Another Trust Question

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cheese_breath
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Another Trust Question

Post by cheese_breath » Fri Jul 13, 2018 11:41 am

So I went to an estate planning / probate attorney and among the documents he put together is a revocable trust with both DW and myself as settlors. The intent is to fund the trust to pay for DW’s medical care if I should die first. When we’re both gone whatever remains in it will go to our children as beneficiaries.

He wants me to name the trust as primary beneficiary to both my Roth and Traditional IRAs. The Roth seems like a no-brainer, but I wonder about the Traditional. So let me give you my thought process and let the experts comment on it.

Since this is not, and never will be a qualified trust I wonder if the Traditional will be considered a taxable withdrawal. If so, this would put it in the married filing jointly 35% tax bracket.

If this the case, then I’m wondering about leaving DW as beneficiary of the Traditional and letting it go into an inherited IRA so smaller withdrawals over a longer period of time would reduce the tax burden. DW’s POA is written so that when I pass on her daughter will get the POA. So presumably she could manage the inherited IRA? Or might the state (Texas) require her to become guardian first? Also since DW is not competent to name beneficiaries for the inherited IRA I assume it would need to go through probate if it isn’t exhausted before she dies.

Please provide your comments on my thought process. The lawyer is of the opinion both IRAs should go into the trust.
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FIREchief
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Re: Another Trust Question

Post by FIREchief » Fri Jul 13, 2018 1:19 pm

I think you may need a new lawyer. A lot of that doesn't make much sense if your IRA assets are of significant magnitude. I don't see any benefit to naming the living trust as beneficiary of your qualified retirement assets. The only time I've known this to provide value is when the spouses have complex family situations (i.e. blended families, expectations of remarriage of surviving spouse, etc.) and each spouse wants to ensure that their remaining retirement assets ultimately wind up with their own kids instead of a new spouse, other spouse's kids, etc. If this doesn't apply in your situation, then the "normal" thing would be for you to name your wife as beneficiary of your accounts and your children as contingent beneficiaries. Upon your death, your spouse could make the IRAs her own, and name your children as beneficiaries, or disclaim the assets and allow them to immediately pass to your children as inherited IRAs. Either way would provide significant tax savings, in most situations, in comparison to naming your living trust as beneficiary. Unfortunately, some "estate attorneys" don't understand this. I personally met with one who even upon "checking with their accounting folks," still didn't understand the very basics of how the IRS treats inherited IRAs in trusts when they are ultimately passed on to another generation.

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Last edited by FIREchief on Fri Jul 13, 2018 1:25 pm, edited 1 time in total.
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FIREchief
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Re: Another Trust Question

Post by FIREchief » Fri Jul 13, 2018 1:23 pm

cheese_breath wrote:
Fri Jul 13, 2018 11:41 am
Since this is not, and never will be a qualified trust I wonder if the Traditional will be considered a taxable withdrawal. If so, this would put it in the married filing jointly 35% tax bracket.
Are you sure about this? The boilerplate living trust documents I've seen all tend to include verbage that allows the trust to act as a qualified conduit trust for inherited IRAs. The limitation is that if an elderly surviving spouse is named as the beneficiary, the conduit trust structure requires the RMDs to be distributed immediately to the beneficiary, with no ability to retain them in trust for future trust beneficiaries. Also, an elderly beneficiary will cause inflated RMDs, since their remaining life expectancy is much shorter than a younger beneficiary.
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Re: Another Trust Question

Post by cheese_breath » Fri Jul 13, 2018 3:36 pm

FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
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bsteiner
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Re: Another Trust Question

Post by bsteiner » Fri Jul 13, 2018 4:11 pm

cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
... With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
You probate the Will, not the assets. Probating a Will is Texas is not difficult, expensive or burdensome.

If you leave your IRA to your wife, she could roll it over into her own IRA, name new beneficiaries, possibly do Roth conversions, and get a stretch.

If she can't do the rollover herself, did she give someone a power of attorney who could do this for her? Presumably if she was capable of creating a revocable trust, she was capable of signing a power of attorney. If she didn't give anyone a power of attorney, she may need to have a guardian appointed to do the rollover for her. I'm not familiar with guardianships in Texas, but in some states they're cumbersome.

Another possibility is to leave the IRA to or in trust for your children. That would provide a stretch as well, though in that case the IRA wouldn't be available for your wife.

If you leave the IRA in trust for your wife, then at best the stretch will be over her life expectancy as of your death. That probably won't be a good result.

If you run the IRA through the revocable trust, the result depends on the terms of the trust, which you didn't provide.

DaBombCat
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Re: Another Trust Question

Post by DaBombCat » Fri Jul 13, 2018 4:20 pm

This is a silly question on my part, but what is DW?
Da Wife?

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FIREchief
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Re: Another Trust Question

Post by FIREchief » Fri Jul 13, 2018 5:48 pm

DaBombCat wrote:
Fri Jul 13, 2018 4:20 pm
This is a silly question on my part, but what is DW?
Da Wife?
Dear Wife, but I suppose "Da Wife" could work just as well!
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FIREchief
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Re: Another Trust Question

Post by FIREchief » Fri Jul 13, 2018 5:53 pm

cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
No, I think your intentions were fairly clear. If your wife doesn't have a POA, and if your situation doesn't warrant the expenses and efforts to have a guardian appointed, then maybe your initial plan is the best you can do. That said, you do need to check the trust language, as some common boilerplate living trust documents do in fact MANDATE that qualified retirement assets inherited by the trust distribute the RMDs to the beneficiary as they are generated (i.e. as conduit trust). NOTE: they don't necessarily include the word "conduit," although that is what the language forces to happen. That may work contrary to your desire to have trustees retain and manage your wife's finances.
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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cheese_breath
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Re: Another Trust Question

Post by cheese_breath » Fri Jul 13, 2018 9:03 pm

I’m presuming based on the answers received so far that my understanding of what will happen to the tIRA is correct, that is to say it will be taxed in its entirety just as if I had withdrawn it myself.

A little on DW’s condition might help provide additional context to my responses to your comments. Although she comprehends everything you say she is still unable to communicate verbally, and is unable to write as her dominant side is still paralyzed. However, she has progressed to the point where she communicates by pointing and shaking her head to yes-no questions.

I do have her POA, and the POA is written so that her daughter will will become POA when I die. I am trustee of the trust, and her daughter is successor trustee if I die.
bsteiner wrote:
Fri Jul 13, 2018 4:11 pm
You probate the Will, not the assets.

I’m aware of that. I misspoke (mistyped). But wouldn’t an IRA without beneficiaries come under the purview of the will?

Probating a Will is Texas is not difficult, expensive or burdensome.

That’s good news.

If you leave your IRA to your wife, she could roll it over into her own IRA, name new beneficiaries, possibly do Roth conversions, and get a stretch.

She’s not capable of doing that, and her POA doesn’t give the agent authority to “create or change rights of survivorship.”

If she can't do the rollover herself, did she give someone a power of attorney who could do this for her? Presumably if she was capable of creating a revocable trust, she was capable of signing a power of attorney. If she didn't give anyone a power of attorney, she may need to have a guardian appointed to do the rollover for her.

See above.

I'm not familiar with guardianships in Texas, but in some states they're cumbersome.

That’s what I’m afraid of.

Another possibility is to leave the IRA to or in trust for your children. That would provide a stretch as well, though in that case the IRA wouldn't be available for your wife.

That’s not what I want.

If you leave the IRA in trust for your wife, then at best the stretch will be over her life expectancy as of your death. That probably won't be a good result.

It’s not specifically in trust for anyone. It’s intended as a pot of money the trustee can draw upon to pay for DW's medical expenses. I trust the successor trustee to use it for the intended purpose.

If you run the IRA through the revocable trust, the result depends on the terms of the trust, which you didn't provide.

The whole thing is 26 pages and contains what I call ‘just in case’ provisions. But I think this may be what you’re asking for…

“The Trustee shall hold, manage, sell, exchange invest and reinvest the trust property, collect all income and, after deducting such expenses as are properly payable, shall accumulate and distribute the income and principle as herein provided. The Trustee shall distribute the income and principal to the Settlors in such amount as the Settlors may direct. Following the death of the first Settlor to die (the “deceased Settlor”), such distributions shall continue to be made to the other Settlor (the “surviving Settlor”) in such amounts as the surviving Settlor may direct. All undistributed trust income shall be accumulated and invested. If either Settlor becomes incapacitated, the Trustee shall distribute such amounts of income and principal of the trust for the comfort, health, support, maintenance and other needs of the Settlors as the Trustee shall determine, in the Trustee’s discretion, to be necessary or appropriate to maintain the Settlors in accordance with the Settlors’ accustomed standard of living at the execution of this Trust Agreement.”

(I hope I haven’t mistyped anything).

As noted in a previous post, DW and I are the Settlors.
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Re: Another Trust Question

Post by cheese_breath » Fri Jul 13, 2018 9:39 pm

FIREchief wrote:
Fri Jul 13, 2018 5:53 pm
cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
No, I think your intentions were fairly clear. If your wife doesn't have a POA, and if your situation doesn't warrant the expenses and efforts to have a guardian appointed, then maybe your initial plan is the best you can do. That said, you do need to check the trust language, as some common boilerplate living trust documents do in fact MANDATE that qualified retirement assets inherited by the trust distribute the RMDs to the beneficiary as they are generated (i.e. as conduit trust). NOTE: they don't necessarily include the word "conduit," although that is what the language forces to happen. That may work contrary to your desire to have trustees retain and manage your wife's finances.
As I was typing my reply to bsteiner I saw the word "accumulate", and it struck me... Golly gee, this must be an accumulation trust. And it doesn't have to be just IRAs that go in it.
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Re: Another Trust Question

Post by FIREchief » Fri Jul 13, 2018 9:49 pm

cheese_breath wrote:
Fri Jul 13, 2018 9:39 pm
FIREchief wrote:
Fri Jul 13, 2018 5:53 pm
cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
No, I think your intentions were fairly clear. If your wife doesn't have a POA, and if your situation doesn't warrant the expenses and efforts to have a guardian appointed, then maybe your initial plan is the best you can do. That said, you do need to check the trust language, as some common boilerplate living trust documents do in fact MANDATE that qualified retirement assets inherited by the trust distribute the RMDs to the beneficiary as they are generated (i.e. as conduit trust). NOTE: they don't necessarily include the word "conduit," although that is what the language forces to happen. That may work contrary to your desire to have trustees retain and manage your wife's finances.
As I was typing my reply to bsteiner I saw the word "accumulate", and it struck me... Golly gee, this must be an accumulation trust. And it doesn't have to be just IRAs that go in it.
You really haven't given us enough information. As I stated previously, most living trust boilerplates I have seen have a section specifically directed at qualified retirement plan assets, and they generally require distributions in a manner which will constitute a "conduit trust" in the eyes of the IRS. The mere fact that you found the word "accumulate" in no way suggests that this trust meets the requirements for a qualified "accumulation trust."
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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Re: Another Trust Question

Post by cheese_breath » Fri Jul 13, 2018 10:18 pm

FIREchief wrote:
Fri Jul 13, 2018 9:49 pm
cheese_breath wrote:
Fri Jul 13, 2018 9:39 pm
FIREchief wrote:
Fri Jul 13, 2018 5:53 pm
cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
No, I think your intentions were fairly clear. If your wife doesn't have a POA, and if your situation doesn't warrant the expenses and efforts to have a guardian appointed, then maybe your initial plan is the best you can do. That said, you do need to check the trust language, as some common boilerplate living trust documents do in fact MANDATE that qualified retirement assets inherited by the trust distribute the RMDs to the beneficiary as they are generated (i.e. as conduit trust). NOTE: they don't necessarily include the word "conduit," although that is what the language forces to happen. That may work contrary to your desire to have trustees retain and manage your wife's finances.
As I was typing my reply to bsteiner I saw the word "accumulate", and it struck me... Golly gee, this must be an accumulation trust. And it doesn't have to be just IRAs that go in it.
You really haven't given us enough information. As I stated previously, most living trust boilerplates I have seen have a section specifically directed at qualified retirement plan assets, and they generally require distributions in a manner which will constitute a "conduit trust" in the eyes of the IRS. The mere fact that you found the word "accumulate" in no way suggests that this trust meets the requirements for a qualified "accumulation trust."
I'm not sure if this is what you're referring to, but way back on page 21 there's a section named "Retirement Benefits Trusts". But I'm going to need to read it 20-30 times to understand what it means.

I don't know if this helps, but the attorney said the trust is an "S Corporation Trust Election" whatever that means.
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Re: Another Trust Question

Post by FIREchief » Sat Jul 14, 2018 12:30 pm

cheese_breath wrote:
Fri Jul 13, 2018 10:18 pm
FIREchief wrote:
Fri Jul 13, 2018 9:49 pm
cheese_breath wrote:
Fri Jul 13, 2018 9:39 pm
FIREchief wrote:
Fri Jul 13, 2018 5:53 pm
cheese_breath wrote:
Fri Jul 13, 2018 3:36 pm
FIREChief... I'm not sure I made myself clear on the purpose of the trust. It's to provide a pot of money my successor trustee can spend as needed caring for my incapacitated spouse.... nursing home, prescription copays averaging $500 per month, etc. She is unable to manage the money herself due to a massive stroke. Also being incapacitated as she is, she is unable to name any beneficiaries. The only way the children will get anything is if there is still money in the trust when she dies. Then they will each get equal shares of whatever is left as beneficiaries of the trust.

But your comment does tie in with the second part of my question. With DW unable to name any beneficiaries is the inherited IRA still the better approach for the tIRA even though it may need to be probated when she dies?
No, I think your intentions were fairly clear. If your wife doesn't have a POA, and if your situation doesn't warrant the expenses and efforts to have a guardian appointed, then maybe your initial plan is the best you can do. That said, you do need to check the trust language, as some common boilerplate living trust documents do in fact MANDATE that qualified retirement assets inherited by the trust distribute the RMDs to the beneficiary as they are generated (i.e. as conduit trust). NOTE: they don't necessarily include the word "conduit," although that is what the language forces to happen. That may work contrary to your desire to have trustees retain and manage your wife's finances.
As I was typing my reply to bsteiner I saw the word "accumulate", and it struck me... Golly gee, this must be an accumulation trust. And it doesn't have to be just IRAs that go in it.
You really haven't given us enough information. As I stated previously, most living trust boilerplates I have seen have a section specifically directed at qualified retirement plan assets, and they generally require distributions in a manner which will constitute a "conduit trust" in the eyes of the IRS. The mere fact that you found the word "accumulate" in no way suggests that this trust meets the requirements for a qualified "accumulation trust."
I'm not sure if this is what you're referring to, but way back on page 21 there's a section named "Retirement Benefits Trusts". But I'm going to need to read it 20-30 times to understand what it means.

I don't know if this helps, but the attorney said the trust is an "S Corporation Trust Election" whatever that means.
That may be it. If not, just check the trust table of contents for any other article/section that mentions retirement plans. In reviewing those sections, looks for words such as "trustee shall immediately distribute amounts withdrawn....". Such wording would be consistent with a trust written to qualify as a conduit trust in the eyes of the IRS. Based upon your original post, I believe that this would be contrary to your wishes to have the assets held in trust for management by a trustee (instead of management of the assets external to the trust by a POA).

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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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