The perils and pitfalls of setting up a family trust the wrong way will be the subject of a series of workshops offered by ATS called “The 7 Biggest Mistakes Trustees Often Make,” which will be held in Escondido, Saturday, August 10, 10 a.m.–12:30 p.m. at Marie Callender’s restaurant.
ATS is a San Diego financial services firm that specializes in advanced trust and estate planning. It brings a wealth of knowledge and experience.
We interviewed Sandeep Varma who has been an independent financial advisor for 29 years (he will celebrate 30 years in the business next year.) When I asked what the seven mistakes are, he chuckled and said, “I’d like people to come to the workshop to find out!”
But he was willing to talk about just one of the seven biggest mistakes, and the changes in our society that has made the creation of family trusts so vital. “In the history of mankind the amount of money changing hands every single day has never been anything like it is today,” Varma declared. “Today millions of dollars are changing hands. When you are talking about the real estate market or stock market, the average knowledge of consumers has skyrocketed.”
That leaves parents with lots of money to leave to children and grandchildren. Often they hear about what a good idea setting up a family trust. But they ONLY hear that. They don’t hear about all the caveats involved. “They all tell you to set up a living trust, but no one tells you what to do afterwards,” says Varma.
The biggest mistake is a two-parter. The first, says Varma, is the failure of parents to properly communicate their predicament. “Sometimes parents don’t tell the children everything they need to know. They will leave it as a surprise. That’s one of the worst things they can do. They don’t tell the kids how much they are leaving them because they are afraid they will be a trust junky. They ask themselves, ‘Do I have a reason to look over my shoulder?’ ”
Part two of that “biggest mistake” is that children don’t want to get involved because they will be perceived as greedy.
It is generally a bad idea to name someone who will be a beneficiary of a family trust as a trustee, says Varma. “When it comes to a living trust they name their oldest son or daughter. Then you have second or third marriages and someone is unhappy and it creates perfect disaster.”
But don’t just believe him. In the foreword to Varma’s book, which has the same title as the series, Ed Slott, CPA, author of “Your Complete Retirement Planning Road Map,” writes, “Every family that has accumulated assets needs to sit and have a serious talk about the issues that financial advisor Sandeep Varma brings to light. You will be shocked when you see the many ways your life savings and property can be lost to taxes, family squabbles, lawsuits, unplanned events, or irreversible errors that happen during your life-and even after your death.”
Varma acts as a fiduciary; a financial advisor who manages money. A fiduciary by definition is someone who acts above his own interest. “I become involved with the family. We set up various entities that protect the kids, gives structure, communication, piece of mind. This is the practice that we have built,” he says. “Making money is only half the battle. Keeping it and saving it is what we have built a niche business around.”
He adds, “Almost everything we do today involves two to three years of planning. We educate the public on the responsibility and liability of being a trustee.”
He continues, “We believe in providing education, tools, process’ and guidance to help trustees make informed and educated financial decisions. With the ever changing economic environment and recent tax law changes, it’s becoming more important to stay informed.”
It used to be when Varma would try to talk to people about these issues, they didn’t have time for it. “Now kids graduating from school are talking about it. Once upon a time you got out of a good school, you got a great job which you kept for most of your life. Now you could graduate from a good school and not get a good job. Kids can’t expect to work for the same place for the rest of their life.”
Add to this the fact that people are living longer than ever before. “How can I talk about my kids’ inheritance when I don’t have enough for myself,” says Varma. “When kids leave college the student loan is a noose around their neck. It is a problem that no one is talking about but we hear it all the time.”
Because of such issues, Varma is a big proponent of educating people. “This first workshop teaches people the liability and responsibility of being a trustee. It’s free,” he says.
As a former Secretary of Defense once observed, it’s the unknown unknowns that can really bite you! “People don’t know what they don’t know,” says Varma. “The minute they start learning what they don’t know, they say ‘Wow! How did that happen?’ ”
The seminars last two and a half hours. After learning a lot, those who want to do an even deeper dive will be asked to commit to doing a phone interview. “They come in for a strategy session. They meet with me and focus on one strategy. Then we send them to the second workshop,” which usually happens two or three weeks later.
Varma has been doing these trustee seminars for twenty years. “When I first came into the business in 1990, I helped one of my clients set up a living trust. I saw this situation unfold in front of me where they named their step-daughter as trustee. People died and the grandson ended up filing a lawsuit against the trustee. I saw this unfold before my eyes.”
Varma is passionate about what he does. He likes to tell a story about a couple who attended one of his seminars 14 years ago and ended up hiring ATS. “They had two piles of money, two homes in Palo Alto and nothing in the middle. They were advised to borrow against the house to fill in the middle. They really wanted to move into a retirement communicate.”
Varma came up with a capital gains bypass trust, which allows you to sell assets without capital gains. Before a family sets up a trust, Varma usually sets up a family meeting. “The wife started to cry immediately. She said, ‘We haven’t told you everything. We haven’t told you about our son, John.”
John and the father had gotten into a fight. John stormed out and no one knew where he was now.
Varma said to them, “You’re telling me this now and you are leaving a third to him?’
The only way the parents had of contacting John was through an email. That was it. Varma sent an email informing John that a family meeting would be held at such and such a time.
“On the day of the meeting the phone rings,” said Varma. “It’s John, who comes at me full speed. ‘Who are you? Why are you doing this?’ ” Varma explained everything to him and he hung up. The family took a break in the meeting.
The next day, the parents came into Varma’s office. “They told me, ‘Last night John called and said, “Why are you leaving me an equal amount I haven’t been anything like a proper son.” ’ ”
The mother answered him, “We love you, that’s why.” The mother, tears in her eyes, told Varma, “John said, ‘I’m coming home for Christmas.’ ”
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