamma: Well, we’ve got a couple live questions, but I think the next one, Erin, in your previous question, you said you’re a trust administrator, you talked a little bit about this, but maybe expand a little bit here.

James in Iowa says, “Interested in learning what trust services Vanguard has.”

Erin Zavislak: Absolutely. I think Alisa really touched base on one of the key points earlier where we can serve as a current trustee, either on our own or in conjunction with a trusted professional or family member. I really personally, I enjoy that arrangement because it allows me to have, I would say, a warm-up period with the family and the beneficiaries. And I benefit from that, working alongside an individual in a co-trustee relationship. Ryan, would you like to expand a little bit about—

Ryan Gager: Yes, absolutely. So, first of all, James, thank you for the question, right. I love to get this question. I’m a little bit biased, as I’ve said, getting to lead our trust department here at Vanguard. But we provide a full-service corporate trustee offer at Vanguard, and what does that mean, right?

As Erin said, that means we can be a sole trustee, we can be a co-trustee with someone else. But, essentially, we’re able to provide investment management for the trust through our Personal Advisor Services platform. And we’re also able to discharge all the administrative duties of the trust. We’re talking paying the taxes, keeping the principal and income accounting, interpreting the trust instrument, making sure beneficiary distributions are made; really everything that needs to be done complying with state law, which is, I think, a lot of value for our clients.

For other clients, they may not need those full trustee services. They may feel comfortable discharging all the other things that we look to the Erins of the world to do and who do it so well. But they may feel like they can do that, but they still need a little bit of help with the investment management. And in those cases, we can provide investment management for the trustee, where an individual trustee engages Vanguard again through our Personal Advisor Services platform to help them make the investments for the trust, which I think is important.

And then, finally, a lot of clients get peace of mind by naming Vanguard as successor trustee. They may not be ready for a corporate fiduciary right now. They may be handling all the duties themselves, but sometime in the future after they’re no longer able to do that, they want the comfort of knowing that a company like Vanguard with its reputation and committing to always put the client first, they want to know that that is a backstop for their plan, that Vanguard will be able to step in and take care of whatever needs to be done at that time.

Gary Gamma: So, Ryan, I think you have moderator duties in your future because you just stole my next question.

Ryan Gager: I’m sorry for that.

Gary Gamma: “Can I list Vanguard as my successor trustee if close friends that I have named as trustees have died?” So clearly the answer is yes?

Ryan Gager: Yes, absolutely.

Gary Gamma: Okay. All right, well, let’s take a look at the live questions here. Sheryl asked to ensure neutrality in family, why not set up individual trusts? There’s a curveball.

Ryan Gager: Yes. And I think the answer to that is many clients do. They will divide up their assets and have separate trusts, and there is a certain clean break to that. It’s very easy to identify the pots of money, and if people need different levels of distribution, no problem. They can each sort of make their own decisions for how much money they want to request. So I do think that’s absolutely a good question. But still the question remains who’s going to be that trustee.

For some families, they’ll name each child as the trustee of their own share. It doesn’t work all the time. Many families have children or other beneficiaries that just aren’t capable of being a trustee or can’t be trusted to spend the money.

Alisa, I know you talk to clients all the time about this very question. What has your experience been like?

Alisa Shin: Yes, I think, again, it’s like Ryan said. It’s really family-dependent. It’s really dependent on the beneficiaries and why we’re putting the money in trust. I think clearly if you have a beneficiary who has difficulty managing money or deciding when to spend money or when not to spend money, probably more importantly, naming the child to be sole trustee probably doesn’t make a whole lot of sense. Or if you have a beneficiary who has dependency issues, on alcohol or drugs or what have you, again, that probably doesn’t make as much sense to have them be sole trustee. It might not even make sense to have that person to be a co-trustee of their own trust.

Other reasons that clients might not name a beneficiary as the sole trustee in a neutrality becomes important is if what you’re trying to do is protect these assets from future creditors. Whether that is third-party creditors who might be suing the beneficiary or it might be from a divorcing spouse. When we talk about asset protection, creditor protection, it really is how effective a trust is, is really on a spectrum. And arguably having a child be sole trustee of his or her own trust, he’s making all the decision about when they can get money and when not, that probably is not as protective than one in which you have somebody neutral who’s making those decisions.

I don’t know, Ryan, if you saw that in private practice.

Ryan Gager: Yes, I certainly did. I mean the rule of thumb, obviously, anytime you want to get involved in any kind of asset protection, you should absolutely talk to your attorney. But even basic asset protection, we’re not talking about anything fancy, the rule of thumb I always thought about was you can have control, you can get some protection, but it’s very hard to have both. It’s very hard to have both. So I think for a lot of families, they make the decision that they still want some neutrality there for that reason.

Gary Gamma: Okay, well, Joe asked the question that I know all three of you get, so I’m going to let you arm wrestle to answer. Should an IRA be included in the trust? Erin, you want to take that one?

Erin Zavislak: Well, I will say that it’s becoming more and more common. When I first started in trust in administration, we didn’t see it a lot. It is a more frequently used planning tool now for a few reasons, and I think I’m going to let our planners speak to those reasons.

Alisa Shin: Absolutely. I think that as, again, it kind of depends, right, on what the client’s objectives are and what their concerns are. I think what we’re starting to see now, our clients have done a phenomenal job investing and saving money, and a lot of times it’s now taking place within someone’s 401(k), their 403(b), or some kind of IRA. And so now we have these large balances. And in conjunction with that, we’ve been fortunate enough where the law has evolved on the estate planning side that we have much more generous estate-tax exemption levels, meaning how much you can pass free of the federal estate tax.

In today’s world, it’s $5.49 million. Probably a decade ago, maybe more than that, we were closer to the million dollars or under a million dollars. And so to be able to shelter your assets from future estate taxes, sometimes it is necessary to use some of your retirement account assets, whether it’s a 401(k) or an IRA, to fully fund what’s called a credit shelter trust, which is the technique that’s commonly used. So a lot of times IRAs are being put into the beneficiary of an IRA as a trust typically.

Other reasons is very similar as what we just talked about. If you have beneficiaries who have a difficult time managing money or spending money, if your beneficiary is a minor, you would typically use a trust to inherit that IRA. And, again, if you wanted to add another layer of protection to protect those assets from future creditors, using a trust probably makes a whole lot of sense. But, again, it’s one of those things that it depends on the client, and working with their attorneys to figure out what makes the most sense is really important.

Gary Gamma: I think I’m going to keep you talking, Alisa, because you mentioned this a little bit earlier. Lynn asks, “Does establishing a revocable trust negate the need for a will?”

Alisa Shin: Great question. So your revocable trust is basically your will substitute. That document holds all your dispositive provisions, meaning it directs where all your assets will pass at your death.

You will typically still have a very simple will that’s called a pour-over will. It’s a will that simply says, among other things, but the main thing it does is that at my death, if I happen to own any assets in my sole name, meaning it’s not titled in my revocable trust name, I direct my executor personal representative to give those assets to the trustee of my revocable trust, to pour it over into that revocable trust. So you will still have a very simple will, but it will be much shorter than the irrevocable trust document will be.

Gary Gamma: Okay.

Ryan Gager: And if you think about the challenge for clients when they set up a revocable trust, it becomes a titling issue, right? In order to make sure all your assets pass the revocable trust, if you don’t have this pour-over will like Alisa said, you have to constantly remind yourself, “Oh, I’ve got to make sure that this asset’s held in the name of that trust.” And while I’m sure all of our Vanguard clients are diligent about all those things, some clients out there, not Vanguard clients, might struggle or forget sometimes to title everything properly. And so I think it’s just that safety net that a will still provides.

Gary Gamma: Okay, Erin, let’s get you involved here. Gerhard from Virginia says, “When is the right time to disperse funds from a dependent’s trust to heirs, and what is the ideal age when dependents should receive funds?”

Erin Zavislak: This is a frequent concern of clients. I would say it’s probably the top concern for clients, and, unfortunately, my answer is not going to be an easy, straightforward answer.

Gary Gamma: Good.

Erin Zavislak: You know, heirs are unique; think about your children and your grandchildren. They all have their own special talents and challenges. So really, Alisa used the word spectrum earlier, and I think it’s a good use of the word here.

You can go very strict and simple and use a distribution from a trust, let’s say, based on age. You know, a certain amount at 21 or 30 or 50. Or you can go to the other end and make it a fully discretionary decision, and then you’re relying on your trust administrator who gets to know the beneficiaries, who knows maybe through a letter of wishes what your objectives were for the money, how you’d like to see it used, work with the beneficiaries as to what are the appropriate reasons that distribution should occur from the trust. So really you can be very specific or you can be very flexible, and in between, there are several different options that planners can discuss with you.

But I really think it’s important to drive home the point that just because, let’s say you have three children and you’re going to develop three trusts, that doesn’t mean that each trust has to have the same exact terms because you want to account for that, that uniqueness.

Alisa Shin: So I think that when we work with clients to talk about their estate planning and how they might design their trust, again, it really goes back to the question of what are your goals and objectives? What are you trying to accomplish?

So I’m going to make some statements that are generalities but probably have truthfulness to some degree for every client, depending on what their goals are. You know, if your goal is to minimize the estate taxes and to take advantage of generational tax planning that you can use with some of these trusts, meaning having the assets and the growth of those assets pass from generation to generation tax-free, it is very unlikely that that trust will be designed so that a beneficiary’s ever guaranteed any portion of the trust. Typically, those trusts are designed so that the trustee has broad discretion to use the income and principal or distribute the income and principal to named beneficiaries. And, again, that letter of intent will help the trustees make decisions of when that might be appropriate.

Clearly, if you are worried about asset protection and credit protection, you typically also wouldn’t design a trust where anybody is guaranteed anything because once they’re guaranteed it, it’s very likely that a creditor could attach those dollars or that provision, that power to withdraw money could impact how a divorce might end up being finalized.

But for some clients where generational tax planning, credit protection planning, or asset protection planning for the life of a child isn’t as important, then they might decide upon the child attaining a certain age, whether that’s 40, 45, 50, or even staggered ages, they might give grant withdrawal rights to withdraw a portion or all the trust assets.

There’s a lot of different ways to design a trust. There’s not just one way to do it. It’s true that attorneys probably had standard ways that they use it, stock language that they use. Although it’s not boilerplate, there is a reason why they use certain language. It is really important to go back to understanding what you’re trying to accomplish, what your goals and objectives are, and what your concerns are. And that way your advisor, your attorneys can really help you hone in that trust.

Gary Gamma: Yes, and for the audience, again, we have the green Resource widget on the screen that contains a lot of information that supports the discussion we’re having today, so please check that out.

Erin, I think you kind of touched a little bit on this in your previous answer, Siyad from Iowa says, “How to tell your kid about our assets without diminishing their motivation to work hard?”

Erin Zavislak: That’s another common concern that clients have, and I will say that normally the clients who have it shouldn’t. You know, you meet the children, you meet the family, and they’re highly motivated and just have learned from the lessons that their parents have imparted to them.

I think the conversation is essential. At the end of the day, what your children remember about what your goals and objectives were in transferring this wealth to them and how you’d like to see them use that wealth, they’ll remember that conversation that a parent had more than the conversation that I have with them years down the road. So I feel like wealth is personal, but when it comes to imparting your intentions to your children, your grandchildren, that’s your opportunity while you’re alive to have those family meetings, to have those discussions, and talk about the fact that the wealth is there, but you still want the children to be motivated.

There’s also the ability to put in some provisions that a planner would talk to you about, to incentivize certain behaviors and discourage others. So that’s a way to work that into your plan.

I know that our Flagship representatives, they’re a great resource to even discuss how do I broach the subject with my family members and maybe set up a family meeting.

Gary Gamma: What about if you don’t have any children? Do you need a trust?

Erin Zavislak: You know, I think that that’s also a question that depends on what your intentions are. Sometimes, we see clients still use trust in the case of charitable gifting. There are several advantages to doing so.

We’ve discussed pretty heavily revocable trust and the ability to use that for nontax purposes as well, such as incapacity planning or the avoidance of probate, so I really think it depends on your goals. What would you think?

Alisa Shin: Yes, no, I agree, Erin. I think if you don’t have any children, a lot of our clients might use a revocable trust to use that for incapacity planning, incompetency planning because they don’t know how to name under their power of attorney.

But, secondly, I think that, depending on who you ultimately want to leave the money, your money to, how much you want to leave and your beneficiary’s ability to manage those dollars, and, frankly, whether or not you worry about how they might use those dollars, I certainly have clients who say, “You know, once I’m gone, people can enjoy the money however they want. And if it’s gone the next day, that’s okay. I hope it isn’t, but if it is, that’s okay.” Other clients who want to try and manage everything to make sure it lasts for the reasons they want. So trust could still be appropriate, depending on what a person’s goals or objectives are.

Ryan Gager: Yes, Alisa, I think all of us have mentioned this incapacity planning a couple times now. I wonder if it makes sense for us to talk a little bit about how that works and what we’re talking about when we talk about incapacity planning.

I know when I was in practice, the concern often for people was, “Hey, look, when I get older, if I can’t manage my own affairs, I don’t want somebody pulling me into court and having a judge declare me incapacitated so a guardian can be put in place.” So I wonder if you could talk a little about how the trust kind of gets around that.

Alisa Shin: Yes, so when you have a revocable trust, not only do you set forth how these dollars should be invested and used for your benefit during your lifetime, you’re going to create a mechanism, and you’re actually going to name who might be trustees. So you might be the initial trustee of your own revocable trust so that while you’re still competent, you’re making your own decisions. But you would likely say that if for any reason I’m not able to be my own trustee, then I appoint my friend, Mary, to be trustee. And if Mary can’t serve, then you might say, “John is going to be your trustee or a corporate trustee like Vanguard’s going to be your trustee.” So there’s a clear succession in terms of who should be trustee if anyone at any point in time can no longer be trustee.

Now, the expectation is not that our clients name as many trustees as they possibly can, because we don’t know how many trustees you actually need. Life changes, different events happen, different things causes people to be able to be trustee or not be trustee. So what’s really important, and in order to build flexibility in your trust documents, it’s empowering somebody, whether it’s the beneficiary or whether it’s your most recent trustee to have the power to appoint his or her successor. And that way the assumption is that the person you appoint as trustee is someone that you trust and you trust their judgment, but they’re going to use that judgment to figure out who makes the most sense to step in.

And once that trustee comes into place, that successor trustee becomes a current trustee, that current trustee is going to kind of take over for you and manage your financial affairs. They’ll have all the powers that you had as your own trustee. They can invest the assets, they can sell the assets, they can purchase new assets, they can make distributions on your behalf to pay your bills, to pay your tax bills, and so forth.

Gary Gamma: So I think this live question we have fits into this a little bit. David asks, “Can a trust protect my assets from a daughter-in-law or son-in-law in the event of future marital problems?”

Alisa Shin: So the short answer to that question is yes. It does technically depend on how you draw up the trust. But the idea being that if you properly have a trust drawn up for the benefit of your child, and your daughter-in-law or son-in-law is not named as a beneficiary in that trust, and the trust is properly drawn, it will be very difficult for that divorcee, spouse, that daughter-in-law, or son-in-law to receive any of those assets in the event of a divorce.

That’s typically how most trusts work. Without a trust, if your child were to receive their inheritance outright and they put that money in their own name, in most states, if not all states, the base amount of the inheritance that they receive should be protected from the divorcing spouse.

What may or may not be protected in that event is the growth of that marriage during the marriage. That is dependent upon state law. Every state is different on that rule. Typically, though, in most states, if the inheritance is held in a properly drawn trust, not only is the base amount of the inheritance held in trust, it is protected from divorce, but also the growth of that money is also protected.

If your child was very generous or just very naïve and took that inheritance and put it into a joint account or comingled it with marital assets, then it becomes very difficult to protect any portion of those assets from a divorcing spouse because then it becomes really fundamentally a tracing game where your child’s going to have to show a court, an arbitrator, that the money in that joint account is all separate property and not marital property. It becomes very hard to prove that.

Gary Gamma: Gotcha.

Ryan Gager: I think that’s a scary thing for a lot of parents when you’re talking about giving a lot of money or even a little bit of money through an inheritance. And I think you’ll see a lot of clients use trusts almost like a belt and suspenders along with the prenuptial agreement or a postnuptial agreement. Again, depending on state law, may not replace one of those documents, but it can certainly support them.

Gary Gamma: So we talked a little bit about the tax benefit of trusts. William from New Jersey, I think, is asking us for some of the mechanics of this. “How do you use trusts to reduce estate taxes?”

Alisa Shin: So typically you create an irrevocable trust or you at least put the structure of an irrevocable trust in place in your will or revocable trust. If you do the latter, what’s called a testamentary trust, that irrevocable trust will come to life upon your passing. But once the money is an irrevocable trust, the best way to make sure that those assets are out of your estate is for you not to retain any interest in those trust assets so you are not a beneficiary of that trust, the donor, the person who gave the money. And for most attorneys, they really believe the safest thing to do is that the donor should also not be a trustee of that trust because it gets complicated whether or not an individual is acting as a donor on his own behalf or is actually acting as a trustee in a fiduciary capacity.

So for that reason, a lot of times, not all attorneys, again, every attorney has a little bit of a different risk tolerance when it comes to the IRS. But most attorneys would probably prefer that the donor not be a trustee.

If then what you’re trying to do is to do some generational tax planning to protect those assets from future taxes upon your child’s death, your beneficiary’s death, and upon your grandchild’s later death and so forth, then that’s really based on the design of the trust. The typical rules of thumb, as I had said before, is you don’t give any guaranteed access to the money. Anything that’s guaranteed could be included in the child’s estate, the beneficiary’s estate.

It doesn’t mean though that the child could not be his or her sole trustee. Properly drafted, a child could be the sole beneficiary of a trust, could be the sole trustee of a trust, and could even have the ability to decide who should receive these assets in what proportions and what manner, and those assets still would not be included in his or her estate when they pass away later.

Ryan Gager: Alisa is hitting on this theme we’ve talked about a couple times where when you’re dealing with trust, usually the option of keeping control or getting some of the benefits, and I think taxes works that way too. The more control you have, the less likely you’re going to be able to keep those assets out of your estate. The less control, the more effective the plan is going to be as a general rule.

Gary Gamma: Well, we’ve reached perfect parity here with live and presubmitted questions. My next question was from Fred. What are the implications of the proposed estate tax repeal? And we’ve got a live question from George saying, “With the possibility that estate taxes may be eliminated in the future, is there still a reason to have an estate plan?”

Ryan Gager: Yes. I mean I think probably the audience knows what we’re going to say here. I mean the answer is yes, right. And I think this is a good question. It’s on a lot of people’s mind.

Unfortunately, we don’t have the answers for everybody as far as what’s going to happen with proposed tax reform. I’d love to say that we did. It’s anybody’s guess right now, but I think a lot of clients do look at trust and estate planning as a tax-based thing. But part of that’s also the way estate planning is packaged a lot of times, right?

Many of you in the audience have had this experience of going to an attorney and asking to have a will drawn up, and they’ve shown you this tax planning, right? Many people have gotten either the folder or a document that has the nice charts on it, and it says, “We’re going to put money here, and then it’s going to go here.” And at the end of the day, there’s a big number it’s going to save you.

And there’s a reason for that, right, and it’s because it’s a great way for attorneys to show their value, and it’s a great way for you as a client to understand kind of what you’ve just purchased. You just saved all this money in taxes.

And it’s a wonderful story. But the truth is, right, and this is what most estate planners would, I think, would tell you too is that the taxes are just a small piece of it. All this other stuff we’ve been talking about. It’s all the questions we received around, “Hey, how do I make sure I don’t ruin my kids now in giving them an inheritance? How do I make sure I’m protecting my legacy? How do I make sure I’m incentivizing the right behaviors in my beneficiaries?” Those have always been the most important aspects for a lot of clients, and so for any client that has any of those interests, that want to have a say in what happens to the legacy they’ve created financially, I think you’re still going to see estate planning. You’re still going to see trust planning. There still needs to be an efficient way to kind of administer your affairs after you’re gone, so it is important.

But, obviously, the really good thing about estate tax repeal, if it happens, besides saving all the money for clients, is that estate planners are going to be able to be a lot more flexible. All right, and, Alisa, I know you have all these conversations. People have to jump through all kinds of hoops in order to meet the various tax laws in their estate plan. What would it look like if planners didn’t have to worry about tax implications for their planning any longer?

Alisa Shin: Well, I think that, you know, that’s hard to say because while we can say the estate tax could be repealed, there’s a lot of details that we don’t know what they are. And the details are really what’s going to drive the decisions. Do we still have what they call the step-up in basis? That little tool that happens, that little magic that happens that when someone passes away, the beneficiary’s basis in an asset becomes what the fair market value of that asset is at the person’s death.

That’s a nifty tool, nifty magic people have had and really relied on. If that goes away, that really changes how we approach the tax planning for estate planning. It becomes more of an income tax issue that’s still a very important part of it.

So the devil’s in the detail with anything. I do think, you know, as we’ve been talking to a lot of our clients since the election, you know, there are probably some safe things to continue doing. If you’re making systematic gifts, if you’re making those annual exclusion gifts, which are the $14,000 gifts you can make to any number of individuals each year free of the gift tax, I think it’s probably safe to say you can still continue doing that because the annual exclusion gift is a use-or-lose proposition. If for some reason the estate tax is not repealed by the end of the year and you have not given away your $14,000, you do lose your ability in 2018 to give away your 2017 annual exclusion gifts.

Charitable giving again. If you’re charitably inclined, if you’re philanthropic, you know, go ahead and make those charitable gifts as a general rule. There’s some things that might have us pause. If you’re making large gifts, we do have some clients who are opting just to wait and see what happens with the tax code overall—not just with the estate taxes but also with the income taxes.

But, you know, but there are also certain life events that’s going to necessitate you to make some decisions that you might want to otherwise wait on. You might have a liquidity event that’s coming. You might be selling your company, and there might be some opportunities to do some planning right now that we might lose next year if we wait until a liquidity event to happen.

So what we’ve been talking and what we’re hearing from a lot of our clients is as a general rule, they want to wait and see what happens with the tax code before they make some large move. But the more smaller moves, like the annual exclusion gifts, the paying of medical and tuition expenses directly to the provider, charitable gifts, they’re still kind of staying on course with that. There’s no right or wrong answer. But, unfortunately, we don’t have a crystal ball to know when any tax reform will happen or what that tax reform will look like.

Gary Gamma: Yes. I think we touched on this a little earlier, but these are live questions, so I’ll ask it. Jasmine says, “Is it a good idea to let our children know the total amount of our assets?” I’m guessing there’s some variation in that answer, but how does that discussion go for you?

Alisa Shin: So, it depends. I feel like that’s what my answer is here with every question. You know, it obviously depends upon the age of the children. It depends on the maturity of your children and what they’ve been doing with their lives. Are they productive? Do they show signs of being able to manage money and still make good decisions?

Some clients have even, what I’ll call, tested their kids over time and given them some gifts, some of large amounts, some are smaller amounts just to see what they did with it. And that would help them gauge when’s the right time to tell them. Unfortunately, there’s no recipe, there’s no right time to tell the kids. It varies from family to family.

I will say at some point it probably would be helpful for kids to understand what they could inherit, but that might be more in their 40s or 50s or as you get older. I don’t want to give exact age, but 70s, 80s, 90 where it might become important.

While I think that it is true that beneficiaries have a sense that Mom and Dad have wealth, but sometimes they don’t really understand the extent to what that wealth can mean and how much that is.

And I do have clients who have inherited significant wealth that’s completely surprised them, and there were none of those conversations that Erin and Ryan talked about before about what Mom and Dad wanted them to use the money for, what they didn’t want them to use the money for.

And sometimes these beneficiaries, these adult children, feel like this isn’t my money, and I don’t know what to do. And sometimes that paralyzes them, believe it or not.

Gary Gamma: Yes.

Alisa Shin: So that’s really why, I think it’s less important about the dollar amount and more important to talk about the history of the family wealth, where it came from, what you hope this money is used for, how you raised your own children, and what principles you used to help make them productive because I think most families, most parents will say that they want their kids to be productive and not the stereotypical trust fund babies. Having those conversations to understand what the purpose of the wealth is, what the family’s mission is, what we want it to be used for is all very helpful for families in the long run.

Ryan Gager: Yes, I think there’s no substitute for age- or maturity-appropriate financial education. Right, like having those conversations is extremely important. I think the question specifically was about should it reveal everything about the assets, and I agree with Alisa. I think it does depend in those circumstances. Not every child is ready for that information. For some children, it would destroy their work ethic if it’s too young and they’re not established yet in their life. But I think that doesn’t mean don’t have any conversation with children about financial education, even getting to specifics.

I like it the way Alisa said even understanding where the family money came from. Who worked for this, how this was created, how it’s been managed. I think we talked about earlier a lot of Vanguard clients have worked hard and saved money, and a lot of those principles are really valuable to pass along, and it would be a shame to not give that to the next generation.

Gary Gamma: Makes me think of that Cosby Show episode where the son finds out his mom and dad have all the money. He said, “We’re rich,” and Mr. Huxtable says, “Your mother and I are rich. You have nothing.”

Alisa Shin: That’s right.

Gary Gamma: I believe we’re getting a lot of live questions about the costs of Vanguard trust services. In the green Resource widget, there is some information that will tell you about our trust services, and I think give you some of the details that you’re looking for.

I know we’re kind of getting short on time here. We have a question from John in California. “What is the most successful method of giving funds to kids and grandkids with regard to bequeathing larger sums of money from an estate?” Who wants to tackle that one?

Alisa Shin: Want to go first, Ryan?

Ryan Gager: I can. It’s a great question as far as the best way to do it. I think we talked about a couple of them here, particularly around incentivizing certain behaviors. But it does start with kind of knowing what your goals are, which has come up a number of times. That’s where I would start.

Alisa Shin: Yes, I think it’s your goals, it’s keeping in mind, and sometimes your attorneys don’t always keep it in mind. I think I’m probably guilty of that when I was in private practice because you’re so focused on kind of showing that end result. But, you know, you can’t let the tax tail wag the dog so to speak, so understanding what your purpose is, what you’re trying to do, why you’re doing what you’re doing is really important to keep in mind.

Sometimes that’s a trust, sometimes that’s some kind of family-limited partnership, sometimes it’s some kind of charitable entities, some kind of charitable trust that you use. There is no right or wrong answer. But I think as long as you understand what your goals and objectives are, what you’re trying to accomplish, that really, what your philosophy is around wealth. Do you believe that you’re trying to get as much wealth to your family as you can or is there a bare minimum or a maximum amount you want to give? How charitably inclined you are.

Understanding that part of yourself and what your family values are, that will help your advisors kind of understand what your wealth planning path looks like and what techniques might be appropriate, and they can help maneuver through that to figure out what makes the most sense.

I think as a general rule, it’s about understanding your objectives. Don’t be afraid to keep things simple. There’s a certain elegance to simplicity. Even if you have a lot of wealth, you don’t need to have a gazillion different techniques to be effective. There is a certain elegance to simplicity, and then lastly, it’s really fundamentally trying to keep things in a way that can be managed by your family and having the right people in place to help your family manage it.

It’s not trying to dictate everything from the grave. You want to make sure that whatever you do is understandable, measurable, and people can be held accountable for what they’re doing and what you’re asking them to do.

Gary Gamma: Gotcha. Thirty seconds, Erin? Last question, live question, Vanguard trust services only applies to Vanguard assets? Is that correct?

Erin Zavislak: Absolutely not.

Gary Gamma: Correct.

Erin Zavislak: There are many different types of assets that you may want to put in our trust, and we can have a trust that handles any sort of asset we have a solution for.

Gary Gamma: Gotcha. Okay?

Ryan Gager: I know, I’m sorry. I know we got some questions around the service. I do want to point people back to the widget where we have a page that describes our services and the costs.

Gary Gamma: Great. All right, thank you. You’ve been wonderful guests. We went right up to the end here, so we hope you found this discussion informative. In a few weeks we’ll send you an email with a link to view highlights of today’s webcast, along with a transcript for your convenience.

And if we could have just one more minute of your time, please select the red Survey widget at the bottom of your screen to complete a brief survey. We appreciate your feedback and welcome any suggestions you have about future topics for us to cover. From all of us here at Vanguard, thank you for joining us tonight, and enjoy the rest of your evening. Take care.

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