Estate planning - can I require only RMDs for inherited Roth IRA?

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iflyjetzzz
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Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 4:29 pm

I have a large Roth IRA balance that I will split between two children. I want to require RMDs rather than lump sum or 5 year liquidation. Is there a way to structure this so that my children are required to take only the minimum RMD annually?

In addition, I have a decent amount saved outside of retirement accounts that I'd like to put into a trust that I want to pass on to great-grandchildren. I want to do this because the Roth should provide enough for the next two generations to comfortably supplement their incomes but do not want all of my savings blown within two generations.
Anyone have any suggestions on how to structure a trust that will go to great-grandchildren not born yet? (For that matter, I don't have any grandchildren yet). If there are no great-grandchildren, I'll have a clause where the money goes to my alma mater.

A big reason why I want to pass on money outside of my Roth to my great-grandchildren is because most money saved by one generation are completely spent by the next two generations. Plus if I can have the money grow untouched for 50 years or so, it should grow into a decent inheritance.

Any suggestions/tweaks/criticism welcome.

bsteiner
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bsteiner » Wed May 29, 2019 4:37 pm

You can create trusts in your Will that say what you want.

You should consider taxes (you didn’t provide enough information to say whether there are any tax considerations).

You should consider the special rules for trusts that receive retirement benefits.

You should keep it flexible since no one knows what the future will bring.

retiringwhen
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by retiringwhen » Wed May 29, 2019 4:38 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:29 pm
I have a large Roth IRA balance that I will split between two children. I want to require RMDs rather than lump sum or 5 year liquidation. Is there a way to structure this so that my children are required to take only the minimum RMD annually?

In addition, I have a decent amount saved outside of retirement accounts that I'd like to put into a trust that I want to pass on to great-grandchildren. I want to do this because the Roth should provide enough for the next two generations to comfortably supplement their incomes but do not want all of my savings blown within two generations.
Anyone have any suggestions on how to structure a trust that will go to great-grandchildren not born yet? (For that matter, I don't have any grandchildren yet). If there are no great-grandchildren, I'll have a clause where the money goes to my alma mater.

A big reason why I want to pass on money outside of my Roth to my great-grandchildren is because most money saved by one generation are completely spent by the next two generations. Plus if I can have the money grow untouched for 50 years or so, it should grow into a decent inheritance.

Any suggestions/tweaks/criticism welcome.
Considering that tax laws and distribution rules regularly change, stipulating a specific withdrawal strategy may have unintended consequences. Outside of a trust, I am not sure how you would force a specific behavior. At least with a trust you can give specific instructions/requirements to a trustee to follow. When my FIL passed away, the trusts setup for younger beneficiaries had language to the effect that the trust was to use legal means to ensure the maximum withdrawal period allowed by law. There was no such language in the will attached to her inherited IRA that was directly inherited.

Alan S.
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Alan S. » Wed May 29, 2019 4:43 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:29 pm
I have a large Roth IRA balance that I will split between two children. I want to require RMDs rather than lump sum or 5 year liquidation. Is there a way to structure this so that my children are required to take only the minimum RMD annually?

In addition, I have a decent amount saved outside of retirement accounts that I'd like to put into a trust that I want to pass on to great-grandchildren. I want to do this because the Roth should provide enough for the next two generations to comfortably supplement their incomes but do not want all of my savings blown within two generations.
Anyone have any suggestions on how to structure a trust that will go to great-grandchildren not born yet? (For that matter, I don't have any grandchildren yet). If there are no great-grandchildren, I'll have a clause where the money goes to my alma mater.

A big reason why I want to pass on money outside of my Roth to my great-grandchildren is because most money saved by one generation are completely spent by the next two generations. Plus if I can have the money grow untouched for 50 years or so, it should grow into a decent inheritance.

Any suggestions/tweaks/criticism welcome.
With respect to the Roth IRA or any retirement plan, are you aware of the comprehensive retirement bills now moving through Congress with very high bi partisan support? The details of those bills cannot be discussed here as they are pending legislation, however you can review the possible extent to which the stretch for non spouse beneficiaries will be severely curtailed for deaths occurring soon after such a bill passes. Google RESA or Secure Act.

You can structure a trust such that income is accumulated in the trust and no passed through, and Roth distributions will not be taxable to the trust, but earnings will not be generated in the Roth for long, they will be generated in the trust and taxed at the highly compressed trust tax rates.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 4:49 pm

Doesn't having a Roth IRA placed into a trust upon death negate the Roth? That would be counterproductive, as the goal is to have the money grow tax free for two generations.

At this point, no estate tax implications. Current estate value (doesn't include wife's assets) is ~$1.7M ... $1.2M in Roth accounts, $500K in a cash brokerage account. Does not include the home, but my wife will likely outlive me and therefore it will go to her.


I am aware that things change with time; I am just trying to get a rough idea of what I'm looking at in terms of options at this point in time, before discussing this with a lawyer. I figure I should be able to get some decent suggestions here.

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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 4:57 pm

Alan S. wrote:
Wed May 29, 2019 4:43 pm
With respect to the Roth IRA or any retirement plan, are you aware of the comprehensive retirement bills now moving through Congress with very high bi partisan support? The details of those bills cannot be discussed here as they are pending legislation, however you can review the possible extent to which the stretch for non spouse beneficiaries will be severely curtailed for deaths occurring soon after such a bill passes. Google RESA or Secure Act.

You can structure a trust such that income is accumulated in the trust and no passed through, and Roth distributions will not be taxable to the trust, but earnings will not be generated in the Roth for long, they will be generated in the trust and taxed at the highly compressed trust tax rates.
Holy moly! I wasn't aware of this, but after a quick read, it looks like it sucks badly for my current plans.

Thanks; I need to keep an eye on this. I guess I can hope for either a revision of the inherited stretch IRA provision or a veto of the bill?

ladycat
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by ladycat » Wed May 29, 2019 5:03 pm

If you're willing for a potentially large amount of your estate to go to your alma mater, why are you handcuffing your children (and possible next generation) in terms of RMD only? Are you concerned they will be irresponsible or wasteful with the inheritance? What if they, or one of their children has a catastrophic health issue or disability? What if they have an amazing business opportunity that requires a capital investment? Would giving them specific amounts to manage as they see fit, separate from a multi-generational legacy fulfill your desires?

As another poster mentioned, flexibility for an unknown future might be an important consideration.

afan
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by afan » Wed May 29, 2019 5:25 pm

Under current tax law, the Roth in an accumulation trust would do what you want. RMDs would go into the trust and the trustee would pay them out to the beneficiaries. If the stretch were to go away then the money would be forced out of the Roth but would still be in trust and the trustee would still pay out according to your schedule.

But the totals are not really enough money to be worried about this. From your comments about multi generational wealth and skipping your grandchildren, I was expecting about 2 orders of magnitude greater networth. At the very least, well into federal estate tax territory. At your level, the costs and hassle of establishing and maintaining the trusts would be hard to justify.

Making a trust, after your spouse, the beneficiary of your retirement account is a good idea anyway, even if tax laws change.

Making a separate trust with rigid distribution rules aiming for the offspring of kids yet to be conceived, for $500k, does not seem remotely worth it. Someone would have to be trustee. Given your long time period, you would almost certainly need a bank or trust comt to do the job. Many would not take a trust with only $500k. Vanguard, I think, might. But a downturn in the market, with the fees still being charged, could make this something even they might want to drop.
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Wed May 29, 2019 5:27 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:49 pm
Doesn't having a Roth IRA placed into a trust upon death negate the Roth? That would be counterproductive, as the goal is to have the money grow tax free for two generations.
Quite the opposite. Under current law, Roth assets are the best way to fund a qualified trust. In the event that the current stretch is curtailed (or even eliminated), then Roth assets become even more desirable. As others have mentioned, this requires a particular type of trust that many estate attorneys don't offer. bsteiner can likely answer any detailed questions you may have.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

DarthSage
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by DarthSage » Wed May 29, 2019 5:30 pm

Two points:

You have no way to know how laws might change between now and when you pass. Ditto for after you pass.

You seem to have very little faith in how your offspring will handle their inheritance. Instead of dictating from beyond the grave, you might want to devote your time to talking to them and explaining what your thoughts are on their future inheritance. While your net worth numbers are fine, they really aren't in the realm of life-altering, especially split between 2 or more children. While they are young, you can talk to them about what you hope to accomplish, whether it's long-term financial security, investment in education, creating a nest egg for future generations, whatever.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Bobby206 » Wed May 29, 2019 5:31 pm

I would talk to a knowledgeable estate planning attorney about a stand alone IRA trust.

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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 5:42 pm

ladycat wrote:
Wed May 29, 2019 5:03 pm
If you're willing for a potentially large amount of your estate to go to your alma mater, why are you handcuffing your children (and possible next generation) in terms of RMD only? Are you concerned they will be irresponsible or wasteful with the inheritance? What if they, or one of their children has a catastrophic health issue or disability? What if they have an amazing business opportunity that requires a capital investment? Would giving them specific amounts to manage as they see fit, separate from a multi-generational legacy fulfill your desires?

As another poster mentioned, flexibility for an unknown future might be an important consideration.
There is more than enough in the Roth to provide for a comfortable pad to income for two generations. That will be the inheritance for two generations and is far more than 99% of Americans inherit.
The likelihood of all of the money being blown in two generations is more likely than any other scenario. http://money.com/money/3925308/rich-fam ... se-wealth/

I'd rather make sure that a third generation benefits from my savings than risk it all being spent in the next two generations.
Last edited by iflyjetzzz on Wed May 29, 2019 5:43 pm, edited 1 time in total.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by JGoneRiding » Wed May 29, 2019 5:43 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:49 pm
Doesn't having a Roth IRA placed into a trust upon death negate the Roth? That would be counterproductive, as the goal is to have the money grow tax free for two generations.

At this point, no estate tax implications. Current estate value (doesn't include wife's assets) is ~$1.7M ... $1.2M in Roth accounts, $500K in a cash brokerage account. Does not include the home, but my wife will likely outlive me and therefore it will go to her.


I am aware that things change with time; I am just trying to get a rough idea of what I'm looking at in terms of options at this point in time, before discussing this with a lawyer. I figure I should be able to get some decent suggestions here.
I am sorry that just isn't 3 generational trust with expensive lawyers kind of money. The only way to get a 3 gen trust run how you want is to pay someone to do it and 500k isn't enough to convince a bank/trust company from what I have seen.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Wed May 29, 2019 5:52 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:29 pm
I have a large Roth IRA balance that I will split between two children. I want to require RMDs rather than lump sum or 5 year liquidation. Is there a way to structure this so that my children are required to take only the minimum RMD annually?
As mentioned by others, it sounds like you should consider a qualified trust to be the beneficiary of your Roth IRA(s). If written as an accumulation trust, any amounts required to be withdrawn from the inherited Roth IRA(s) can be retained in the trust for asset protection and other purposes. The trust can be written to require an independent trustee who would make discretionary distributions to your children in line with your intentions. Also, as Bruce frequently recommends, you could select an age at which each adult child could become trustee of their own share (a much better option than requiring specific distributions at defined ages). There would be no need to tie distributions to the beneficiaries to RMD requirements.
Alan S. wrote:
Wed May 29, 2019 4:43 pm
You can structure a trust such that income is accumulated in the trust and no passed through, and Roth distributions will not be taxable to the trust, but earnings will not be generated in the Roth for long, they will be generated in the trust and taxed at the highly compressed trust tax rates.
Alan: Let's assume a worst case scenario where all assets in an inherited Roth IRA must be withdrawn by the end of the fifth year following death (i.e. the worst option under current law). OP leave $1.2M Roth to a qualified accumulation trust. Trustee splits into sub-trusts for each of OP's children, leaving entire $600,000 in each of the inherited Roth IRAs for the full five years, growing to $800,000. Neither trust or beneficiaries pay any taxes during this period. End of year five, trustee withdraws entire Roth balance and invests it in a trust-owned after tax account, entirely in S&P 500 index fund. Again, no taxes owed. Year six, after tax investments yield 2% in qualified dividends. Each sub-trust now has income of $16,000. 2019 20% capital gains bracket for trusts starts at $12950. Trustee may choose to retain $12950 within trust (with 15% capital gains tax) and distribute $3050 to beneficiary (who will pay taxes at their own tax rates). Is this a valid scenario for the OP to consider?

I assume that if a ten year option became available, everything could be delayed another five years, with greater tax free growth.
Last edited by FIREchief on Wed May 29, 2019 5:59 pm, edited 1 time in total.
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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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 5:57 pm

JGoneRiding wrote:
Wed May 29, 2019 5:43 pm
I am sorry that just isn't 3 generational trust with expensive lawyers kind of money. The only way to get a 3 gen trust run how you want is to pay someone to do it and 500k isn't enough to convince a bank/trust company from what I have seen.
That is one of my concerns - too small of an amount for setting up a generation skipping trust. However, based on current personal deposits into the account, I'd expect a minimum of $50K/yr contribution for the next 6 yrs absent any growth. I also max out both 401k ($62k this year) and IRA every year.
And since my wife and I have two military retirements that provide more than enough for us to currently live on, I should be making more deposits into the brokerage account during retirement.


What would you consider to be the minimum amount that would make it worthwhile to set up such a plan?
From the little readings that I've done, it sounds like Vanguard has some of the best fees for managing trusts - what kind of minimum do they require? Or would anyone recommend a different choice?

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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 6:01 pm

Quick note - thanks for all of the replies thus far. Many angles that I haven't fully fleshed out are being discussed here. And Alan's post on new legislation tells me that I need to wait until the dust settles on that legislation before seeking any lawyer to set up trusts.

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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 6:11 pm

afan wrote:
Wed May 29, 2019 5:25 pm
But the totals are not really enough money to be worried about this. From your comments about multi generational wealth and skipping your grandchildren, I was expecting about 2 orders of magnitude greater networth. At the very least, well into federal estate tax territory. At your level, the costs and hassle of establishing and maintaining the trusts would be hard to justify.

Making a trust, after your spouse, the beneficiary of your retirement account is a good idea anyway, even if tax laws change.

Making a separate trust with rigid distribution rules aiming for the offspring of kids yet to be conceived, for $500k, does not seem remotely worth it. Someone would have to be trustee. Given your long time period, you would almost certainly need a bank or trust comt to do the job. Many would not take a trust with only $500k. Vanguard, I think, might. But a downturn in the market, with the fees still being charged, could make this something even they might want to drop.
I should have mentioned in the original post that this is current numbers. I will still be working for another 6 1/2 years and contributing to all accounts.
I've already maxed out my 401k for 2019 ($62K) and converted all taxable amounts to Roth.
I've put $7K into my IRA in 2019 and already did a backdoor Roth.
I add at least $50K/yr into my brokerage account that's currently $500K.

My wife has also accumulated significant assets. We plan on passing on the money independently.
When one of us dies, the other will get the house but neither of us need the other's assets to live on.

Yes, the numbers are not big to many Bogleheads. To me, they're huge since I had nothing until my late 20s.

I'd like to thank everyone for their inputs so far, these are some of the things that I'm still trying to flesh out. I'm not going to engage a lawyer to set up a trust until I have a good idea of what I want.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Wed May 29, 2019 6:18 pm

Bobby206 wrote:
Wed May 29, 2019 5:31 pm
I would talk to a knowledgeable estate planning attorney about a stand alone IRA trust.
+1. Ask them when making an appointment if they are able to draft a qualified accumulation trust (i.e. not a conduit trust). If they say "no," or don't understand, then keep looking. It might not hurt to ask them during the initial meeting if they have read Natalie Choate's book. If they show you their well worn copy, you probably have found a good candidate.
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afan
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by afan » Wed May 29, 2019 6:40 pm

You have to consider the bare minimum account size at which a bank will agree to be trustee ànd the effects of fees on smaller trusts.

You can probably find companies that will be trustee at $500k. But that is going to br close to the lowest balance for which this may be possible. But what happens when the market goes down? What happens as distributions to beneficiaries reduces the value? At some point, and if you start at the minimum that point could be soon, it will be too small for a bank to want the business. They will be thinking about this as they consider whether to take on the trustee role. You would be paying their minimum fees. This means you are very small potatoes to them and barely worth bothering with. At the same time those fees would be a high percentage of assets. That will make it harder for investment returns to make up for distributions and maintain the value of the trust.

The Roth, with $1.2M, should be comfortably above the minimum for a number of banks. Still far from a big trust by their standards but enough to get them to be trustee. They would be interested in how much will be going out each year. If only small distributions then the trust might grow and not get into the situation of the $500k trust. You may get more interest by lumping them all together.

If they follow your instructions and pay out at RMD rates, then as your children age the payouts will get larger and the total in the trust will go down.

The accumulation trust for the retirement account may well work for a reasonably long time. Probably not for the lifetimes of your kids.

The trust for your great grandchildren does not sound feasible.
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by willthrill81 » Wed May 29, 2019 6:42 pm

iflyjetzzz wrote:
Wed May 29, 2019 4:29 pm
I have a large Roth IRA balance that I will split between two children. I want to require RMDs rather than lump sum or 5 year liquidation. Is there a way to structure this so that my children are required to take only the minimum RMD annually?
What if the law changes and requires that inherited IRAs be depleted faster than the current RMD schedule?

I understand what you're trying to achieve here, but I'm not convinced that this stipulation is the way to do it. Also, you might want to consider the consequences of your heirs later believing that you're trying to 'rule them from the grave' would be and how that fits into your overall goal.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Dottie57 » Wed May 29, 2019 7:02 pm

FIREchief wrote:
Wed May 29, 2019 5:27 pm
iflyjetzzz wrote:
Wed May 29, 2019 4:49 pm
Doesn't having a Roth IRA placed into a trust upon death negate the Roth? That would be counterproductive, as the goal is to have the money grow tax free for two generations.
Quite the opposite. Under current law, Roth assets are the best way to fund a qualified trust. In the event that the current stretch is curtailed (or even eliminated), then Roth assets become even more desirable. As others have mentioned, this requires a particular type of trust that many estate attorneys don't offer. bsteiner can likely answer any detailed questions you may have.
Just a footnote, Congress has legislation which may pass this summer and it is about stretch IRA rules (which override a will). Check new laws as the summer progresses.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 7:51 pm

willthrill81 wrote:
Wed May 29, 2019 6:42 pm
Also, you might want to consider the consequences of your heirs later believing that you're trying to 'rule them from the grave' would be and how that fits into your overall goal.
Well, that's exactly my intent. I want to ensure that my lifetime of savings isn't squandered in a few short years.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by willthrill81 » Wed May 29, 2019 7:53 pm

iflyjetzzz wrote:
Wed May 29, 2019 7:51 pm
willthrill81 wrote:
Wed May 29, 2019 6:42 pm
Also, you might want to consider the consequences of your heirs later believing that you're trying to 'rule them from the grave' would be and how that fits into your overall goal.
Well, that's exactly my intent. I want to ensure that my lifetime of savings isn't squandered in a few short years.
Shouldn't your concern be that your heirs don't squander their inheritance in a few short years? There is a meaningful distinction.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by celia » Wed May 29, 2019 8:19 pm

I think your desired goals are very risky. Besides not yet having some of your descendants not existing yet, nor know what the rules will be when they inherit, there are too many unknowns. Even your existing children may have a financial need to spend your Roth distributions after you die.

For example, you and a child are in a car accident. You die and the surviving child ends up with a disability that requires a modified car and housing and can no longer work.

Since you never know what the future holds, I think you need to allow some flexibility.

PS what if your kids never have kids?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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iflyjetzzz
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Wed May 29, 2019 8:56 pm

celia wrote:
Wed May 29, 2019 8:19 pm
I think your desired goals are very risky. Besides not yet having some of your descendants not existing yet, nor know what the rules will be when they inherit, there are too many unknowns. Even your existing children may have a financial need to spend your Roth distributions after you die.

For example, you and a child are in a car accident. You die and the surviving child ends up with a disability that requires a modified car and housing and can no longer work.

Since you never know what the future holds, I think you need to allow some flexibility.

PS what if your kids never have kids?
My children are now adults. The unknown medical needs has already been covered, but SSDI would provide enough funds to survive. It's far more likely that without restrictions, the money would be gone in a few years. I don't know how to state this more clearly.

What do you propose in terms of flexibility? I'm posting here to gather information. You're not the first person to use that term without details of how to implement flexibility while limiting annual distributions.

No heirs has also been covered. The funds would go to my alma mater.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Bobby206 » Wed May 29, 2019 9:07 pm

I just bumped into this article that talks about some options in this arena. Here's the link https://www.investmentnews.com/article/ ... tretch-ira or go to investmentnews.com and look for how to replicate a stretch IRA.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bsteiner » Wed May 29, 2019 9:26 pm

Bobby206 wrote:
Wed May 29, 2019 9:07 pm
I just bumped into this article that talks about some options in this arena. Here's the link https://www.investmentnews.com/article/ ... tretch-ira or go to investmentnews.com and look for how to replicate a stretch IRA.
I know the author.

He is correct that a charitable remainder trust (CRT) will replicate the stretch. A CRT is tax-exempt so it can receive the IRA benefits all at once without current tax. It makes distributions to the children over their lifetimes, which will be taxable to the extent of the CRT’s current and accumulated taxable income and gains. Upon the children's death, the balance goes to charity. The value of the charity's remainder interest has to be worth at least 10% of the initial value. The benefit is that it replicates the stretch. The disadvantages are that the CRT is inflexible and you give up 10% of the value. Alternatively the CRT can pay to a trust, in which case the payments can run for 20 years. That provides less of a stretch, but keeps the assets (except for the 10% going to charity) protected.

I don't understand why the author discussed life insurance.
Last edited by bsteiner on Thu May 30, 2019 6:29 am, edited 1 time in total.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by lkar » Wed May 29, 2019 9:30 pm

If your estate is significant, you need an estate planning lawyer. There are too many trap doors and you need to sit across the table from a pro so you can lay out exactly what you want. It is easy to make a mistake when you’re trying to do stuff like this that makes a covenant unenforceable or has an unintended tax consequence or runs afoul of obscure state law like a rule against perpetuities or the statute of frauds. Or makes something probatable.

If there’s money involved, there is a risk of fighting. The more you desire to control things from beyond the grave the more careful planning you will need. Pay a lawyer a little now so those that might want access to the money don’t squander your legacy on lawyers of their own when you are gone. You need a pro. Get the right person and don’t skimp and you can relax and then you will have someone you can call in five years when you change your mind on some detail.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bayview » Wed May 29, 2019 9:34 pm

^^ I think OP wrote that he is gathering info and ideas in order to be prepared to meet with an attorney.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by lkar » Wed May 29, 2019 10:11 pm

bayview wrote:
Wed May 29, 2019 9:34 pm
^^ I think OP wrote that he is gathering info and ideas in order to be prepared to meet with an attorney.
Ahh, sorry. Yes great idea then! Might be more valuable to discuss with the lawyer and then come here to Bogleheads the various options instead of the other way.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Wed May 29, 2019 10:59 pm

iflyjetzzz wrote:
Wed May 29, 2019 8:56 pm
celia wrote:
Wed May 29, 2019 8:19 pm
I think your desired goals are very risky. Besides not yet having some of your descendants not existing yet, nor know what the rules will be when they inherit, there are too many unknowns. Even your existing children may have a financial need to spend your Roth distributions after you die.

I think you need to allow some flexibility.
My children are now adults. The unknown medical needs has already been covered, but SSDI would provide enough funds to survive. It's far more likely that without restrictions, the money would be gone in a few years. I don't know how to state this more clearly.

What do you propose in terms of flexibility? I'm posting here to gather information. You're not the first person to use that term without details of how to implement flexibility while limiting annual distributions.
OP: I think your goals are noble and correct. I try to ignore the "controlling from beyond the grave" talk. When I lay on my death bed in not too many years (yep, happens to everybody except Enoch and Elijah), I hope to find some peace in the knowledge that I have done what I could to keep my children out of poverty between "now" and when they find themselves in the same situation. I don't wish wealth upon them, but I do wish for them to avoid poverty.

Unfortunately, I've found the word "flexibility" to have as many negative connotations as positive connotations in the estate planning process. If I want trust assets invested in passive, index-based investments; then I'm going to require that. If I want a trustee to preserve funds for when my children reach retirement age, I'm going to require that as well. Preservation of hard earned assets for multiple generations is a legitimate goal. It is your money, and you can do what you wish with it (before and after you've breathed your last). :beer
Last edited by FIREchief on Thu May 30, 2019 3:31 pm, edited 1 time in total.
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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by afan » Thu May 30, 2019 4:55 am

He is correct that a charitable remainder trust (CRT) will replicate the stretch. A CRT is tax-exempt so it can receive the IRA benefits all at once without current tax. It makes distributions to the children over their lifetimes, which will be taxable.
Bsteiner,
So if someone contributes a Roth to a CRT, the distributions to beneficiaries become taxable? That sounds like a major disadvantage. Using a traditional retirement account, where the distributions would be taxable without the trust, the CRT does not disadvantage the heirs. Converting tax free money into taxable sounds like a bad move. Does this really work out well for people who have Roths?

Firechief,

You must live in a very nice part of America.
The care that poor people get is consistently far below what is given to those with money (employer based insurance or Medicare). Having Medicaid is marginally better than nothing but the coverage is so limited that it hardly compares to Medicare or good insurance. The indigent will be seen for emergencies, perhaps even admitted. But arranging follow up care can be impossible.

The emergency department will treat your heart attack for free if you cannot pay. But they will not manage your diabetes, high blood pressure and high cholesterol. With proper management one might have avoided the heart attack at all. Without this management, the chances of avoiding another are about zero.

Have you been following the debate about the cost of insulin? It is a life and death situation for diabetics. But one can be well above povery level and unable to afford the patients' share of the cost, even if one has insurance.

Same for cancer. If it starts bleeding, the emergency department will see you. But they will not do a full evaluation and deliver tens or hundreds of thousands of dollars of medical, surgical and radiation therapy.

I work in a nice part of a big city. I see homeless people everyday on my commute. They have well documented challenges of finding food. Malnutrition is typical for this population. And this is in a place that prides itself on the amount of money and attention it devotes to such people.

America is a terrible place to be poor. The safety net is not nearly as generous as many people who do not rely on it may assume.

For the OP, if you can find an appropriate trustee, a better solution than mandating payments that follow the RMD rules would be to give the trustee discretion to make distributions. You indicate that your goal is to provide a modest steady income. You don't necessarily want the distributions to automatically become larger each year. If you tie the distributions to a formula that was developed for entirely different purposes, you will leave the trustee with no choices where choice would be better.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by MnD » Thu May 30, 2019 8:00 am

You're trying to control/limit use of funds out as far as 4 generations (including your own) for what is currently $600K in Roth assets and 250K taxable (per current adult kid), neither of whom has even produced any kids of their own? Assuming your idea is possible, there are thousands of unknown scenarios of life circumstances, tax rules ect. going out to hypothetical great-grandkids that your plan could interact with, potentially in a very negative way. In my opinion, all this sort of planning for that amount of money would do would be to annoy heirs with limits, costs and complexity and result in them thinking less of you.

If one or both of your kids are demonstrably financially irresponsible, you might consider straightforward spendthrift trusts for one or both of them. Otherwise, consider that your years of life and parenting with them will be reflected in their future and that of their heirs and beyond that, they don't need "you" managing their financial affairs after you are gone.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bsteiner » Thu May 30, 2019 8:45 am

afan wrote:
Thu May 30, 2019 4:55 am
He is correct that a charitable remainder trust (CRT) will replicate the stretch. A CRT is tax-exempt so it can receive the IRA benefits all at once without current tax. It makes distributions to the children over their lifetimes, which will be taxable.
Bsteiner,
So if someone contributes a Roth to a CRT, the distributions to beneficiaries become taxable? That sounds like a major disadvantage. Using a traditional retirement account, where the distributions would be taxable without the trust, the CRT does not disadvantage the heirs. Converting tax free money into taxable sounds like a bad move. Does this really work out well for people who have Roths?
...
I had traditional IRAs in mind. I didn't think of the possibility that someone might leave a Roth IRA to a CRT (and still can't see where it would make sense).

My description of CRTs was oversimplified. A more detailed but still oversimplified explanation is that distributions are ordinary income to the extent the trust has current and accumulated ordinary income, and then capital gain to the extent the trust has current or accumulated capital gain, and then return of capital.

For example, if you contribute an asset with a basis of 10 and value of 100 to a CRT, and the CRT sells it for 100, the CRT has capital gain of 90. Since the CRT is tax-exempt, it doesn't pay tax on the gain. If in year 1 the CRT invests the 100 and earns income of 3, and distributes 5, the beneficiary has 3 of ordinary income and 2 of capital gain.

With a traditional IRA, the simplest thing is to assume that all of the distributions will be ordinary income, since that will be the case for many years.
afan wrote:
Thu May 30, 2019 4:55 am
...
For the OP, if you can find an appropriate trustee, a better solution than mandating payments that follow the RMD rules would be to give the trustee discretion to make distributions. You indicate that your goal is to provide a modest steady income. You don't necessarily want the distributions to automatically become larger each year. If you tie the distributions to a formula that was developed for entirely different purposes, you will leave the trustee with no choices where choice would be better.
Agreed. The RMDs for a beneficiary start out small, then get larger, and then end. If the trust didn't have IRA assets, I doubt that very many people would want the trust to make distributions in that pattern.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by lkar » Thu May 30, 2019 8:57 am

FIREchief wrote:
Wed May 29, 2019 10:59 pm
OP: I think your goals are noble and correct. I try to ignore the "controlling from beyond the grave" talk.
I think I used this term and it wasn’t pejorative. It was meant to be merely descriptive.

This is a very common impulse. It is why trusts and estates lawyers, good ones at least, make a good living and are in demand. And the truth is that when there is wealth involved children of the wealthy are often poorly prepared to manage the money effectively because it wasn’t a concern for them. Obviously, this is not going to be a high correlation for Bogleheads who are more likely to pass on sound financial management to their children, but Bogleheads are not the majority. Nor does the OP’s situation really seem to about that.

But I think one needs to have a very realistic understanding of what is possible and what can happen when money is involved.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Reb Tevye » Thu May 30, 2019 9:13 am

Here’s an opinion:

It’s the spouses.
It’s not the kids themselves, it’s when the kids marry someone not from Lake Wobegon.

That said, non-special-needs trusts for ordinary folks, IMO, as a group, create as many problems as they attempt to solve. And shouldn’t be presumed to on their own create happiness or comfort that won’t otherwise be there.
Excepting of course for the lawyers and professional trustees. Queue the Upton Sinclair quote.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by willthrill81 » Thu May 30, 2019 9:31 am

Personally, my view is that once your children, grandchildren, etc. reach about age 30, if they are financially responsible enough to deal with full access to inherited accounts, they probably never will be.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by Bobby206 » Thu May 30, 2019 9:34 am

bsteiner wrote:
Thu May 30, 2019 8:45 am
afan wrote:
Thu May 30, 2019 4:55 am
He is correct that a charitable remainder trust (CRT) will replicate the stretch. A CRT is tax-exempt so it can receive the IRA benefits all at once without current tax. It makes distributions to the children over their lifetimes, which will be taxable.
Bsteiner,
So if someone contributes a Roth to a CRT, the distributions to beneficiaries become taxable? That sounds like a major disadvantage. Using a traditional retirement account, where the distributions would be taxable without the trust, the CRT does not disadvantage the heirs. Converting tax free money into taxable sounds like a bad move. Does this really work out well for people who have Roths?
...
I had traditional IRAs in mind. I didn't think of the possibility that someone might leave a Roth IRA to a CRT (and still can't see where it would make sense).

My description of CRTs was oversimplified. A more detailed but still oversimplified explanation is that distributions are ordinary income to the extent the trust has current and accumulated ordinary income, and then capital gain to the extent the trust has current or accumulated capital gain, and then return of capital.

For example, if you contribute an asset with a basis of 10 and value of 100 to a CRT, and the CRT sells it for 100, the CRT has capital gain of 90. Since the CRT is tax-exempt, it doesn't pay tax on the gain. If in year 1 the CRT invests the 100 and earns income of 3, and distributes 5, the beneficiary has 3 of ordinary income and 2 of capital gain.

With a traditional IRA, the simplest thing is to assume that all of the distributions will be ordinary income, since that will be the case for many years.
afan wrote:
Thu May 30, 2019 4:55 am
...
For the OP, if you can find an appropriate trustee, a better solution than mandating payments that follow the RMD rules would be to give the trustee discretion to make distributions. You indicate that your goal is to provide a modest steady income. You don't necessarily want the distributions to automatically become larger each year. If you tie the distributions to a formula that was developed for entirely different purposes, you will leave the trustee with no choices where choice would be better.
Agreed. The RMDs for a beneficiary start out small, then get larger, and then end. If the trust didn't have IRA assets, I doubt that very many people would want the trust to make distributions in that pattern.
The other problem with a CRT is tax reporting requirements. In my experience with them CPAs charge a lot to do the annual returns. Last one I saw was $5k a year. So if the CRT is not large that tax preparation hit really takes away some of the advantages. However, it's good to know there might be options still even if the new laws pass.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by afan » Thu May 30, 2019 11:40 am

Wow.

From bsteiner's description, the CRAT sounded like the accounting and tax preparation would be no fun. I had no idea it would be that much.

bsteiner,

Thanks for the clarification. It was getting puzzling as to how the taxes worked for a Roth in a CRAT. I gather the answer is that you would not do that.

From the complexity, accounting and reporting costs not to absorb too much of the money in a CRAT, I assume these should be large donations. But how large would it have to be to justify doing it? $5M, $20M, more?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by iflyjetzzz » Thu May 30, 2019 12:05 pm

willthrill81 wrote:
Thu May 30, 2019 9:31 am
Personally, my view is that once your children, grandchildren, etc. reach about age 30, if they are financially responsible enough to deal with full access to inherited accounts, they probably never will be.
I did not come here for folksy family advice; I came here to solicit ideas to present to an estate lawyer so that they can craft a trust that meets my requirements. I am not taking on this project on a whim.

One child is 30 and the second is close. I have spent a great deal of time over the course of their lives trying to educate them on financial responsibility. I have failed. For that reason, I am attempting to develop a rough, workable plan for the money that I have saved in my lifetime.

I would not give my Glock to a 7 year old to play with. I would not give a brand new sports car to a 14 year old who has a history of misbehavior. I will not give my life savings to my children with no restrictions, and I will not deprive successive generations for the shortcomings of one generation.

Your comments thus far have been an extremely painful distraction for me. If you cannot make suggestions to help me develop a rough plan to present to a lawyer, please refrain from further posts on this thread. Thank you in advance for respecting my request.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bsteiner » Thu May 30, 2019 12:13 pm

Bobby206 wrote:
Thu May 30, 2019 9:34 am
...
The other problem with a CRT is tax reporting requirements. In my experience with them CPAs charge a lot to do the annual returns. Last one I saw was $5k a year. So if the CRT is not large that tax preparation hit really takes away some of the advantages. However, it's good to know there might be options still even if the new laws pass.
That may be for the first year. In subsequent years it should be less than that.
afan wrote:
Thu May 30, 2019 11:40 am
...
From the complexity, accounting and reporting costs not to absorb too much of the money in a CRAT, I assume these should be large donations. But how large would it have to be to justify doing it? $5M, $20M, more?
I agree that if it's too small it may not be practical. But sometimes someone wants to do a CRT for an asset of modest value. Some people like the idea of deferring the capital gains tax on the sale of an asset even if it's of modest value.

At the other end, CRTs usually aren't very large. Wealthy people don't need the "income" along the way, and just give the asset to charity (or leave their IRAs to charity). Moderately wealthy people wouldn't put a substantial amount into a CRT because of the inflexibility.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by lkar » Thu May 30, 2019 12:22 pm

iflyjetzzz wrote:
Thu May 30, 2019 12:05 pm
I came here to solicit ideas to present to an estate lawyer so that they can craft a trust that meets my requirements.
As a lawyer, but not a T&E lawyer, my opinion is you're doing this in the wrong order.

You should find a qualified T&E lawyer who has walked this path many times to tell you where the bumps are and who will know what questions to ask you. Once you have the structure of what's possible, the stuff that's not in the lawyer's main zone of comfort -- what kind of financial planning you might want within the structure -- is probably something that you would find good advice for here.

A good T&E lawyer will know the exact problem that you are describing and will have tailored ideas once he or she asks you the right questions. He or she also should know tax pretty well.

If you've decided that your budget does not allow for that kind of advice and what you're looking for is a step-and-fetch lawyer who will implement exactly what you tell them, that's probably out there too, but I really don't think it's ideal for what you're trying to achieve. (But of course another lawyer would say that I guess?) You get what you pay for here. And what you're paying for here is a situation where your wishes will be preserved without loopholes or perceived loopholes that family sniffing money won't try to exploit, squandering your life savings by paying much more expensive lawyers to fight. Generation skipping limited income trust restrictions with tax advantaged accounts is not routine stuff.

I know that boglehead dogma is not to pay for advice that you don't need but I'm not sure this is really the place where free advice is worth the paid for kind. Again, I get that I'm biased because I'm a lawyer, but I tell family and friends all the time "you don't need a lawyer for that," and I can't really say that here.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by willthrill81 » Thu May 30, 2019 1:22 pm

iflyjetzzz wrote:
Thu May 30, 2019 12:05 pm
willthrill81 wrote:
Thu May 30, 2019 9:31 am
Personally, my view is that once your children, grandchildren, etc. reach about age 30, if they are financially responsible enough to deal with full access to inherited accounts, they probably never will be.
I did not come here for folksy family advice; I came here to solicit ideas to present to an estate lawyer so that they can craft a trust that meets my requirements. I am not taking on this project on a whim.

One child is 30 and the second is close. I have spent a great deal of time over the course of their lives trying to educate them on financial responsibility. I have failed. For that reason, I am attempting to develop a rough, workable plan for the money that I have saved in my lifetime.

I would not give my Glock to a 7 year old to play with. I would not give a brand new sports car to a 14 year old who has a history of misbehavior. I will not give my life savings to my children with no restrictions, and I will not deprive successive generations for the shortcomings of one generation.

Your comments thus far have been an extremely painful distraction for me. If you cannot make suggestions to help me develop a rough plan to present to a lawyer, please refrain from further posts on this thread. Thank you in advance for respecting my request.
I regret that anything I said has "been an extremely painful distraction" to you, though I fail to see how that occurred. I'm sorry that you're in a difficult situation, and as others have suggested, you just need to speak to a lawyer experienced in your state's requirements to achieve your intended result. This forum is not the place to solicit such advice.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by ronno2018 » Thu May 30, 2019 2:14 pm

willthrill81 wrote:
Thu May 30, 2019 1:22 pm
iflyjetzzz wrote:
Thu May 30, 2019 12:05 pm
willthrill81 wrote:
Thu May 30, 2019 9:31 am
Personally, my view is that once your children, grandchildren, etc. reach about age 30, if they are financially responsible enough to deal with full access to inherited accounts, they probably never will be.
I did not come here for folksy family advice; I came here to solicit ideas to present to an estate lawyer so that they can craft a trust that meets my requirements. I am not taking on this project on a whim.

One child is 30 and the second is close. I have spent a great deal of time over the course of their lives trying to educate them on financial responsibility. I have failed. For that reason, I am attempting to develop a rough, workable plan for the money that I have saved in my lifetime.

I would not give my Glock to a 7 year old to play with. I would not give a brand new sports car to a 14 year old who has a history of misbehavior. I will not give my life savings to my children with no restrictions, and I will not deprive successive generations for the shortcomings of one generation.

Your comments thus far have been an extremely painful distraction for me. If you cannot make suggestions to help me develop a rough plan to present to a lawyer, please refrain from further posts on this thread. Thank you in advance for respecting my request.
I regret that anything I said has "been an extremely painful distraction" to you, though I fail to see how that occurred. I'm sorry that you're in a difficult situation, and as others have suggested, you just need to speak to a lawyer experienced in your state's requirements to achieve your intended result. This forum is not the place to solicit such advice.
I think the original poster has gotten great advice in this thread and I have found it extremely informative.

I think maybe the poster should not do a spendthrift trust and be open with his kids about what they might get -- he should tell them not to expect anything at all as a lengthy health emergency at the end of his life could use it all up.

Then perhaps he should gift them some money now contingent on having them shape up financially (here is some money, you will not get more when I die if you can't demonstrate what you do responsibly with this gift). Seems sort of harsh though.

I think the poster needs to give himself some credit for being a decent parent, sometimes it is all genetics and nurture cannot overwhelm that. Maybe just not worry about what happens when you are gone, enjoy life in the present, it is fleeting.

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Re: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Thu May 30, 2019 3:39 pm

afan wrote:
Thu May 30, 2019 4:55 am
Firechief,

America is a terrible place to be poor. The safety net is not nearly as generous as many people who do not rely on it may assume.
I think this just supports the original poster's position. He wants to ensure that inherited funds are preserved somewhat so that they can benefit his heirs for an extended period of time. I interpret his comments to suggest that he isn't trying to make them rich, but to supplement their incomes to perhaps keep them from becoming poor at some point. I edited my post, as my comments were apparently not clear.
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: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by FIREchief » Thu May 30, 2019 3:46 pm

lkar wrote:
Thu May 30, 2019 12:22 pm
iflyjetzzz wrote:
Thu May 30, 2019 12:05 pm
I came here to solicit ideas to present to an estate lawyer so that they can craft a trust that meets my requirements.
As a lawyer, but not a T&E lawyer, my opinion is you're doing this in the wrong order.
I think it is good that the original poster is investing some time trying to build a basic understanding of the options prior to meeting with a lawyer. I did that myself and it proved to be time very well spent. Unfortunately, in my area some of the most "successful" estate attorneys are not very good.
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: Estate planning - can I require only RMDs for inherited Roth IRA?

Post by bayview » Thu May 30, 2019 11:07 pm

ronno2018 wrote:
Thu May 30, 2019 2:14 pm
... I think maybe the poster should not do a spendthrift trust and be open with his kids about what they might get -- he should tell them not to expect anything at all as a lengthy health emergency at the end of his life could use it all up.

Then perhaps he should gift them some money now contingent on having them shape up financially (here is some money, you will not get more when I die if you can't demonstrate what you do responsibly with this gift). Seems sort of harsh though...
I don’t think that this is at all harsh. I will be dealing with my mother’s estate. About 15% of it will be distributed in equal portions among my kids and me. The rest seems to go to me via co-ownership and POD/TOD. Most of that will go to my kids when I die.

One of my adult kids can’t responsibly handle this. Another “knows” what to do, but will probably blow a portion of it. The third will be ok.

The Will and Trust that deals with the 15% says that the successor trustee (me) can impose limitations (not the exact terminology) on the distributed funds. I will require all three to show my a sensible plan for the use of the inherited funds if they want to have a reasonably free access to the remainder of the money when I die. Otherwise, they can go argue with the trustee.

You can guide your children all day long about responsible behavior, but sometimes you just have to be the bad guy to get their attention.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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