Does Your Broker Understand What You Mean by “Safety of Principal?”

ronald farrington sharp
Ronald Farrington Sharp May 21, 2020

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Most investors think they have “safety of principal” in their portfolios… do you? Did you tell your broker you want to focus on safety in your investments? If so, does your portfolio reflect your ideal risk/safety level?

Doug stresses the importance of having clear communication with your broker. An investor must understand their own investments, and make sure they are appropriate.

The best tool for a conservative investor may be CDs (certificates of deposits.) Doug lays out the benefits and different types of CDs. If “safety” is a major concern for you in your investments, then Doug has some helpful tips.

Keep your loved one’s estate out of probate

Ronald Farrington Sharp is an estate planner and the author of Living Trust for Everyone. Ronald explains how to avoid probate when a loved one passes on, and how to steer clear of unnecessary red tape. Doug and Ronald discuss the difference between a “will” and a “trust” and what the ideal situation is for each of these arrangements.

To read more about the uses of trusts you can find Ronald’s book Living Trust for Everyone on Amazon.

If you’re not already receiving updates on new episodes, sign up now, and as a special bonus, receive Doug’s free ebook The Retirement Planning Book. You can also watch Doug’s interviews here.

Watch Does Your Broker Understand What You Mean by “Safety of Principal?” on YouTube.

Read the Transcript

Interview With Ronald Sharp

Join Douglas Goldstein, CFP®, and Ronald Sharp as they discuss wills and trusts. What’s the difference between the two and what is a living trust?

Douglas Goldstein: I'm very excited to have on The Goldstein on Gelt Show attorney Ronald Sharp. He has over 40 years’ experience in family and divorce law, but then diversified into the areas of trusts and estate planning probate. One of the things that we’ve talked about a lot, on The Goldstein on Gelt Show, is the issue of how you deal with your money, especially in terms of passing it on to the next generation.

People often throw out words like “will” or “trust.” Can you give us a basic understanding of what the difference is between them?

The Difference Between A Will and a Trust

Ronald Sharp: Sure, Doug. People often come in here for a will and they don't know what the difference is between a will and a trust. A will is just written instructions to a probate court as to what you want done with your assets after your death. A trust is also written instructions, but it's not to a court. It's to your family, basically telling them what you want done with your stuff after your death, and who's going to be in charge of seeing that that happens, but it doesn't go to a court. Avoiding probate and court involvement, and the time and expense, is one of the big advantages of a trust.

Douglas Goldstein: A trust is a document that continues on for a long time, possibly after you die, whereas with a will, it wraps up your affairs, gives out your stuff, and then it's done?

Ronald Sharp: Yes. I often analogize a trust to a family business, like Doug's Hardware. Doug's Hardware owns the building, the bank accounts, the hardware, and the cash register, and everything else. Even if Doug dies, the hardware is still alive. It continues to operate, but new owners come in, and that's the family. They come in and take over control of your assets, according to the way you've described in your trust document. They won’t need the court's permission. They don’t need to pay any fees or expenses or anything else. It's very quick, easy, and inexpensive for them.

Douglas Goldstein: Isn't that like trying to control everything from the grave?

Ronald Sharp: That's a good idea, sometimes. One of the main reasons that people should have a trust is, not necessarily to avoid probate and court costs, and all that, although that's important, but sometimes people have situations, like a lot of people have minor children. They may have a disabled beneficiary, whether it's a child or an adult, or they may have people who don't know how to handle money. Those are ideal situations for a trust to control that money so that it's not wasted. You don’t turn over $100,000 to an 18-year-old who doesn't have any idea what to do with it. The trust can spread out and manage assets for beneficiaries who aren't able to manage it for themselves.

Douglas Goldstein: What you’re saying is thata trust would be something that you could use to control the situation, when perhaps the people receiving the money might not really have the maturity or the ability to handle the money on their own? That begs the question, is there something that people should be doing during their lifetime, to make sure that their kids can manage their money well?

Ronald Sharp: Perhaps that goes toward parenting and child rearing. You could get them practicing to do that, but the fail-safe is to make sure that there are controls in place and that a person is appointed. The trustee will be in charge of your trust and will make decisions, or help your kids make decisions, about the trust. Sometimes there's a time limit. For example, with minor children who are under the age of 30, then these controls will be in effect. If they're over 30, then you might say that they can get it all at once.

The Myth Of Not Paying Taxes When You Have a Trust

Douglas Goldstein: Let's try to dispel a myth that I’ve heard a lot of times. People think that if you have a trust, you can avoid taxes, whereas if you have a will, you're going to have to pay taxes. Is there any truth to that?

Ronald Sharp: There is some truth to that. It used to be a big deal when the estate taxes, for example, were levied at anything over $600,000. For a married couple, you'd have to have over $10 million to worry about estate taxes, so that part is not true any longer, but there are other taxes and expenses. With a will, there are probate costs involved, primarily attorney fees, and that can be thousands or even tens of thousands of dollars. There's also time constraints. Wills, by their nature, and by statute, are required to be open for a period of time, whereas a trust can literally be wrapped up as soon as you identify the creditors and the assets. You can follow the terms of the trust and immediately end it. Yes, there are some expenses saved, as well as time.

Douglas Goldstein: There's certainly a lot of flexibility. As a financial advisor, people tell me, "Hey Doug, we really like how you help us manage our money. Would you be willing to be the trustee in our trust?" However, that creates a conflict of interest and it is not my specialty. I'm an investment guy, and you need to have someone with the requisite qualifications to be a trustee. How do you suggest people choose trustees to manage their portfolios or their estates?

Ronald Sharp: It depends on the situation. If you have minor children, the children can't be the trustees. You may take a brother, a parent, a good friend, or someone like that. If you have a responsible person who can act as a trustee for people who can't act as their own trustees, then you name that person. Sometimes it's a good idea to name two people, so that they are accountable to each other.

Generally, people name their children as their trustees, and they also happen to be their heirs. There are no restrictions on when and how they get their money. That's a typical thing. That way, the kids take the death certificate and the trust paperwork to the bank, the insurance company, and the real estate office, instead of hiring a lawyer. They can then transfer using their own names. It's a pretty simple thing if they know what to do.

Douglas Goldstein: As opposed to leaving the trust, for example?

Ronald Sharp: Sometimes the person who makes the trust requires that it be kept in the trust for a period of time until circumstances and conditions are met. But usually it's a matter of distributing the assets and liquidating things, so that they can be distributed. The problem that it does, and this is a major problem, is that people go to an attorney and have the trust created. When the person dies, the kids have no idea what to do. They’re like, "Okay, I've got this trust, but what do I do now?"

They go back to the attorney and pay $300 an hour for what they call trust settlement, which is not much more than clerical work. It ends up costing a lot of money even though they are with a probate that they are still paying. When I’m preparing a trust, I give people very specific written instructions, including formal letters that they can use, to tell them exactly how to settle an estate after the person dies. They won’t need an attorney. I’ve received a lot of feedback from people and I’ve put those instructions in a book that I wrote called Living Trust so that people can get written instructions on how to settle an estate.

Douglas Goldstein: Explain why it's called a “living trust” as opposed to other types of trusts.

What Is A Living Trust?

Ronald Sharp: There are different kinds of trusts, dozens even. A living trust is a trust that's created while you were alive and not one that goes into effect or is created at your death. There are trusts that are created within the language of a will and that is called a testamentary trust; it's in your last moment testament. That kind of trust has to go through probate before it's created, and that's not what we want. We want a trust that is created while you're alive; while you're in charge of it. At your death, it can't be changed but while you’re alive it's revocable, which means it's changeable. You can use any of the assets any way you want to. You can change your mind about anything during your lifetime. Usually they call it “the revocable living trust.”

Douglas Goldstein: Is it as hard to create as a will?

Ronald Sharp: It's a little harder to create because a will is usually four, five, or six pages long. You simply say who's in charge and who gets your stuff after you've gone. A trust may contain more than that. After you create the trust, you have to fund the trust. As a harder analogy, you have to put the hardware store in the name of the trust and the bank account in the name of the trust, and your furniture is in the name of the trust. Everything is owned by the trust so there is nothing left in your name at your death to be probated.

However, just because it's in the trust, it doesn't mean you're in any way restricted to these assets during your lifetime. You don't have to file any special papers, or anything to sell your house or access your bank account or anything else. That doesn't complicate things; it just makes things simpler after your death.

Douglas Goldstein: There are certainly a lot of benefits, and there's a lot more to learn about a living trust. We are out of time, but please tell us in the last few seconds, how can people learn more about the work that you do?

Ronald Sharp: A really good resource is the book that I wrote, which is Living Trust for Everyone, and my new edition is out in March of this year. Living Trust for Everyone has got all of this information and much more. It’s available on Amazon.

Douglas Goldstein: Ronald Sharp, thanks so much for taking the time.

Ronald Sharp: Thank you for talking to me, Doug. I appreciate it.

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