How to leave assets to son?

[stephen2]

I’m looking for ideas on how to leave our estate to our son who is 23. We are updating our revocable living trust here in California. He is in college and we are 60 so hopefully this will not kick in for several years. Current house equity = $1M and liquid assets = $2M. So if he inherits in 20 years this could be much more or much less but will likely be a sizable sum.

We are thinking of the following:

Code: Select all

     1) Son becomes the trustee when we pass on and gets house 
         and 25% of liquid assets immediately
     2) Ten years later he gets 50% of remaining liquid assets.
     3) At age 50 he gets control of remaining liquid assets 
         (Roth assets will be kept here).

The assets in (2) and (3) could be managed by Vanguard Asset Management Services. They would put the assets into a sensible 60/40 type portfolio and they charge .75% of 1st $1M, 0.35% of next $1M, and 0.20% of assets above that.

Above is just the basic outline and there will probably be a few more details plus it has to be put in proper legal mumbo-jumbo. I don’t discuss our finances with our son as I want him to push hard to find a productive career and not count on anything big from us. We do help him with his college/living expenses for now and he works when he can. I’m sure he knows someday he’ll inherit a reasonable sum. We don’t feel that leaving everything to him outright is a good idea since he’s never handled large sums before. At this point he shows no signs of truly becoming a Boglehead type investor. In 10 years we may have to revisit this as conditions change.

Are there better ways to do this? Has anyone had experience with Vanguard Asset Management Services? It would be ideal if our son could just move assets around within a Vanguard account and rely on them for some advice without paying the management fee but I don't know how one would set this up.

I'd really appreciate getting opinions as it's hard to find informed people on a personal subject like this.

[gassert]

First - we have to assume that you have done the appripriate estate planning when it comes to state and federal estate taxes - that alone will determine the desitnation method of assets.

Second - look through trusts for retirement assets are fine, but you will want to definetly structure trusts so that RMDs (income) are paid to the income beneficiary, son. This means that your intent may be for him not to be able to access the corpus until future dates, but he should receive the income because of tax rates.

Third - only you can answer the family dynamic questions, but IMO a 20yr old may not be able to handle 2M, but assuming you dont pass in the next 5 or 10 yrs, I would think you could trust your son at that point. Depending on the type of assets in question and the added expenses for trustees, you are going to "lose" a decent amount simply for the "control" aspect of trusts (estate tax is one, control is second and distinctly different). If there's estate tax issue, then ok, but if it's just for control just consider if its worth it.

[LynnSwann]

You really have to get your estate planning in order first. Qualified assets need to be handled in a different manner than NQ.

[stephen2]

First - we have to assume that you have done the appripriate estate planning when it comes to state and federal estate taxes - that alone will determine the desitnation method of assets.

Gassert, probably we haven't got the optimal plan which was set up 20 years ago. I think we need to move to an A/B trust. I really don't know much about this stuff. Have been focused on investing and spending but not on estate planning. I'm hoping not to spend too much on lawyers but I guess it's not possible in this case.

Second - look through trusts for retirement assets are fine, but you will want to definetly structure trusts so that RMDs (income) are paid to the income beneficiary, son. This means that your intent may be for him not to be able to access the corpus until future dates, but he should receive the income because of tax rates.

Don't know what a look through trust is.

Third - only you can answer the family dynamic questions, but IMO a 20yr old may not be able to handle 2M, but assuming you dont pass in the next 5 or 10 yrs, I would think you could trust your son at that point. Depending on the type of assets in question and the added expenses for trustees, you are going to "lose" a decent amount simply for the "control" aspect of trusts (estate tax is one, control is second and distinctly different). If there's estate tax issue, then ok, but if it's just for control just consider if its worth it.

By control I'm guessing you mean that we have to pay for Vanguard to manage the money until it flows to our son. It is fairly costly but to have a portion available as he matures as an adult seems like it might be best.

LynnSwann - by qualified assets I guess you mean IRA's and Roths.

[Ron]

I just got this book from the library:

The retirement savings time bomb-- and how to defuse it : a five-step action plan for protecting your IRAs, 401(k)s, and other retirement plans from near annihilation by the taxman / by Ed Slott

after seeing Ed on a local PBS show. There are a lot of good ideas (such as streach IRA's) to allow the estate to "grow" in the future (for tax deferred holdings).

There are a lot of considerations beyond the trust expenses. The government will get a good portion/most of your $$$ beyond the expenses of managing a trust.

- Ron

[LynnSwann]

LynnSwann - by qualified assets I guess you mean IRA's and Roths.

Yes and work retirement plans. You want the beneficiary designations to be set up in such a way that he'll have the ability to take distributions based upon his life expectancy.

[bolt]

2mill... i'd involve the appropiate atty. besides direct benificary options.GoodLucK!

[Grandpaboys]

You are concerned about how your son will handle your money. Don't blame you, but believe you should sit him down and develop a relationship that will educate him to be able to handle a large sum of money in his future. Giving him the benefit of your council is very important. Hopefully your financial relationship on down the road will be beneficial to you both. Stringing his inheritance out to your sons age of 50 is in my opinion not the way to go. Being in college would be a good time for him to take courses on money management which would serve as a corner stone for your financial relationship.

[paulob]

Are there better ways to do this? Has anyone had experience with Vanguard Asset Management Services? It would be ideal if our son could just move assets around within a Vanguard account and rely on them for some advice without paying the management fee but I don't know how one would set this up.

The size of your liquid assets would indicate you are flagship, correct? If so, that would qualify your son for free financial plans. That would coincide with your "ideal" of letting your son move assets but relying on Vanguard for the heavy lifting.

[paulob]

My biggest concern based on your post would be estate taxes, not that your son may or may not be able to manage money. Others have already voiced their concern, but some "assumed" that estate planning has taken place. From your statements, I kinda doubt that assumption is correct.

Today's law is that the federal exemption reverts to $1 million in 2011, I believe. So, a death occurring in a few years could result in a third of the estate wiped out by taxes ($3M-2M x 45%). So, if you worried about your son being able to manage a large portfolio, the IRS may take a huge "upfront load" to make it more palatable.

I have seen living trusts prepared that address asset control, but do no tax planning whatsoever. Does your living trust distribute to an "A" trust or to an "A/B" type trust?

The statements that the son inherits after "we pass on" implies that you don't have a bypass trust (A/B). Such a trust would pass some assets to a trust for his benefit upon the first death to occur.

[stephen2]

Paul, we don't have an A/B trust. I suppose it's time to change our simpler revocable living trust (an A trust perhaps) to an A/B. I hate to pay those high lawyer fees but it looks like it's necessary now.

I'm not clear on what you said about Flagship. Yes we have that at Vanguard and I'm aware relatives can also then get special treatment. But currently our son has minimal extra money as he's a student and I think that mind set is best for now (in his case). If the trust allows him to handle assets doesn't it allow him to take them out of Vanguard and spend on anything he chooses? Or can a trust specify the money has to stay at VG for a time, and can VG enforce this without the fee structure of their Asset Management Service?

GP, thanks for your thoughts. Perhaps as you say the money should be distributed faster. Currently the trust document reads that basically he gets 1/3 every 5 years until age 35. I'm just thinking it would be nice to be sure he has at least some money coming if he blows it somewhat early in his life. But maybe I shouldn't be so concerned as I won't have to suffer the consequences.

As a 23 year old he has just in the last 2 years become serious about his education and before that was just way too wild and really didn't learn things in high school. We discuss money handling from time to time. For instance, he wanted to get a credit card and I think I've convinced him for now that it's not a good idea. He is very far from being a Boglehead. As time goes on I hope to transfer some common sense about money matters to him assuming I'm still around. I would love to talk about our finances with him and show him the virtues of a slow steady investment strategy. But I'm afraid that would have the unintended consequence of him thinking that lots of money is coming his way and so why concentrate on a career path. In 10 years the situation hopefully will be quite different.

[paulob]

Paul, we don't have an A/B trust. I suppose it's time to change our simpler revocable living trust (an A trust perhaps) to an A/B. I hate to pay those high lawyer fees but it looks like it's necessary now.

I'm not clear on what you said about Flagship. Yes we have that at Vanguard and I'm aware relatives can also then get special treatment. But currently our son has minimal extra money as he's a student and I think that mind set is best for now (in his case). If the trust allows him to handle assets doesn't it allow him to take them out of Vanguard and spend on anything he chooses? Or can a trust specify the money has to stay at VG for a time, and can VG enforce this without the fee structure of their Asset Management Service?

If you are updating your trust already, I would throw estate tax planning into the heap. I believe it will be worth the attorney's expense.

My point about Flagship was that after you both pass on, your son would have access to the free annual financial plans that Flagship offers. The point being that he would significant VG advice without paying the AUM fee.

The other concern raised was that of "spendthrift provisions". You can specify in the trust document that he can invade the principal for education, medical, avoid eviction, etc. He could gain full control over assets at various points in life as per your post. By the way, I don't think the age 50 criteria you stated is unreasonable. If he blows the money at step 1 and 2, perhaps he will have learned a lesson before it is all gone.

[stephen2]

My point about Flagship was that after you both pass on, your son would have access to the free annual financial plans that Flagship offers. The point being that he would significant VG advice without paying the AUM fee.

Paul, thanks for your replies. From what I understand, someone or some institution still has to control his access to the VG funds for assets not yet released to him. That is where VG Asset Management Services comes into the picture with their fees. I don't know how to have the funds held so that he can move them around but only withdraw according to the trust document. VG AMS then handles everything under their control in a 60/40 stock/bond allocation. The money distributed to our son is probably available for him to use Flagship status for financial planning assuming he wants to stay with VG. I guess that is what you are pointing out.

I just made an appointment to talk with a VG "situational planner" tomorrow. The Flagship rep suggested this. He should be able to give me the options available from VG. I'll post this in case others are interested.

[paulob]

From what I understand, someone or some institution still has to control his access to the VG funds for assets not yet released to him. That is where VG Asset Management Services comes into the picture with their fees. I don't know how to have the funds held so that he can move them around but only withdraw according to the trust document. VG AMS then handles everything under their control in a 60/40 stock/bond allocation. The money distributed to our son is probably available for him to use Flagship status for financial planning assuming he wants to stay with VG. I guess that is what you are pointing out.

Yes, that was my point about Flagship.

My thoughts are that: as you said, your son will be the trustee. That could give him powers to manage the portfolio and/or name an asset manager (e.g. Vanguard, et al). The trust document would specifiy his powers to extract funds. These are two separate issues. Having the power over one does not give power for the other, unless the trust document allows it.

Ask the rep about the pros and cons of this kind of a situation.

P.S. its likely/possible the trust would need to be amended to address these issues.

[HerbertSitz]

I’m looking for ideas on how to leave our estate to our son who is 23. [. . . ]

I'd really appreciate getting opinions as it's hard to find informed people on a personal subject like this.

In another similar thread I just suggested reading "Beyond the Grave: The Right Way and the Wrong Way of Leaving Money To Your Children (and Others)". There are all sorts of things you can do, and different ways of approaching the issue. Beyond the Grave will probably be helpful at clarifying lots of stuff for you:
http://www.amazon.com/Beyond-Grave-revi ... 039&sr=8-1

[stephen2]

My thoughts are that: as you said, your son will be the trustee. That could give him powers to manage the portfolio and/or name an asset manager (e.g. Vanguard, et al). The trust document would specifiy his powers to extract funds. These are two separate issues. Having the power over one does not give power for the other, unless the trust document allows it.

That sounds like the sort of thing I'm after. Thanks, I'll bring it up with the VG rep tomorrow.

Herbert, I browsed through that book in the library. It didn't seem to help a lot in our situation, but that was some months ago so I'll go back and read it over again. Thanks.

[HerbertSitz]

Herbert, I browsed through that book in the library. It didn't seem to help a lot in our situation, but that was some months ago so I'll go back and read it over again. Thanks.

Yes, I guess if you've already decided on the (1), (2), (3) elements of your transfer, that book won't add much. It's more directed towards help with that sort of thing. Even then, though, "Beyond the Grave" has some pretty good practical advice, from estate planning lawyers with long experience. I"m pretty sure they came strongly down on the side of talking everything over with prospective heirs, that keeping silent about your concerns is not a good way of handling things. And suggestions they have, while maybe not exactly applicable to your situation, might give you some insight into how you could modify your current plan to make it better.

Regarding allowing your son ability to direct investments while still having some sort of trust arrangement, I expect that it is technically (i.e., legally) possible but that you're unlikely to find a corporate trustee to agree to it because it's unusual. There may be estate planning lawyers around who also act as professional trustees who might be willing. "Beyond the Grave" has chapter, I believe" on plusses and minuses of institutional trustees, individual professional trustees, and individual non-professional trustees.

In any case, finding a good estate planning lawyer for advice on all of this seems to me like the best thing to do, although certainly not all of them are good at dealing with the touchy-feely end of things that you're mostly concerned with. You shouldn't be too worried about paying for a lawyer's time. As an estate grows in value you stand to do much more harm to the estate by avoiding professional advice than you could ever save by economizing and trying to avoid expense of a lawyer. Also, executor of your estate is almost certainly going to need legal advice, best for you to do the search now and identify the lawyer you will want used.

Another rationale for paying money and getting professional advice: This is your son's life your talking about. You can't quantify the benefit you're trying to create for him; it's essentially priceless. Forget about trying to maximize efficient use of every dollar and do whatever you need to do to get the absolute best possible advice.

[paulob]

[
Regarding allowing your son ability to direct investments while still having some sort of trust arrangement, I expect that it is technically (i.e., legally) possible but that you're unlikely to find a corporate trustee to agree to it because it's unusual. There may be estate planning lawyers around who also act as professional trustees who might be willing.

I don't see this as it all unusual. Stephen2 has already created a living trust and funded it with assets. As trustee or cotrustee he is managing those assets. He is also likely a beneficiary if his wife predeceases him. No professional trustee has been involved unless Stephen2 requested them. Why would it be any different if the son becomes trustee?

[HerbertSitz]

[
Regarding allowing your son ability to direct investments while still having some sort of trust arrangement, I expect that it is technically (i.e., legally) possible but that you're unlikely to find a corporate trustee to agree to it because it's unusual. There may be estate planning lawyers around who also act as professional trustees who might be willing.

I don't see this as it all unusual. Stephen2 has already created a living trust and funded it with assets. As trustee or cotrustee he is managing those assets. He is also likely a beneficiary if his wife predeceases him. No professional trustee has been involved unless Stephen2 requested them. Why would it be any different if the son becomes trustee?

Stephen2 apparently wants a trust that restricts the son's access to the principal, while at the same time giving the son the right to manage assets. If the son is sole trustee and sole beneficiary of a trust then there's basically nothing (as a practical matter) to enforce access to principal restrictions in the trust. You could solve that with a co-trustee setup, but I'm pretty sure it's highly unusual for a bank trustee or institutional trustee like Vanguard to accept a position as co-trustee in a trust (with duty to restrict access to principal) while at the same time the beneficiary is acting as co-trustee doing the asset management. Institutional trustees operate with a careful eye on potential liability for themselves, and I'm skeptical that they would accept a position like that. I don't know whether their potential risks are higher, but I suspect they would reject it just because it's out of the ordinary. I could be wrong, or maybe I read the thread too quickly and didn't really understand what Stephen2 wanted to do. In any case, consulting an experienced estate planning lawyer is the reasonable thing to do.

[paulob]

[
Regarding allowing your son ability to direct investments while still having some sort of trust arrangement, I expect that it is technically (i.e., legally) possible but that you're unlikely to find a corporate trustee to agree to it because it's unusual. There may be estate planning lawyers around who also act as professional trustees who might be willing.

I don't see this as it all unusual. Stephen2 has already created a living trust and funded it with assets. As trustee or cotrustee he is managing those assets. He is also likely a beneficiary if his wife predeceases him. No professional trustee has been involved unless Stephen2 requested them. Why would it be any different if the son becomes trustee?

Stephen2 apparently wants a trust that restricts the son's access to the principal, while at the same time giving the son the right to manage assets. If the son is sole trustee and sole beneficiary of a trust then there's basically nothing (as a practical matter) to enforce access to principal restrictions in the trust. You could solve that with a co-trustee setup, but I'm pretty sure it's highly unusual for a bank trustee or institutional trustee like Vanguard to accept a position as co-trustee in a trust (with duty to restrict access to principal) while at the same time the beneficiary is acting as co-trustee doing the asset management. Institutional trustees operate with a careful eye on potential liability for themselves, and I'm skeptical that they would accept a position like that. I don't know whether their potential risks are higher, but I suspect they would reject it just because it's out of the ordinary. I could be wrong, or maybe I read the thread too quickly and didn't really understand what Stephen2 wanted to do. In any case, consulting an experienced estate planning lawyer is the reasonable thing to do.

Good points. I would agree with consulting the lawyer.

(Maybe a different lawyer since the existing trust is not an A/B trust. )

One thing to consider: I believe the fees quoted in the OP are for managing the portfolio. He needs to investigate the fees schedule, if different, for being a trustee of the son's trust.

[stephen2]

Herbert, you are interpreting me correctly. I am a bit concerned that the arrangement of a co-trustee (if that is the right term) is not very common because trustee's, when they are not beneficiaries, want to make a good sum of money on the arrangement. How else to interpret the high fees that VG AMS wants, and I'm sure they are competitive. In addition to the fees I mentioned in the original post they charge $2.5k annually for trust administration. Of course, there are also the ER's of the VG funds they choose. So for a $2M estate we are talking about $13.5k annually plus fund ER's. For $1M estate that number goes to $10k annually.

I will also look into what a lawyer would charge to work with our son as a co-trustee. The lawyer is basically just allows the withdrawals to take place on schedule. VG could still work with our son to set the AA and advise on fund selection. Seems the only other thing needed is yearly trust tax returns.

[gassert]

It is very very common (and often a suggestion of estate planning attorneys) to have co-trustees, one being an institution and one a living person, realtive; though it is somewhat less common for the beneficiary to be the co-trustee. And in terms of bypass trusts to avoid estate tax, it's generally not ok to have the benefiary as the trustee or co-trustee at all. I dont see any problem having an institution as the sole trustee.

You are not in an unusual position. An every day meeting with an estate planning attorney will address and resolve these issues and give you the options. The first meeting should be an exchange of information at no cost, then they should give a price range for executing the appropriate documents, but not under any obligation.

An estate plan - drafted documents - will cost you pennys compared to the long term management costs of the arrangements you put in place. Don't loose sight of what's important. Network for good lawyers and referrals and pay a couple grand and ensure that your wishes are carried out. VG is fine, but that's not who you want advising on the structure of your estate plan. They can throw their hat in the ring for trustee and management roles at your death, but not for this upfront advice. Seriously. And as far as naming a trustee - there several choices of institutions that will manage the money with reasonable trustee costs and use low cost VG, DFA, etfs, etc with the wrap of a few bps. Unlike in the retail space you live now - the institutional space has additional options.

[stephen2]

Gassert, thanks for your comments and how to handle an initial contact with a lawyer. We need to select a new lawyer as we have moved in recent years. Haven't gotten a good referral yet from friends, they seem to be clueless too. The Vanguard rep suggested 2 sources for estate and trust lawyers:
actec (this is a dot org address)
martindale (this is a dot com address)

I cannot post links yet due to this sites policies so anyone using these will have to put the words together to form a link, sorry. The actec lawyer listings were the Vanguard rep's pick for the best source.