Estate Questions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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trustquestioner
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Estate Questions

Post by trustquestioner » Sun Sep 03, 2017 7:01 pm

All - been reading the forum for a long time - thanks to everyone for all the great advice.

Recently, single parent died - 8 figure estate. Revocable trust is beneficiary of everything, me and sibling are beneficiaries of the trust (now irrevocable). The executor, who drafted the will and the trust, and whose law partner is the "trust protector," is not providing any information to us. We have no idea how the assets are being invested, if at all. Further, the executor's law partner, as trust protector, has installed a corporate trustee once the assets pass from the estate to the trust (replacing family members). The trust document allows wide discretion with distributions, under the HEMS standard.

My questions are:

1. What standard is the executor held to re: investment decisions? If, as I suspect, he has converted everything to cash, is that legally acceptable (I assume it is, just checking).

2. What does HEMS mean, in practical terms?

3. What should I be thinking/worrying about, that I may be overlooking?

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pondering
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Re: Estate Questions

Post by pondering » Sun Sep 03, 2017 9:28 pm

Can you tell me a little more about what a trust protector is?
--Robert Sterbal | 412-977-3526 call/text

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celia
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Re: Estate Questions

Post by celia » Sun Sep 03, 2017 9:47 pm

You can search for "trust protector" online to see what this person can do.

OP, How long ago did your parent die? Are any of the beneficiaries minors or young adults?

I ask about the time here since it may take at least a month for things to settle down after someone died. Within a few months of death, the beneficiaries and guardians of minor children should be notified that there is a trust in place for which they are beneficiaries. At that time you each can request a copy of the trust. Reading it will give you an idea of what the trustees are supposed to do. Once all the assets of the trust are known, you should also get an accounting of what the trust holds.

bsteiner
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Re: Estate Questions

Post by bsteiner » Sun Sep 03, 2017 9:57 pm

trustquestioner wrote:
Sun Sep 03, 2017 7:01 pm
...
What does HEMS mean, in practical terms?
...
Health, maintenance, support and education. Some people limit distributions to these things.

While most distributions are for these things, it's usually not a good idea to limit distributions to these things. Sometimes you may want to make distributions for other purposes. Limiting distributions will preclude decanting in some states. Disputes could arise as to whether a proposed distribution falls within these purposes.
pondering wrote:
Sun Sep 03, 2017 9:28 pm
Can you tell me a little more about what a trust protector is?
The concept of a protector comes from offshore trusts where you don't want the trustee to be able to do anything without the consent of a trusted person (who you don't want to be a trustee since he/she is in the United States).

Usually the primary beneficiary has the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee. If the beneficiary has a disability, sometimes someone else has this power. Some people call that person a protector.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Mon Sep 04, 2017 4:21 pm

It has been about three months. Beneficiaries (me and my sister) are both adults. There is one trust for Dad's GST exemption, and another one for everything else.

Given the size of the estate I could easily live off the income and never touch principal, leaving it to my children. However, the trust document gives the trustee discretion over distributions and the trust protector must approve distributions. The real question is what limitations, if any, exist with respect to the trust protector's ability to block distributions. I like the trustee; no relationship with the trust protector, who was Dad's personal lawyer.

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FIREchief
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Re: Estate Questions

Post by FIREchief » Mon Sep 04, 2017 4:41 pm

celia wrote:
Sun Sep 03, 2017 9:47 pm
You can search for "trust protector" online to see what this person can do.
I don't believe there is any real standard for what a trust protector can do. In a legal sense they can only do what state law and, more importantly, the terms of the trust allow. The trust may also provide varying levels of power to the beneficiaries with regard to appointment, retention and removal of a trust protector. It sounds like in the OP's situation, the trust protector may have been given "super powers," which may or may not ultimately work for the optimal benefit of the beneficiaries.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Mon Sep 04, 2017 4:48 pm

Also, the obvious question is why this arrangement exists at all; the way it was explained to me at the time was that it was set up this way in case I ever got divorced or sued.

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prudent
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Re: Estate Questions

Post by prudent » Mon Sep 04, 2017 4:54 pm

Sounds like you have copies of the actual trust document. Does it say explicitly what the trust protector's powers are?

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FIREchief
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Re: Estate Questions

Post by FIREchief » Mon Sep 04, 2017 4:58 pm

trustquestioner wrote:
Mon Sep 04, 2017 4:48 pm
Also, the obvious question is why this arrangement exists at all; the way it was explained to me at the time was that it was set up this way in case I ever got divorced or sued.
I'm guessing that this referred to the question "why was the estate left in trust," for which the explanation is likely very valid.

If the question is "why does the trust allow for a trust protector," then potential answers become more nebulous. If other readers have existing trusts that include provisions for a trust protector, I will strongly recommend that they review them and decide if they are comfortable with the terms and powers granted to the trust protector. We don't have much discussion on this topic, but it may be very important in some situations.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Mon Sep 04, 2017 5:00 pm

Extensive powers. Can remove/replace trustees and has veto power over distributions. Notably, does not have the power to direct investment decisions. I suspect the attorney who drafted it just wanted to make sure the trust stays in existence perpetually in order to collect the (generous) fees the trust allows his firm to bill.

I doubt Dad ever even read what he signed. Just trusted that his friend would "do what's right."

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FIREchief
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Re: Estate Questions

Post by FIREchief » Mon Sep 04, 2017 5:05 pm

trustquestioner wrote:
Mon Sep 04, 2017 5:00 pm
I suspect the attorney who drafted it just wanted to make sure the trust stays in existence perpetually in order to collect the (generous) fees the trust allows his firm to bill.

I doubt Dad ever even read what he signed. Just trusted that his friend would "do what's right."
While I don't know your specific situation, I have shared such concerns regarding similar language within trusts.

Does the trust outline any terms for removal and replacement of the trust protector? (e.g. by petition to the court by the trust beneficiaries)

Also, does the trust allow the trust protector to alter the investment terms of the trust? (not necessarily to direct investments)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Mon Sep 04, 2017 5:17 pm

Trust protector can only be removed "for cause." Who knows what that means. Can't change investment policy.

I honestly don't see major problems arising as I'm not going to ask for anything crazy and have very frugal tastes (especially when considering the size of the estate). I'm just uncomfortable with someone I don't know well having so much power.

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celia
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Re: Estate Questions

Post by celia » Mon Sep 04, 2017 6:40 pm

trustquestioner wrote:
Mon Sep 04, 2017 5:17 pm
Trust protector can only be removed "for cause." Who knows what that means. Can't change investment policy.

I honestly don't see major problems arising as I'm not going to ask for anything crazy and have very frugal tastes (especially when considering the size of the estate). I'm just uncomfortable with someone I don't know well having so much power.
From your dad's perspective, I think you should consider when the trust was generated and when it was amended (if it ever was). How old were you and your siblings at that time? What do you think your dad's assets were at that time? We don't know if he had been exposed to a contentious divorce (it didn't even have to be his own), but maybe he was protecting you and his assets from problems he himself witnessed or imagined. And, not many people would want their kid to have $1M to spend as soon as he becomes an adult.

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Re: Estate Questions

Post by LarryAllen » Mon Sep 04, 2017 6:46 pm

I would hire a highly experienced trust attorney, in your state, to represent you as a beneficiary. Based on the size of the trust they should be able to easily provide great value. Perhaps you and your sibs can hire one attorney assuming no conflict of interest between your positions within the trust. This type of situation requires a careful reading of the estate documents, knowing state law, and considering all options. Perhaps getting the trustee changed? Perhaps going to court for some type of modification? Who knows. Hire someone HIGHLY experienced in trust administration. Good luck.

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FIREchief
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Re: Estate Questions

Post by FIREchief » Mon Sep 04, 2017 7:15 pm

I think Larry's advice is spot on. At a minimum, a judge may review the trust records and determine that the trust protector is collecting too much in compensation and/or wasting money buying outside services that are unnecessary. These could constitute "removal for cause," although the trust might also require that another independent trust protector be appointed to fill the role (which might just get the OP back to square one).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

bsteiner
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Re: Estate Questions

Post by bsteiner » Mon Sep 04, 2017 7:32 pm

trustquestioner wrote:
Mon Sep 04, 2017 4:48 pm
Also, the obvious question is why this arrangement exists at all; the way it was explained to me at the time was that it was set up this way in case I ever got divorced or sued.
Our clients almost always provide for their children in trust rather than outright. That keeps their inheritances out of their estates for estate tax purposes (which is no longer relevant for most people, but may be very important in this case), and protects their inheritances against their potential creditors and spouses.

However, that only explains the reasons for providing for the children in trust rather than outright.

No reason has been given for creating a revocable trust. Many people in this group are in California where revocable trusts are commonly used for reasons specific to California. Did the decedent live in California? Was there some other reason to create a revocable trust in this case?

Sometimes the attorney is a reasonable choice as executor. Perhaps the children don't get along, or neither is capable of acting as executor (though people in this group tend to be highly capable). A bank or trust company is often a better choice, but sometimes the estate is too small for a bank or trust company (that's not the case here), or sometimes the client doesn't want a bank or trust company as executor, or sometimes the lawyer has a close relationship with the client or is familiar with the assets. Lawyers aren't allowed to seek appointment as a fiduciary, but are allowed to accept the appointment if the client wants to pick the lawyer.

You said that there's one trust for the GST exempt portion and one trust for the GST taxable portion. Except occasionally when the children are young, or to hold a vacation home, it would be unusual to have a single trust (or a single GST exempt trust and a single GST taxable trust) for both children. Usually each child has a separate trust (or separate GST exempt and GST taxable trusts). Does each child have a separate GST exempt trust and a separate GST taxable trust? (If not, it's probably possible to divide the GST exempt and GST taxable trust into separate trusts for each child.)

Usually each child gets to control his/her trust upon reaching a specified age. In other words, upon reaching a specified age, the child 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). Are the children too young to have this power? Do the children have disabilities such that someone else should have this power? It seems odd to give this power to the lawyer. The trust protector is used mainly in offshore trusts where you don't want the offshore trust company to be able to do anything unilaterally, so you select someone else who has to approve everything. That person is a protector rather than a trustee because he/she only has veto power over the trustees, but not the power to affirmatively act as a trustee. The reason for that is so that a creditor won't be able to get jurisdiction over the trustees in the United States, since that person is merely a protector, not a trustee.

It's usually the better practice to give the trustees complete discretion over distributions rather than limiting distributions to health, maintenance, support and education. Limiting distributions will preclude decanting in some states. It will preclude the trustees from making distributions for other purposes. For example, suppose a beneficiary is terminally ill and has an estate less than the exclusion amount, and the trustees want to distribute appreciated assets. It also means that the trustees have to examine proposed distributions more carefully to make sure they're permitted.

An 8-figure estate will need an estate tax return. There will also be lots of tax planning, elections, opportunities and pitfalls. Is this under control?

Unfortunately we don't have enough background to try to guess why the decedent did what he/she did. We don't know whether the children were sufficient capable and cooperative to administer the estate, whether each child is sufficient capable to control his/her own trust, whether the lawyer regularly deals with estates of this size, whether the lawyer overreached, or whether the decedent wanted to impose tighter than usual controls.

Given the size of the estate, I agree with LarryAllen that it would probably be worth the effort for you (or you and your siblings if they have the same interests and get along) to have your own lawyer who can look at the documents and the situation and provide appropriate advice.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Tue Sep 05, 2017 9:30 am

Thanks for the advice. My attorney has looked it over. He thinks this was likely "sold" to Dad in the name of giving flexibility in order to make sure needs were met. The fear is that the drafter has now installed himself in a lucrative role and has a financial incentive to serve himself and his law firm, potentially at my expense. Of course, the trust provides that if we challenge any action taken by the trustee or trust protector, they get to pay for their lawyers out of the trust. So practically speaking something terrible would have to happen for me to take it to court. Ultimately I think I just have to "wait and see." All the money is still in the estate for now.

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Tue Sep 26, 2017 8:25 pm

Follow up question: a large portion of the estate is stock in a privately held business. The estate tax return will value these interests with minority discounts, because Dad did (apparently good) estate planning and moved the majority of the ownership out of his estate prior to death. If the business is subsequently sold, can the IRS disallow the minority discounts used for estate tax purposes?

Lastrun
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Re: Estate Questions

Post by Lastrun » Tue Sep 26, 2017 11:38 pm

The, not so sarcastic, answer to your question is yes. The IRS may not allow the discount on the retained minority interest. In my 5 years as a IRS Chief Counsel trial attorney, I frequently saw the Service take wrong, incorrect and unsupported positions. More out of bumbling and bungling than malice. So honestly, who knows what the Service will do. The question you ask though is whether there a legal basis to attack the discount on the minority interest held at the moment of death.

Under Sections 2031 and 2033, the value of the business interest is the date of death value and the minority interest discount should apply in theory. This is despite any subsequent sale. There was an old Revenue Ruling back in the early 90s that came out when i was at the IRS (Rev. Rul. 93-12) to this effect. Of course, the subsequent sale would be considered by the Service in any enterprise value and marketability discounts on the estate tax return or any prior gift tax return, depending on the time frame of the sale and retrun filing dates. So the prior gifts may also possibly be subject to this line of attack, particularly if made recently,

May I suggest that the IRS attack may not come from "front line" but rather from the "flank" that is to include the prior lifetime transfers into the gross estate, under Section 2036 or similar theory, and have the benefit of both inclusion of the entire business and denial of any marketability discount. After some eary losses, the Service has been getting better and better with these lines of attack. But all of this is heavily fact driven and is a good discussion to have with your counsel.

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Re: Estate Questions

Post by Spirit Rider » Wed Sep 27, 2017 9:41 am

LarryAllen wrote:
Mon Sep 04, 2017 6:46 pm
I would hire a highly experienced trust attorney, in your state, to represent you as a beneficiary.
trustquestioner wrote:
Tue Sep 05, 2017 9:30 am
Thanks for the advice. My attorney has looked it over.
You need to follow Larry's explicit recommendation. Estate and Trust law is a very complicated specialty, just ask bsteiner. With the amount of money and the complex issues involved, your lawyer is unlikely the best choice.

lhl12
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Re: Estate Questions

Post by lhl12 » Wed Sep 27, 2017 12:53 pm

Spirit Rider wrote:
Wed Sep 27, 2017 9:41 am
LarryAllen wrote:
Mon Sep 04, 2017 6:46 pm
I would hire a highly experienced trust attorney, in your state, to represent you as a beneficiary.
trustquestioner wrote:
Tue Sep 05, 2017 9:30 am
Thanks for the advice. My attorney has looked it over.
You need to follow Larry's explicit recommendation. Estate and Trust law is a very complicated specialty, just ask bsteiner. With the amount of money and the complex issues involved, your lawyer is unlikely the best choice.
+1

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Tue Oct 10, 2017 2:52 pm

Thank you to all for the responses. Have consulted a wills and trusts attorney. No major concerns there at this point. Communication hasn't been great, but now we know what the assets are, where they are and the expected post-tax value of the estate.

Next round of questions pertains to investment decisions. The corporate trustee has agreed to allow a reputable fee-only financial adviser manage all the money. After estate taxes, it looks like the share of the estate will be low 8 figures. Obviously "won the game" territory. My expertise pretty much tops out at "three fund portfolio, stay the course, live below your means," so I am overwhelmed by the task and scared of making very expensive mistakes.

Any/all suggestions welcome and appreciated.

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Dale_G
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Re: Estate Questions

Post by Dale_G » Tue Oct 10, 2017 3:51 pm

It is unlikely that you will make any serious mistake with a 3 fund portfolio at a low cost provider. It's likely the bonds will be in munis, but you could add some short term treasuries for peace of mind.

The serious mistakes are only likely if someone persuades you that "complicated" is better" or convinces you to "invest in XXXX with higher returns and less risk".

Enjoy,

Dale
Volatility is my friend

angler-39
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Re: Estate Questions

Post by angler-39 » Wed Oct 11, 2017 9:15 am

Completely agree with Dale's comment above that there are a lot worse things that you can do besides the 3-fund portfolio (with munis and treasuries).
A 'reputable fee-only' advisor will still salivate over a low 8-figure portfolio since AUM fee of less than 1% is still a fair amount of money.
In this case, simplicity will be loads cheaper (no pun intended!) because most advisors will have lots of complex machinations to deliver better-than-market results with less than-market-risk! Taylor's 'list of gems' repudiates those strategies!
Your situation proves that a very significant windfall, rather than alleviates all stress, in fact creates more stress (of a different variety than most of are used to). You are in a unique situation.
Many non-bogleheads do not have enough personal finance knowledge to tax-loss harvest or have the general level of knowledge about investing that most on this site do. I would love to change my cars' brakes but do not have the knowledge to DIY - albeit as simple as it is. And afraid to mess up and put my life in danger!
My previous life was as a CPA-PFS so I am well aware of how incredibly complicated and diverse alternate investing strategies and philosophies can be, including high level tax and estate planning.
Just because you have a very high portfolio balance doesn't mean that your advisors are able to out-perform their respective benchmarks after fees. Please remember that.
Good luck to you, and my condolences on your loss.
George M

trustquestioner
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Re: Estate Questions

Post by trustquestioner » Fri Aug 17, 2018 8:43 am

Update:

Substantially the entire estate has been liquidated, but now have a new round of questions:

1. The executor is holding the entire estate, a low/mid 8 figure amount, in cash, with the exception of income producing real estate (held in LLCs). Is there any point in asking about at least moving the money into some kind of interest bearing, liquid investments, potentially with the consent of the beneficiaries? Especially given #2 below? We are leaving 6 figures annually on the table for no good reason.

2. Executor is going to hold the entire estate until the estate tax audit is done. The IRS has the estate tax return and the estate tax has been paid, but we have been told the audit/review might take 2-3 years.

3. I'm concerned about the tax implications of zero assets being transferred into the trust. Substantial income is being generated in the estate, and it is all, to my understanding, subject to the highest tax rate. If the trust were funded it would be taxed at the beneficiaries' tax rate, if distributed.

Any help appreciated.

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