Vanguard as Trustee of Estate Trust

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cowdogman
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Vanguard as Trustee of Estate Trust

Post by cowdogman » Thu Apr 30, 2020 10:16 am

Like a lot of people, COVID-19 has been making me think about estate plans.

Our (wife and I) will was put in place in 2000 and hasn't changed much since then. But our sons are now 22 and 15. I suspect that at least one of my wife and I will make it to my younger son's 18th birthday (I'm hoping that is an understatement).

Our will is set up so that if both my wife and I die 1/2 of the estate goes into a trust for the benefit of each son (that is, one trust for each son), with the trustee to distribute funds as needed (college, etc.) and also make some lump sum distributions at 25 (1/3), 30 (1/2) and 35 (100%) years of age--so that the trust is totally distributed at 35.

On the assumption that our sons are both over 18 at the time these trusts are created, there will no longer be a need to have a guardian appointed for our sons. It's really just a question of appointing a trustee.

For a large number of reasons I have been thinking that an independent trustee would be best--currently the trustee would be a relative.

Would Vanguard act as sole trustee in these circumstances? Is there a benefit/downside to having a relative/friend as a co-trustee to monitor Vanguard? I suspect my sons will also be monitoring Vanguard. Anything else I should be thinking about for this issue?

Thanks.

fourwheelcycle
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Re: Vanguard as Trustee of Estate Trust

Post by fourwheelcycle » Thu Apr 30, 2020 3:37 pm

Ha Ha, very funny beginning to your post. First, my wife and I are now in our early 70s and our sons are in their late thirties, with families of their own. My guess is that your understatement will turn out to be just that, and both you and your wife will outlive the age 35 final payouts provided in your testamentary trusts. Second, I expect, and hope, you and your wife do not share a single will.

I expect Vanguard would be willing to serve as the sole trustee for your trusts if you have enough money in each trust to interest them. I looked at their web site and I could not find a stated minimum, but my guess is that it might be $500K or so. I expect $1M or more in each trust would be fine. At that level, up to $5M per trust, their total fee will be about 1.1% per year, plus the expenses built into each index fund they put your money into. That total fee is probably less than a local bank trust department, or a local estate attorney, would charge. There is also a risk a local bank trust department or estate attorney would put your money in mutual funds with higher ERs, and perhaps other higher investment expenses, than the funds Vanguard would choose.

Regarding a possible co-trustee, I am certain Vanguard would only agree to serve as trustee if they have sole authority for financial management of the funds. I don't know whether they would accept a "partner" with regard to decisions about supplementary payouts your sons might request for special costs like first cars, first mortgage down payments, or even medical or educational expenses. I imagine you could call Vanguard and ask this question. However, I do expect a co-trustee, or a designated "go to" person, would be very helpful in advising your sons on life needs like negotiating lease provisions with a difficult landlord or advising on terms for a first mortgage.

Edit: Afan is correct. I added the numbers wrong - Vanguard's fee would be .55%.
Last edited by fourwheelcycle on Thu Apr 30, 2020 4:16 pm, edited 1 time in total.

afan
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Thu Apr 30, 2020 3:50 pm

I would not plan to distribute all the assets at specified ages. The beneficiaries are better off if the funds stay in the trusts with distributions at the discretion of the trustee. By keeping it that way forever, they get asset protection that they would lose if the funds went directly to them.

Vanguard's fees are 0.55% for amounts up to $5M. The fee would not be 1.1%. If there are two trusts, the fees would be 0.55%, or less for each trust. The index fund fees will be typical Vanguard- close to zero.
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senex
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Re: Vanguard as Trustee of Estate Trust

Post by senex » Thu Apr 30, 2020 10:01 pm

There are many threads on this topic, but not many summaries (that I've found) of the main pluses and minuses. Based on what I've read, it seems:

Corporate Trustee:
- unlikely to do anything reckless/illegal
- accustomed to dealing with difficult interpersonal issues
- potentially costly (with your age kids, if trust lasts 60 years even an Vanguard's cheap 0.55%, fees could consume 28% of the inheritance; for traditional trust companies, likely to consume over half)
- will invest like the herd (Vanguard better than most, and will choose index funds, but maybe more bonds and less tax-efficient than you prefer)
- special flat-fee trustees may allow an outside investment manager (for instance, your son could manage investments himself), if you have strong desire for control of investments
- some will refuse to serve as trustee if trust holds real estate (in some cases, holds anything besides stocks or etfs)

Volunteer Trustee:
- more likely to follow "quirky" requests that a corporate trustee would refuse
- more likely to make management mistakes or be manipulated (if a manipulative beneficiary is a possibility)
- if he/she is a close relative of beneficiary (or other close relationship), asset protections may be lost

Corporate Trustee with Volunteer or Beneficiary as co-Trustee:
- I don't really understand the pluses/minuses. It might depend on exactly what decisions the corporate trustee is willing to share.

No Trust:
- child can use money for anything he wants, no approval required by a trustee (this could be a plus or minus, depends on circumstance)
- no trust tax returns or other additional paperwork/administration/expenses
- no protection from lawsuits, divorce, etc.

Not a lawyer. Just summarizing themes I've seen on bogleheads.

oldfort
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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Fri May 01, 2020 8:19 pm

People worry too much about the asset protection angle of trusts. In most cases, your heirs could maintain a $10 million dollar umbrella policy for a fraction of the cost of a corporate trustee. If you're worried about how assets could get split up in the event your kids get a divorce, tell your sons to get a prenup and not to commingle marital and inherited property.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Fri May 01, 2020 8:34 pm

In some states avoiding loss of assets in divorce is not nearly that simple. If you advise your sons to get prenups, what do advise your daughters to do?

Umbrella insurance does nothing to protect your children from estate taxes at their deaths.
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oldfort
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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Fri May 01, 2020 8:39 pm

afan wrote:
Fri May 01, 2020 8:34 pm
In some states avoiding loss of assets in divorce is not nearly that simple. If you advise your sons to get prenups, what do advise your daughters to do?
Prenups work as well for brides as grooms. Based on what the OP posted here, I assumed the OP only has sons.

Mike83
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Re: Vanguard as Trustee of Estate Trust

Post by Mike83 » Sat May 02, 2020 12:08 am

In my VG Trust:
Last surviving spouse is sole trustee, until help is required due to infirmity
Then one designated adult child steps in with VG as co-trustee
At death of remaining spouse, that arrangement continues with trust for each child
----
Trust distributes according to guidelines in the document, for basic life needs

But each child can decide to take possession of their trust assets at a certain age (eg become the co-trustee and/or switch corporate trustee). They are likely to reach that age before the trusts are activated.

They have all reached an age where they understand the benefits of isolating these marital assets and that the trusts provide an excuse (soft barrier) not to co-mingle assets.

And if they pass 'without issue' the funds roll up to their surviving siblings, and then to the surviving grandchildren

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Re: Vanguard as Trustee of Estate Trust

Post by cowdogman » Sat May 02, 2020 9:55 am

senex wrote:
Thu Apr 30, 2020 10:01 pm
There are many threads on this topic, but not many summaries (that I've found) of the main pluses and minuses. Based on what I've read, it seems:

....
Thanks all.

For me the only purpose of the trust is to make sure the money is not squandered at a young age. The asset protection (to the extent available) is nice but that is something my kids can make their own decisions/mistakes about that when relevant. Ditto the pre-nup. I'd rather be a fond memory than have a role in those decisions.

senex: thanks for the helpful pros and cons. I'm coming to the conclusion VG as sole trustee makes sense. Also I contemplating reducing the 25/30/35 distributions to 25 (1/3) and 30 (100%).

Thanks again.

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Re: Vanguard as Trustee of Estate Trust

Post by sport » Sat May 02, 2020 10:05 am

senex wrote:
Thu Apr 30, 2020 10:01 pm
investments
- some will refuse to serve as trustee if trust holds real estate (in some cases, holds anything besides stocks or etfs)
I remember reading other threads that stated that Vanguard will not be a trustee for real estate.

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Re: Vanguard as Trustee of Estate Trust

Post by cowdogman » Sat May 02, 2020 10:23 am

sport wrote:
Sat May 02, 2020 10:05 am
senex wrote:
Thu Apr 30, 2020 10:01 pm
investments
- some will refuse to serve as trustee if trust holds real estate (in some cases, holds anything besides stocks or etfs)
I remember reading other threads that stated that Vanguard will not be a trustee for real estate.
Thanks. Pretty sure our trust will ultimately hold only $$, but there likely would be a time when real and personal property is liquidated and/or distributed. I'll look into that.

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celia
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Re: Vanguard as Trustee of Estate Trust

Post by celia » Sat May 02, 2020 12:51 pm

I’ve never heard of a joint will. Is that in case you both die at the same time? I hope you don’t, and especially within the next 3 years.

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Re: Vanguard as Trustee of Estate Trust

Post by cowdogman » Sat May 02, 2020 1:00 pm

celia wrote:
Sat May 02, 2020 12:51 pm
I’ve never heard of a joint will. Is that in case you both die at the same time? I hope you don’t, and especially within the next 3 years.
A joint will between spouses is a will signed by both spouses and is intended to bind the surviving spouse--that is, so that the surviving spouse cannot change the will--as opposed to a will for each spouse (often identical).

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sat May 02, 2020 3:10 pm

cowdogman wrote:
Sat May 02, 2020 9:55 am
senex wrote:
Thu Apr 30, 2020 10:01 pm
There are many threads on this topic, but not many summaries (that I've found) of the main pluses and minuses. Based on what I've read, it seems:

....
Thanks all.

For me the only purpose of the trust is to make sure the money is not squandered at a young age. The asset protection (to the extent available) is nice but that is something my kids can make their own decisions/mistakes about that when relevant.

Thanks again.

Unfortunately, no. The kids do not get to make a decision about whether the trust assets are held in trust for them for their lifetimes. You make that decision when you do your estate planning. If you set it up to distribute the assets to them outright at some point, then the asset and estate tax protection is gone and they cannot get it back.

Fine if you do not want to provide those protections. Do not make your decision on the false assumption that your children can reclaim those advantages later.
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: Vanguard as Trustee of Estate Trust

Post by oldfort » Sat May 02, 2020 3:42 pm

afan wrote:
Sat May 02, 2020 3:10 pm
Unfortunately, no. The kids do not get to make a decision about whether the trust assets are held in trust for them for their lifetimes. You make that decision when you do your estate planning. If you set it up to distribute the assets to them outright at some point, then the asset and estate tax protection is gone and they cannot get it back.

Fine if you do not want to provide those protections. Do not make your decision on the false assumption that your children can reclaim those advantages later.
This is true up to a point. 19 states now allow for domestic asset protection trusts, which are self-settled.

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Re: Vanguard as Trustee of Estate Trust

Post by cowdogman » Sat May 02, 2020 4:25 pm

oldfort wrote:
Sat May 02, 2020 3:42 pm
afan wrote:
Sat May 02, 2020 3:10 pm
Unfortunately, no. The kids do not get to make a decision about whether the trust assets are held in trust for them for their lifetimes. You make that decision when you do your estate planning. If you set it up to distribute the assets to them outright at some point, then the asset and estate tax protection is gone and they cannot get it back.

Fine if you do not want to provide those protections. Do not make your decision on the false assumption that your children can reclaim those advantages later.
This is true up to a point. 19 states now allow for domestic asset protection trusts, which are self-settled.
Thanks both. My main point was that I'd like those options to be up to them--to the extent available.

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Re: Vanguard as Trustee of Estate Trust

Post by illumination » Sat May 02, 2020 4:34 pm

Is this a really large sum of money? If it is and you start getting into estate tax issues, generation skipping, etc, that's where I could see an arrangement like that making more sense.

My advice is not to go down this path unless it's a really large amount. The experience I had with a corporate trustee was not great, I felt the fees and investment decisions were poorly done. Also just difficult in general to work with. But this was a more traditional trust company, not Vanguard, so that may be a totally different model. There is also the reality of legal fees that go along with this type of arrangement (but that's obviously a big x factor) Also, to do a trust in a way where it offers asset protection, you have to put in restrictions to where it can almost feel like it's someone else's money. It can't really be a switch you just throw on and off whenever the beneficiary wants the money and then you claim it's "untouchable" for asset protection.

If you had someone you felt you could trust and take that role until you felt the adult kids were old enough and gave specific instructions on how to invest, I would do that instead.

afan
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sat May 02, 2020 5:05 pm

oldfort wrote:
Sat May 02, 2020 3:42 pm
afan wrote:
Sat May 02, 2020 3:10 pm
Unfortunately, no. The kids do not get to make a decision about whether the trust assets are held in trust for them for their lifetimes. You make that decision when you do your estate planning. If you set it up to distribute the assets to them outright at some point, then the asset and estate tax protection is gone and they cannot get it back.

Fine if you do not want to provide those protections. Do not make your decision on the false assumption that your children can reclaim those advantages later.
This is true up to a point. 19 states now allow for domestic asset protection trusts, which are self-settled.
They allow for those trusts but there are serious questions about how well they work.

In many of those states the law specifically exempts divorce decrees from protection. All of the states impose minimum time periods, years, between funding the trust and when the protection becomes effective. All states exclude protection in case of fraudulent conveyances. If your children do not live in an asset protection state or if the suit against them is in a non asset protection state, then there may be little protection.

If you fund a self settled trust, you do not escape estate taxes.

The protection you can provide by setting this up in your estate plan has none of these limitations. Individuals cannot reproduce for themselves the advantages of having it done by their parents.

Not. Even. Close.
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sat May 02, 2020 5:11 pm

illumination wrote:
Sat May 02, 2020 4:34 pm
Is this a really large sum of money? If it is and you start getting into estate tax issues, generation skipping, etc, that's where I could see an arrangement like that making more sense.

My advice is not to go down this path unless it's a really large amount. The experience I had with a corporate trustee was not great, I felt the fees and investment decisions were poorly done. Also just difficult in general to work with. But this was a more traditional trust company, not Vanguard, so that may be a totally different model. There is also the reality of legal fees that go along with this type of arrangement (but that's obviously a big x factor) Also, to do a trust in a way where it offers asset protection, you have to put in restrictions to where it can almost feel like it's someone else's money. It can't really be a switch you just throw on and off whenever the beneficiary wants the money and then you claim it's "untouchable" for asset protection.

If you had someone you felt you could trust and take that role until you felt the adult kids were old enough and gave specific instructions on how to invest, I would do that instead.
Important to give the beneficiaries or a trust protector the ability to change trustees.

Giving the trustee but not the beneficiary discretion for distributions is key to the protection. This is often described as the goal for those who don't want their kids to get full control of the money too soon. When the kids are the ages at which some would simply give them the money, they can serve as trustees, only needing an independent trustee if they want to make a discretionary distribution.

This approach maintains asset protection and keeps the money out of their taxable estates.
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: Vanguard as Trustee of Estate Trust

Post by oldfort » Sat May 02, 2020 5:17 pm

afan wrote:
Sat May 02, 2020 5:05 pm
If you fund a self settled trust, you do not escape estate taxes.
Obviously, but there is nothing in this thread to indicate the OP's estate is likely to be over the lifetime exemption.

illumination
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Re: Vanguard as Trustee of Estate Trust

Post by illumination » Sat May 02, 2020 6:48 pm

afan wrote:
Sat May 02, 2020 5:11 pm
illumination wrote:
Sat May 02, 2020 4:34 pm
Is this a really large sum of money? If it is and you start getting into estate tax issues, generation skipping, etc, that's where I could see an arrangement like that making more sense.

My advice is not to go down this path unless it's a really large amount. The experience I had with a corporate trustee was not great, I felt the fees and investment decisions were poorly done. Also just difficult in general to work with. But this was a more traditional trust company, not Vanguard, so that may be a totally different model. There is also the reality of legal fees that go along with this type of arrangement (but that's obviously a big x factor) Also, to do a trust in a way where it offers asset protection, you have to put in restrictions to where it can almost feel like it's someone else's money. It can't really be a switch you just throw on and off whenever the beneficiary wants the money and then you claim it's "untouchable" for asset protection.

If you had someone you felt you could trust and take that role until you felt the adult kids were old enough and gave specific instructions on how to invest, I would do that instead.
Important to give the beneficiaries or a trust protector the ability to change trustees.

Giving the trustee but not the beneficiary discretion for distributions is key to the protection. This is often described as the goal for those who don't want their kids to get full control of the money too soon. When the kids are the ages at which some would simply give them the money, they can serve as trustees, only needing an independent trustee if they want to make a discretionary distribution.

This approach maintains asset protection and keeps the money out of their taxable estates.

In the situation I referenced, there were stipulations on what types of organizations could do it. And shopping around, many places were just as bad. And most places do not take a "Boglehead" approach to investing. Some even had like a 1% exit fee, etc. Everyone involved with the trust just decided to just decant the trust and make an individual the trustee instead of a corporate trustee. Everyone involved felt it was a big mistake to use this estate planning model, the organization (Northern Trust) had a TERRIBLE rate of return during a bull market. Tried to sell all sorts us all sorts of things like secondary private equity offerings, etc. Put us in their funds that had at least 10 times the expense ratio a similar Vanguard fund, etc.

I personally am just not a fan of the corporate trustee model unless you have assets that start approaching into Estate Tax territory. That's when you can realize massive tax savings and allow generations access to the wealth and you're protecting an "empire". Places like Vanguard handling it though may be a much better experience than what I had. I personally though have had really poor service with Vanguard just doing basic service on a brokerage account (but I'm a big fan of their funds)

I don't know what the OP is dealing with in terms of dollars, but if I wanted to leave under a million dollars to each of my adult kids, no way would I go down this road.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sat May 02, 2020 8:01 pm

oldfort wrote:
Sat May 02, 2020 5:17 pm
afan wrote:
Sat May 02, 2020 5:05 pm
If you fund a self settled trust, you do not escape estate taxes.
Obviously, but there is nothing in this thread to indicate the OP's estate is likely to be over the lifetime exemption.
Funding the trust would not affect the estate tax situation for the OP. That would not be the goal of this aspect of estate planning.
However, leaving the assets in trust to the children would keep them out of the children's estates. Since the children are likely to live many decades from now, no one knows what the exclusion amount would be at the time of their deaths.
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

BillWalters
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Re: Vanguard as Trustee of Estate Trust

Post by BillWalters » Sat May 02, 2020 8:22 pm

It continues to surprise me that no corporate trust company has gobbled up market share by eliminating all the nonsense that accompanies dealing with the typical corporate trustee today. Their fees are nothing short of outrageous.

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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Sat May 02, 2020 8:31 pm

afan wrote:
Sat May 02, 2020 5:05 pm
In many of those states the law specifically exempts divorce decrees from protection.

The protection you can provide by setting this up in your estate plan has none of these limitations.
It's not nearly as simple as this to enable your heirs to escape their legal obligations. Many states treat spouses, ex-spouses, and children of beneficiaries as exception creditors who can attach to distributions from any spendthrift trust for child support or alimony.
Last edited by oldfort on Sun May 03, 2020 3:44 pm, edited 1 time in total.

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Re: Vanguard as Trustee of Estate Trust

Post by Gill » Sat May 02, 2020 8:48 pm

cowdogman wrote:
Sat May 02, 2020 1:00 pm
celia wrote:
Sat May 02, 2020 12:51 pm
I’ve never heard of a joint will. Is that in case you both die at the same time? I hope you don’t, and especially within the next 3 years.
A joint will between spouses is a will signed by both spouses and is intended to bind the surviving spouse--that is, so that the surviving spouse cannot change the will--as opposed to a will for each spouse (often identical).
These are not valid in all states and can sometimes be ignored by courts by allowing the survivor to ignore the document. Also can be inadvisable because they don’t allow for changed circumstances. There are often better ways to accomplish the same objective.
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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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sun May 03, 2020 9:52 am

oldfort wrote:
Sat May 02, 2020 8:31 pm
afan wrote:
Sat May 02, 2020 5:05 pm
In many of those states the law specifically exempts divorce decrees from protection.

The protection you can provide by setting this up in your estate plan has none of these limitations.
It's not nearly as simple as this to enable your heirs to escape their legal obligations. Many states treat ex-spouses as exception creditors who can attach to distributions from any spendthrift trust for child support or alimony.
The protection will be better for trusts created by the parent for the child than for a trust that the child establishes for themselves.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Vanguard as Trustee of Estate Trust

Post by cowdogman » Sun May 03, 2020 10:55 am

Gill wrote:
Sat May 02, 2020 8:48 pm
cowdogman wrote:
Sat May 02, 2020 1:00 pm
celia wrote:
Sat May 02, 2020 12:51 pm
I’ve never heard of a joint will. Is that in case you both die at the same time? I hope you don’t, and especially within the next 3 years.
A joint will between spouses is a will signed by both spouses and is intended to bind the surviving spouse--that is, so that the surviving spouse cannot change the will--as opposed to a will for each spouse (often identical).
These are not valid in all states and can sometimes be ignored by courts by allowing the survivor to ignore the document. Also can be inadvisable because they don’t allow for changed circumstances. There are often better ways to accomplish the same objective.
Gill
Agreed. I was trying to not be judgmental. Joint wills are another way for somebody to try to control others from the grave, which in general I don't think is a good thing--despite the best of intentions.

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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Sun May 03, 2020 12:18 pm

afan wrote:
Sat May 02, 2020 8:01 pm
oldfort wrote:
Sat May 02, 2020 5:17 pm
afan wrote:
Sat May 02, 2020 5:05 pm
If you fund a self settled trust, you do not escape estate taxes.
Obviously, but there is nothing in this thread to indicate the OP's estate is likely to be over the lifetime exemption.
Funding the trust would not affect the estate tax situation for the OP. That would not be the goal of this aspect of estate planning.
However, leaving the assets in trust to the children would keep them out of the children's estates. Since the children are likely to live many decades from now, no one knows what the exclusion amount would be at the time of their deaths.
There can be significant tax disadvantages to a trust. The trust may pay higher tax rates on undistributed income than the beneficiary would be subject to. I'm willing to bet most of the smaller trusts get spent down to zero long before the unborn grandchildren would be in a position to inherit it 60 years in the future.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sun May 03, 2020 12:46 pm

The trustee can invest with taxes in mind. The trustee can also distribute income so that it will be taxed at the beneficiaries' rates. Although the trust tax brackets are compressed, the tax rates are the same as for individuals. If the beneficiary has a tax rate above zero, then one can minimize taxes by keeping income within the trust until the trust tax rate would equal the beneficiary rate. If trust and beneficiary average tax rates are equal, then there is no tax penalty to holding income inside the trust.

If the beneficiary is in the top tax bracket then holding income inside the trust reduces income taxes.

These considerations are not secret. Every year the trustee can take account of taxes on trust income as compared to beneficiary income and decide whether to distribute income or retain it in trust.

With dividends as low as they are now, even quite large trusts will have low levels of taxable income. The trustee would have to decide whether the asset protection and estate planning advantages justify paying slightly higher income taxes, if in a given case retaining income would result in higher taxes at all.
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sun May 03, 2020 12:48 pm

oldfort wrote:
Sun May 03, 2020 12:18 pm
afan wrote:
Sat May 02, 2020 8:01 pm
oldfort wrote:
Sat May 02, 2020 5:17 pm
afan wrote:
Sat May 02, 2020 5:05 pm
If you fund a self settled trust, you do not escape estate taxes.
Obviously, but there is nothing in this thread to indicate the OP's estate is likely to be over the lifetime exemption.
Funding the trust would not affect the estate tax situation for the OP. That would not be the goal of this aspect of estate planning.
However, leaving the assets in trust to the children would keep them out of the children's estates. Since the children are likely to live many decades from now, no one knows what the exclusion amount would be at the time of their deaths.
There can be significant tax disadvantages to a trust. The trust may pay higher tax rates on undistributed income than the beneficiary would be subject to. I'm willing to bet most of the smaller trusts get spent down to zero long before the unborn grandchildren would be in a position to inherit it 60 years in the future.
I suspect you are right. That does not mean doing so is a good idea. Many people come to this site to avoid doing foolish things.
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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Sun May 03, 2020 5:31 pm

afan wrote:
Sun May 03, 2020 12:46 pm
The trustee can invest with taxes in mind. The trustee can also distribute income so that it will be taxed at the beneficiaries' rates. Although the trust tax brackets are compressed, the tax rates are the same as for individuals. If the beneficiary has a tax rate above zero, then one can minimize taxes by keeping income within the trust until the trust tax rate would equal the beneficiary rate. If trust and beneficiary average tax rates are equal, then there is no tax penalty to holding income inside the trust.

If the beneficiary is in the top tax bracket then holding income inside the trust reduces income taxes.

These considerations are not secret. Every year the trustee can take account of taxes on trust income as compared to beneficiary income and decide whether to distribute income or retain it in trust.

With dividends as low as they are now, even quite large trusts will have low levels of taxable income. The trustee would have to decide whether the asset protection and estate planning advantages justify paying slightly higher income taxes, if in a given case retaining income would result in higher taxes at all.
It's not that difficult for a smallish trust to reach the top tax brackets. A $1 million trust, invested 50% in corporate bonds, yielding 5%, will produce $25k/year in taxable interest. For a trust, the 35% bracket starts at $9,300. If the beneficiary is in the 24% bracket, then the tax efficient strategy, as you note, would be to distribute most of the interest, dividends, and short terms capital gains to the beneficiary every year. However, making large distributions consistently diminishes the value of the trust. This dovetails into my second point about how many 7 figure trusts will be distributed, spent, and terminated long before the OP's potential grandkids might theoretically be in a position to inherit what remains 60+ years in the future.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Sun May 03, 2020 7:01 pm

It might be more logical for the trustee to hold tax exempt bonds, depending on the beneficiaries' tax rates.

The most recent SEC yield on the Vanguard Intermediate Term Corporate Bond fund is 2.82%, nowhere close to 5%.

The yield of the total stock market fund is 2.19%. A 50/50 portfolio would have a yield of 2.50% That would be $25,000 taxable (assuming they did not use muni bonds). If one used munis, then the taxable income would be $10,950. The taxes on that would be 24% of the full $10,945 if distributed to the beneficiary.

Again, the trustee would have the choice of whether to distribute or retain income in the trust. The beneficiaries' tax brackets would be among the considerations.

For a beneficiary in the 24% bracket without any money from the trust, if all of that $10,950 were distributed, then all of it would be taxed as 24%. If retained in the trust, the first $2,600 would be taxed at 10%, less than the rate of the beneficiary. From a tax perspective, it would behoove the trustee to retain at least that amount in the trust. From $2,600 to $9,450 the trust tax rate would be 24%, same as for the beneficiary. Only the $1,500 above $9,450 would be taxed at 35%. That would be $525 in tax, or 0.025% of the total value of the trust.
The total tax paid would be less if some income were left in the trust, rather than paying it all out to the beneficiary. If the money had been left to the beneficiary outright then there would be no option to retain a part of the income and pay tax at a lower rate.
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Re: Vanguard as Trustee of Estate Trust

Post by LilyFleur » Sun May 03, 2020 7:21 pm

oldfort wrote:
Sun May 03, 2020 5:31 pm
afan wrote:
Sun May 03, 2020 12:46 pm
The trustee can invest with taxes in mind. The trustee can also distribute income so that it will be taxed at the beneficiaries' rates. Although the trust tax brackets are compressed, the tax rates are the same as for individuals. If the beneficiary has a tax rate above zero, then one can minimize taxes by keeping income within the trust until the trust tax rate would equal the beneficiary rate. If trust and beneficiary average tax rates are equal, then there is no tax penalty to holding income inside the trust.

If the beneficiary is in the top tax bracket then holding income inside the trust reduces income taxes.

These considerations are not secret. Every year the trustee can take account of taxes on trust income as compared to beneficiary income and decide whether to distribute income or retain it in trust.

With dividends as low as they are now, even quite large trusts will have low levels of taxable income. The trustee would have to decide whether the asset protection and estate planning advantages justify paying slightly higher income taxes, if in a given case retaining income would result in higher taxes at all.
It's not that difficult for a smallish trust to reach the top tax brackets. A $1 million trust, invested 50% in corporate bonds, yielding 5%, will produce $25k/year in taxable interest. For a trust, the 35% bracket starts at $9,300. If the beneficiary is in the 24% bracket, then the tax efficient strategy, as you note, would be to distribute most of the interest, dividends, and short terms capital gains to the beneficiary every year. However, making large distributions consistently diminishes the value of the trust. This dovetails into my second point about how many 7 figure trusts will be distributed, spent, and terminated long before the OP's potential grandkids might theoretically be in a position to inherit what remains 60+ years in the future.
In my experience, a small estate of $1 million doesn't buy you a lot of discussions about tax strategy with a corporate trustee/executor. Also, better write that trust to cover ALL the contingencies in case of the corporate trustee taking over in case of incapacity. When my other was diagnosed with severe dementia and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners. I gave my children each their normal Christmas check and let them know I was loaning Grammy the money. It made my mom happy; she didn't even notice she hadn't signed the check or that it was a check on my bank.

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Re: Vanguard as Trustee of Estate Trust

Post by bsteiner » Sun May 03, 2020 9:20 pm

LilyFleur wrote:
Sun May 03, 2020 7:21 pm
... When my other was diagnosed with severe dementia and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners. I gave my children each their normal Christmas check and let them know I was loaning Grammy the money. It made my mom happy; she didn't even notice she hadn't signed the check or that it was a check on my bank.
While there's some overlap, trusts and estates law and elder law (mainly Medicaid and guardianships) are for the most part different practice areas.

It's possible to draft to permit gifts. There's been considerable discussion as to whether it's advisable to do so now that very few people have estates large enough to pay estate tax, and allowing for gifts increases the possibility of abuse. A middle ground in drafting is to permit annual exclusion gifts consistent with the principal's history of making such gifts.

Was there a need for a corporate trustee during her lifetime? Was there a reason it wasn't appropriate to give one or more of her children a power of attorney?

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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Sun May 03, 2020 10:43 pm

afan wrote:
Sun May 03, 2020 7:01 pm
It might be more logical for the trustee to hold tax exempt bonds, depending on the beneficiaries' tax rates.

The most recent SEC yield on the Vanguard Intermediate Term Corporate Bond fund is 2.82%, nowhere close to 5%.
Interest rates are at historic lows. Whether those historically low rates will persist 5, 10, or 30 years into the future is anyone's guess. While it is possible to manage a trust in a tax-efficient manner: invest in index funds for stocks and tax exempt bonds, which corporate trustees do so? With the exception of Vanguard, I would be surprised if any corporate trustees invested the assets in a three fund portfolio, substituted a muni fund for VBTLX, and called it a day.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Mon May 04, 2020 7:01 am

There are alternatives under which one hires an administrative trustee to handle the noninvestment tasks and has someone else manage the investments. This could be a paid adviser who will run a simple portfolio. There are those who will do it for a low flat fee, not charging based on assets under management at all. It could be an individual, including a beneficiary, who may do it for free.

I agree that it may be difficult to find a traditional trustee who would do a simple all index portfolio. However, even a traditional trustee should be thinking about taxes.

If there is a way to change trustees, the the beneficiaries are able to switch if a corporate trustee is not doing its job.

Not all such trusts require a corporate trustee at all. That is a solution when there is no one else to do the job. For many people they are not necessary.
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Mon May 04, 2020 7:52 am

LilyFleur wrote:
Sun May 03, 2020 7:21 pm
and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners.
If the trust was written by an experienced estates and trusts attorney and mom was a financial planner, I would at least consider the possibility that she was using that "omission" to get out from under the expectation of those gifts.

How did you lend money to the trusts for an expense the trust was not authorized to incur? How did you lend it to someone who had severe dementia? Using a POA? Or was it a gift to mom, not a loan?
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Re: Vanguard as Trustee of Estate Trust

Post by Gill » Mon May 04, 2020 7:57 am

afan wrote:
Mon May 04, 2020 7:52 am
LilyFleur wrote:
Sun May 03, 2020 7:21 pm
and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners.
If the trust was written by an experienced estates and trusts attorney and mom was a financial planner, I would at least consider the possibility that she was using that "omission" to get out from under the expectation of those gifts.

How did you lend money to the trusts for an expense the trust was not authorized to incur? How did you lend it to someone who had severe dementia? Using a POA? Or was it a gift to mom, not a loan?
Sounds as if she told her children she was lending Grammy the money when she really was not.
Gill
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Re: Vanguard as Trustee of Estate Trust

Post by afan » Mon May 04, 2020 8:13 am

So just a gift directly to the kids, with the grandmother not really involved.
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Re: Vanguard as Trustee of Estate Trust

Post by LilyFleur » Mon May 04, 2020 11:59 am

bsteiner wrote:
Sun May 03, 2020 9:20 pm
LilyFleur wrote:
Sun May 03, 2020 7:21 pm
... When my other was diagnosed with severe dementia and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners. I gave my children each their normal Christmas check and let them know I was loaning Grammy the money. It made my mom happy; she didn't even notice she hadn't signed the check or that it was a check on my bank.
While there's some overlap, trusts and estates law and elder law (mainly Medicaid and guardianships) are for the most part different practice areas.

It's possible to draft to permit gifts. There's been considerable discussion as to whether it's advisable to do so now that very few people have estates large enough to pay estate tax, and allowing for gifts increases the possibility of abuse. A middle ground in drafting is to permit annual exclusion gifts consistent with the principal's history of making such gifts.

Was there a need for a corporate trustee during her lifetime? Was there a reason it wasn't appropriate to give one or more of her children a power of attorney?
Both of her daughters lived very far away, and she was in severe denial about her declining cognitive ability. She would order the same items online multiple times, and her friend who worked for her helped her with all the bills and returned all the duplicate items. Finally it got to be too much, and after her diagnosis and she was declared incapacitated, the corporate trustee took over. I was in a job that had barely any time off, and my sister was in a similar situation. We still spent a significant amount of time helping her remotely, and every day on my commute to work, I spent on the phone with my mom. I finally ended up quitting my job, but she died a few months later. The corporate trustee was very helpful settling the estate, selling things, dealing with medical bills, getting the trusts taxes done, etc.

Thank you for the perspective on gifts. Her gifts were not large (less than $1,000) but it felt really strange that the trustee would not do that for her grandchildren.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Mon May 04, 2020 12:09 pm

Our trusts would let a trustee continue an established pattern of gifting.
In your case, Mom's trustee was presumably following the terms of the instrument she signed.
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Re: Vanguard as Trustee of Estate Trust

Post by LilyFleur » Mon May 04, 2020 12:11 pm

afan wrote:
Mon May 04, 2020 7:52 am
LilyFleur wrote:
Sun May 03, 2020 7:21 pm
and the trustee took over, the estate was not allowed to give my Mom's normal Christmas gifts to her children and grandchildren, even though she wanted to, because it wasn't written specifically into her trust. And, yes, my parents' trusts were written by the top estate/elder care attorney in their state, and both my parents were financial planners.
If the trust was written by an experienced estates and trusts attorney and mom was a financial planner, I would at least consider the possibility that she was using that "omission" to get out from under the expectation of those gifts.

How did you lend money to the trusts for an expense the trust was not authorized to incur? How did you lend it to someone who had severe dementia? Using a POA? Or was it a gift to mom, not a loan?
I didn't do it officially so perhaps it was an informal loan, and it was only for the last Christmas before she died. The gifts were small, $500 to each of my children, which was what she normally gave, but I was a single mom, underemployed, and that was $1,000 that I had to take out of my HELOC, knowing that eventually I would be paid back when the estate was paid out.

Perhaps it was a safeguard built into the trust. I know that there was some protective language in my father's trust about my mom remarrying, but thankfully, that did not happen. With her dementia taking part of her away from us, it just felt good for her to be able to give my children her normal amount at Christmas. Toward the end, I don't even think she was aware she had a trust or a trustee, but she did know all of us up to the end.

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Re: Vanguard as Trustee of Estate Trust

Post by bsteiner » Mon May 04, 2020 12:15 pm

LilyFleur wrote:
Mon May 04, 2020 11:59 am
...
Both of her daughters lived very far away, and she was in severe denial about her declining cognitive ability. She would order the same items online multiple times, and her friend who worked for her helped her with all the bills and returned all the duplicate items. Finally it got to be too much, and after her diagnosis and she was declared incapacitated, the corporate trustee took over. I was in a job that had barely any time off, and my sister was in a similar situation. We still spent a significant amount of time helping her remotely, and every day on my commute to work, I spent on the phone with my mom. I finally ended up quitting my job, but she died a few months later. The corporate trustee was very helpful settling the estate, selling things, dealing with medical bills, getting the trusts taxes done, etc.

Thank you for the perspective on gifts. Her gifts were not large (less than $1,000) but it felt really strange that the trustee would not do that for her grandchildren.
Banks and trust companies prefer to be trustees rather than agents under a power of attorney. So if your mother wanted a bank or trust company to take over, it was appropriate for her to have a revocable trust.
afan wrote:
Mon May 04, 2020 12:09 pm
Our trusts would let a trustee continue an established pattern of gifting.
In your case, Mom's trustee was presumably following the terms of the instrument she signed.
Our clients' revocable trusts often contain such a provision as well.
Last edited by bsteiner on Mon May 04, 2020 9:34 pm, edited 1 time in total.

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Re: Vanguard as Trustee of Estate Trust

Post by senex » Mon May 04, 2020 9:09 pm

oldfort wrote:
Sun May 03, 2020 10:43 pm
With the exception of Vanguard, I would be surprised if any corporate trustees invested the assets in a three fund portfolio, substituted a muni fund for VBTLX, and called it a day.
afan wrote:
Mon May 04, 2020 7:01 am
There are alternatives under which one hires an administrative trustee to handle the noninvestment tasks and has someone else manage the investments. This could be a paid adviser who will run a simple portfolio. There are those who will do it for a low flat fee, not charging based on assets under management at all. It could be an individual, including a beneficiary, who may do it for free.
afan and oldfort, thank you for your extended counterpoint (not just the point above, but your whole back-and-forth). It improved my understanding of the theoretical and practical aspects of trusts.

Based on boglehead posts, both from experts and the common man, it seems that an ideally structured/managed trust can be strictly better than an outright bequest, but that (a) it's difficult to structure it ideally, (b) it's difficult to know whether you've structured it ideally (until it's too late), and (c) it's difficult to know whether the benefits are worth the costs (because both are difficult to estimate on trust timescales).

Appreciate your discourse.

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Re: Vanguard as Trustee of Estate Trust

Post by MikeG62 » Tue May 05, 2020 7:34 am

oldfort wrote:
Fri May 01, 2020 8:19 pm
...If you're worried about how assets could get split up in the event your kids get a divorce, tell your sons to get a prenup and not to commingle marital and inherited property.
Easy to say, but not so easy to do. The discussion of a prenup itself can be enough to derail marriage plans or send the discussion to a very bad place. Totally different situation than assets one party inherits in trust (something they had no choice about in the first place).

FWIW, our wills provide that our assets pass to our adult daughters in trust. The trusts will allow for distributions for HEMS. So they will have considerable, but not unfettered access to the funds. The primary reason for using trusts is to protect the assets from a divorcing spouse. It also has the possible benefit of protecting our daughters from themselves (i.e., such as squandering the money too quickly). There are countless stories out there about inheritances being wasted within a few years of receipt by people who had no experience managing large sums of money. We have discussed the use of trusts with our daughters and they think it makes a ton of sense. In fact, their response was, “why doesn’t everyone do it this way”. Trusts will distribute taxable income so as to avoid high trust tax rates at low levels of income.

Is a trust more effort to manage than not? Sure it is. We have made the decision that for our family the benefits outweigh the costs. Plus, it importantly avoids putting our daughters in the difficult position of needing to have a discussion about prenup’s with their potential spouse.
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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Tue May 05, 2020 11:30 am

MikeG62 wrote:
Tue May 05, 2020 7:34 am
It also has the possible benefit of protecting our daughters from themselves (i.e., such as squandering the money too quickly). There are countless stories out there about inheritances being wasted within a few years of receipt by people who had no experience managing large sums of money.
The median age to receive an inheritance is 60. Your daughters are likely to be in their 40s or older by the time they inherit.

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Re: Vanguard as Trustee of Estate Trust

Post by MikeG62 » Tue May 05, 2020 11:38 am

oldfort wrote:
Tue May 05, 2020 11:30 am
MikeG62 wrote:
Tue May 05, 2020 7:34 am
It also has the possible benefit of protecting our daughters from themselves (i.e., such as squandering the money too quickly). There are countless stories out there about inheritances being wasted within a few years of receipt by people who had no experience managing large sums of money.
The median age to receive an inheritance is 60. Your daughters are likely to be in their 40s or older by the time they inherit.
Hopefully they will be really old when they inherit the assets. But the will is to address what happens now. Plenty of time to change it when and if circumstances dictate changes make sense.
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Re: Vanguard as Trustee of Estate Trust

Post by BuyandHold37 » Tue May 05, 2020 11:58 am

Another thing you may want to consider, depending on the amount of money we are talking about.

Create trusts that follow the bloodline, in perpetuity.

For example:

Upon the death of the surviving spouse, 50% of assets go into a trust for son #1, and 50% of assets go into a trust for son #2.

They are to receive a certain payout of the value of the trust, say 5% of value, spread over 12 months. ($1MM/$50K/$4,166 per month....reset annually based on the value of the assets as of say Dec 31).

When son #1 dies, if he has two children, the assets remaining in his trust go 50/50 to his two children, etc.

If son #2 dies and has no children, his assets flow back into his brother's trust, or if son #1 is already deceased, split 50/50 into the trusts of the two children of son #1.

This goes on in perpetuity, or until the assets run out.

Your sons are welcome to purchase life insurance policies, etc. that will create a windfall for their spouse, but they cannot will the assets of the trust or the monthly distributions to their spouses.

The benefit of this would be that you are leaving a legacy that lives over multiple generations. Also, your sons would have less pressure put on them to provide an inheritance for their heirs, and thus could enjoy more of their own money with their families during their lifetimes.
It all but guarantees that they will always have a roof over their heads and will not go hungry. ("Give them enough to do something, not enough to do nothing.")

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Re: Vanguard as Trustee of Estate Trust

Post by oldfort » Tue May 05, 2020 12:01 pm

BuyandHold37 wrote:
Tue May 05, 2020 11:58 am
Another thing you may want to consider, depending on the amount of money we are talking about.

Create trusts that follow the bloodline, in perpetuity.
Some states have rules against perpetuities.

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Re: Vanguard as Trustee of Estate Trust

Post by afan » Tue May 05, 2020 2:51 pm

Then create the trust in a state that does not have that rule.
Is a trust more effort to manage than not? Sure it is
In 30 years with a revocable trust I have never encountered an issue that would not have been identical without the trust. Once established, there is nothing to it.

In a few years as trustee of an irrevocable trust I have the the "trouble" to be negligible. Have to file a trust tax return. Otherwise it is the same as if there were no trust.

People who do not have them grossly over estimate the cost and hassle. There is nothing to it. Easy.
Last edited by afan on Tue May 05, 2020 3:24 pm, edited 1 time in total.
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