Do I need "Professional Trustee?"

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Lucky2Invest
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Do I need "Professional Trustee?"

Post by Lucky2Invest » Fri Jun 14, 2019 4:57 pm

Hey Everyone

My parents have asked me and my twin sister to serve as trustees for their Dynasty trust. In the first meeting with the lawyer, she (lawyer) told us that she would be the 3rd trustee and would take a 1.25% fee of the assets per year. After research this seems pretty standard. The trust assets include a substantial amount of money in 3 index funds.

My question: do we really need a professional trustee? The trustee stressed that it is for creditor protection. Does having a professional trustee, when 2 trustees are family members/beneficiaries really mitigate any creditor liability issues? Everything I read online says to have a professional trustee for issues with kids/grandkids squabbling over who gets what, but that won't be an issue for us as my sister and I best friends and this just won't happen. It seems silly to pay a lawyer 6 figures a year to sit as trustee. Could we not pay a lawyer hourly to handle any distributions or tax issues?

Thanks

bsteiner
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Re: Do I need "Professional Trustee?"

Post by bsteiner » Fri Jun 14, 2019 5:21 pm

If the two of you are the trustees for each other, there could be a risk that the IRS could say that it's reciprocal. Marty Shenkman and I wrote an article on reciprocal trusts in the April 2012 issue of Trusts & Estates that discusses that concept in detail: https://www.kkwc.com/wp-content/uploads ... ctrine.pdf.

It's up to your parents (or whichever of them is creating the trust) to select whomever they want as trustee(s). The trustees may hire lawyers, accountants, or other professionals as they deem appropriate.

A few states, such as New York, have statutory schedules for trustees' commissions (fees) for individuals. In New York, an individual trustee gets 1.05% on the first $400,000, 0.45% on the next $600,000, and 0.3% above $1 million. In most states, a trustee gets "reasonable compensation." If the trustees and beneficiaries can't agree, the court decides. Alternatively, your parents can make a specific provision in the trust. In states that don't have a statutory schedule, we sometimes include a specific provision as to trustees' commissions so as to avoid any disputes over it.

Another possibility here is for your parents to add a trust company act as a trustee. If, as is typically the case, the trust company is managing the investments, they'll probably charge about 1% (or probably a bit less in this case given the size of the trust). But it sounds like you and your sister can handle the investments. There are a few states that specifically allow the duties of the trustees to be bifurcated so that you and your sister will be responsible for the investments and the trust company won't have any responsibility for the investments. We've worked with several trust companies in these states that are willing to act as a trustee for about $3,000 to $10,000 a year so long as they're not responsible for the investments.

Trader Joe
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Re: Do I need "Professional Trustee?"

Post by Trader Joe » Fri Jun 14, 2019 5:27 pm

Lucky2Invest wrote:
Fri Jun 14, 2019 4:57 pm
Hey Everyone

My parents have asked me and my twin sister to serve as trustees for their Dynasty trust. In the first meeting with the lawyer, she (lawyer) told us that she would be the 3rd trustee and would take a 1.25% fee of the assets per year. After research this seems pretty standard. The trust assets include a substantial amount of money in 3 index funds.

My question: do we really need a professional trustee? The trustee stressed that it is for creditor protection. Does having a professional trustee, when 2 trustees are family members/beneficiaries really mitigate any creditor liability issues? Everything I read online says to have a professional trustee for issues with kids/grandkids squabbling over who gets what, but that won't be an issue for us as my sister and I best friends and this just won't happen. It seems silly to pay a lawyer 6 figures a year to sit as trustee. Could we not pay a lawyer hourly to handle any distributions or tax issues?

Thanks
No, you do not need a professional trustee. It is a waste of money.

trustquestioner
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Re: Do I need "Professional Trustee?"

Post by trustquestioner » Fri Jun 14, 2019 5:27 pm

You do not need a professional trustee. As someone currently dealing with not only a corporate trustee but also a completely unnecessary trust protector, I urge you to be firm on this. It’s literally millions of dollars. And beyond the money, they can create “issues” out of thin air to justify legal fees in addition to the sickening AUM fees.

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TierArtz
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Re: Do I need "Professional Trustee?"

Post by TierArtz » Fri Jun 14, 2019 5:45 pm

I also do not think you need a professional trustee. Two competent adults (you and your sister) can handle the job. If you feel better about using one, I suggest you evaluate what Vanguard National Trust Company can do for you. I have selected them to be co-trustee with DW if I'm promoted from this world first. If we go together and one or more of our kids survive (all minors), VNTC will serve as sole trustee.

eukonomos
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Re: Do I need "Professional Trustee?"

Post by eukonomos » Fri Jun 14, 2019 6:01 pm

At the moment it is 3 to 1.

3 people saying "you" do not need a professional trustee.

1 saying it is up to your parents to decide, that there may be good reasons to have another trustee, and giving you some information that may be useful for discussions with your parents.

I'd listen to the 1.

Gill
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Re: Do I need "Professional Trustee?"

Post by Gill » Fri Jun 14, 2019 6:06 pm

There is definitely an advantage to having a professional trustee, but if I were going to pay 1.25% to the trustee I would certainly retain a qualified corporate trustee, not the attorney who drafted the instrument who could not have the combined skills of a corporate trustee nor the perpetual existence required of a long term trust.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

afan
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Re: Do I need "Professional Trustee?"

Post by afan » Fri Jun 14, 2019 7:06 pm

Gill and bsteiner are experts. I would trust their opinions over an arbitrary number of people who have not spent their careers in this field.

Bsteiner,

Beyond the reciprocal trustee concern, can you elaborate on the asset protection advantages of a corporate trustee?

If one wants a trustee that will do the administrative work but not manage the investments, is it a simple matter to arrange this? Must the trust be created in one of these states? Which states are they?
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

J295
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Re: Do I need "Professional Trustee?"

Post by J295 » Fri Jun 14, 2019 7:15 pm

Ask an experienced ACTEC lawyer if you want a second opinion. Advice here from non-lawyers who haven’t read the document and don’t know pertinent facts is of nominal to no value.

Bsteiner is very highly regarded lawyer and Gill is a retired lawyer/ trust officer I believe.

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celia
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Re: Do I need "Professional Trustee?"

Post by celia » Fri Jun 14, 2019 7:22 pm

Because Dynasty Trusts can theoretically "last forever", there are probably some unique issues involved that the typical lawyer/trustee might not understand. I don't know enough about them to comment one way or the other, but, to me, the question might instead be: Do your parents NEED a Dynasty Trust? Or does their LAWYER want them to have one?

Even if it is a good idea to use a lawyer as a trustee, the 1.25% fee means the lawyer receives 12.5% of the trust assets after 10 years and 25% of the assets after 20 years. Is that what your parents want to happen or would they prefer that that money go to a charity or worthwhile cause instead? (My comments assume the trust has not yet been created, signed, notarized and funded.)

Gill
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Re: Do I need "Professional Trustee?"

Post by Gill » Fri Jun 14, 2019 7:36 pm

Another issue, if the lawyer is a co-trustee, who will do any legal work required for the trust? This will be separate and apart from the attorney’s role as a co-trustee. Will she retain another member of her firm and pay the fees from the trust or will she represent herself? Just another reason why her acting in this role is a poor idea.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

eukonomos
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Re: Do I need "Professional Trustee?"

Post by eukonomos » Fri Jun 14, 2019 7:41 pm

bsteiner wrote:
Fri Jun 14, 2019 5:21 pm
...
Another possibility here is for your parents to add a trust company act as a trustee. If, as is typically the case, the trust company is managing the investments, they'll probably charge about 1% (or probably a bit less in this case given the size of the trust). But it sounds like you and your sister can handle the investments. There are a few states that specifically allow the duties of the trustees to be bifurcated so that you and your sister will be responsible for the investments and the trust company won't have any responsibility for the investments. We've worked with several trust companies in these states that are willing to act as a trustee for about $3,000 to $10,000 a year so long as they're not responsible for the investments.
bsteiner,
afan articulated exactly the questions I also have on the asset protection and the split responsibilities.
afan wrote:
Fri Jun 14, 2019 7:06 pm
...
Bsteiner,

Beyond the reciprocal trustee concern, can you elaborate on the asset protection advantages of a corporate trustee?

If one wants a trustee that will do the administrative work but not manage the investments, is it a simple matter to arrange this? Must the trust be created in one of these states? Which states are they?

bltn
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Re: Do I need "Professional Trustee?"

Post by bltn » Fri Jun 14, 2019 9:48 pm

Gill wrote:
Fri Jun 14, 2019 6:06 pm
There is definitely an advantage to having a professional trustee, but if I were going to pay 1.25% to the trustee I would certainly retain a qualified corporate trustee, not the attorney who drafted the instrument who could not have the combined skills of a corporate trustee nor the perpetual existence required of a long term trust.
Gill
Gill
Could you discuss the advantages of having a corporate trustee and how, if possible, the administrative obligations could be delegated separately from the financial management ? O

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Lucky2Invest
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Re: Do I need "Professional Trustee?"

Post by Lucky2Invest » Fri Jun 14, 2019 10:46 pm

bsteiner wrote:
Fri Jun 14, 2019 5:21 pm
If the two of you are the trustees for each other, there could be a risk that the IRS could say that it's reciprocal. Marty Shenkman and I wrote an article on reciprocal trusts in the April 2012 issue of Trusts & Estates that discusses that concept in detail: https://www.kkwc.com/wp-content/uploads ... ctrine.pdf.

It's up to your parents (or whichever of them is creating the trust) to select whomever they want as trustee(s). The trustees may hire lawyers, accountants, or other professionals as they deem appropriate.

A few states, such as New York, have statutory schedules for trustees' commissions (fees) for individuals. In New York, an individual trustee gets 1.05% on the first $400,000, 0.45% on the next $600,000, and 0.3% above $1 million. In most states, a trustee gets "reasonable compensation." If the trustees and beneficiaries can't agree, the court decides. Alternatively, your parents can make a specific provision in the trust. In states that don't have a statutory schedule, we sometimes include a specific provision as to trustees' commissions so as to avoid any disputes over it.

Another possibility here is for your parents to add a trust company act as a trustee. If, as is typically the case, the trust company is managing the investments, they'll probably charge about 1% (or probably a bit less in this case given the size of the trust). But it sounds like you and your sister can handle the investments. There are a few states that specifically allow the duties of the trustees to be bifurcated so that you and your sister will be responsible for the investments and the trust company won't have any responsibility for the investments. We've worked with several trust companies in these states that are willing to act as a trustee for about $3,000 to $10,000 a year so long as they're not responsible for the investments.
God I love this website!

Thank you everyone for your responses.

Mr Steiner: I read your article and it was very informative. You make several suggestions in the article on how to set up a trust so that it isn't "unwound" by the IRS and included in an estate. To be honest, I'm more worried about it being taken by creditors in case of an accident (car crash, etc). Would having a professional trustee mitigate this issue? This is the issue the lawyer continues to stress as to why she will be a trustee.

I am going to look into have a trust company act as a trustee without investment responsibilities.

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FIREchief
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Re: Do I need "Professional Trustee?"

Post by FIREchief » Sat Jun 15, 2019 12:38 am

Lucky2Invest wrote:
Fri Jun 14, 2019 10:46 pm
To be honest, I'm more worried about it being taken by creditors in case of an accident (car crash, etc). Would having a professional trustee mitigate this issue? This is the issue the lawyer continues to stress as to why she will be a trustee.
Do you live in an asset protection state (i.e. a state where there are strong laws in favor of protecting assets from lawsuits)? Much of this is dependent upon state laws. In my state, a person can skip the independent trustee and still enjoy full asset protection for trust owned assets. I believe that this is not true in some states.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

WannabeAgAlum
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Re: Do I need "Professional Trustee?"

Post by WannabeAgAlum » Sat Jun 15, 2019 1:19 am

Lucky2Invest wrote:
Fri Jun 14, 2019 4:57 pm
Hey Everyone

My parents have asked me and my twin sister to serve as trustees for their Dynasty trust. In the first meeting with the lawyer, she (lawyer) told us that she would be the 3rd trustee and would take a 1.25% fee of the assets per year. After research this seems pretty standard. The trust assets include a substantial amount of money in 3 index funds.

My question: do we really need a professional trustee? The trustee stressed that it is for creditor protection. Does having a professional trustee, when 2 trustees are family members/beneficiaries really mitigate any creditor liability issues? Everything I read online says to have a professional trustee for issues with kids/grandkids squabbling over who gets what, but that won't be an issue for us as my sister and I best friends and this just won't happen. It seems silly to pay a lawyer 6 figures a year to sit as trustee. Could we not pay a lawyer hourly to handle any distributions or tax issues?

Thanks
I will try to limit my response to address the question about creditor protection as it relates to who should act as trustee. I think in this context there is an important distinction between a professional trustee and an independent trustee, though they generally go together. I think the independence of the trustee is just as important if not more important than the professionalism of the trustee in this context.

In general, subject to how the trust is drafted, there is better creditor protection if the trustee is not a beneficiary. This makes sense of course. If a beneficiary's creditor is looming, the beneficiary is better off being able to say "I have no control over the trust assets; there's an independent or non-beneficiary trustee in charge." It's even better if the distribution standard is purely discretionary, and there is no health, maintenance, support or education standard.

There are many benefits to having a professional trustee, and independence is one of them, but independence can also be achieved with an individual (friend, neighbor, etc.). An independent individual willing to take on such risk to be a trustee should want to charge a hefty fee to compensate for the risk.

I suspect the lawyer in this case would say her independence as trustee would achieve better creditor protection than having solely beneficiary trustees. I also wouldn't be surprised if you and your sister are advised to resign as trustees and let the independent trustee act alone if/when the dark clouds of creditors start gathering.

Wannabe

brandy
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Re: Do I need "Professional Trustee?"

Post by brandy » Sat Jun 15, 2019 2:06 am

WannabeAgAlum wrote:
Sat Jun 15, 2019 1:19 am
I will try to limit my response to address the question about creditor protection as it relates to who should act as trustee. I think in this context there is an important distinction between a professional trustee and an independent trustee, though they generally go together. I think the independence of the trustee is just as important if not more important than the professionalism of the trustee in this context.
...
An independent individual willing to take on such risk to be a trustee should want to charge a hefty fee to compensate for the risk.
Wannabe
What RISKS does a person take on as a trustee for an estate? The OP apparently has a huge estate in mind, but what of risks of persons who are trustees of small estates?

MikeG62
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Re: Do I need "Professional Trustee?"

Post by MikeG62 » Sat Jun 15, 2019 6:44 am

Lucky2Invest wrote:
Fri Jun 14, 2019 10:46 pm

To be honest, I'm more worried about it being taken by creditors in case of an accident (car crash, etc). Would having a professional trustee mitigate this issue? This is the issue the lawyer continues to stress as to why she will be a trustee.

I am going to look into have a trust company act as a trustee without investment responsibilities.
bsteiner is an expert in this field, so hopefully he will circle back and respond.

Having said that, while IANAL I have researched this issue myself and have come to the conclusion that having an independent trustee does provide stronger creditor protection than simply a beneficiary controlled trust (BTW, the states in which your beneficiaries live matter). Our estate plans provide for an independent trustee to act along with the beneficiary for this very reason.

I would add that an Umbrella Insurance policy would likely provide a good deal of the protection for the specific issue your lawyer is stressing. Using an independent trustee would add protections beyond the Umbrella, such as in situations involving a divorcing spouse for example (and I'd bet there are other situations as well).
trustquestioner wrote:
Fri Jun 14, 2019 5:27 pm
You do not need a professional trustee. As someone currently dealing with not only a corporate trustee but also a completely unnecessary trust protector, I urge you to be firm on this. It’s literally millions of dollars. And beyond the money, they can create “issues” out of thin air to justify legal fees in addition to the sickening AUM fees.
Are your issues more with the corporate trustee or the trust protector? Can you elaborate on the multitude of issues you have encountered?
Real Knowledge Comes Only From Experience

Gill
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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 8:18 am

bltn wrote:
Fri Jun 14, 2019 9:48 pm
Gill wrote:
Fri Jun 14, 2019 6:06 pm
There is definitely an advantage to having a professional trustee, but if I were going to pay 1.25% to the trustee I would certainly retain a qualified corporate trustee, not the attorney who drafted the instrument who could not have the combined skills of a corporate trustee nor the perpetual existence required of a long term trust.
Gill
Gill
Could you discuss the advantages of having a corporate trustee and how, if possible, the administrative obligations could be delegated separately from the financial management ? O
I have posted many times on this forum about the advantages of a corporate trustee over an individual trustee. First of all, I question how the attorney in this situation can be considered a “professional trustee “. A corporation, by its very nature, has a perpetual existence, unlike an individual. It does not go on vacation, become ill or die. It offers experience, group judgment, independence and a wide range of skills among its directors, officers and employees. It is impartial when dealing with beneficiaries. It is always available, unlike an individual. All these attributes can’t be duplicated by an individual.

Quite honestly, I feel the attorney in this situation is overreaching and self dealing and her suggestion and the proposed fee is unethical. Bsteiner and other practicing attorneys may disagree, but that is how I see it.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

afan
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Re: Do I need "Professional Trustee?"

Post by afan » Sat Jun 15, 2019 1:31 pm

Fascinating and helpful as always, Gill.
Your explanations highlight the advantages of a corporate trustee. As you point out, this should be an institution that has this as a core business, not someone in another field who does it occasionally.

From your past indication that corporate trust departments have a lot of lawyers, where did you draw the line between "our in house trust attorneys know what to do, so they do it" and "this calls for legal services, so we hire an outside attorney to handle it"? If you already have a staff of trust attorneys who do this full time, where do you turn for more expertise?

Can you comment on the asset protection implications of a corporate trustee vs and individual independent trustee? Granted, the corporate trustee will always be there, or the trust business will be sold to a successor organization. But on the purely asset protection side, does it matter?
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

WannabeAgAlum
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Re: Do I need "Professional Trustee?"

Post by WannabeAgAlum » Sat Jun 15, 2019 1:34 pm

brandy wrote:
Sat Jun 15, 2019 2:06 am
WannabeAgAlum wrote:
Sat Jun 15, 2019 1:19 am
I will try to limit my response to address the question about creditor protection as it relates to who should act as trustee. I think in this context there is an important distinction between a professional trustee and an independent trustee, though they generally go together. I think the independence of the trustee is just as important if not more important than the professionalism of the trustee in this context.
...
An independent individual willing to take on such risk to be a trustee should want to charge a hefty fee to compensate for the risk.
Wannabe
What RISKS does a person take on as a trustee for an estate? The OP apparently has a huge estate in mind, but what of risks of persons who are trustees of small estates?
Being accountable to beneficiaries and creditors, including IRS. Trustees/personal representatives get sued all the time, even for "small" estates. Lots of ways to get tripped up if you aren't careful.

Wannabe

LFS1234
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Re: Do I need "Professional Trustee?"

Post by LFS1234 » Sat Jun 15, 2019 3:07 pm

Gill wrote:
Sat Jun 15, 2019 8:18 am
bltn wrote:
Fri Jun 14, 2019 9:48 pm
Gill wrote:
Fri Jun 14, 2019 6:06 pm
There is definitely an advantage to having a professional trustee, but if I were going to pay 1.25% to the trustee I would certainly retain a qualified corporate trustee, not the attorney who drafted the instrument who could not have the combined skills of a corporate trustee nor the perpetual existence required of a long term trust.
Gill
Gill
Could you discuss the advantages of having a corporate trustee and how, if possible, the administrative obligations could be delegated separately from the financial management ? O
I have posted many times on this forum about the advantages of a corporate trustee over an individual trustee. First of all, I question how the attorney in this situation can be considered a “professional trustee “. A corporation, by its very nature, has a perpetual existence, unlike an individual. It does not go on vacation, become ill or die. It offers experience, group judgment, independence and a wide range of skills among its directors, officers and employees. It is impartial when dealing with beneficiaries. It is always available, unlike an individual. All these attributes can’t be duplicated by an individual.

Quite honestly, I feel the attorney in this situation is overreaching and self dealing and her suggestion and the proposed fee is unethical. Bsteiner and other practicing attorneys may disagree, but that is how I see it.
Gill
Although we aren't provided with much information, this one isn't passing my smell test either.

OP insinuates that the lawyer/trustee's 1.25% fee would amount to at least $100K/year, in which case the trust assets would have to be at least $8M. If this is correct, and unless there are some additional unusual factors which haven't been mentioned, then that 1.25% seems to be a great deal higher than a highly regarded corporate trustee typically would charge for the same job.

OP writes that "after research, this (1.25% p.a. fee) seems pretty standard". Where did this information come from? Was it "helpfully" provided by the attorney? I'm sorry, but I'm skeptical.

It would make sense to explore at least three aspects of this:

1) whether a highly regarded corporate trustee (e.g. Northern Trust) could do the job for considerably less), and

2) whether the 1.25% fee has been fixed in the agreement as mandatory and immutable, and

3) whether the family trustees at their discretion have been provided with the right to replace the lawyer/trustee with a different trustee, provided that the latter trustee meets all legal requirements, most likely including being unrelated to, and not an employee of, the beneficiaries.

This smells like the lawyer involved may have put her own interests over those of the client. I'd do some more research and get a second opinion from a different attorney before signing. Obviously, the parents are the ones that should be doing this, but perhaps they could be nudged. That 1.25% would be a big drain going forward.

afan
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Re: Do I need "Professional Trustee?"

Post by afan » Sat Jun 15, 2019 3:57 pm

Deleted double post
Last edited by afan on Sun Jun 16, 2019 2:55 pm, edited 2 times in total.
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

afan
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Re: Do I need "Professional Trustee?"

Post by afan » Sat Jun 15, 2019 4:01 pm

If I was looking for trust management at a reasonable fee, Northern Trust would be the last place to inquire. They would make that 1.25% seem like a bargain.

Try Vanguard, or a truat company that would do the administrative and discretionary distributions while letting someone else manage the investments. Then fund a flat fee investment manager.
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

Gill
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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 6:10 pm

afan wrote:
Sat Jun 15, 2019 3:57 pm
If I wanted trustee servicea at a reasonable price, northern Trust would probably be the last place I looked. That 1.25% will seem a bargain vompared to what NT would charge.
As a former senior officer of that bank, I suspect you’re correct. However, they are a far better alternative to having an individual trustee as I outlined earlier.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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patrick013
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Re: Do I need "Professional Trustee?"

Post by patrick013 » Sat Jun 15, 2019 7:14 pm

If the trust only contained marketable securities to be distributed equally.....

I think even HRBlock could close the trust for a couple of family trustees and co-signors.
age in bonds, buy-and-hold, 10 year business cycle

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celia
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Re: Do I need "Professional Trustee?"

Post by celia » Sat Jun 15, 2019 7:51 pm

Gill wrote:
Sat Jun 15, 2019 8:18 am
A corporation, by its very nature, has a perpetual existence, unlike an individual. It does not go on vacation, become ill or die. It offers experience, group judgment, independence and a wide range of skills among its directors, officers and employees. It is impartial when dealing with beneficiaries. It is always available, unlike an individual
Although I have mentioned this several times before in this forum, for the OP's information, the above is not always true.

We were early in our careers with small children when we first made our trust. The lawyer strongly suggested that we list several successor trustees, which we did, closing with our choice of a local trust company since "they would always be there" whereas our relatives may not or might not have the time/willingness to be the trustee. So we selected one of the local trust companies as a last resort.

Fast forward 20+ years and our kids became responsible adults. All the relatives who were listed as successor trustees were still living at their listed addresses, but when I googled the trust company, it was nowhere to be found (and neither was the original lawyer who probably retired or died). I kept looking for them online, until I found a reference that appeared they had been bought out by another trust company. But googling the second trust company also came up empty-handed. The best I could determine was that at least one of the companies "disappeared" during the 2008 stock market melt-down, possibly because there were very little assets left to manage. Yes, I'm partly guessing here at what might have happened, but my point is that trust companies do not last forever, just as any other company doesn't.

Gill
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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 8:07 pm

celia wrote:
Sat Jun 15, 2019 7:51 pm
Gill wrote:
Sat Jun 15, 2019 8:18 am
A corporation, by its very nature, has a perpetual existence, unlike an individual. It does not go on vacation, become ill or die. It offers experience, group judgment, independence and a wide range of skills among its directors, officers and employees. It is impartial when dealing with beneficiaries. It is always available, unlike an individual
Although I have mentioned this several times before in this forum, for the OP's information, the above is not always true.

We were early in our careers with small children when we first made our trust. The lawyer strongly suggested that we list several successor trustees, which we did, closing with our choice of a local trust company since "they would always be there" whereas our relatives may not or might not have the time/willingness to be the trustee. So we selected one of the local trust companies as a last resort.

Fast forward 20+ years and our kids became responsible adults. All the relatives who were listed as successor trustees were still living at their listed addresses, but when I googled the trust company, it was nowhere to be found (and neither was the original lawyer who probably retired or died). I kept looking for them online, until I found a reference that appeared they had been bought out by another trust company. But googling the second trust company also came up empty-handed. The best I could determine was that at least one of the companies "disappeared" during the 2008 stock market melt-down, possibly because there were very little assets left to manage. Yes, I'm partly guessing here at what might have happened, but my point is that trust companies do not last forever, just as any other company doesn't.
Celia, yes I’ve seen you post this rather silly comment before. You bear some responsibility for not looking at your estate plan in 20+ years. Certainly, trust institutions merge or change names but your trust will not lack a trustee for this reason. The trust business will always pass to a successor in these situations. The Federal and state regulators will be sure of it. Did you consider contacting them? In the future review your estate plan more often than every 20 years.
Gill
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Re: Do I need "Professional Trustee?"

Post by afan » Sat Jun 15, 2019 8:16 pm

Presumably the trust business was sold or taken over by another bank.
No way to avoid this.

Small local banks are at higher risk but even the big institutions can go away.

Wilmington trust was founded in, I think, 1903 by the DuPonts to manage their fortune. It was over 100 years old when it became part of M&T. US Trust became part of Bank of America. I don't remember hearing of trusts losing their trustees with the change.

Gill, how did you determine which legal issues were handled by the lawyers in the trust department and which ones were referred to outside lawyers? Did you do everything in house except for litigation or you needed a lawyer in a jurist where you did not have branches?
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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 8:19 pm

afan wrote:
Sat Jun 15, 2019 8:16 pm
Presumably the trust businy was sold or takrn over by another bank.
No way to avoid this.

Small local banks are at higher risk but even the big institutions can go away.

Wilmington trust was founded in, I think, 1903 by the DuPonts to manage their fortune. It was over 100 years old when it became part of M&T. US Trust became part of Bank of America. I don't remember hearing of trusts losing their trustees with the change.
Of course not. The acquiring bank continues as trustee, although there might be situations where an instrument needs to be amended.

In answer to your question about legal matters in a trust department, all legal matters involving a trust or estate are referred to the attorney for the trust or estate. Banks are very careful to avoid the unauthorized practice of law. Nevertheless, most good trust institutions have lawyers on their staff, but they are in no way acting as attorney for the trust or estate.
Gill
Last edited by Gill on Sat Jun 15, 2019 8:27 pm, edited 3 times in total.
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Re: Do I need "Professional Trustee?"

Post by celia » Sat Jun 15, 2019 8:21 pm

Gill, Good to know that trust companies are regulated. It didn't impact us as the (relative) trustees were still available. We now have also re-stated our trusts. celia

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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 8:28 pm

celia wrote:
Sat Jun 15, 2019 8:21 pm
Gill, Good to know that trust companies are regulated. It didn't impact us as the (relative) trustees were still available. We now have also re-stated our trusts. celia
You didn’t know trust companies were regulated?
Gill
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Re: Do I need "Professional Trustee?"

Post by trustquestioner » Sat Jun 15, 2019 8:37 pm

Why does anyone choose Northern Trust? Presumably people who amass tens of millions of dollars are intelligent enough to realize it’s a massive ripoff?

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Re: Do I need "Professional Trustee?"

Post by Gill » Sat Jun 15, 2019 8:45 pm

trustquestioner wrote:
Sat Jun 15, 2019 8:37 pm
Why does anyone choose Northern Trust? Presumably people who amass tens of millions of dollars are intelligent enough to realize it’s a massive ripoff?
Come on now. I’m not a big fan of The Northern either, but you’re overstating it a bit. As a former trust executive there I know a fair bit about their inner workings and it’s not always pretty. Nevertheless, they do serve a purpose although their fees are quite excessive.

One of my favorite examples was the annual review of an account in the Trust Investment Committee and the assigned investment officer present in the meeting didn’t even recognize the name of the trust. That happened quite often. Northern makes money in the trust business by assigning way too many accounts to its administrative and investment officers.
Gill
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Re: Do I need "Professional Trustee?"

Post by bsteiner » Sun Jun 16, 2019 8:28 am

afan wrote:
Fri Jun 14, 2019 7:06 pm
Gill and bsteiner are experts. I would trust their opinions over an arbitrary number of people who have not spent their careers in this field.

Bsteiner,

Beyond the reciprocal trustee concern, can you elaborate on the asset protection advantages of a corporate trustee?
...
It's the possibility of the reciprocal trust issue.
afan wrote:
Fri Jun 14, 2019 7:06 pm
...
If one wants a trustee that will do the administrative work but not manage the investments, is it a simple matter to arrange this? Must the trust be created in one of these states? Which states are they?
It's a fair amount of additional legal work to set this up, but that shouldn't be an issue in the context of an $8 million or more trust. About half the states have statutes specifically allowing this, though Alaska, Delaware, Nevada and South Dakota have had it for many years so that there are many trust companies in those states that are set up to do this at a modest cost so long as they're not responsible for the investments.
celia wrote:
Fri Jun 14, 2019 7:22 pm
Because dynasty trusts can theoretically "last forever", there are probably some unique issues involved that the typical lawyer/trustee might not understand. ...
Every trust can essentially be a dynasty trust, except that in many states a trust can't last forever. Many states limit the duration of a trust to "lives in being plus 21 years," which means 21 years after the death of the last survivor of some class of persons living at the inception (such as the grantor's or testator's issue, or the issue of King George V). That usually allows about 90 to 100 years. Other states allow a fixed number of years ranging from 150 to 1,000. As a practical matter, even 90 years is a long time.
Gill wrote:
Fri Jun 14, 2019 7:36 pm
Another issue, if the lawyer is a co-trustee, who will do any legal work required for the trust? This will be separate and apart from the attorney’s role as a co-trustee. Will she retain another member of her firm and pay the fees from the trust or will she represent herself? Just another reason why her acting in this role is a poor idea.
There isn't usually very much legal work for a trust on an ongoing basis (exceptions include decanting, dividing trusts, combining trusts, buying or selling real estate), but most likely a lawyer who's a trustee would retain her own firm to do whatever legal work might arise if she thought her firm could do it. However, if for whatever reason she thought she needed a lawyer outside her firm, she could bring in whomever she thought best. I've been retained by practicing lawyers in other firms on estate and trust matters many times.
Lucky2Invest wrote:
Fri Jun 14, 2019 10:46 pm
...
Mr Steiner: I read your article and it was very informative. You make several suggestions in the article on how to set up a trust so that it isn't "unwound" by the IRS and included in an estate. To be honest, I'm more worried about it being taken by creditors in case of an accident (car crash, etc). Would having a professional trustee mitigate this issue? This is the issue the lawyer continues to stress as to why she will be a trustee.

I am going to look into have a trust company act as a trustee without investment responsibilities.
I'm not saying whether if you and your sister are the trustees the reciprocal trust doctrine would or wouldn't apply, just that it's something to consider, and perhaps something that the lawyer had in mind. A third trustee, professional or otherwise, would help in this regard.
brandy wrote:
Sat Jun 15, 2019 2:06 am
...
What RISKS does a person take on as a trustee for an estate? The OP apparently has a huge estate in mind, but what of risks of persons who are trustees of small estates?
The risk of a dispute with a beneficiary, such as over whether the fiduciary mismanaged the assets.
Gill wrote:
Sat Jun 15, 2019 8:18 am
...
Quite honestly, I feel the attorney in this situation is overreaching and self dealing and her suggestion and the proposed fee is unethical. Bsteiner and other practicing attorneys may disagree, but that is how I see it.
I can't disagree. The trust is at least $8 million (in order for a 1.25% trustee's commission (fee) to be 6 figures).

The New York schedule for trustee's commissions for individuals is 1.05% on the first $400,000, 0.45% on the next $600,000, and 0.3% above $1 million (plus 1% on payments of principal). On $8 million it would be $27,900, or 0.35%.

The New Jersey schedule is 0.5% on the first $400,000 and 0.3% above $400,000, plus 6% of income, plus a commission on payments of principal. On $8 million, if the income is $200,000, it would be $36,800, or 0.46%.

A trust company that doesn't manage the money would be about $5,000 to $10,000 a year, plus possibly the cost of maintaining an LLC to hold the assets (though that might not be necessary if the only assets are a few mutual funds).

Perhaps more important, has the more typical structure been discussed? Typically one parent would create the trust with the other parent as trustee. After the surviving parent dies, the trust would usually be divided into separate trusts for each child. Unless there's a reason not to do so, each child would be a trustee of his/her own trust, together with someone he/she is comfortable with as co-trustee.

The above could be modified to avoid state income taxes or to allow the trusts to run longer than the traditional lives in being plus 21 years.
LFS1234 wrote:
Sat Jun 15, 2019 3:07 pm
...

It would make sense to explore ... whether a highly regarded corporate trustee (e.g. Northern Trust) could do the job for considerably less), and

2) whether the 1.25% fee has been fixed in the agreement as mandatory and immutable, and

3) whether the family trustees at their discretion have been provided with the right to replace the lawyer/trustee with a different trustee ...

This smells like the lawyer involved may have put her own interests over those of the client. I'd do some more research and get a second opinion from a different attorney before signing. Obviously, the parents are the ones that should be doing this, but perhaps they could be nudged. That 1.25% would be a big drain going forward.
A conventional trust company (Northern Trust, U.S. Trust before it was taken over, Fiduciary Trust, JPMorgan Chase, Bessemer, SunTrust, just to name a few and not to suggest any of them) would probably charge less than 1.25% for a trust of $8 million or more (except Bessemer's minimum is now $10 million).

I agree that there are enough issues here that it might be worth consulting with appropriate counsel.

In addition to the issues mentioned, if they're considering giving away $8 million or more, they probably have substantial other assets. So this should be considered in the context of their overall estate planning.
celia wrote:
Sat Jun 15, 2019 7:51 pm
[...
We were early in our careers with small children when we first made our trust. The lawyer strongly suggested that we list several successor trustees, which we did, closing with our choice of a local trust company since "they would always be there" whereas our relatives may not or might not have the time/willingness to be the trustee. So we selected one of the local trust companies as a last resort.

Fast forward 20+ years and our kids became responsible adults. All the relatives who were listed as successor trustees were still living at their listed addresses, but when I googled the trust company, it was nowhere to be found (and neither was the original lawyer who probably retired or died). ...
You could provide that the last acting trustee for whom there's no designated successor may name co-trustee(s) or successor trustees. The corporate trustee would only come in if no one is serving. That would provide more flexibility.
trustquestioner wrote:
Sat Jun 15, 2019 8:37 pm
Why does anyone choose Northern Trust? Presumably people who amass tens of millions of dollars are intelligent enough to realize it’s a massive ripoff?
When you get up into the tens (or hundreds) of millions of dollars, the fees of a corporate trustee (as a percentage of the value of the trust) are much less than they are for 7-figure trusts. At that level, some people want the protection of having a corporate trustee. Also, without expressing any opinion as whether it's beneficial, at that level some people want to invest a portion of the assets in nontraditional investments.

I've also found that as the amount involved gets larger, corporate trustees are more responsive and are more likely to assign their best people to the account. Also, if the amount involved is larger, you have a wider choice of corporate trustees since some have a $5 million or $10 million minimum size whereas others will take a $500,000 or $1 million trust.

chemocean
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Re: Do I need "Professional Trustee?"

Post by chemocean » Sun Jun 16, 2019 11:38 am

I am a DYI working on revising our wills to name the next generation (30-somethings) as executors and trustee of separate trust for our children (all married with one spouse in each couple in a high-risk profession). Once I decide on the terms of the wills and trusts, I will be working with an estate lawyer to redraft our wills. It seems for a modest trusts (slightly less than $1 million) once the trust is established, the majority of duties of the trustee(s) are:
1) Distribution of mandatory (income for conduit IRA trusts) and discretionary distribution to beneficiaries, and
2) Asset management,
3) The filing of tax returns and distribution tax documents to the beneficiary.

The independence of a named trustee or co-trustee with the beneficiary is primarily needed for asset protection as related to the beneficiary's control of discretionary distributions of the first duty.

The asset management following the BH strategy would be for the trust to be set up with an asset allocation in Index mutual funds or EFTs. The main duty of the trustee would be to change the asset allocation according to the changing life situation of the beneficiary and occasional rebalancing. This is simply a math problem for which a competent trustee could execute with the aid of a spreadsheet (I have created my own spreadsheet). Of course, we all know staying the course in difficult times is always a challenge.

It would seem that the filing of tax returns and distribution documents could be handled by a CPA as separate task for a negotiated fee at the industry's standard rate.
If legal services are needed for asset protection, the trustee could retain the appropriate lawyer to conduct these activities.

With this perception in mind and reading the post for this tread, I am leaning towards naming the beneficiaries as trustees of their separate trustees with a named independent individuals with financial or legal expertise as co-trustee (with provision for appropriate compensation), naming several individuals as successor co-trustees and a trust company that would take such a small trust as the final successor. I would also give the beneficiary the right to replace the standing co-trustee. If the trust is set up as testamentary trust, it is my understanding that the beneficiary trustee would need to go back to probate court to name a successor co-trustee. This provision would encourage the beneficiary trustee and co-trustee to compromise on minor disagreements.
I look forward to further discussion of the costs and benefits of a professional trustee in this thread and future threads before presenting the specifics of my requests for our wills to our estate lawyer.

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Re: Do I need "Professional Trustee?"

Post by afan » Sun Jun 16, 2019 12:49 pm

Assume one had a bank or trust company as the administrative trustee, with no responsibility for managing investments. Could the beneficiary be co-trustee and be the one who does the investing? If the beneficiary had no control over discretionary distributions, would their ability to manage the investments create any asset protection problems?

Would this be a way to keep trustee expenses down, have a 3-fund portfolio and maintain asset protection?

One reason that many of us are leery of banks and trust companies is that we don't want them doing active management of the portfolio. Even Vanguard as trustee apparently will invest the way people have reported PAS. This has included, for example, holding short, intermediate and long term bond funds. The effect is an intermediate term bond portfolio, so why three funds instead of one?

I think the appeal of the large traditional trust companies with high minimums and high fees is their ability to do things most people do not need. From Gill's comments in the past, a place like Northern Trust can run a privately held business, manage complex real estate portfolios and deal with large numbers of beneficiaries with widely differing needs and claims to the money. For the very wealthy who may have such complexities, that is what the big trust companies offer.

For someone who is just as wealthy but has a simple nuclear family and assets all in marketable securities, the capabilities of a big trust company would not be needed. It would be a waste of money to pay for services one would never use.
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: Do I need "Professional Trustee?"

Post by bsteiner » Sun Jun 16, 2019 1:30 pm

chemocean wrote:
Sun Jun 16, 2019 11:38 am
I am a DYI working on revising our wills to name the next generation (30-somethings) as executors and trustee of separate trust for our children (all married with one spouse in each couple in a high-risk profession). Once I decide on the terms of the wills and trusts, I will be working with an estate lawyer to redraft our wills. It seems for a modest trusts (slightly less than $1 million) once the trust is established, the majority of duties of the trustee(s) are:
1) Distribution of mandatory (income for conduit IRA trusts) and discretionary distribution to beneficiaries, and
2) Asset management,
3) The filing of tax returns and distribution tax documents to the beneficiary.
...
I look forward to further discussion of the costs and benefits of a professional trustee in this thread and future threads before presenting the specifics of my requests for our wills to our estate lawyer.
It's better not to mandate distributions. For that reason, conduit trusts rarely make sense.

The selection of trustees depends on the circumstances.

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Re: Do I need "Professional Trustee?"

Post by bsteiner » Sun Jun 16, 2019 1:36 pm

afan wrote:
Sun Jun 16, 2019 12:49 pm
Assume one had a bank or trust company as the administrative trustee, with no responsibility for managing investments. Could the beneficiary be co-trustee and be the one who does the investing? If the beneficiary had no control over discretionary distributions, would their ability to manage the investments create any asset protection problems?

Would this be a way to keep trustee expenses down, have a 3-fund portfolio and maintain asset protection?

One reason that many of us are leery of banks and trust companies is that we don't want them doing active management of the portfolio. Even Vanguard as trustee apparently will invest the way people have reported PAS. This has included, for example, holding short, intermediate and long term bond funds. The effect is an intermediate term bond portfolio, so why three funds instead of one?

I think the appeal of the large traditional trust companies with high minimums and high fees is their ability to do things most people do not need. From Gill's comments in the past, a place like Northern Trust can run a privately held business, manage complex real estate portfolios and deal with large numbers of beneficiaries with widely differing needs and claims to the money. For the very wealthy who may have such complexities, that is what the big trust companies offer.

For someone who is just as wealthy but has a simple nuclear family and assets all in marketable securities, the capabilities of a big trust company would not be needed. It would be a waste of money to pay for services one would never use.
Your proposed solution works if the family is able to handle the investments. But sometimes they can't, and another solution is needed.

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Re: Do I need "Professional Trustee?"

Post by afan » Sun Jun 16, 2019 4:00 pm

I understand that some beneficiaries may not be up to the task of managing investments.

By separating the investment job, one could use Vanguard starting at 0.3%, less for a larger account. Or hire a flat fee manager. Even if the bank charged $10,000 and the flat fee was $5,000, the total would be much less than what Vanguard would charge to be trustee. Far less than a traditional bank trust department or trust company.

If one does not need the capabilities of a big trust company, it would be foolish to pay for them.
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: Do I need "Professional Trustee?"

Post by chemocean » Sun Jun 16, 2019 7:09 pm

bsteiner wrote:
Sun Jun 16, 2019 1:30 pm
chemocean wrote:
Sun Jun 16, 2019 11:38 am
I am a DYI working on revising our wills to name the next generation (30-somethings) as executors and trustee of separate trust for our children (all married with one spouse in each couple in a high-risk profession). Once I decide on the terms of the wills and trusts, I will be working with an estate lawyer to redraft our wills. It seems for a modest trusts (slightly less than $1 million) once the trust is established, the majority of duties of the trustee(s) are:
1) Distribution of mandatory (income for conduit IRA trusts) and discretionary distribution to beneficiaries, and
2) Asset management,
3) The filing of tax returns and distribution tax documents to the beneficiary.
...
I look forward to further discussion of the costs and benefits of a professional trustee in this thread and future threads before presenting the specifics of my requests for our wills to our estate lawyer.
It's better not to mandate distributions. For that reason, conduit trusts rarely make sense.

The selection of trustees depends on the circumstances.
I have assumed that my IRA can be transferred to an inherited IRA in a testamentary trust for the beneficiary as a non-taxable event. Thus, all distributions from the trust will be taxable to the beneficiary.
For any distribution from an inherited IRA in trust to be taxed at the beneficiary's rate, I have been led to believe that the trust had to be a conduit trust. In the absence of the language in the will for a conduit trust, I have been led to believe that the income within the trust would be taxable to the trust at the higher tax rate of an accumulation trust. The tax rate of the beneficiaries presently are lower that the tax rate for the accumulation trust. However, this condition might not be true when the IRA funds are transferred to the beneficiary's trust.
Is my understanding of how testamentary inherited IRAs in trust work correct?

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Re: Do I need "Professional Trustee?"

Post by bsteiner » Sun Jun 16, 2019 8:18 pm

chemocean wrote:
Sun Jun 16, 2019 7:09 pm
bsteiner wrote:
Sun Jun 16, 2019 1:30 pm
chemocean wrote:
Sun Jun 16, 2019 11:38 am
I am a DYI working on revising our wills to name the next generation (30-somethings) as executors and trustee of separate trust for our children (all married with one spouse in each couple in a high-risk profession). Once I decide on the terms of the wills and trusts, I will be working with an estate lawyer to redraft our wills. It seems for a modest trusts (slightly less than $1 million) once the trust is established, the majority of duties of the trustee(s) are:
1) Distribution of mandatory (income for conduit IRA trusts) and discretionary distribution to beneficiaries, and
2) Asset management,
3) The filing of tax returns and distribution tax documents to the beneficiary.
...
I look forward to further discussion of the costs and benefits of a professional trustee in this thread and future threads before presenting the specifics of my requests for our wills to our estate lawyer.
It's better not to mandate distributions. For that reason, conduit trusts rarely make sense.

The selection of trustees depends on the circumstances.
I have assumed that my IRA can be transferred to an inherited IRA in a testamentary trust for the beneficiary as a non-taxable event. Thus, all distributions from the trust will be taxable to the beneficiary.
For any distribution from an inherited IRA in trust to be taxed at the beneficiary's rate, I have been led to believe that the trust had to be a conduit trust. In the absence of the language in the will for a conduit trust, I have been led to believe that the income within the trust would be taxable to the trust at the higher tax rate of an accumulation trust. The tax rate of the beneficiaries presently are lower that the tax rate for the accumulation trust. However, this condition might not be true when the IRA funds are transferred to the beneficiary's trust.
Is my understanding of how testamentary inherited IRAs in trust work correct?
No. It's generally better to give the trustees discretion over distributions. If the trustees have discretion, amounts distributed will be taxable to the beneficiaries and amounts not distributed will be taxable to the trust. But it's possible that there might be a reason for the trustees to retain some of the IRA distributions in some years. For example, a beneficiary might have a taxable estate, or be concerned about creditors, spouses or Medicaid.

chemocean
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Re: Do I need "Professional Trustee?"

Post by chemocean » Sun Jun 16, 2019 9:29 pm

bsteiner wrote:
Sun Jun 16, 2019 8:18 pm
chemocean wrote:
Sun Jun 16, 2019 7:09 pm
bsteiner wrote:
Sun Jun 16, 2019 1:30 pm
chemocean wrote:
Sun Jun 16, 2019 11:38 am
No. It's generally better to give the trustees discretion over distributions. If the trustees have discretion, amounts distributed will be taxable to the beneficiaries and amounts not distributed will be taxable to the trust. But it's possible that there might be a reason for the trustees to retain some of the IRA distributions in some years. For example, a beneficiary might have a taxable estate, or be concerned about creditors, spouses or Medicaid.
In summary, as long as the distribution of an accumulation (discretionary) inherited IRA trust to the beneficiary is at least the amount of the RMD, the distribution would be taxable to the beneficiary at their own rate (stretch provision of IRA) and the assets would be protected as long as the beneficiary did not have full control of the trust.

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Re: Do I need "Professional Trustee?"

Post by bsteiner » Mon Jun 17, 2019 2:02 pm

chemocean wrote:
Sun Jun 16, 2019 9:29 pm
...
In summary, as long as the distribution of an accumulation (discretionary) inherited IRA trust to the beneficiary is at least the amount of the RMD, the distribution would be taxable to the beneficiary at their own rate (stretch provision of IRA) and the assets would be protected as long as the beneficiary did not have full control of the trust.
The remaining assets would continue to be protected. However, the assets distributed would cease to be protected.

The trustees have to decide each year how much to distribute and how much to retain, taking into account income taxes, estate taxes, asset protection, and any other factors they deem relevant.

afan
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Re: Do I need "Professional Trustee?"

Post by afan » Mon Jun 17, 2019 8:34 pm

Unless the trust was specifically designed for this purpose, it probably would not qualify for the stretch treatment at all.

Since the trustee of an accumulation trust can always distribute the proceeds of the RMDs to the beneficiary, it can work like a conduit trust. If beneficiary tax rates would be lower than trust tax rates, this is not always the case, and taxes were the only consideration then the accumulation trust can behave like a conduit.

If there are reasons to keep the RMDs in trust, the the conduit trust cannot do that.

If you have not worked with an experienced attorney to create a conduit or accumulation trust, you likely have neither.
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

chemocean
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Re: Do I need "Professional Trustee?"

Post by chemocean » Wed Jun 26, 2019 11:36 pm

afan wrote:
Mon Jun 17, 2019 8:34 pm
Unless the trust was specifically designed for this purpose, it probably would not qualify for the stretch treatment at all.

Since the trustee of an accumulation trust can always distribute the proceeds of the RMDs to the beneficiary, it can work like a conduit trust. If beneficiary tax rates would be lower than trust tax rates, this is not always the case, and taxes were the only consideration then the accumulation trust can behave like a conduit.

If there are reasons to keep the RMDs in trust, the the conduit trust cannot do that.

If you have not worked with an experienced attorney to create a conduit or accumulation trust, you likely have neither.
Reading this tread and other scholarly articles, I am totally confused about the mechanism of a testamentary trust for my IRA to my children (my primary asset to pass to the my children). I looked for books on this subject in our public library, but there are none. There are some interesting books at the local business school, for which I am going to ask a friend to take out for me. Any reading suggestions would be appreciated. I did read Steiner (Tax Management 29(2) 108), but without understanding the mechanism (schematic and flow chart) of a testamentary trust for an inherited IRA, I had more questions than the article could give answers. I will be working with an experienced estate attorney to revise our wills, but I need to know what to ask for.

My goal is to provide asset protection of the principle, maintaining the stretch provisions of the inherited IRA for my children, while providing some discretion for distribution of the principle for Health, Education and Support. From the above two posts, it seems that the distributions of the principal and earnings from the an inherited IRA reside in a separate trust account (whether accumulation or conduit) from the principal of the inherited IRA. From the context of one article, I got the impression that if the principal of the inherited IRA gets transferred to the trust account, that is a IRA distribution taxable to the trust.

If the principal is not transferred to the trust, where does the principal reside (remains in an estate account of the original owner)?
If the principal and the distributions reside in different accounts, does the Trustee control both the distribution of the principal of the inherited IRA to the trust account and the distribution from the trust account to the beneficiary?
Or do only the RMD or earnings flow from the inherited IRA account to the trust account.
If there are provisions for the discretionary distributions for Health, Education and Support to the beneficiary, do these apply only to the distribution from the Trust account to the beneficiary or do they also apply to possible distributions from the principal to the trust account.

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FIREchief
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Re: Do I need "Professional Trustee?"

Post by FIREchief » Thu Jun 27, 2019 12:15 am

chemocean wrote:
Wed Jun 26, 2019 11:36 pm
afan wrote:
Mon Jun 17, 2019 8:34 pm
Unless the trust was specifically designed for this purpose, it probably would not qualify for the stretch treatment at all.

Since the trustee of an accumulation trust can always distribute the proceeds of the RMDs to the beneficiary, it can work like a conduit trust. If beneficiary tax rates would be lower than trust tax rates, this is not always the case, and taxes were the only consideration then the accumulation trust can behave like a conduit.

If there are reasons to keep the RMDs in trust, the the conduit trust cannot do that.

If you have not worked with an experienced attorney to create a conduit or accumulation trust, you likely have neither.
Reading this tread and other scholarly articles, I am totally confused about the mechanism of a testamentary trust for my IRA to my children (my primary asset to pass to the my children). I looked for books on this subject in our public library, but there are none. There are some interesting books at the local business school, for which I am going to ask a friend to take out for me. Any reading suggestions would be appreciated. I did read Steiner (Tax Management 29(2) 108), but without understanding the mechanism (schematic and flow chart) of a testamentary trust for an inherited IRA, I had more questions than the article could give answers. I will be working with an experienced estate attorney to revise our wills, but I need to know what to ask for.

My goal is to provide asset protection of the principle, maintaining the stretch provisions of the inherited IRA for my children, while providing some discretion for distribution of the principle for Health, Education and Support. From the above two posts, it seems that the distributions of the principal and earnings from the an inherited IRA reside in a separate trust account (whether accumulation or conduit) from the principal of the inherited IRA. From the context of one article, I got the impression that if the principal of the inherited IRA gets transferred to the trust account, that is a IRA distribution taxable to the trust.

If the principal is not transferred to the trust, where does the principal reside (remains in an estate account of the original owner)?
If the principal and the distributions reside in different accounts, does the Trustee control both the distribution of the principal of the inherited IRA to the trust account and the distribution from the trust account to the beneficiary?
Or do only the RMD or earnings flow from the inherited IRA account to the trust account.
If there are provisions for the discretionary distributions for Health, Education and Support to the beneficiary, do these apply only to the distribution from the Trust account to the beneficiary or do they also apply to possible distributions from the principal to the trust account.
Your mistake may be in thinking in terms of a "trust account." A trust is a legal entity that can own many kinds of assets, including inherited IRAs and an after-tax brokerage account (just like what we as individuals can own). If an IRA or similar qualified account names a trust as beneficiary, then there are three basic scenarios:

a) the trust is not drafted in a manner that will enable it to be recognized as an "individual" by the IRS. Generally, all assets will need to be withdrawn from the IRA within five years.
b) the trust is drafted as a conduit trust (the primary beneficiary(s) is an individual, and the trust requires all RMDs to be distributed to the beneficiary as they are withdrawn from the inherited IRA)
c) the trust is drafted as an accumulation trust (all beneficiaries - both primary and successor - are individuals and the trust allows the trustee to retain all or a portion of the RMDs within the trust, typically in an after tax brokerage account owned by the trust)

There are more details, but that should serve as a high level overview. Of the three scenarios listed, only the accumulation trust will provide both robust asset protection and the benefits of the stretch. The trustee can be given significant discretion whether or not to distribute trust assets to the beneficiary. Unfortunately, there are many "experienced" estate attorneys who either won't or can't draft accumulation trusts. They're certainly out there, but you may have to look a bit. BSteiner is our resident expert, and he can likely answer any detailed questions you may have. Please see my signature!
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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