Just how "vulnerable" are our assets? (Will/trust)

[Bammerman]

My wife and I are updating our wills, and the lawyer, after some vacillation, recommended establishing a trust to protect the assets that a surviving spouse, and (our grown) children (and grandchildren) might eventually inherit. I mention vacillation because the lawyer said several times that because our assets are mostly in the form of 401(k)s, the TSP, Roths, and such tax-deferred retirement vehicles, they therefore would be very difficult for some potential litigant to get their hands on. He seemed to be saying that a trust would be best, but that even without a trust, our assets are already fairly well-protected. If we go with the lawyer's recommendation the whole package (wills, trusts, POA, living will, etc.) will cost almost $3,000. Considering that when we had our wills done 13 years ago it cost us about one tenth of that amount, this seems rather dear. Maybe it's not, I don't know. Now, if a trust really is the best thing, then we're ready to spend the money. But how do you decide that sort of thing? Is it mostly a matter of how big the inheritance might be? Or what? And what about the fact that our assets basically consist of our house, two cars, my USG pension (my wife gets half if I go first) and a decent-sized pile of money in tax-deferred retirement accounts? Happy to hear any thoughts as we mull this over.

[Cut-Throat]

I have no clue how vulnerable your assets are......That's why you go to an estate lawyer.

I did it about 3 years ago and it cost me $2,400....It gave me piece of mind which was well worth it. All wills are subject to probate, trusts are not Basically.

There are some here that jumped up and down and said that a trust was not necessary and that I totally wasted my money. They were not lawyers however. They asked me to explain exactly why I needed a Trust. I cannot, I am not a Lawyer. That's why I paid for one. I don't want to study the law.

I do not do my own dental work either. You either trust the legal advice you are getting or you don't. I am sure that there are many that will weigh in here (That aren't lawyers), that will give you different advice than your lawyer gave you.

[livesoft]

I have to say that I am not worried about some potential litigant. Are you? I am repelled by folks who use Fear, Uncertainty, and Doubt in selling me something. Ask the lawyer to give three specific examples from the past 2 years of how a trust he set up protected someone from a potential litigant.

Would a personal umbrella liability policy be a better way to protect from potential litigants?

We have so-called Bypass Trusts to save on potential estate taxes, but that's another matter. It is very easy to explain how certain trusts are beneficial tax-wise.

[chaz]

A personal umbrella liability policy is good along with a trust(to avoid the cost and delay of probate).

[Bammerman]

My wife and I do have personal umbrella liability policies, but they would not cover the full amount of our assets now. Maybe I'd better look into that. Neither I nor my wife, nor our kids, have "vulnerable" (or lucrative!) professions, either.

[Peter Foley]

I am not an attorney, but I understand from reading other threads here that pensions (including 401k, 403b, etc) are protected from litigation. So one consideration would be the value of your assets excluding pensions. Another reason for a trust might be to avoid state inheritance taxes.

[scone]

If the trust protects the surviving-- grieving-- spouse from going through probate, I'd say it's money well spent. The less stress you and the rest of the family endure, the better. But that's a big "if," isn't it? The issue, it seems to me, is not the money, but the effectiveness of the trust mechanism.

[magellan]

My wife and I do have personal umbrella liability policies, but they would not cover the full amount of our assets now. Maybe I'd better look into that.

This is a common misconception about umbrella policies. Umbrella policies don't "cover" your assets per se. The goal is to make the umbrella policy limits high enough that it's not worth the bother for a litigant to go after your assets.

So say you had $2m in assets and a $2m umbrella. The $2m umbrella buys you a good insurance company lawyer who will represent their interests, and indirectly, yours. They have up to $2m to offer in a settlement with the plaintiff and your assets won't be touched. If the plaintiff is bold and doesn't think $2m is enough compensation, they're perfectly within their rights to try to sue you for $4m. If they win, they can get $2m from the insurance policy and also take all your assets.

In reality, this is unlikely because going to trial is a huge expense and risk for the plaintiff and they'll usually just take the $2m 'bird in the hand' rather than risking everything in a trial. The key is to make sure that the value of the 'bird in the hand' is high enough to dissuade them from going after the' two in the bush' (eg your assets).

So the goal is less about matching your coverage to your assets than it is about making sure you have enough coverage sitting in front of your assets that it makes going after your assets not worth it. Even if you have "only" $500k in assets, if your income and earnings potential is high enough, IMO it's sensible to consider a $1-2 million umbrella policy just to increase the chance that your assets are never an attractive target.

Jim (IANAL - I am not a lawyer)

[jon-nyc]

I had a thread on asset protection not long ago, based on the responses trusts seem uncommon here, many had umbrella policies though.

I spoke to an estate person just last week, we discussed a variety of trusts. I'm likely to pursue it, though I have most of my money in taxable (i.e. its potentially vulnerable). I am also interested in reducing inheritance taxes.

I carry an umbrella policy as well.

[reggiesimpson]

That price is fair.

[Bammerman]

I checked with USAA and the advisor said since most of our assets are in retirement vehicles they are already well "protected" and, therefore, I did not need to increase our umbrella liability insurance coverage from what it is now.

[letsgobobby]

- for the reasons outlined above, you should still have an umbrella. We recently increased ours. I consider $1M the absolute bare minimum.

- 401k are fully protected from bankruptcy and almost all creditors.

- IRA are protected from bankruptcy up to $1M, but from other creditors per state law, which varies a great deal. in some states (CA is often cited as an example) protection is minimal.

- non ERISA plans such as non ERISA 403b plans seem to depend on state law, like IRAs.

- none of these laws protect your assets from the future spouse of the survivor. Example: you die, leaving your wife $1 M in various accounts. She meets a stunning, handsome man a few years later and gets married. Then she dies. Who gets the money? Maybe you don't think that would happen with your wife; what about with your kids?

[Bammerman]

letsgobobby: these, especially the last, are the main reasons my wife wants to go with the trust. And that's probably what we'll do. Although I must say, it goes against the grain, because I have always tried to keep my life, our lives (and our taxes!) as simple and straightforward as possible.

Thanks to all who contributed.

[pointyhairedboss]

I have no clue how vulnerable your assets are......That's why you go to an estate lawyer.

I did it about 3 years ago and it cost me $2,400....It gave me piece of mind which was well worth it. All wills are subject to probate, trusts are not Basically.

There are some here that jumped up and down and said that a trust was not necessary and that I totally wasted my money. They were not lawyers however. They asked me to explain exactly why I needed a Trust. I cannot, I am not a Lawyer. That's why I paid for one. I don't want to study the law.

I do not do my own dental work either. You either trust the legal advice you are getting or you don't. I am sure that there are many that will weigh in here (That aren't lawyers), that will give you different advice than your lawyer gave you.

In any profession, there will be professionals who are untrustworthy, sleazy, and/or incompetent. If there is a lot money to be had, the percentage of untrustworthy and sleazy professionals will higher than professions where there is less money to be had. The idea that you can hire an expensive professional and needn't worry about good and bad practices is foolish. The more knowledgeable you are on a topic, the less chance you have of getting victimized by bad advice. Imagine if somebody wrote the following:

I have no clue how important costs are to your portfolio......That's why you go to an financial adviser.

I did it about 3 years ago and my average fund expense ratio is 1.80%....It gave me piece of mind which was well worth it.

There are some here that jumped up and down and said that higher expense ratios were not necessary and that I totally wasted my money. They were not financial advisers however. They asked me to explain exactly why I needed an actively managed fund. I cannot, I am not a financial adviser. That's why I paid for one. I don't want to study investments.

I do not do my own dental work either. You either trust the financial advice you are getting or you don't. I am sure that there are many that will weigh in here (that aren't financial advisers), that will give you different advice than your financial adviser gave you.

[Cut-Throat]

In any profession, there will be professionals who are untrustworthy, sleazy, and/or incompetent. If there is a lot money to be had, the percentage of untrustworthy and sleazy professionals will higher than professions where there is less money to be had. The idea that you can hire an expensive professional and needn't worry about good and bad practices is foolish. The more knowledgeable you are on a topic, the less chance you have of getting victimized by bad advice. Imagine if somebody wrote the following:

I have no clue how important costs are to your portfolio......That's why you go to an financial adviser.

I did it about 3 years ago and my average fund expense ratio is 1.80%....It gave me piece of mind which was well worth it.

There are some here that jumped up and down and said that higher expense ratios were not necessary and that I totally wasted my money. They were not financial advisers however. They asked me to explain exactly why I needed an actively managed fund. I cannot, I am not a financial adviser. That's why I paid for one. I don't want to study investments.

I do not do my own dental work either. You either trust the financial advice you are getting or you don't. I am sure that there are many that will weigh in here (that aren't financial advisers), that will give you different advice than your financial adviser gave you.

Well, you certainly threw the baby out with the bath water !

I never said you don't research the Professional that you are getting advice from or stick your head in sand and not educate yourself on such matters.

Sheeeeeesh !!

[willardx]

I just want to point out that creating and funding trusts does not automatically mean you lower your inheritance taxes. Unless you stop owning or controlling the funds in that trust (irrevocable trust), it will still count toward determining your tax bill.

I usually promote the privacy and speed of trust administration versus probating an estate. Fees are probably about the same, you either pay upfront for the trust creation or pay at probate with the court filing fees and notice requirements, with hiring an attorney at death in both cases. I also encourage vigorous insurance coverage for asset protection.

[Browser]

Is your attorney familiar with strategies for minimizing the taxes on your inherited IRAs and other tax-deferred accounts? For example, if you create a trust and make the trust your beneficiary, that has implications for being able to "stretch" the mandatory distributions from the inherited tax-deferred accounts, since RMDs must then be based on the life expectancy of the oldest trust beneficiary, which could force much larger distributions than might be desirable with a much greater tax burden to the recipients. If your attorney is not familiar with these matters, then I'd consult another attorney before decided to establish a trust. Another consideration is flexibility in specifying beneficiaries. For example, Vanguard has only a limited set of standard beneficiary designations for IRA accounts and they won't be bothered with establishing customized designations unless you are a Flagship client with $1M or more in assets. If the standard designations for your various accounts are not suitable for you, making a trust the beneficiary has the advantage that you can specify whatever arrangements you want within the trust. Still another consideration is the greater expense of administering a trust, and taxation of assets in the trust at a possibly higher rate than for individuals. If I were you, I'd spend the time to do a little more research on the pros and cons of setting up a trust as beneficiary for your IRA and other tax-deferred accounts before leaping. My situtation is the same as yours, with most of my assets in tax-deferred accounts. I went through this process recently with an estate planning attorney and wound up not doing a trust, and a Will instead.

[letsgobobby]

Another consideration is flexibility in specifying beneficiaries. For example, Vanguard has only a limited set of standard beneficiary designations for IRA accounts and they won't be bothered with establishing customized designations unless you are a Flagship client with $1M or more in assets. If the standard designations for your various accounts are not suitable for you, making a trust the beneficiary has the advantage that you can specify whatever arrangements you want within the trust. Still another consideration is the greater expense of administering a trust, and taxation of assets in the trust at a possibly higher rate than for individuals. If I were you, I'd spend the time to do a little more research on the pros and cons of setting up a trust as beneficiary for your IRA and other tax-deferred accounts before leaping. My situtation is the same as yours, with most of my assets in tax-deferred accounts. I went through this process recently with an estate planning attorney and wound up not doing a trust, and a Will instead.

Is the bolded portion confirmed - that Vanguard will establish customized IRA beneficiary arrangements for Flagship? I have never heard that. Within the last few months someone posted that she had to move assets from Vanguard because they would not allow the level of beneficiary customization per IRA account that she wanted.

[Browser]

Another consideration is flexibility in specifying beneficiaries. For example, Vanguard has only a limited set of standard beneficiary designations for IRA accounts and they won't be bothered with establishing customized designations unless you are a Flagship client with $1M or more in assets. If the standard designations for your various accounts are not suitable for you, making a trust the beneficiary has the advantage that you can specify whatever arrangements you want within the trust. Still another consideration is the greater expense of administering a trust, and taxation of assets in the trust at a possibly higher rate than for individuals. If I were you, I'd spend the time to do a little more research on the pros and cons of setting up a trust as beneficiary for your IRA and other tax-deferred accounts before leaping. My situtation is the same as yours, with most of my assets in tax-deferred accounts. I went through this process recently with an estate planning attorney and wound up not doing a trust, and a Will instead.

Is the bolded portion confirmed - that Vanguard will establish customized IRA beneficiary arrangements for Flagship? I have never heard that. Within the last few months someone posted that she had to move assets from Vanguard because they would not allow the level of beneficiary customization per IRA account that she wanted.

Well, that's what another poster said. I don't know for sure myself. I'm a Voyager client and they wouldn't do it for me. I also have moved some IRA money.

[2stepsbehind]

I have no clue how vulnerable your assets are......That's why you go to an estate lawyer.

I did it about 3 years ago and it cost me $2,400....It gave me piece of mind which was well worth it. All wills are subject to probate, trusts are not Basically.

There are some here that jumped up and down and said that a trust was not necessary and that I totally wasted my money. They were not lawyers however. They asked me to explain exactly why I needed a Trust. I cannot, I am not a Lawyer. That's why I paid for one. I don't want to study the law.

I do not do my own dental work either. You either trust the legal advice you are getting or you don't. I am sure that there are many that will weigh in here (That aren't lawyers), that will give you different advice than your lawyer gave you.

In any profession, there will be professionals who are untrustworthy, sleazy, and/or incompetent. If there is a lot money to be had, the percentage of untrustworthy and sleazy professionals will higher than professions where there is less money to be had. The idea that you can hire an expensive professional and needn't worry about good and bad practices is foolish. The more knowledgeable you are on a topic, the less chance you have of getting victimized by bad advice. Imagine if somebody wrote the following:

I have no clue how important costs are to your portfolio......That's why you go to an financial adviser.

I did it about 3 years ago and my average fund expense ratio is 1.80%....It gave me piece of mind which was well worth it.

There are some here that jumped up and down and said that higher expense ratios were not necessary and that I totally wasted my money. They were not financial advisers however. They asked me to explain exactly why I needed an actively managed fund. I cannot, I am not a financial adviser. That's why I paid for one. I don't want to study investments.

I do not do my own dental work either. You either trust the financial advice you are getting or you don't. I am sure that there are many that will weigh in here (that aren't financial advisers), that will give you different advice than your financial adviser gave you.

I agree with this completely (and I am a lawyer). To the OP, if your kids are older, your accounts are properly titled, and you are below the estate tax threshold there may be little need for a series of extensive trusts. Depending on your state, probate can be a simple procedure (particularly if given proper titling few things are in your taxable estate). Moreover, going through probate may actually be beneficial for your estate. For example, state law sets strict timelines regarding when claims may be asserted against the estate verses a trust.

[Bammerman]

2stepsbehind: what do you mean by "properly titled" accounts?

[2stepsbehind]

2stepsbehind: what do you mean by "properly titled" accounts?

I mean accounts where the beneficiary designations are up to date (hopefully both primary and contingent). Depending on the state, you can have not only payable on death designations for your bank accounts, but transfer-on-death registrations for securities, vehicles, and even deeds for real estate. To the extent that most of your property could bypass probate then your estate may qualify for your state's simplified "small estate" probate procedures.

[bsteiner]

In response to Bammerman: fees will vary depending upon the client, the attorney, the law firm, and the metropolitan area. In the higher cost of living parts of the country, $3,000 would be at the low end of the range for Wills for a husband and wife (with marital and credit shelter provisions and trusts for children), along with powers of attorney, living Wills and health care proxies.

If you create a trust for your own benefit, you won't obtain any better asset protection. In most cases, it won't save (or cost) any taxes. While it occasionally makes sense to do this, for most people, except in a few states, it's not worth the effort.

If you create a credit shelter trust in your Will for the estate tax exempt amount, you'll protect that amount from your spouse's potential creditors, including future spouses. You'll also keep that amount, plus the income and growth thereon during your spouse's lifetime, out of your spouse's estate. Under the new tax law, portability is now permanent. In other words, if you were to leave your entire estate to your spouse, your spouse would receive your unused estate tax exempt amount. So in smaller estates, while the credit shelter trust may provide some asset protection, you don't need it for Federal estate tax reasons. Since portability is not indexed for inflation, and it doesn't apply to the generation-skipping transfer tax, in larger estates there's still a tax benefit to creating a credit shelter trust. Some states have estate taxes, with a lower exempt amount, so in smaller estates you would have to consider the state estate tax as well.

If you provide (in your Will) for your children to inherit in trust rather than outright, you'll keep their inheritances out of their estates, and protect their inheritances against their creditors, including spouses.

In response to scone: there's generally no reason to protect your spouse from "going through probate." Probating a Will is generally not particularly difficult, expensive or burdensome. The lawyer (or, more often, a paralegal) fills out some forms and brings or sends them in with the Will, a death certificate and a check for a filing fee. While there are exceptions, there was no information presented to suggest that this case would be an exception.

In response to 2stepsbehind: transfer on death registration can defeat carefully done estate plans. For example, if your Will provides that your children will receive their shares in separate trusts for their benefit rather than outright, but you name them as beneficiaries on your brokerage account, they'll receive them outright. Some states allow you to designate a beneficiary of real estate on a deed. That's the equivalent of making your Will public during your lifetime.

In response to Browser: yes, Vanguard will allow customized IRA beneficiary designations for Flagship clients. Fidelity will also let clients with over a certain amount of assets (I don't remember the amount) to have customized beneficiary designations. We've also had other financial institutions accept customized beneficiary designations. Our most common customized beneficiary designation names the spouse as primary beneficiary, with the shares for persons other than the spouse payable to separate trusts for their benefit.