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Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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letsgobobby
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bayview
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Re: irrevocable trust for children receiving an inheritance

Post by bayview »

Are all four your own children, all nieces/nephews, or a combination?

How would the other parents feel about this?

It doesn't seem as though this would be legal, but TG-IANAL.

Assuming this is doable, couldn't you time the transfers so that there is something left in the original trust to distribute to them when they turn 30? Age thirty doesn't exactly seem feckless to me, although of course, some people never reach financial maturity.
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Re: irrevocable trust for children receiving an inheritance

Post by mac808 »

I believe that if all parties agree, you can change the terms of the trust and might be able to avoid creating a new trust.
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Re: irrevocable trust for children receiving an inheritance

Post by Avo »

letsgobobby wrote:The problem is the trust terminates when the grandchildren turn 30. It was probably not my parents' intention to leave their grandkids this very large sum of money without encumbrances at that age, but as it currently stands that is what will happen.
I don't understand why this is a problem.

It sounds like you think they won't be mature enough at 30 to handle money.

That may be true, but it's what your parents intended. Or allowed to happen through not paying attention to the fact that the sum was now very large.

Whatever. I sure wouldn't try to fight it. Only the lawyers will get rich.
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Re: irrevocable trust for children receiving an inheritance

Post by BolderBoy »

letsgobobby wrote:The only difference is the new trust would not terminate when the grandchildren turned 30.
That isn't the only difference. Under your parents' trust, the grandchildren get it all when they turn thirty. Your trust intention would be to subvert that.

How would you feel about being sued by the grandchildren?

IANAL.
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Re: irrevocable trust for children receiving an inheritance

Post by Gill »

You would be violating the terms of the trust because the children are the only beneficiaries of the trust. You cannot create a new beneficiary of the trust. Unless bsteiner has some ideas along the lines of decanting the original trust, you must distribute the trust under its terms, I.e., when the children attain age 30.
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

letsgobobby wrote:My parents left a substantial inheritance to 4 minor grandchildren in an irrevocable trust. I am the trustee, and the trust offers quite a lot of flexibility, including the ability to withdraw all of the assets for the benefit of the beneficiaries.

The problem is the trust terminates when the grandchildren turn 30. It was probably not my parents' intention to leave their grandkids this very large sum of money without encumbrances at that age, but as it currently stands that is what will happen. The trusts were written when we (the children) were not even 30 and had no children of our own, so I believe my parents simply imagined that "grandchilden 30 and over" was indefinitely far into the future. ....
This was common before 1995. Until then, if you gave a beneficiary the power to remove and replace the trustees, there was a risk under Revenue Ruling 79-35 that the trust would be included in the beneficiary's estate. (That ruling involved a grantor retaining the power to remove and replace the trustees. However, many people thought the IRS would apply it to a beneficiary who had that power.) The IRS changed its position in 1995 in Revenue Ruling 95-58, and said that a grantor could retain the power to remove and replace the trustees, provided the replacement trustee was not a close relative or subordinate employee. Since 1995, the better practice has been to give the beneficiary effective control at the age you would otherwise have ended the trust. For example, in this case, upon reaching age 30, each grandchild could have the right to become a trustee, the power to remove and replace his/her co-trustees (provide the replacement trustee is not a close relative or subordinate employee), and the power to appoint (give or leave) the trust assets to anyone he/she wants (other than the grandchild or his/her estate or creditors).

This illustrates why it's a good idea for people to review their Wills periodically. People's assets change, their family situations change, the laws change, and sometimes people think of things that they didn't think of previously.
Gill wrote:... You cannot create a new beneficiary of the trust. Unless bsteiner has some ideas along the lines of decanting the original trust, you must distribute the trust under its terms, I.e., when the children attain age 30.
You were reading my mind. The solution is to decant the trust so that instead of mandating distribution at age 30, each grandchild gets to control his/her trust at age 30. There are favorable decanting statutes in both the original poster's home state (it was enacted this year and takes effect 4 weeks from now) and also in his parents' home state.
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Re: irrevocable trust for children receiving an inheritance

Post by FBN2014 »

Would decanting the trust and allowing the grandchild to become trustee of their own trust protect their inheritance from creditors or a divorce settlement?
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Re: irrevocable trust for children receiving an inheritance

Post by FIREchief »

FBN2014 wrote:Would decanting the trust and allowing the grandchild to become trustee of their own trust protect their inheritance from creditors or a divorce settlement?
I believe that this varies from state to state.
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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NotWhoYouThink
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Re: irrevocable trust for children receiving an inheritance

Post by NotWhoYouThink »

Ummm...wait a minute.

Decanting so that the money can be kept out of their estates and protected from lawsuits is one thing. Keeping it out of their control so they can't make decisions you don't approve of is something else. Why do you think you need to control their financial decisions after age 30? Would you have wanted your parents to control yours?
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NotWhoYouThink
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Re: irrevocable trust for children receiving an inheritance

Post by NotWhoYouThink »

You can put whatever restrictions you want on money you leave them. But putting extra restrictions in place that the grantors of the trust did not intend, or at least did not direct, is a different thing. If my parents had done that to me, I would resent it. If my parents put in place a corporate trustee I couldn't fire, when my grandparents had allowed me to have full control of the money, I would resent it.

Whether you can do it or not is another subject. Whether they will take you to court for it will be their decision.
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

You'll create a new trust for the same beneficiaries with whatever terms you think best. Then you'll sign an instrument whereby you determine to transfer the assets of (decant) the existing trust to the new trust. Then you'll transfer the assets of (decant) the existing trust to the new trust.

If the new trust gives them control (the right to become a trustee, the power to remove and replace their co-trustee
(with someone not a close relative or subordinate employee) and the power to appoint (give or leave the trust assets to anyone they want (except themselves or their estates or creditors) at age 30, they'll be happy.
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Re: irrevocable trust for children receiving an inheritance

Post by Grt2bOutdoors »

What is the purpose of an irrevocable trust if someone comes along and says "I don't think this is what the grantor intended" and then attorneys offer up suggestions on how to circumvent the intentions of the grantor? :oops: Not only would I resent it if I were the beneficiary, I'd be looking into all legal options available including suing the trustee. I can't believe that its legal to break a trust because of the "bias or misguided beliefs (it will ruin their lives - and you know that how??) of trustee. I don't recall reading this one in Beyond the Grave, but maybe Condon will put it in his next update.
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Re: irrevocable trust for children receiving an inheritance

Post by Avo »

What is the point of a corporate co-trustee? Won't that just get the money invested in non-boglehead ways, at what we would regard as very high fees?
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Re: irrevocable trust for children receiving an inheritance

Post by NotWhoYouThink »

If the new trust gives them control (the right to become a trustee, the power to remove and replace their co-trustee
(with someone not a close relative or subordinate employee) and the power to appoint (give or leave the trust assets to anyone they want (except themselves or their estates or creditors) at age 30, they'll be happy.
What if they want to start their own business? Or their own non-profit. If the grandparents' trust terms would have allowed it, but the replacement trust would not, would they be happy? Or maybe you're saying the replacement trust would allow it.
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Re: irrevocable trust for children receiving an inheritance

Post by Grt2bOutdoors »

Well, I must say this has been a real eye-opener for me. I'll make sure when I write my own trust not to include such an explicit statement where the trustee can "remove ALL of the assets" for the benefit of beneficiary without slapping some restrictions on just what type of requirements must be met before such removal can be effected.
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Re: irrevocable trust for children receiving an inheritance

Post by 123 »

I am curious what alternative restrictive distribution plan of assets to the grandchildren the OP would like to be able to achieve. If age 30 doesn't seem to be a good idea what alternative distribution ages/percentages would the OP like to be able to achieve?
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Re: irrevocable trust for children receiving an inheritance

Post by Rrolack »

letsgobobby wrote:Remember the terms of the trust allow me (the trustee) to remove ALL the assets at any time, for the benefit of the beneficiary.
If you plan to remove assets based on this clause, I would suggest ensuring that your justification for removal would pass legal muster as being "for the benefit of the beneficiaries" if it were ever questioned in court. If it weren't, you may risk being accused of misappropriating the assets, which could have criminal (not just civil) implications.
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Re: irrevocable trust for children receiving an inheritance

Post by Watty »

I'm just curious, does the trust say anything about any future grandkids that might still be born being included in the trust?

If so then splitting up the trust now might leave any future grandkids with nothing.

If the kids are still young you might also be making any big decisions too early. You might want to postpone making any big changes until the oldest grandkid is in their 20's.
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Re: irrevocable trust for children receiving an inheritance

Post by WorkToLive »

What, specifically, are you worried about the grandchildren doing? Are they drug addicts? How old are they now? Are there reasons to believe it is a terrible idea to follow the trust guidance, which is to distribute the assets at age 30, if I understand correctly?

I am having trouble understanding your reasons for wanting to change things. By 30, most of my friends and relatives were on stable footing. If these grandchildren are 25 and living on the streets, I could understand your concern, but otherwise, I don't get it.
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Re: irrevocable trust for children receiving an inheritance

Post by Zott »

Something is confusing, or at least I'm confused. Bsteiner's comments all involve each grandchild having "control" of the successor trust, including the right to name themselves as trustee. That would protect the assets from creditors, etc, but couldn't each grandchild remove all the funds from the successor trust at any time, as permitted to the trustee? That would not be consistent with the OP's objectives.
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

Grt2bOutdoors wrote:... I don't recall reading this one in Beyond the Grave, but maybe Condon will put it in his next update.
I'm not sure it would fit his book. He focuses on the two extreme points (either leaving assets to beneficiaries outright or leaving assets to beneficiaries in trusts that they don't control). However, most of our clients select a middle ground (leaving assets to beneficiaries in trusts in which the beneficiary effectively controls the trust upon reaching a specified age). That's generally better than mandating distributions. It keeps the trust assets out of the beneficiary's estate for estate tax purposes, and better protects the assets against the beneficiary's creditors and spouses.
NotWhoYouThink wrote:
bsteiner wrote:If the new trust gives them control (the right to become a trustee, the power to remove and replace their co-trustee (with someone not a close relative or subordinate employee) and the power to appoint (give or leave the trust assets to anyone they want (except themselves or their estates or creditors) at age 30, they'll be happy.
What if they want to start their own business? Or their own non-profit. If the grandparents' trust terms would have allowed it, but the replacement trust would not, would they be happy? Or maybe you're saying the replacement trust would allow it.
Yes, the replacement trust that I would propose would allow it. It would give the trustees complete discretion as to distributions. Depending on the facts and circumstances at the time, starting a business could easily be a reasonable purpose for distributions.
Grt2bOutdoors wrote:... I'll make sure when I write my own trust not to include such an explicit statement where the trustee can "remove ALL of the assets" for the benefit of beneficiary without slapping some restrictions on just what type of requirements must be met before such removal can be effected.
No one knows what the future will bring. If you try to say what the trustees must or can't make distributions for, something may come up that you didn't think of. Our clients generally give the trustees discretion as to distributions, and focus on selecting trustees in whose judgment they have confidence.
123 wrote:I am curious what alternative restrictive distribution plan of assets to the grandchildren the OP would like to be able to achieve. If age 30 doesn't seem to be a good idea what alternative distribution ages/percentages would the OP like to be able to achieve?
Mandating distribution at age 30 (or any other age) will throw the trust assets into the beneficiary's estate for estate tax purposes, and will expose the trust assets to the beneficiary's creditors and spouses. Most of our clients would say that the trustees have discretion as to distributions, and that, absent special needs, upon reaching a specified age, the beneficiary gets to control the trust. For this purpose, control means that the beneficiary has the right to become a trustee, has the power to remove and replace his/her co-trustee, and has the power to appoint (give or leave) the trust assets to anyone he/she wants (except the beneficiary or his/her estate or creditors). Since the existing trust ends at 30, the new trust would probably provide that the beneficiary gets control at 30. The trustees would then have many years to guide the beneficiary such that the beneficiary will be able to assume control at 30.
Watty wrote:I'm just curious, does the trust say anything about any future grandkids that might still be born being included in the trust?
The new trust can't add beneficiaries. If the existing trust provides for future grandchildren, the new trust can do so. But if the existing trust doesn't, then the new trust can't either.

If you're creating trusts for grandchildren, you have to decide whether to include future grandchildren. There are a couple of ways to draft for this. One is to have a single pot trust that divides into separate trusts at a point when there are unlikely to be any additional grandchildren. Another is to say that if there's ever a new grandchild, a new trust is set up for the new grandchild, with a pro rata portion of each existing grandchild's trust being transferred to the new grandchild's trust.
Zott wrote:Something is confusing, or at least I'm confused. Bsteiner's comments all involve each grandchild having "control" of the successor trust, including the right to name themselves as trustee. That would protect the assets from creditors, etc, but couldn't each grandchild remove all the funds from the successor trust at any time, as permitted to the trustee? That would not be consistent with the OP's objectives.
In my example, the grandchild can become a trustee, and can remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee). However, if the grandchild wants a distribution, he/she can't vote on it. That decision has to be made by the other trustee(s).

Of course, in my example, as long as the requested distribution is within reason, the grandchild will be able to obtain it by removing and replacing the trustee. That's what most clients want. They want the beneficiary to effectively control the trust after reaching a specified age, while still protecting the trust assets from creditors and spouses, and keeping the trust assets out of the beneficiary's estate for estate tax purposes.

Sometimes, due to special needs or some other circumstance it's not appropriate for a beneficiary to have control. In that case the beneficiary would not have control.

Sometimes, particularly if the amount involved is large, a client will divide a beneficiary's share into two trusts, one in which the beneficiary has control after a specified age and one in which the beneficiary won't have control.
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Re: irrevocable trust for children receiving an inheritance

Post by samsmith »

I think that what bsteiner is suggesting may not be exactly what the OP desires. It seems like the OP wants their to be a corporate co-trustee for the new trust that will receive the assets after decanting. Bsteiner explained that the new trust:
If the new trust gives them control (the right to become a trustee, the power to remove and replace their co-trustee
(with someone not a close relative or subordinate employee) and the power to appoint (give or leave the trust assets to anyone they want (except themselves or their estates or creditors) at age 30, they'll be happy.
so it seems to me that the new receiving trust allows for the assets to remain in trust after the grandkids are over 30 -
which is a desirable thing for all of the reasons noted. At the same time, the grand kids would have effective control of the trust assets as they would "control" the trustee in the sense that they can become trustee and (if they are required to have a co-trustee) they can replace the co-trustee. Finally, they could appoint the assets at any time (presumably after age 30) to anyone except themselves or their estates or creditors. In addition, bsteiner says the new trust would allow the grandkids to replace their co-trustee with someone not a close relative or subordinate employee. It is not clear if decanting would allow for the restriction that the new trustee also must be a corporate trustee?

I would defer to the lawyers, but it seems like the reason this works is the new decanted trust still allows the grandkids significant control of the assets at age 30 and gives them the added desirable option/benefit of leaving the assets in trusts longer.

A question for bsteiner would the new trust be out of the grandkids estate? Since the original trust was for the benefit of grandkids it might have used the parents GST exclusion and maybe the new trust could be kept out of grandkids estate?
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Re: irrevocable trust for children receiving an inheritance

Post by NotWhoYouThink »

samsmith wrote:I think that what bsteiner is suggesting may not be exactly what the OP desires. It seems like the OP wants their to be a corporate co-trustee for the new trust that will receive the assets after decanting.
I agree that OP and bsteiner appear to be proposing different things. I'm ok with bsteiner's proposal, less so with OP's.
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Re: irrevocable trust for children receiving an inheritance

Post by Totrep »

letsgobobby,

My wife was the beneficiary of a trust very similar to the one you are describing. Suppose her parent, the trustee, had told her around age 30: "Your trust is set to expire and will distribute all assets to you. Perhaps you would rather I decant everything into a new trust, leaving you effective control but keeping the assets out of your estate and maybe providing some protection from creditors." Whatever she decided, I do not think she would be offended.

On the other hand, suppose that parent had told her: "Your trust is set to expire. However, it has a lot of assets and
letsgobobby wrote: I'm worried [you will] ruin [your life].
You need a corporate trustee to prevent bad decisions." Even if the end result were the same, I think that conversation would have destroyed their relationship.

In fact, my wife's parent decided to distribute all assets out of the trust even before my wife turned 30. At that time, she had a post-graduate degree, a career, a house, a family, an estate plan of her own ... I couldn't have imagined anyone questioning her maturity. It was decided that the costs of maintaining the trust structure outweighed the potential benefits. I'm not sure how the amount compares to the trusts you are discussing, but it was significant enough to affect important life decisions for my wife.

I urge you to think very carefully about the motivation behind the actions you are considering in this thread.
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

NotWhoYouThink wrote:
samsmith wrote:I think that what bsteiner is suggesting may not be exactly what the OP desires. It seems like the OP wants their to be a corporate co-trustee for the new trust that will receive the assets after decanting.
I agree that OP and bsteiner appear to be proposing different things. I'm ok with bsteiner's proposal, less so with OP's.
If he's the trustee, he gets to decide, subject to his fiduciary duty to act in the best interests of the beneficiaries. Since the existing trust doesn't end until age 30, he has time to decide what's best based on the circumstances at the time. If they're doing well, he might be amenable to letting them have control at that point.

Of course, if he has the power to designate a successor trustee, he should do so now. Note that if he picks a bank or trust company as his successor, he should make sure to pick one that will be comfortable decanting the trust when the time comes.
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Re: irrevocable trust for children receiving an inheritance

Post by Totrep »

bsteiner wrote:
NotWhoYouThink wrote:
samsmith wrote:I think that what bsteiner is suggesting may not be exactly what the OP desires. It seems like the OP wants their to be a corporate co-trustee for the new trust that will receive the assets after decanting.
I agree that OP and bsteiner appear to be proposing different things. I'm ok with bsteiner's proposal, less so with OP's.
If he's the trustee, he gets to decide, subject to his fiduciary duty to act in the best interests of the beneficiaries.
This thread is making me rethink a lot of things I thought I knew about trusts. We're discussing a situation where the original trust gave the beneficiaries control of the assets at age 30, but where the OP (without mentioning any specific reasons) is proposing to create a new trust where the beneficiaries may never gain full control of the assets. I'm surprised to learn that this maneuver is so simple to execute and doesn't appear to create an obvious risk of being sued.
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Re: irrevocable trust for children receiving an inheritance

Post by bayview »

letsgobobby wrote: If my kids sue me in 20 years because they don't like the terms of the new trust, it will have confirmed that my decision to decant and place the assets in a new trust was a wise one. A price I'm willing to pay.
Hmmm. :shock:

Do you honestly believe that you have the only informed insight into what is best for the kids once each one hits age 30? And that if they are unhappy with the terms of the new trust, they couldn't possibly have a legitimate complaint? Really?

I do understand that there is apparently a really large sum of money being considered here, but this seems both unilateral and judgmental on your part.
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Re: irrevocable trust for children receiving an inheritance

Post by NotWhoYouThink »

letsgobobby wrote:
bayview wrote:
letsgobobby wrote: If my kids sue me in 20 years because they don't like the terms of the new trust, it will have confirmed that my decision to decant and place the assets in a new trust was a wise one. A price I'm willing to pay.
Hmmm. :shock:

Do you honestly believe that you have the only informed insight into what is best for the kids once each one hits age 30? And that if they are unhappy with the terms of the new trust, they couldn't possibly have a legitimate complaint? Really?

I do understand that there is apparently a really large sum of money being considered here, but this seems both unilateral and judgmental on your part.
I'm surprised so many are so opposed. The grandchildren in question are all 10 and under. Some don't even talk yet. It's impossible to predict who or what they will have become at age 30. The trusts under discussion would always permit the trustee to make a full distribution, so while some control is surrendered, it is not as if the beneficiaries could 'never' receive the money. For example, if a beneficiary is a serial entrepreneur with a track record of success, the trustee could distribute 100% of the trust on or even before the 30th birthday, if the beneficiary wanted and the trustee agreed.

At any rate, the 'creditor and predator' protection is important regardless of the integrity and sophistication of the beneficary.
There are 3 options under discussion:
1) Leave assets in the trust until the beneficiaries reach age 30, then transfer the assets to the beneficiaries free of trust.
2) Decant the trust assets into a trust that the beneficiaries will effectively control at age 30. Per @bsteiner,
Since 1995, the better practice has been to give the beneficiary effective control at the age you would otherwise have ended the trust. For example, in this case, upon reaching age 30, each grandchild could have the right to become a trustee, the power to remove and replace his/her co-trustees (provide the replacement trustee is not a close relative or subordinate employee), and the power to appoint (give or leave) the trust assets to anyone he/she wants (other than the grandchild or his/her estate or creditors).
This option keeps the assets out of the beneficiaries estates and protects them from creditors.
3) Decant the trust assets into a trust the beneficiary will never have full control over, because the beneficiaries have no power to fire the co-trustee, so are subject to "mother-may-I" trustee approvals on spending the assets.

It is option 3 that OP seems to be proposing, and that is the subject of the objections mentioned in this thread.
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FBN2014
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Re: irrevocable trust for children receiving an inheritance

Post by FBN2014 »

bsteiner wrote:
NotWhoYouThink wrote:
samsmith wrote:I think that what bsteiner is suggesting may not be exactly what the OP desires. It seems like the OP wants their to be a corporate co-trustee for the new trust that will receive the assets after decanting.
I agree that OP and bsteiner appear to be proposing different things. I'm ok with bsteiner's proposal, less so with OP's.
If he's the trustee, he gets to decide, subject to his fiduciary duty to act in the best interests of the beneficiaries. Since the existing trust doesn't end until age 30, he has time to decide what's best based on the circumstances at the time. If they're doing well, he might be amenable to letting them have control at that point.

Of course, if he has the power to designate a successor trustee, he should do so now. Note that if he picks a bank or trust company as his successor, he should make sure to pick one that will be comfortable decanting the trust when the time comes.
Bsteiner, can you discuss the mechanics of appointing a future successor trustee? I want Vanguard as my successor trustee if I am incapacitated or at my death. Vanguard stated that they will not accept a successor trustee position unless they have control of the assets. They told me that at my death or incapacity either my executor or a POA should contact them and they will issue an assignment or acceptance of trustee form to transfer the funds to Vanguard Trust Services. I will have a form in the trust's records stating my chose of successor trustee. Vanguard is currently reviewing the trust and if approved will send me a letter stating that they agree to serve at the appropriate time in the future. Am I doing this correctly? Any pitfalls you see?
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afan
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Re: irrevocable trust for children receiving an inheritance

Post by afan »

We have a similar setup to the one bsteiner describes. In our case, the beneficiaries- our kids- are old enough that we know what they are like. The oldest, although youthful, is perfectly suitable to manage the trusts now and is our successor trustee. We are perfectly happy to have oldest child run the trusts. They never distribute all the money to beneficiaries, but they permit the beneficiary to get out of the trust what they need, which could include everything.

This lets the money stay asset-protected while remaining available if the kids need it.
Since we are happy with our successor trustee/child running things, we have not mandated a corporate trustee. Even Vanguard charges >$0 for their services. If the kids decide they want someone else to manage the money they can hire Vanguard to do that without paying the trustee fees. If they decide they need a corporate trustee, they can pick one at the time. It could be decades before they want one and who knows what the trustee market will look like then?

We are lucky in that our kids view the money we have given them so far as something on which they pay taxes once a year but otherwise never touch. They live on what they earn, and save from their earnings. If they behaved much differently, we would have to make more restrictive plans.

The corporate trustee design I most prefer has a trust company or bank doing the administrative job but a separate entity managing investments. Since the big fees are for investment management, when there is nothing to do, I think this will end up being the least expensive route. It could even leave the beneficiaries able to control the investments while relieved of other trustee responsibilities.

For the OP, you might at least consider revising the requirement of a corporate trustee down the road when you have a better idea of whether the kids are responsible enough to run the trusts themselves. We don't have any clue of what our- yet to be conceived as far as I know- grandchildren will be like as adults. But we figure their parents will have a better chance of judging that than we do.
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
bsteiner
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

letsgobobby wrote:Yes, I see that there are two possibilities for the new trust. Bsteiner points out that the new trust could be either, or both (2 new trusts).

Can this decanting process work in reverse? Say I have a trust which never terminates, and which the beneficiary never controls. Could a trustee decant that trust into a new trust which does give the beneficiary effective control?
Probably, depending on the terms of the trust. If not, the trustees could give greater consideration to the beneficiary's wishes.
FBN2014 wrote:... Bsteiner, can you discuss the mechanics of appointing a future successor trustee? I want Vanguard as my successor trustee if I am incapacitated or at my death. Vanguard stated that they will not accept a successor trustee position unless they have control of the assets. They told me that at my death or incapacity either my executor or a POA should contact them and they will issue an assignment or acceptance of trustee form to transfer the funds to Vanguard Trust Services. I will have a form in the trust's records stating my chose of successor trustee. Vanguard is currently reviewing the trust and if approved will send me a letter stating that they agree to serve at the appropriate time in the future. Am I doing this correctly? Any pitfalls you see?
The person authorized in the Will or trust agreement to pick successor trustees should pick successor trustees, following the procedure set forth in the Will or trust agreement.
afan wrote:... The corporate trustee design I most prefer has a trust company or bank doing the administrative job but a separate entity managing investments. ....
It's possible to accomplish this.
afan
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Re: irrevocable trust for children receiving an inheritance

Post by afan »

bsteiner wrote:
It's possible to accomplish this.
I know. It just is so different from what most trust companies want to do that there does not seem to be nearly the competition. Vanguard, for example, will not do this. I am hoping it becomes more common and readily available. From huge companies with national reach, high quality web services, and competing to keep prices low.

bsteiner, I know you have been reluctant to recommend specific companies, but do you have any that are large, stable, interested in being the administrative trustee without managing the investments and charging fees that hardcore bogleheads would consider reasonable? For example, Vanguard currently charges 0.25% of assets as its administrative fee. Do you know of banks or trust companies that would charge something at that level, or lower, with someone else doing the investment management? The last time I checked, Schwab would do something like this, but the investments had to be managed, at big fees, by one of their RIA partners. It could not be a committee of people who did it themselves.
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
FoolMeOnce
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Re: irrevocable trust for children receiving an inheritance

Post by FoolMeOnce »

bsteiner wrote:In my example, the grandchild can become a trustee, and can remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee). However, if the grandchild wants a distribution, he/she can't vote on it. That decision has to be made by the other trustee(s).
What if the grandchild removes all trustees and only appoints himself/herself as trustee? Or can that be forbidden in the trust document? And if that can be forbidden - the grandchild cannot become sole trustee - is it still consistent with the original trust to place the assets out of the reach of the beneficiary (and does that even matter)?
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Re: irrevocable trust for children receiving an inheritance

Post by aristotelian »

letsgobobby wrote: The problem is the trust terminates when the grandchildren turn 30. It was probably not my parents' intention to leave their grandkids this very large sum of money without encumbrances at that age, but as it currently stands that is what will happen.
They put age 30 in the papers, and they signed the papers. That is the clearest statement of their intent. They also nominated you as trustee, so it could also be said that they intended to trust your judgment. (Then again, if they really trusted your judgment, they would have given the money to you directly). The question would be whether their trust in your judgment supersedes their expectation that the money be distributed.

Personally, if the kids are still young, I would wait until they are age 28 or 29. If they seem like mature people, I would go ahead and distribute the money as planned. If the kids are minors, as you say, there is no reason you need to be concerned about this right now. If it is looking like there might be an issue, then you could consider your legal options to change the terms of the trust at that point. If you change the terms now, then it looks like you are expecting your kids to be the types of people who cannot manage money, and that is just asking for a toxic relationship as well as a lawsuit.
letsgobobby wrote: If my kids sue me in 20 years because they don't like the terms of the new trust, it will have confirmed that my decision to decant and place the assets in a new trust was a wise one. A price I'm willing to pay.
If you change the legal terms of a trust that was supposed to distribute at Age 30, that could confirm to them that you are an authoritarian who intends to control their behavior indefinitely. Which then forces them to act accordingly and sue you. Don't act as if the worst case scenario has already happened, and then be shocked when it happens.

Instead, focus on how you might use the money to incentivize good behavior so the problem doesn't arise. For example, as trustee you can use the money before age 30 to support their college education.
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Lastrun
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Re: irrevocable trust for children receiving an inheritance

Post by Lastrun »

I would tread very carefully here.

Bsteiner has some great points, but I would seek the advice of a good trusts and estate lawyer to run through the decanting issues. Some thoughts:

1. Is the interest vested?

The Uniform Trust Decanting Act defines a "vested interest" as "a right to receive an ascertainable part of the trust property on the trust’s termination which is not subject to the exercise of discretion or to the occurrence of a specified event that is not certain to occur."

The Act further provides that "in an exercise of the decanting power under this section, a second trust may not: ..... reduce or eliminate a vested interest."

It is not clear from the OP's write up whether the interest is vested or not. As an example, if the trust provides that the trust share terminates when the beneficiary reaches age 30, or upon the death of the beneficiary, to the beneficiaries estate, this would be a vested interest under the Act, as compared to a typical "to the beneficiaries decedents, per stirpes" approach.

2. Notice

Notice is a requirement under most state decanting statutes. Make sure you comply with this provision which is critical as minors are involved. Notice to you and your sister may not suffice.

3. Modification at Age 18

Have you thought about a modification when the beneficiary turns age 18?

4. Corporate Trustee

Be careful what you do now, as it may impact a corporate trustee's willingness to take over later if they see and issue on due diligence with the decant.
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Afull
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Re: irrevocable trust for children receiving an inheritance

Post by Afull »

letsgobobby wrote:Not going to discuss any further why I and my sibling want to protect our very young children from creditors, etc. two or three decades from now. Suffice it to say we have very good reasons that my parents could not have forseen. Furthermore I do not have the aversion to perpetual trusts that some others do, since I both use one in my own estate planning and am the beneficiary of another.

To those who left me money in trust so that I am not exposed to estate taxes and the money is not exposed to loss I say, "Thank you."

To my children to whom I will leave money in trust so it does not expose them to estate taxes or lawsuits I say, "You're welcome."

To those who say I should use money to incentivize good behavior in my children I say, "That's crazy."

Thanks to those who contributed to my understanding of the decanting process.
Thank you for posting...very good reply.

I was not aware of the decanting possibility for an irrevocable trust and I am in the situation of your parents, somewhat. Our trust will end when grandson is 30 (he's abt 2-1/2 today and I'm 68) and in the next estate planning iteration I will be discussing the decanting possibility with the attorney.
Last edited by Afull on Tue Jul 04, 2017 11:44 am, edited 1 time in total.
Lastrun
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Re: irrevocable trust for children receiving an inheritance

Post by Lastrun »

On the vested interest issue, I am just not sure as it depends on the exact trust language:

1. To B, in trust, until B=age 30, then outright. If B dies before 30, then to B's descendants, per stirpes. This is NOT a vested interest under the Act. So you could modify this as part of the decant.

2. To B, in Trust, outright at age 30, of B dies before termination then to B's estate. This is considered a vested interest under the Act. You can pull up the Act and read the comments online. The point is that most of the state laws are modeled after this Act. So a court, etc. will give the comments great weight.
http://www.uniformlaws.org/shared/docs/ ... %20Act.pdf

On the notice, a custodial parent, who is not the trustee, will likely suffice.

Good luck.
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Re: irrevocable trust for children receiving an inheritance

Post by bsteiner »

afan wrote:
bsteiner wrote:
It's possible to accomplish this.
I know. It just is so different from what most trust companies want to do that there does not seem to be nearly the competition. Vanguard, for example, will not do this. I am hoping it becomes more common and readily available. From huge companies with national reach, high quality web services, and competing to keep prices low.

bsteiner, I know you have been reluctant to recommend specific companies, but do you have any that are large, stable, interested in being the administrative trustee without managing the investments and charging fees that hardcore bogleheads would consider reasonable? For example, Vanguard currently charges 0.25% of assets as its administrative fee. Do you know of banks or trust companies that would charge something at that level, or lower, with someone else doing the investment management? The last time I checked, Schwab would do something like this, but the investments had to be managed, at big fees, by one of their RIA partners. It could not be a committee of people who did it themselves.
There are lots of them in the asset protection states such as Alaska, Delaware, Nevada and South Dakota. The lawyer who handles your estate planning should have relationships with some of them.
FoolMeOnce wrote:
bsteiner wrote:In my example, the grandchild can become a trustee, and can remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee). However, if the grandchild wants a distribution, he/she can't vote on it. That decision has to be made by the other trustee(s).
What if the grandchild removes all trustees and only appoints himself/herself as trustee? Or can that be forbidden in the trust document? And if that can be forbidden - the grandchild cannot become sole trustee - is it still consistent with the original trust to place the assets out of the reach of the beneficiary (and does that even matter)?
Revenue Ruling 95-58 created a safe harbor, permitting a grantor to remove and replace the trustee, provided the replacement trustee is not a close relative or subordinate employee. To avoid any doubt, most lawyers include the same restriction when giving a beneficiary the power to remove and replace a trustee. In other words, if a beneficiary removes the trustee, he/she has to replace the removed trustee with someone who's not a close relative or subordinate employee.

Wills and trusts generally provide that a beneficiary can't participate in decisions to make discretionary distributions to himself/herself. That means that if a beneficiary wants a discretionary distribution, there has to be a co-trustee to make that distribution. The exception is that you can permit a beneficiary to make distributions to himself/herself for an ascertainable standard such as health, support and maintenance. Some lawyers draft that way, permitting a beneficiary to be the sole trustee, with the power to distribute to himself/herself, but only for health, maintenance and support, and giving the beneficiary the power to add a co-trustee if he/she ever wants distributions for other reasons. In some states, the trust would still be protected against creditors. We generally avoid that, since (i) it's not clear that it would be protected against creditors in every state, (ii) Medicaid might say it's an available resource since the beneficiary could take distributions for health, and (iii) there's a greater chance that the beneficiary will withdraw money when it might not be advisable to do so.
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