Could a Trust Fit Your Estate Plan?

**Mark Riepe** (0:10)
I'm Mark Riepe, I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision making and the cognitive and emotional biases that can cloud our judgment.
We're tackling a topic that strikes fear into many an investor's heart, trusts.
It's not that trusts are inherently scary, but they can be intimidating. There's a lot to consider, different kinds of trusts serve different purposes, and that means you've got to figure out what kind of trust you need. In addition to that, like any legal document, it's important to understand your rights and obligations. The end result is a process that could be, if you're not careful, cognitively taxing. Trusts like many financial processes also have an emotional component to them as well. In the case of a trust, you're forced to consider potentially unpleasant things like your own mortality. We recently came across a paper entitled Terror Management Theory, Understanding Existential Anxiety. The upshot is that if we dwell on the fact of our passing for too long, the death anxiety as it's known would overwhelm us. But I think we all know that deep down, avoiding reality is rarely a good plan. It's far better to confront that reality and make the most of it. And for some, a trust is a great tool to have in our financial toolkit. To help us navigate the world of trust, we've got a returning guest, Austin Jarvis puts the trust in trust education. He's our trust, estate planning, and tax expert here at the Schwab Center for Financial Research. Austin analyzes and provides insights on complex estate, gifts and trust planning, advanced charitable strategies, business succession, and executive compensation.
Austin Jarvis, welcome to the show.

**Austin Jarvis** (1:58)
Happy to be here, Mark.

**Mark Riepe** (1:59)
So Austin, maybe we'll start at the beginning here. Is there a simple test for whether someone should even be thinking about a trust? What sort of problems are trusts typically aiming to solve?

**Austin Jarvis** (2:10)
So I really hate to start out the interview like this and sound like a lawyer, but it really depends on each person's goals and circumstances. Like if you live in a state that has a slow and costly probate process, a revocable trust as a will substitute may be what's right for you because then you get to basically have an alternative through going through your state's probate process. But there are many more types of trust than just a typical revocable trust that many people are familiar with. Trusts can be used to hold assets for beneficiaries that can't manage their own affairs.
Maybe someone in your family that you want to give money to has gambling problems or creditors have sued them or they just can't manage a large inheritance or a large gift. Trusts are set up all the time to manage those types of circumstances. And if you're a high net worth person, trusts are often used for charitable planning purposes, estate tax mitigation, especially for states that have state estate taxes. And then for the ultra rich, we have trusts that are really efficient for tax-focused generational wealth transfer. So the long and short of it is, trust can be used for the average person just looking for a way to avoid the probate process, give themselves a little bit more flexibility and control over transferring of assets at their death, or it can be used for a multitude of other purposes, depending on what your goals and circumstances are.

**Mark Riepe** (3:31)
The word trust, it's a simple word, we use it all the time. When people hear that word in this context, what should they be picturing? Is it an account? Is it a kind of a legal construct? Is it a set of instructions? What is it exactly?

**Austin Jarvis** (3:46)
So I like to think of a trust as a box.
And so for like a revocable trust, it's a box that's open that you can put assets into, take them out of, control them. Basically, during your life, it flows in and out. You have full control. But at your death or in capacity for a revocable trust, then the box closes and those set of instructions, you basically slap on top so that the next trustee takes over. Now for an irrevocable trust, which basically just means that it can't be changed without significant effort after you've established it, the box typically starts off closed with a set of instructions that the trustee has to follow.

**Mark Riepe** (4:23)
A lot of different trusts that are out there, Austin. What are the main categories or use cases that people should be thinking about?