Living Trust - Death of grantor/trustee

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oldbykur
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Living Trust - Death of grantor/trustee

Post by oldbykur » Mon Mar 20, 2017 8:31 pm

If accounts are held at financial institutions such as Vanguard and the accounts are registered to a living trust (grantor is the trustee) what happens at the death of the trustee? I understand that the trust becomes irrevocable, an EIN must be obtained and that the successor trustee assumes certain responsibilities. My question pertains to the specific accounts owned by the trust. Must new account numbers be issued? If one of the accounts is a checking account, must new checks be obtained? Are any monthly checking account debits and credits (say utility bills) impacted?

If there is no impact other than the trust being managed by a new trustee, it seems that the trust simplifies settling an estate compared to an estate where a trust does not exist.

Gill
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Re: Living Trust - Death of grantor/trustee

Post by Gill » Mon Mar 20, 2017 8:43 pm

There is no change in the ownership of the assets. You simply have a successor trustee and the trust becomes irrevocable. Yes, it very much simplifies the administration of an estate and the trust continues for the beneficiaries.
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oldbykur
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Re: Living Trust - Death of grantor/trustee

Post by oldbykur » Mon Mar 20, 2017 8:54 pm

Thank you Gil. So account numbers would remain the same after the successor assumed responsibility?

Sandtrap
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Re: Living Trust - Death of grantor/trustee

Post by Sandtrap » Tue Mar 21, 2017 12:39 am

I have a grantor trust setup at Vanguard. Not dead yet though. AFAIK the transition is fairly seamless to successor trustee. The account setup was more involved than a single or joint account but worth it.

oldbykur
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Re: Living Trust - Death of grantor/trustee

Post by oldbykur » Tue Mar 21, 2017 4:07 pm

For anyone following this thread:

I was just informed by Vanguard that a new account number would be assigned to a living trust's Vanguard Brokerage Account after the passing of the grantor/trustee. That would require that all automatic withdrawals and deposits that used the original account number would need to be changed.

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Re: Living Trust - Death of grantor/trustee

Post by Gill » Tue Mar 21, 2017 6:13 pm

oldbykur wrote:Thank you Gil. So account numbers would remain the same after the successor assumed responsibility?

I can't speak for the various brokers or mutual funds, but in my experience managing grantor trusts for corporate fiduciaries, we didn't change anything other than the name of the trustee and the ID number. The trust owned the assets before death and nothing has changed after death other than the trust no longer being revocable.
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oldbykur
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Re: Living Trust - Death of grantor/trustee

Post by oldbykur » Wed Mar 22, 2017 3:01 pm

One final comment:

I was just informed by Ally Bank that they do NOT change account numbers for checking or savings accounts titled in the name of a living trust at the death of the grantor/trustee. Therefore changes to recurring debit/credit transactions would not be necessary.

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Kevin M
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Re: Living Trust - Death of grantor/trustee

Post by Kevin M » Wed Mar 22, 2017 3:07 pm

Vanguard uses a change of ownership form to transfer the assets into new accounts owned by the successor trustee as trustee of the trust. It's quite easy, but as you note, account numbers will change. Certainly much easier than going through probate, at least in my state (CA). Some estate attorneys argue that probate is easy and cheap enough in many states that it doesn't make much if any difference.

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FIREchief
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Re: Living Trust - Death of grantor/trustee

Post by FIREchief » Thu Mar 23, 2017 2:04 am

This sounds like, once again, Vanguard is using some archaic process to make peoples' lives more difficult. Do they really make people create new accounts?!
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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celia
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Re: Living Trust - Death of grantor/trustee

Post by celia » Thu Mar 23, 2017 3:37 am

FIREchief wrote:This sounds like, once again, Vanguard is using some archaic process to make peoples' lives more difficult. Do they really make people create new accounts?!

Once again, Vanguard is following the procedures that should be followed.

I was a trustee for a relative's trust both before and after she died. She had living trust accounts at a bank, Vanguard, and other places. The bank and Vanguard were the only places transactions were made. (The other accounts were small and were just cashed out when everything was being dispersed.)

I went to the bank and was recognized as the acting trustee and put my signature on the signature card. All automatic transactions continued but I was also able to write checks from her checkbook.

When I called Vanguard for directions on splitting the account, they said I should have notified them as soon as she died, since the living trust became irrevocable on death. They already knew I had been acting as trustee. I obtained an EIN from the IRS online for the trust and filled out paperwork (I think) for transferring the account to a new account number with the EIN instead of her SSN. They back-dated the account transfer back to date of death. It was then very clear which transactions had been done while she was living and which were done when the trust was irrevocable. This turned out to make my life simpler, since in the year of death, there are two tax returns: January 1 to date of death for the person, and day after date of death to December 31 for the irrevocable trust. The two tax returns are similar, but the first is on Form 1040, while the second is on Form 1041 (for which I paid a tax preparer). By having two different accounts, capital gains, losses, interest, and dividends are automatically separated onto 2 separate tax forms, with a SSN or EIN. The step-up in basis was obvious in the irrevocable account. Although she died early in the year, I had to wait until the end of the year for the tax forms. So when I did distributions to beneficiaries during the year, I withheld more than enough until all the taxes were paid the following year. After the IRS was satisfied, the remainder was dispersed.


NOTE: It is recommended that all financial transactions (except for the splitting of retirement accounts) go through the checking account (bill paying, closing of other accounts and depositing the proceeds into checking, proceeds from sale of real estate, payments to beneficiaries) so that a paper trail is maintained for anyone who might be needed to follow up if the trustee couldn't finish the whole job, or in case someone had questions.

oldbykur wrote:For anyone following this thread:

I was just informed by Vanguard that a new account number would be assigned to a living trust's Vanguard Brokerage Account after the passing of the grantor/trustee. That would require that all automatic withdrawals and deposits that used the original account number would need to be changed.

Assumedly, you are not paying bills from your investments, but from a checking account. You are likely getting ready to close out any existing Vanguard accounts so that they can be liquidated and/or split up for the beneficiaries. You seem to be mixing two different concepts into one and are making it harder than it needs to be, if there is already a trust.

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1210sda
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Re: Living Trust - Death of grantor/trustee

Post by 1210sda » Thu Mar 23, 2017 7:13 am

celia wrote:there are two tax returns: January 1 to date of death for the person, and day after date of death to December 31 for the irrevocable trust. The two tax returns are similar, but the first is on Form 1040, while the second is on Form 1041 (for which I paid a tax preparer).


1. I assume the 1041's continue for the life of the irrevocable trust.
2. Is any trust income not distributed taxed as trust income(at a higher tax)?
3. Once the trust income is distributed, does it lose it's creditor and divorce protection?

Thank you
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Re: Living Trust - Death of grantor/trustee

Post by bsteiner » Thu Mar 23, 2017 7:49 am

1210sda wrote:
celia wrote:there are two tax returns: January 1 to date of death for the person, and day after date of death to December 31 for the irrevocable trust. The two tax returns are similar, but the first is on Form 1040, while the second is on Form 1041 (for which I paid a tax preparer).


1. I assume the 1041's continue for the life of the irrevocable trust.

2. Is any trust income not distributed taxed as trust income(at a higher tax)?

3. Once the trust income is distributed, does it lose it's creditor and divorce protection?


1. Correct.

2. It could be taxed at a higher or lower rate, depending on the situation.

3. If the trust is well-drafted, the trust assets will go to the beneficiaries in separate trusts for their benefit, so as to continue the creditor and divorce protection except to the extent the trustees make distributions to the beneficiaries.

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celia
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Re: Living Trust - Death of grantor/trustee

Post by celia » Thu Mar 23, 2017 10:54 am

2. A trust tax return does not have exemptions or standard deductions. There is no "age" associated with the "owner".

To avoid having to file taxes again for the year after death, I had all undistributed assets remain as cash. The following year, I filed the two returns, and distributed the remaining cash.

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Re: Living Trust - Death of grantor/trustee

Post by afan » Thu Mar 23, 2017 11:16 am

FIREchief wrote:This sounds like, once again, Vanguard is using some archaic process to make peoples' lives more difficult. Do they really make people create new accounts?!


We had to do the same thing with a different major discount broker and with several banks.

It is not just Vanguard.

All of the financial institutions with which we dealt required the account number change. I was interested to see that some do not.
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afan
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Re: Living Trust - Death of grantor/trustee

Post by afan » Thu Mar 23, 2017 11:32 am

For the other questions- What celia said.

To elaborate on the question of tax rates: The tax rates on the irrevocable trust will move to higher brackets at much lower income than for an individual or couple. So the trust will hit the top tax bracket at an income far below the point at which an individual would.

But that is not the point for tax optimization. You need to compare the trust tax rate if all the income remained in the trust to the beneficiary's tax bracket. If the beneficiary is in the top tax bracket without any income from the trust, then distributing the income to the beneficiary ensures that every penny will be taxed at the top rate. Since some of the trust income will be taxed at rates below the top, the income tax optimizing move would be to retain within the trust all the income that is taxed at anything below the top rate. For income that would be taxed at the top rate whether held in trust or distributed, it does not matter what you do. The tax rate will be the same.

For beneficiaries who are below the top tax rate without the trust income, then the income tax optimal maneuver would be to distribute an amount that resulted in the lowest overall tax due. This would take advantage of the low tax rate on the first income that came to the trust, then distribute to the beneficiary any money that would be taxed at a higher rate on the trust tax return than on the beneficiary's return.

Of course, distributing to the benefircary has effects that might go against the overall plan

1. It moves that money into the beneficiary's estate. If the beneficiary will have estate taxes due at death, this makes this worse.
2. It removes the asset protection the money enjoys while it is in the trust.
3. If the trust will avoid GST taxes, then taking money out and giving it to the beneficiary will expose it to these taxes.
4. If the goal of the trust is to pass on money to later generations as tax efficiently as possible (considering estate and income taxes), and be available to the beneficiary only to the extent needed, then taking money out of the trust reduces the amounts that go where intended.

A sweeping generalization: people who will have estate tax problems of their own in general, probably, most of the time, will have no need to get any of the income from the trust. So the long term goals are better served by leaving it in. It is probably better to leave it in even if the income tax rate is slightly higher (say someone has an estate large enough to worry about estate taxes but their income does not put them in the top bracket).

Of course, any future changes in estate or income tax laws could change the optimal choice.
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Re: Living Trust - Death of grantor/trustee

Post by afan » Thu Mar 23, 2017 11:35 am

celia wrote:Assumedly, you are not paying bills from your investments, but from a checking account.


Nowadays it is quite practical to use the cash portion of a brokerage account for the same purpose as a checking account. We found that setting up automatic payments was a bit simpler with our broker than doing through the bank portion of the account. So bills get paid directly from the brokerage account, rather than transferring cash from the brokerage to the bank account and paying them from there.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Living Trust - Death of grantor/trustee

Post by Gill » Thu Mar 23, 2017 11:40 am

celia wrote: A trust tax return does not have exemptions...

That is incorrect. A complex trust has a $100 exemption, a simple trust a $300 exemption and an estate has a $600 exemption.
Gill

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celia
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Re: Living Trust - Death of grantor/trustee

Post by celia » Thu Mar 23, 2017 6:25 pm

afan wrote:
celia wrote:Assumedly, you are not paying bills from your investments, but from a checking account.


Nowadays it is quite practical to use the cash portion of a brokerage account for the same purpose as a checking account. We found that setting up automatic payments was a bit simpler with our broker than doing through the bank portion of the account. So bills get paid directly from the brokerage account, rather than transferring cash from the brokerage to the bank account and paying them from there.

The point is to keep records simple by having everything go in and out of one account. If Vanguard has to change to a new account number and automatic payments be set up again, that does not sound simple! But it is the trustee's choice.

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Re: Living Trust - Death of grantor/trustee

Post by afan » Thu Mar 23, 2017 7:01 pm

It was pretty simple in our case, since we were already using the brokerage account as the checking account.
Again, this was not with Vanguard, but we were fine with cancelling the old account and automatic transactions. We had been involved long enough to know about any monthly deductions, but were never sure when something might float up related to the old account. By starting fresh we were sure that nothing could be charged against the new account with old information.

Although the broker insisted that we get a new account number and new checks along with a new TIN, it was not much hassle and the clean slate effect was reassuring.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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