Inheritance question - beneficiary is a spend thrift

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CrazyCatLady
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Joined: Mon Apr 30, 2018 9:19 pm

Inheritance question - beneficiary is a spend thrift

Post by CrazyCatLady » Thu Aug 16, 2018 12:49 pm

Asking this for a friend. He is 58, single, one son (25) who would blow through any inheritance. His primary assets are his 401(k) (both Roth and traditional, but primarily traditional) and a small rIRA. His main goal is to provide a little liquidity for any major purchases (though college or a house are not likely) and provide money (preferably Roth) for his son's retirement (son has not started saving for retirement and lives paycheck to paycheck).

He asked if he names his son as the beneficiary, if the son would get a lump sum or yearly distributions. I told him to check with his plan administrator on whether a lump sum would be required or if they allow a longer payout. I told him that I thought it would be his son's decision whether he took a lump sum, rollover, etc. I also explained about RMDs.

He is also thinking of naming his sister as beneficiary for the benefit of his son. I told him that would give her the right to decide how to pay the money to his son and she would be responsible for any taxes. She is married with one adult child.

He does not have a trust and taxwise I don't know if one would be practical given the fact most of his money is pre-tax.

Does anyone have any thoughts on the best way to help him accomplish his goals? If he has to choose, I would say his most pressing desire is to help fund his son's retirement (rather than liquidity for major purchases).

Thanks!

magicrat
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Re: Inheritance question - beneficiary is a spend thrift

Post by magicrat » Thu Aug 16, 2018 1:11 pm

CrazyCatLady wrote:
Thu Aug 16, 2018 12:49 pm
Asking this for a friend. He is 58, single, one son (25) who would blow through any inheritance. His primary assets are his 401(k) (both Roth and traditional, but primarily traditional) and a small rIRA. His main goal is to provide a little liquidity for any major purchases (though college or a house are not likely) and provide money (preferably Roth) for his son's retirement (son has not started saving for retirement and lives paycheck to paycheck).

He asked if he names his son as the beneficiary, if the son would get a lump sum or yearly distributions. I told him to check with his plan administrator on whether a lump sum would be required or if they allow a longer payout. I told him that I thought it would be his son's decision whether he took a lump sum, rollover, etc. I also explained about RMDs.

He is also thinking of naming his sister as beneficiary for the benefit of his son. I told him that would give her the right to decide how to pay the money to his son and she would be responsible for any taxes. She is married with one adult child.

He does not have a trust and taxwise I don't know if one would be practical given the fact most of his money is pre-tax.

Does anyone have any thoughts on the best way to help him accomplish his goals? If he has to choose, I would say his most pressing desire is to help fund his son's retirement (rather than liquidity for major purchases).

Thanks!
I would advise him to, 1) Speak with an attorney on how to set up a trust to achieve these goals. Pre-tax money does not impact this. 2) Not put his sister in the position to be in charge of his son's finances. That will probably not go well.

CrazyCatLady
Posts: 58
Joined: Mon Apr 30, 2018 9:19 pm

Re: Inheritance question - beneficiary is a spend thrift

Post by CrazyCatLady » Thu Aug 16, 2018 1:17 pm

magicrat wrote:
Thu Aug 16, 2018 1:11 pm
CrazyCatLady wrote:
Thu Aug 16, 2018 12:49 pm
Asking this for a friend. He is 58, single, one son (25) who would blow through any inheritance. His primary assets are his 401(k) (both Roth and traditional, but primarily traditional) and a small rIRA. His main goal is to provide a little liquidity for any major purchases (though college or a house are not likely) and provide money (preferably Roth) for his son's retirement (son has not started saving for retirement and lives paycheck to paycheck).

He asked if he names his son as the beneficiary, if the son would get a lump sum or yearly distributions. I told him to check with his plan administrator on whether a lump sum would be required or if they allow a longer payout. I told him that I thought it would be his son's decision whether he took a lump sum, rollover, etc. I also explained about RMDs.

He is also thinking of naming his sister as beneficiary for the benefit of his son. I told him that would give her the right to decide how to pay the money to his son and she would be responsible for any taxes. She is married with one adult child.

He does not have a trust and taxwise I don't know if one would be practical given the fact most of his money is pre-tax.

Does anyone have any thoughts on the best way to help him accomplish his goals? If he has to choose, I would say his most pressing desire is to help fund his son's retirement (rather than liquidity for major purchases).

Thanks!
I would advise him to, 1) Speak with an attorney on how to set up a trust to achieve these goals. Pre-tax money does not impact this. 2) Not put his sister in the position to be in charge of his son's finances. That will probably not go well.
Thanks! Would a trust not have to receive the 401(k) as a lump sum and pay a higher tax rate on the pre-tax money? I thought I read that somewhere, but i know just enough about tax to be dangerous.

I agree the trust would be the best scenario control wise, but I was afraid there would be tax implications. That would be ideal if not.

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FIREchief
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Re: Inheritance question - beneficiary is a spend thrift

Post by FIREchief » Thu Aug 16, 2018 1:43 pm

Based upon the limited information provided, it sounds like a qualified accumulation trust with an independent trustee might be the best approach. Because the son is young (25) the required RMDs from the inherited IRA (the 401k assets would likely be rolled into an inherited IRA via trustee to trustee transfer) would be fairly small. If distributed annually to the son, the son would pay the taxes based upon his tax rates (not trust tax rates). The sister could be named trustee, but a corporate trustee might work out better.

See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Thegame14
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Re: Inheritance question - beneficiary is a spend thrift

Post by Thegame14 » Thu Aug 16, 2018 1:45 pm

set up a trust and put in rules about how much or when he can get the money. You could have it invested in something and he can only withdraw a fixed amount per year, or only can withdraw any dividends or interest but not principal.

c1over8
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Re: Inheritance question - beneficiary is a spend thrift

Post by c1over8 » Thu Aug 16, 2018 1:49 pm

CrazyCatLady wrote:
Thu Aug 16, 2018 1:17 pm
magicrat wrote:
Thu Aug 16, 2018 1:11 pm
CrazyCatLady wrote:
Thu Aug 16, 2018 12:49 pm
Asking this for a friend. He is 58, single, one son (25) who would blow through any inheritance. His primary assets are his 401(k) (both Roth and traditional, but primarily traditional) and a small rIRA. His main goal is to provide a little liquidity for any major purchases (though college or a house are not likely) and provide money (preferably Roth) for his son's retirement (son has not started saving for retirement and lives paycheck to paycheck).

He asked if he names his son as the beneficiary, if the son would get a lump sum or yearly distributions. I told him to check with his plan administrator on whether a lump sum would be required or if they allow a longer payout. I told him that I thought it would be his son's decision whether he took a lump sum, rollover, etc. I also explained about RMDs.

He is also thinking of naming his sister as beneficiary for the benefit of his son. I told him that would give her the right to decide how to pay the money to his son and she would be responsible for any taxes. She is married with one adult child.

He does not have a trust and taxwise I don't know if one would be practical given the fact most of his money is pre-tax.

Does anyone have any thoughts on the best way to help him accomplish his goals? If he has to choose, I would say his most pressing desire is to help fund his son's retirement (rather than liquidity for major purchases).

Thanks!
I would advise him to, 1) Speak with an attorney on how to set up a trust to achieve these goals. Pre-tax money does not impact this. 2) Not put his sister in the position to be in charge of his son's finances. That will probably not go well.
Thanks! Would a trust not have to receive the 401(k) as a lump sum and pay a higher tax rate on the pre-tax money? I thought I read that somewhere, but i know just enough about tax to be dangerous.

I agree the trust would be the best scenario control wise, but I was afraid there would be tax implications. That would be ideal if not.
If the trust isn't properly set up, the benefits might be required to be distributed within 5 years. But the attorney can certainly set the trust up to avoid that result.

Everything you wanted to know about leaving retirement assets to a trust and more:

http://www.theworkplace.biz/files/Choat ... iaries.pdf
6.2.01 If retirement benefits are left to a “see-through trust” (¶ 6.2.03), the benefits can be distributed in annual instalments over the life expectancy of the oldest trust beneficiary, just as if the benefits had been left to an individual human Designated Beneficiary. In contrast, if the trust does not qualify as a see-through trust under the rules explained here, the retirement benefits must be distributed under the “no-DB rules.” The no-DB (no Designated Beneficiary) rules require that all sums be distributed out of the plan within five or six years after the participant’s death, if the participant died before his required beginning date (RBD); or (if the participant died after his RBD) over the remainder of what would have been the participant’s life expectancy.
Trusts reach the higher tax rates at lower amounts of income than individuals. But if distributions are made to the beneficiary the income will flow out and be taxed to the individual.

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dm200
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Re: Inheritance question - beneficiary is a spend thrift

Post by dm200 » Thu Aug 16, 2018 1:53 pm

When we did our wills man decades ago, we specified that our son would get 1/3 five years apart - since we thought he would blow it. We hoped that he might learn something between the bites of the apple.

We did not die - and he has become a productive member of society and (mostly) financially responsible.

CrazyCatLady
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Joined: Mon Apr 30, 2018 9:19 pm

Re: Inheritance question - beneficiary is a spend thrift

Post by CrazyCatLady » Thu Aug 16, 2018 7:42 pm

Thanks everyone for your insights, they are greatly appreciated! I will pass the information on so he can decide if he wants to do the trust route.

Also, thanks c1over for the link to the CLE materials! The topic is new to me so I look forward to reading up on it! :)

:sharebeer

delamer
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Re: Inheritance question - beneficiary is a spend thrift

Post by delamer » Thu Aug 16, 2018 7:47 pm

CrazyCatLady wrote:
Thu Aug 16, 2018 7:42 pm
Thanks everyone for your insights, they are greatly appreciated! I will pass the information on so he can decide if he wants to do the trust route.

Also, thanks c1over for the link to the CLE materials! The topic is new to me so I look forward to reading up on it! :)

:sharebeer
Really he needs to meet with an estates attorney and then decide if he wants to a trust. Making that decision based on a few comments on an internet forum is ill-advised.

CrazyCatLady
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Re: Inheritance question - beneficiary is a spend thrift

Post by CrazyCatLady » Thu Aug 16, 2018 8:00 pm

delamer wrote:
Thu Aug 16, 2018 7:47 pm
CrazyCatLady wrote:
Thu Aug 16, 2018 7:42 pm
Thanks everyone for your insights, they are greatly appreciated! I will pass the information on so he can decide if he wants to do the trust route.

Also, thanks c1over for the link to the CLE materials! The topic is new to me so I look forward to reading up on it! :)

:sharebeer
Really he needs to meet with an estates attorney and then decide if he wants to a trust. Making that decision based on a few comments on an internet forum is ill-advised.
I agree, didn't mean to imply otherwise. I just let him know that such a trust existed (I had originally told him that I thought the entire amount would be taxed if his 401(k) was paid to a trust) but that it was above my pay grade so he'd need to talk to a tax/estate planning attorney to figure out the next steps. The reading is for my benefit. I have a revocable trust, but I may decide to upgrade (I wouldn't do that myself, I'd hit up a tax attorney for help if I decided the upgrade was appropriate for me). Thanks!

chevca
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Re: Inheritance question - beneficiary is a spend thrift

Post by chevca » Thu Aug 16, 2018 8:52 pm

Poor kid. I'd hate to hear what I may have been called at 25. He may end up just fine and not be a spend thrift.

bsteiner
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Re: Inheritance question - beneficiary is a spend thrift

Post by bsteiner » Thu Aug 16, 2018 9:49 pm

CrazyCatLady wrote:
Thu Aug 16, 2018 12:49 pm
Asking this for a friend. He is 58, single, one son (25) who would blow through any inheritance. ...

Does anyone have any thoughts on the best way to help him accomplish his goals? ...
He should provide (in his Will) for his son in trust rather than outright.

He may want to give his son some degree of control over the trust but not as much control as he might if his son were more financially responsible.

He should then change his beneficiary designations for his retirement benefits so that they're payable to his son in trust rather than outright.

He should keep in mind that there are some special requirements for trusts that receive retirement benefits. See my article on this in the March 2004 issue of BNA Tax Management's Estates, Gifts & Trusts Journal: https://www.kkwc.com/wp-content/uploads ... 132954.pdf.

This should be a routine matter.
CrazyCatLady wrote:
Thu Aug 16, 2018 1:17 pm
... Would a trust not have to receive the 401(k) as a lump sum and pay a higher tax rate on the pre-tax money? ...
If it's properly drafted, the trust could take distributions over the son's life expectancy, in the same way that the son (if he were the beneficiary) could take distributions over his life expectancy.
Thegame14 wrote:
Thu Aug 16, 2018 1:45 pm
set up a trust and put in rules about how much or when he can get the money. You could have it invested in something and he can only withdraw a fixed amount per year, or only can withdraw any dividends or interest but not principal.
It's better not to put in rules. You don't know what the future will bring.
c1over8 wrote:
Thu Aug 16, 2018 1:49 pm
...
Trusts reach the higher tax rates at lower amounts of income than individuals. But if distributions are made to the beneficiary the income will flow out and be taxed to the individual.
The trustees would take this (and any other factors they think appropriate) in determining how much to distribute each year.

Roth conversions would eliminate the tradeoff between making distributions to save income taxes and retaining the IRA distributions in the trust for asset protection.
CrazyCatLady wrote:
Thu Aug 16, 2018 8:00 pm
... I have a revocable trust, but I may decide to upgrade (I wouldn't do that myself, I'd hit up a tax attorney for help if I decided the upgrade was appropriate for me).
You can put the same dispositive provisions in a revocable trust as in a Will, and vice versa. In other words, you can provide for a child in trust rather than outright in a revocable trust as you would in a Will, and you can include the necessary provisions for trusts that receive retirement benefits in a revocable trust that you would in a Will.

Revocable trusts make sense in some cases, and in some states. But they're overhyped and oversold, aren't necessary in most cases in most states, and often tend to be a distraction.

aristotelian
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Re: Inheritance question - beneficiary is a spend thrift

Post by aristotelian » Thu Aug 16, 2018 10:53 pm

Yes, if accounts are TOD, the son would have lump sum option. Of course, he could take RMD option and still cash it out at any time.

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celia
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Re: Inheritance question - beneficiary is a spend thrift

Post by celia » Thu Aug 16, 2018 11:11 pm

magicrat wrote:
Thu Aug 16, 2018 1:11 pm
I would advise him to, 1) Speak with an attorney on how to set up a trust to achieve these goals. Pre-tax money does not impact this. 2) Not put his sister in the position to be in charge of his son's finances. That will probably not go well.
A trust will not put the sister in charge of the son's finances, but, as trustee, she will have to follow the directions in the trust in regard to dispensing money to the son. She can always "blame" the trust rules over which she had no control. :D

In fact, the son is just young and probably has no experience with money. He has to make some mistakes so he can learn from them. And there is always the possibility that a GF/wife could influence him positively. I've heard stories about men who were clueless until their GF asked why they bought something or why their retirement savings weren't larger.

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