Should we create a testamentary trust for $6M estate?

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2020content
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Should we create a testamentary trust for $6M estate?

Post by 2020content »

Due to some family dynamic changes, we decided to update our wills and change the beneficiary to just our one daughter. We are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren.

-- 30 yo daughter, married, with one child, more on the way
-- total value of our estate estimated to be $6.5M
-- most of the assets, 80%, are in index funds, CDs, and cash

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?

Thanks, Bogleheads, in advance for the wonderful feedback!
Gill
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

There is no question that a trust seems appropriate for your daughter to provide management of the assets, potentially to save significant estate taxes and protect her from claims of creditors and possibly spouses. A corporate trustee would seem advisable who would likely invest the trust in a manner similar to your current investments. Normally such a trust gives wide discretion to the trustee with respect to paying income and principal to your daughter or other beneficiaries. It would seem a huge mistake for many reasons to leave your estate outright to her.

In January you stated your estate is $3.5 million. Lots of growth since then! Also, what about the other children?
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
SouthernFIRE
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Re: Should we create a testamentary trust for $6M estate?

Post by SouthernFIRE »

A trust seems advisable and you should consult an estate planning attorney for the particulars. Generally, a trust saves on taxes by disbursing the estate over a period of time rather than all at once, especially if your estate is subject to the estate tax. You are under the current limit but it could change. There are other reasons besides taxes, including that you can direct what the money is spent on, how it is invested, and the view that it is unwise to give a young person a large sum of unrestricted money all at once.
Leesbro63
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Re: Should we create a testamentary trust for $6M estate?

Post by Leesbro63 »

SouthernFIRE wrote: Mon May 11, 2020 7:25 am A trust seems advisable and you should consult an estate planning attorney for the particulars. Generally, a trust saves on taxes by disbursing the estate over a period of time rather than all at once, especially if your estate is subject to the estate tax. You are under the current limit but it could change. There are other reasons besides taxes, including that you can direct what the money is spent on, how it is invested, and the view that it is unwise to give a young person a large sum of unrestricted money all at once.
Can you better explain or give an example of an trust saving taxes by disbursing the estate over a period of time?
SouthernFIRE
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Re: Should we create a testamentary trust for $6M estate?

Post by SouthernFIRE »

Leesbro63 wrote: Mon May 11, 2020 7:30 am
SouthernFIRE wrote: Mon May 11, 2020 7:25 am A trust seems advisable and you should consult an estate planning attorney for the particulars. Generally, a trust saves on taxes by disbursing the estate over a period of time rather than all at once, especially if your estate is subject to the estate tax. You are under the current limit but it could change. There are other reasons besides taxes, including that you can direct what the money is spent on, how it is invested, and the view that it is unwise to give a young person a large sum of unrestricted money all at once.
Can you better explain or give an example of an trust saving taxes by disbursing the estate over a period of time?
Sure - if your estate is over the estate tax threshold, then the estate is taxed at a very high rate upon disbursement to heirs (assuming you don’t have a trust). The current threshold is very high ($11.4 million) but has been lower in the past. If you have a trust, your estate is owned by your trust as of your death (or sometimes before) and is not disbursed upon your death. The trust disburses the assets over time so that the threshold is not hit, avoiding the estate tax.
Leesbro63
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Re: Should we create a testamentary trust for $6M estate?

Post by Leesbro63 »

SouthernFIRE wrote: Mon May 11, 2020 7:41 am
Leesbro63 wrote: Mon May 11, 2020 7:30 am
SouthernFIRE wrote: Mon May 11, 2020 7:25 am A trust seems advisable and you should consult an estate planning attorney for the particulars. Generally, a trust saves on taxes by disbursing the estate over a period of time rather than all at once, especially if your estate is subject to the estate tax. You are under the current limit but it could change. There are other reasons besides taxes, including that you can direct what the money is spent on, how it is invested, and the view that it is unwise to give a young person a large sum of unrestricted money all at once.
Can you better explain or give an example of an trust saving taxes by disbursing the estate over a period of time?
Sure - if your estate is over the estate tax threshold, then the estate is taxed at a very high rate upon disbursement to heirs (assuming you don’t have a trust). The current threshold is very high ($11.4 million) but has been lower in the past. If you have a trust, your estate is owned by your trust as of your death (or sometimes before) and is not disbursed upon your death. The trust disburses the assets over time so that the threshold is not hit, avoiding the estate tax.
Estate tax magic, eh? Wow!
Gill
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

SouthernFIRE wrote: Mon May 11, 2020 7:41 am
Leesbro63 wrote: Mon May 11, 2020 7:30 am
SouthernFIRE wrote: Mon May 11, 2020 7:25 am A trust seems advisable and you should consult an estate planning attorney for the particulars. Generally, a trust saves on taxes by disbursing the estate over a period of time rather than all at once, especially if your estate is subject to the estate tax. You are under the current limit but it could change. There are other reasons besides taxes, including that you can direct what the money is spent on, how it is invested, and the view that it is unwise to give a young person a large sum of unrestricted money all at once.
Can you better explain or give an example of an trust saving taxes by disbursing the estate over a period of time?
Sure - if your estate is over the estate tax threshold, then the estate is taxed at a very high rate upon disbursement to heirs (assuming you don’t have a trust). The current threshold is very high ($11.4 million) but has been lower in the past. If you have a trust, your estate is owned by your trust as of your death (or sometimes before) and is not disbursed upon your death. The trust disburses the assets over time so that the threshold is not hit, avoiding the estate tax.
I don’t understand this either. You seem to be talking about the estate of a beneficiary of an irrevocable trust where the trust assets are not included in his estate. Otherwise, I think you are confusing the issues for the OP. Isn’t your specialty plaintiff’s personal injury?
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
Topic Author
2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

Gill wrote: Mon May 11, 2020 7:08 am There is no question that a trust seems appropriate for your daughter to provide management of the assets, potentially to save significant estate taxes and protect her from claims of creditors and possibly spouses. A corporate trustee would seem advisable who would likely invest the trust in a manner similar to your current investments. Normally such a trust gives wide discretion to the trustee with respect to paying income and principal to your daughter or other beneficiaries. It would seem a huge mistake for many reasons to leave your estate outright to her.

In January you stated your estate is $3.5 million. Lots of growth since then! Also, what about the other children?
Gill
Thank you, Gill for the response. The $3.5 million mentioned in that post was the sum of our investment/retirement accounts. It did not include other property we own, but do not intend to use for retirement income. The $6.5m is the estimated now and future value of our estate and based on some assumptions:

-- life insurance (depending on how and when we decease)
-- personal property including home, real estate, and other possessions
-- likely inheritance and the estimation of that inheritance

Many factors may change, but this is what we know now and what we can reasonably plan for. I'm sure it will look different in 5 years and we might need to revise our wills based on what we know then... which we cannot know now.

Regarding, children... I was counting our SIL as a child (shouldn't have). We have one biological child.

Thanks!
bsteiner
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

2020content wrote: Mon May 11, 2020 6:49 am Due to some family dynamic changes, we decided to update our wills and change the beneficiary to just our one daughter. We are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly great-grandchildren.

-- 30 yo daughter, married, with one child, more on the way
-- total value of our estate estimated to be $6.5M
-- most of the assets, 80%, are in index funds, CDs, and cash

Questions:

1-- Should we place the assets in a testamentary trust?
2-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
3-- How does the trust avoid a large tax burden?
4-- Any ideas advice on how to invest the moneys in the trust?
5-- Any ideas or guidance on how to disperse the moneys?
6-- Anything else we should consider?
...
I numbered your questions to make it easier to associate my responses with your questions.

1. Yes. That will keep her inheritance out of her estate for estate tax purposes (even if this were her only asset, she would have a taxable estate once the estate tax exclusion amount reverts to pre-2018 law in 2026). It will also protect her inheritance from her creditors and spouses. It will also accomplish your objective of having someone else manage it. (If you're in California you would probably do this in a revocable trust rather than in your Will, but the effect is the same.)

2. You could use Vanguard's trust company, a conventional bank or trust company, or individuals if you have appropriate friends, family members or other appropriate individuals. You could have one or more individuals together with a bank or trust company.

3. The trust would be out of her estate for estate tax purposes. She would pay income tax on the income that's distributed each year, and the trust would pay income tax on the income that's not distributed. Trusts are generally in higher brackets than individuals, but unless she has substantial other income, the trust would likely distribute most or all of its income. If the trust doesn't do much trading, it won't have much in the way of capital gains.

4. That's for the trustees to decide, based on the expected duration of the trust, her current and expected future needs, and whatever other factors they deem relevant. Most likely they would invest in a way similar to what would be appropriate if the assets were hers, at least at this point.

5. That's for the trustees to decide, based on her current and future needs (and to a lesser degree the expected needs of her children), as well as tax considerations.

6. Make sure the trust is sufficiently flexible that the trustees will be able to do what's best from time to time. No one knows what the future will bring. Consider the degree of control, if any, that she should gain over the trust at a specified age. Select a law firm with a good trusts and estates practice.
Last edited by bsteiner on Mon May 11, 2020 10:24 am, edited 1 time in total.
KSActuary
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Re: Should we create a testamentary trust for $6M estate?

Post by KSActuary »

A couple points.

The revocable trust will save you money because it will be drafted to take advantage of twice the current estate tax limit.

After your both deceased, there may be an irrevocable trust which will need a separate tax id number. Income produced by the irrevocable trust not paid to the beneficiary each year is taxed at the highest marginal tax rate so the trust will make payments of interest and dividends each year to avoid the higher tax rate.

A corporate trustee can be an excellent choice, just know what you are getting into. Large banks with trust departments may want the legal work along with the assets. Trust departments may have different investment philosophies than you so be comfortable with that up front. Last, know the costs.

Good luck
afan
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Re: Should we create a testamentary trust for $6M estate?

Post by afan »

Your lawyer will remind you to make sure that the trust is the beneficiary of the life insurance.

If possible, find out form of the inheritance you are to receive. Will it be in trust for you with your daughter becoming the beneficiary on your death? If so, then the inheritance will not be in your estate for estate tax purposes and your need to keep money out of your daughter's estate will be less.

If the "other property" you own is real estate then, as far as I know, Vanguard will not accept a trust that includes real estate. Most trust companies and bank trust departments will hold real estate. This is just a Vanguard thing.

There should be some provision to change trustees in the future, once the trust is irrevocable.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

Gill wrote: Mon May 11, 2020 7:08 am It would seem a huge mistake for many reasons to leave your estate outright to her.
Could you explain why? Is a reason (other than potential taxes) that a multi-million inheritance may be destabilizing to a person (who doesn't already have a lot of money)? Or is there some other reason?

Would you recommend to the OP distribution in lump sums at certain ages (e.g., 35 and 40) or something longer term?

I'm looking at these same issues and my current inclination is lump sum distributions at maybe 25 and 30. My view (maybe naive) is that my kids should, at a certain age, be making their own decisions and living with the consequences (good or bad). I acknowledge there may be facts for some children that would require more oversight, but absent those facts, what are your thoughts?
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Re: Should we create a testamentary trust for $6M estate?

Post by delamer »

Given that the alternative is handing over $6 million in assets to a young adult who is ill-equipped to manage those assets, what else could you do? Surely, handling them over to her outright would be a bad idea?

But I am curious as to why your daughter isn’t your sole heir already?
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

cowdogman wrote: Mon May 11, 2020 10:07 am
Gill wrote: Mon May 11, 2020 7:08 am It would seem a huge mistake for many reasons to leave your estate outright to her.
Could you explain why? Is a reason (other than potential taxes) that a multi-million inheritance may be destabilizing to a person (who doesn't already have a lot of money)? Or is there some other reason?

Would you recommend to the OP distribution in lump sums at certain ages (e.g., 35 and 40) or something longer term?

I'm looking at these same issues and my current inclination is lump sum distributions at maybe 25 and 30. My view (maybe naive) is that my kids should, at a certain age, be making their own decisions and living with the consequences (good or bad). I acknowledge there may be facts for some children that would require more oversight, but absent those facts, what are your thoughts?
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.

However, if the original poster thought it appropriate, he could give his daughter effective control over her trust upon reaching a specified age. In other words, upon reaching a specified age, she could become a trustee, she could appoint (give) the trust assets to anyone she wanted (other than herself or her creditors), and she could remove and replace her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee). Or he could give her some but not all of these powers.
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Re: Should we create a testamentary trust for $6M estate?

Post by Seasonal »

bsteiner wrote: Mon May 11, 2020 8:41 am
2020content wrote: Mon May 11, 2020 6:49 am 5-- Any ideas or guidance on how to disperse the moneys?
6-- Anything else we should consider?
5. That's for the trustees to decide, based on her current and future needs (and to a lesser degree the expected needs of her children), as well as tax considerations.

6. Make sure the trust is sufficiently flexible that the trustees will be able to do what's best from time to time. No one knows what the future will bring. Consider the degree of control, if any, that she should gain over the trust at a specified age. Select a law firm with a good trusts and estates practice.
What would an institutional trustee likely do with either a general standard (such as health, education, maintenance and support) or something even more flexible (sole discretion)? Cover all of her expenses? Only cover needs? Design a lifetime budget? Something else?
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

KSActuary wrote: Mon May 11, 2020 9:57 am A corporate trustee can be an excellent choice, just know what you are getting into. Large banks with trust departments may want the legal work along with the assets. Trust departments may have different investment philosophies than you so be comfortable with that up front. Last, know the costs.

Good luck
Bank trust departments don't do legal work and they don't practice law.
Gill
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

Seasonal wrote: Mon May 11, 2020 10:38 am What would an institutional trustee likely do with either a general standard (such as health, education, maintenance and support) or something even more flexible (sole discretion)? Cover all of her expenses? Only cover needs? Design a lifetime budget? Something else?
There is no simple answer to your question, but I always took comfort in the fact that the trust institutions where I was employed used what was called a Discretionary Payments Committee comprised of senior officers who had the responsibility to review and approve all distributions where the trust company was given discretion. This elminated the risk of a single officer having total control over discretionary payments from trusts and created a more objective standard for these payments based on experience and group judgment. Obviously, this committee would do its best to administer the trust in the best interests of the beneficiaries including income beneficiaries and remaindermen giving due consideration to the reasons the trust was established.
Gill
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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

delamer wrote: Mon May 11, 2020 10:12 am Given that the alternative is handing over $6 million in assets to a young adult who is ill-equipped to manage those assets, what else could you do? Surely, handling them over to her outright would be a bad idea?

But I am curious as to why your daughter isn’t your sole heir already?
We had another family member as an heir. Now, she will be our only heir.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

bsteiner wrote: Mon May 11, 2020 10:23 am
cowdogman wrote: Mon May 11, 2020 10:07 am
Gill wrote: Mon May 11, 2020 7:08 am It would seem a huge mistake for many reasons to leave your estate outright to her.
Could you explain why? Is a reason (other than potential taxes) that a multi-million inheritance may be destabilizing to a person (who doesn't already have a lot of money)? Or is there some other reason?

Would you recommend to the OP distribution in lump sums at certain ages (e.g., 35 and 40) or something longer term?

I'm looking at these same issues and my current inclination is lump sum distributions at maybe 25 and 30. My view (maybe naive) is that my kids should, at a certain age, be making their own decisions and living with the consequences (good or bad). I acknowledge there may be facts for some children that would require more oversight, but absent those facts, what are your thoughts?
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Same question: Why?
J295
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Re: Should we create a testamentary trust for $6M estate?

Post by J295 »

No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Perhaps I'm not understanding this from Bsteiner post (highly respected poster on this topic).

I'm a retired lawyer from a firm whose estate planners routinely (and in my view appropriately) drafted trusts that provided for periodic distributions on reaching certain ages (often 1/3 at 30, 35, and 40). These lawyers included ACTEC members, state bar president, Harvard grad, estate plan periodical author, law professor, University trustee, etc.

Every family of course is unique. OP should consult with trusted advisors for the 30,000 foot decision then drill down on the details (which are not rocket science for a good professional/attorney). FWIW our plans leave outright to spouse and then to our three children now ages 30,32, 34 (if today each child would be 7 figure inheritances).

Remember too OP this does not have to be either/or .... it can be both/and .... you can leave part outright and part in trust ..... I am not a fan or ruling an adult child's life financially from the grave (and yes I understand from a capital preservation standpoint a trust is arguably "safer" especially in terms of creditors and divorce; but trusts have their downsides too).

YMMV. Seek good trusted counsel and dialogue for the best fit for your family.
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

J295 wrote: Mon May 11, 2020 11:22 am
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Perhaps I'm not understanding this from Bsteiner post (highly respected poster on this topic).

I'm a retired lawyer from a firm whose estate planners routinely (and in my view appropriately) drafted trusts that provided for periodic distributions on reaching certain ages (often 1/3 at 30, 35, and 40). These lawyers included ACTEC members, state bar president, Harvard grad, estate plan periodical author, law professor, University trustee, etc.

Every family of course is unique. OP should consult with trusted advisors for the 30,000 foot decision then drill down on the details (which are not rocket science for a good professional/attorney). FWIW our plans leave outright to spouse and then to our three children now ages 30,32, 34 (if today each child would be 7 figure inheritances).

Remember too OP this does not have to be either/or .... it can be both/and .... you can leave part outright and part in trust ..... I am not a fan or ruling an adult child's life financially from the grave (and yes I understand from a capital preservation standpoint a trust is arguably "safer" especially in terms of creditors and divorce; but trusts have their downsides too).

YMMV. Seek good trusted counsel and dialogue for the best fit for your family.
I won't pretend to speak for bsteiner, but I believe the thinking that mandated distributions are not advisable is based on the possibility that the required distribution may come at just the wrong time such as when a creditor is attempting to levy on a beneficiary's assets or when a spouse is seeking half the beneficiary's assets in a divorce. By making the distributions discretionary the trustee can protect the beneficiary from risks such as these. Also, the beneficiary may prefer to have the assets continue in trust to bypass his estate, for management purposes or because he wishes the assets to pass under the terms of the trust. From the standpoint of the trustee, mandated distributions increase the administrative work in managing the trust and may result in unfavorable results in determining the assets to be distributed.
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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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

J295 wrote: Mon May 11, 2020 11:22 am
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Perhaps I'm not understanding this from Bsteiner post (highly respected poster on this topic).

I'm a retired lawyer from a firm whose estate planners routinely (and in my view appropriately) drafted trusts that provided for periodic distributions on reaching certain ages (often 1/3 at 30, 35, and 40). These lawyers included ACTEC members, state bar president, Harvard grad, estate plan periodical author, law professor, University trustee, etc.

Every family of course is unique. OP should consult with trusted advisors for the 30,000 foot decision then drill down on the details (which are not rocket science for a good professional/attorney). FWIW our plans leave outright to spouse and then to our three children now ages 30,32, 34 (if today each child would be 7 figure inheritances).

Remember too OP this does not have to be either/or .... it can be both/and .... you can leave part outright and part in trust ..... I am not a fan or ruling an adult child's life financially from the grave (and yes I understand from a capital preservation standpoint a trust is arguably "safer" especially in terms of creditors and divorce; but trusts have their downsides too).

YMMV. Seek good trusted counsel and dialogue for the best fit for your family.
Good advice. Thank you.
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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

Gill wrote: Mon May 11, 2020 11:30 am
I won't pretend to speak for bsteiner, but I believe the thinking that mandated distributions are not advisable is based on the possibility that the required distribution may come at just the wrong time such as when a creditor is attempting to levy on a beneficiary's assets or when a spouse is seeking half the beneficiary's assets in a divorce. By making the distributions discretionary the trustee can protect the beneficiary from risks such as these. Also, the beneficiary may prefer to have the assets continue in trust to bypass his estate, for management purposes or because he wishes the assets to pass under the terms of the trust. From the standpoint of the trustee, mandated distributions increase the administrative work in managing the trust and may result in unfavorable results in determining the assets to be distributed.
Gill
Very good points.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

J295 wrote: Mon May 11, 2020 11:22 am
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Perhaps I'm not understanding this from Bsteiner post (highly respected poster on this topic).

I'm a retired lawyer from a firm whose estate planners routinely (and in my view appropriately) drafted trusts that provided for periodic distributions on reaching certain ages (often 1/3 at 30, 35, and 40). These lawyers included ACTEC members, state bar president, Harvard grad, estate plan periodical author, law professor, University trustee, etc.

Every family of course is unique. OP should consult with trusted advisors for the 30,000 foot decision then drill down on the details (which are not rocket science for a good professional/attorney). FWIW our plans leave outright to spouse and then to our three children now ages 30,32, 34 (if today each child would be 7 figure inheritances).

Remember too OP this does not have to be either/or .... it can be both/and .... you can leave part outright and part in trust ..... I am not a fan or ruling an adult child's life financially from the grave (and yes I understand from a capital preservation standpoint a trust is arguably "safer" especially in terms of creditors and divorce; but trusts have their downsides too).

YMMV. Seek good trusted counsel and dialogue for the best fit for your family.
Yes, those are exactly my thoughts too (and I'm a commercial finance attorney and our will (providing for distributions at 25, 30 and 35) was drafted by one of the top Seattle law firms).

I understand the arguments about asset protection, but the image of my sons at the age of 35+ having to justify an expense to a trustee is not attractive to me at all--borderline Kafkaesque.

But I'm trying to figure out if asset protection is the only thing driving the thinking of bsteiner and Gill. Or something else?
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

Seasonal wrote: Mon May 11, 2020 10:38 am ...
What would an institutional trustee likely do with either a general standard (such as health, education, maintenance and support) or something even more flexible (sole discretion)? Cover all of her expenses? Only cover needs? Design a lifetime budget? Something else?
If they have full discretion (which better drafted Wills provide), they would consider all of the facts and circumstances, including the current beneficiaries' current and expected needs, the subsequent beneficiaries, the size of the trust, perhaps the other assets available, income taxes, estate taxes, and any other relevant facts and circumstances. This is what they do, and they're usually pretty good at it.

If you limit their discretion, they're stuck with the restrictions, though they'll try to fit what's needed into the restrictions. Support and maintenance aren't limited to the poverty line.
cowdogman wrote: Mon May 11, 2020 11:03 am
bsteiner wrote: Mon May 11, 2020 10:23 am ...
I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Same question: Why?
Because no one knows what the future will bring.
J295 wrote: Mon May 11, 2020 11:22 am
No. I would not recommend mandating distribution at specified ages. I would strongly discourage it. A nationally prominent lawyer, now retired, said that if the client insisted on it, he would refuse to draft it, and tell the client to find another lawyer.
Perhaps I'm not understanding this from Bsteiner post (highly respected poster on this topic).

I'm a retired lawyer from a firm whose estate planners routinely (and in my view appropriately) drafted trusts that provided for periodic distributions on reaching certain ages (often 1/3 at 30, 35, and 40). These lawyers included ACTEC members, state bar president, Harvard grad, estate plan periodical author, law professor, University trustee, etc.

Every family of course is unique. OP should consult with trusted advisors for the 30,000 foot decision then drill down on the details (which are not rocket science for a good professional/attorney). FWIW our plans leave outright to spouse and then to our three children now ages 30,32, 34 (if today each child would be 7 figure inheritances).
...
When I first started doing estate planning, mandating distributions at ages such as 25, 30 and 35 was common.

In 1979, the IRS ruled (in Revenue Ruling 79-353) that if you created a trust and retained the power to remove and replace the trustee, the trust would be included in your estate. Most people thought or feared that the IRS might extend that to beneficiaries, and would say that if you gave a beneficiary that power, the trust would be included in the beneficiary's estate.

Given the choice between providing for the child outright at a specified age or providing for the child in a trust that the child would never control, most people preferred to mandate distribution at a specified age or ages.

In 1995, after losing a couple of court cases, the IRS changed its position (in Revenue Ruling 95-58). The IRS now says that if you create a trust, you may retain the power to remove and replace the trustee, and so long as the replacement trustee can't be a close relative or subordinate employee, the trust won't be included in your estate. If a grantor may retain this power, then presumably a beneficiary may have this power.

Now that you can give a beneficiary the power to remove and replace the trustees (or his/her co-trustee) without adverse tax consequences, you no longer have to choose between giving the beneficiary control and keeping the trust out of the beneficiary's estate and protecting the assets from the beneficiary's creditors and spouses, and Medicaid. You can have the best of both worlds. Instead of mandating distribution, you can provide that upon reaching the age when you would have mandated distribution, the beneficiary can become a trustee, may have the power to appoint (give) the trust assets to anyone he/she wants (except himself/herself or her creditors), and may have the power to remove and replace his/her co-trustees (provided the replacement trustee isn't a close relative or subordinate employee). Of course, depending on the circumstances, the beneficiary might have a lesser degree of control, or no control.

In 1995, the estate tax exclusion amount was only $600,000, so keeping inheritances out of children's estates was important, at least up to the then $1 million GST exemption. Many clients liked it for protection against spouses as well.

Given the level of the estate tax exclusion amount, it may no longer be advantageous to keep the child's inheritance out of his/her estate. In those cases, the trustees could distribute the assets, or give the child a broad or narrow testamentary general power of appointment.
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Re: Should we create a testamentary trust for $6M estate?

Post by afan »

Of course, the estate tax exclusion amount has varied over time, is scheduled to drop dramatically in a few years and no one has any idea what it may be decades from now. Keeping assets out of your heirs' estates helps them with their estate planning and is essentially "free". They need not pay a corporate trustee at all to get this favorable tax treatment.
To the extent that their reasons for a discretionary distribution are reasonable, then I assume they can get an independent trustee to agree to it.
The families I know that have received assets in this form are quite happy with it. A number of them were initially unhappy before they understood why things were set up that way. One person did go through a divorce and was glad this money was completely off the table. Among those I know, they got the money after they had been out on their own for a long time and established their lives without it. So far none that I know of has had to go to the trust for support or unexpected bills. The money is there if they need it and will go to their kids if they do not.

Gill,

Can you give examples of how a distribution committee dealt with borderline requests for discretionary distributions. Not "I want to buy a Ferrari" but "I want to put more money into my business". Say the borderline is whether putting trust assets into the business is a close call. Could work out well, might lose a lot.
Or some other request that perhaps some officers supported while others thought it was not appropriate?
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Re: Should we create a testamentary trust for $6M estate?

Post by senex »

2020content wrote: Mon May 11, 2020 6:49 am -- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
You've gotten some excellent advice from the professionals.

The cost of corporate trustees can be quite high. Vanguard may be among the lowest cost, especially because they use ultra-low-cost index funds as investments. If you go with an old-school trust company, your all-in costs may be 1-2+%/year, which consumes a large fraction of wealth.

From what I've read here, almost no corporate trustees will follow investing instructions (from you or anyone else) at your level of wealth. They will invest according to current herd behavior, which seems to be a lot more bonds than you may want for a beneficiary with a 50 years of life expectancy. If you want a Buffett-esque 90% S&P500, I think you need a friend/relative as trustee (or a flat fee trustee and a friend/relative investment advisor to that flat-fee trustee).

I haven't tried any of these things; just aggregating things I've read here.
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Re: Should we create a testamentary trust for $6M estate?

Post by afan »

Vanguard it seems would avoid active management and put the money in low cost cap weighted index funds.
The stock/bond allocation might be something to discuss with them as you are looking for corporate trustees. The trustee would have to consider the potential current needs of the beneficiary, which might argue in favor of some bonds in the portfolio, versus those of beneficiaries decades from now.
Schwab has placed its prices slightly below Vanguard. I have not heard how they will invest the money.

I do like the idea of an administrative trustee, which apparently will serve for a low flat fee, plus having beneficiaries or a separate company manage the investing. There are investment managers who will do a simple index fund portfolio for a low flat fee.
Depending on the size of the trust, this may be cheaper than Vanguard or Schwab, which do not offer flat fee pricing. Schwab wil serve as administrative trustee as long as the investments are handled by an entity that was in the large Schwab Advisor Network. The administrative fees are relatively low but you have to add the fees for the investment manager to get the total cost. By the time one pays an investment adviser the total cost may be similar to having Schwab or Vanguard also manage the investments.
As as as I know, Schwab will not serve as administrative trustee with an individual or group of beneficiaries handling the investments.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

bsteiner wrote: Mon May 11, 2020 11:45 am ...

Given the level of the estate tax exclusion amount, it may no longer be advantageous to keep the child's inheritance out of his/her estate. In those cases, the trustees could distribute the assets, or give the child a broad or narrow testamentary general power of appointment.
Thanks. That's a lot of info that I did not know before. And to be fair, our wills were drafted 20 years ago--so it probably does not comply with current practice in various ways. We have tentatively set up a time with our estate lawyer this summer to revisit the wills in their entireties. I'm just trying to think thru the issues before the meeting.

When you say "the trustees could distribute the assets, or give the child a broad or narrow testamentary general power of appointment," could the trust document provide for parameters when the trustee should do that?
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Re: Should we create a testamentary trust for $6M estate?

Post by illumination »

On a trust that has a future distribution built in based on something like age, can someone make a plausible future claim with that in mind?

So say a trust said 1/3 to be distributed at age 45, the beneficiary was 40 years old. Could a currently divorcing spouse make a "reasonable" claim on that money that will come to him in 5 years?

Just curious if that is a likely scenario with trusts structured that way.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

If you go with a corporate trustee, I would look for one who invests according to boglehead principles: something approximating a three fund portfolio.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

illumination wrote: Mon May 11, 2020 12:49 pm On a trust that has a future distribution built in based on something like age, can someone make a plausible future claim with that in mind?

So say a trust said 1/3 to be distributed at age 45, the beneficiary was 40 years old. Could a currently divorcing spouse make a "reasonable" claim on that money that will come to him in 5 years?

Just curious if that is a likely scenario with trusts structured that way.
This would almost certainly vary with state law, and whether a prenup was involved.
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Re: Should we create a testamentary trust for $6M estate?

Post by Taylor Larimore »

cowdogman:

I have little doubt that a trust structured by a competent probate attorney is a good idea.

I will suggest another idea which my wife and I adopted many years ago. Instead of waiting until your death to distribute your daughter's inheritance, consider giving her part of her inheritance now in the form of a monthly gift while she probably needs it most.

Best wishes.
Taylor
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Re: Should we create a testamentary trust for $6M estate?

Post by tibbitts »

2020content wrote: Mon May 11, 2020 6:49 am Due to some family dynamic changes, we decided to update our wills and change the beneficiary to just our one daughter. We are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren.

-- 30 yo daughter, married, with one child, more on the way
-- total value of our estate estimated to be $6.5M
-- most of the assets, 80%, are in index funds, CDs, and cash

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?

Thanks, Bogleheads, in advance for the wonderful feedback!
So it seems that somethng pretty dramatically changed. You were seemingly content with your daughter's judgement until now. What has made you less confident in her ability to manage the inheritance?

In terms of taxes there is still (even after taking some hits from recent legislation) some deferral capability for your deferred investments, and of course discretion for when to take capital gains on taxable investments.
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Re: Should we create a testamentary trust for $6M estate?

Post by Leesbro63 »

Taylor Larimore wrote: Mon May 11, 2020 1:39 pm cowdogman:

I have little doubt that a trust structured by a competent probate attorney is a good idea.

I will suggest another idea which my wife and I adopted many years ago. Instead of waiting until your death to distribute your daughter's inheritance, consider giving her part of her inheritance now in the form of a monthly gift while she probably needs it most.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I got time to plan my estate with some care. And I’m taking care of my wife of course first, and I’m taking care of my children, I have 6 children and those 12 grandchildren ."
Taylor has helped all of us with great advice. I'll be the devil's advocate here on this one: Perhaps a monthly gift just allows a bigger house or nicer car, but doesn't really improve the sustainable long term financial health of the adult child. I'd much rather gift to a 529 plan for grandkids or some other account for adult kids' retirement, but nothing they can access immediately. Even a gift to those effectively let's them "not save" as much for retirement or college. But they are better than direct gifts outright. I don't like the idea of directly subsidizing adult childrens' consumption. I think the Millionaire Next Door author Thomas Stanley called it "economic outpatient care".
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

illumination wrote: Mon May 11, 2020 12:49 pm On a trust that has a future distribution built in based on something like age, can someone make a plausible future claim with that in mind?

So say a trust said 1/3 to be distributed at age 45, the beneficiary was 40 years old. Could a currently divorcing spouse make a "reasonable" claim on that money that will come to him in 5 years?

Just curious if that is a likely scenario with trusts structured that way.
You may want to read this: https://www.skoloffwolfe.com/files/2015 ... vocate.pdf
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

Leesbro63 wrote: Mon May 11, 2020 1:46 pm
Taylor has helped all of us with great advice. I'll be the devil's advocate here on this one: Perhaps a monthly gift just allows a bigger house or nicer car, but doesn't really improve the sustainable long term financial health of the adult child. I'd much rather gift to a 529 plan for grandkids or some other account for adult kids' retirement, but nothing they can access immediately. Even a gift to those effectively let's them "not save" as much for retirement or college. But they are better than direct gifts outright. I don't like the idea of directly subsidizing adult childrens' consumption. I think the Millionaire Next Door author Thomas Stanley called it "economic outpatient care".
I agree with you, Leesbro63.
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Re: Should we create a testamentary trust for $6M estate?

Post by senex »

afan wrote: Mon May 11, 2020 12:16 pm Keeping assets out of your heirs' estates helps them with their estate planning and is essentially "free".
Afan said "essentially" and used quotes around "free." I think it's worth elaborating those qualifiers for benefit of OP. An inheritance left in trust has these costs:

(a) annual tax preparation costs (trust must file its own tax return)

(b) trustee expenses, which can range from zero if you have a willing friend/relative, to 0.5% - 2%+ per year all-in if you use a corporate trustee (trustee fee, plus investment expenses, plus tax inefficiency, plus tax churn). Over a 50-year life expectancy of child, corporate expenses at those rates would consume between 22% - 63+% of trust assets (edited after reading afan's later posts to say his idea for flat-fee trustee plus flat-fee advisor sounds like a promising way to reduce these expenses if you don't have a suitable friend/relative).

(c) the beneficiary cannot use the money how she wishes; she must get permission for each withdrawal (in some cases this is a non-financial/psychological cost, in some cases a benefit).

afan wrote: Mon May 11, 2020 12:16 pm They need not pay a corporate trustee at all to get this favorable tax treatment.
I'm glad you share this idea (of having friend as trustee) frequently, as it seems to be *the* lynchpin of a trust being clearly superior. Without it, expenses could consume more of the inheritance than a hypothetical divorce or future estate tax. With corporate trustee, the numeric superiority (if any) of a trust depends on a difficult computation of the probability of events decades hence, plus one's own risk aversion.

afan wrote: Mon May 11, 2020 12:16 pm To the extent that their reasons for a discretionary distribution are reasonable, then I assume they can get an independent trustee to agree to it.
I wish there were hard data on this point. How much lack of control & use actually occurs?

Appraisers may give a 20-30+% haircut to an asset that has true lack of control. So, if there is true lack of control, it may decrease the subjective "value" of the inheritance by a large amount. Conversely, if there is not bona fide lack of control, then the various protections may be lost.

There seem to be a lot of legal tricks/loopholes that convince the courts & gotv that the beneficiary has no control (when she gets sued, or has estate tax due), while allowing her to actually exercise a great deal of control (by changing trustees etc in such a way that she can withdraw & use money mostly as she wishes). The unsavory appearance of that dichotomy is, I think, something that creates hesitancy and doubt among non-lawyers that the promised benefits will operate as promised. Even if current law allows it, will the law continue to provide such special treatment to the children of the wealthy? etc.

I'm not saying you're wrong -- in fact, if anything most beneficiaries seem to extract plenty of money from their trusts. Just saying that this point is important, under-specified, subject to change over time (as law changes), and can feel mysterious/uncertain to a trust first-timer.

afan wrote: Mon May 11, 2020 12:16 pm The families I know that have received assets in this form are quite happy with it. A number of them were initially unhappy before they understood why things were set up that way.
The book The Cycle of the Gift claims (p. 70) that 80% of their clients report an inherited trust being a net negative impact on their life. They provide no raw data, they do not clarify the alternatives (do they mean relative to the money outright, or relative to no inheritance at all?), and it's unclear who forms their clientelle. It is interesting, though, and I'm glad to hear your personal stories in the other direction. Thanks for sharing.
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

tibbitts wrote: Mon May 11, 2020 1:43 pm
So it seems that somethng pretty dramatically changed. You were seemingly content with your daughter's judgement until now. What has made you less confident in her ability to manage the inheritance?

In terms of taxes there is still (even after taking some hits from recent legislation) some deferral capability for your deferred investments, and of course discretion for when to take capital gains on taxable investments.
The significant change is the size of our estate since we last updated our wills. What prompted the review of our wills was the desire to remove a family member. It was then that we were kind of "struck" by the size of the inheritance to our daughter... which prompted the question about establishing a trust.

We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

I think you're at the level of wealth, where you should at least be thinking about estate taxes. However, my understanding is most of the tax strategies with a trust involve giving away assets now: giving yearly amounts below the gift tax limits to a trust, or giving money to a trust now to lock in today's generous lifetime exemption and keep any future appreciation out of the estate.
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Re: Should we create a testamentary trust for $6M estate?

Post by delamer »

Leesbro63 wrote: Mon May 11, 2020 1:46 pm
Taylor Larimore wrote: Mon May 11, 2020 1:39 pm cowdogman:

I have little doubt that a trust structured by a competent probate attorney is a good idea.

I will suggest another idea which my wife and I adopted many years ago. Instead of waiting until your death to distribute your daughter's inheritance, consider giving her part of her inheritance now in the form of a monthly gift while she probably needs it most.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I got time to plan my estate with some care. And I’m taking care of my wife of course first, and I’m taking care of my children, I have 6 children and those 12 grandchildren ."
Taylor has helped all of us with great advice. I'll be the devil's advocate here on this one: Perhaps a monthly gift just allows a bigger house or nicer car, but doesn't really improve the sustainable long term financial health of the adult child. I'd much rather gift to a 529 plan for grandkids or some other account for adult kids' retirement, but nothing they can access immediately. Even a gift to those effectively let's them "not save" as much for retirement or college. But they are better than direct gifts outright. I don't like the idea of directly subsidizing adult childrens' consumption. I think the Millionaire Next Door author Thomas Stanley called it "economic outpatient care".
Money is, to a large extent, fungible. So you are right that contributing to a 529 for the grandkid allows the parents to more easily afford the high-end car, for example.

But if you are planning to leave your estate to your kid(s) anyway, why not give them the benefit of some of the money sooner rather than later? I speak as someone who received a substantial inheritance in my 60’s when I had already retired. Receiving even 1/10 of that money 10 years earlier would have allowed me to do some things to benefit me, my husband, and kids that were out of reach financially for us at the time.

(Note that I am not arguing for gifting money prematurely that you might need for your own upkeep, medical bills, long-term care, etc. Nor am I arguing that you have any obligation to leave money to your kids instead of your favorite charity. But if you are financially secure and want your kids to get the money eventually, then I don’t get the reluctance to gift some of it to them now.)
Last edited by delamer on Mon May 11, 2020 2:28 pm, edited 1 time in total.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

2020content wrote: Mon May 11, 2020 2:12 pm We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors.
On the investment angle, most corporate trustees might not be making the best decisions either: putting you in individual stocks or bonds, active mutual funds, or exotic high fee investments such as hedge funds and private equity. Some may brag about their tactical asset allocation, which is the new marketing term for market timing.
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Re: Should we create a testamentary trust for $6M estate?

Post by Leesbro63 »

2020content wrote: Mon May 11, 2020 2:12 pm
tibbitts wrote: Mon May 11, 2020 1:43 pm
So it seems that somethng pretty dramatically changed. You were seemingly content with your daughter's judgement until now. What has made you less confident in her ability to manage the inheritance?

In terms of taxes there is still (even after taking some hits from recent legislation) some deferral capability for your deferred investments, and of course discretion for when to take capital gains on taxable investments.
The significant change is the size of our estate since we last updated our wills. What prompted the review of our wills was the desire to remove a family member. It was then that we were kind of "struck" by the size of the inheritance to our daughter... which prompted the question about establishing a trust.

We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
Again to be the devil's advocate: I've seen this movie before. Where the grandchildren of a long-ago deceased "wealthy" person are about my age (60), with their own kids and grandkids. In at least as many cases as not, the money seems to have done more harm than good for the grandchildren or great-grandchildren than the cases where it did them good. The future generations can't even conceive of life without the money, so there's no "gee, grandpa really improved the quality of our life" "ah-ha" moment. And in a few cases the money just fueled substance habits...although that also happens without inherited money.
Last edited by Leesbro63 on Mon May 11, 2020 3:03 pm, edited 1 time in total.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

2020content wrote: Mon May 11, 2020 2:12 pm
We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I get this, but I am hopeful that if the money goes into a trust managed by an entity I trust (for me, Vanguard) for a certain period of time before being distributed, then that gives my sons a "cool down" period and a period where they can follow the decisions of the trustee and learn from them--before the money is distributed in full. If they don't learn and make serious mistakes, then ok, that's on them.

I also made the decision a few weeks ago to wrap my sons more into our financial situation and the way we deal with money--saving, investing, living below our means--usual Bogleheads stuff. I can't expect them to handle a significant sum of money without teaching them what I can.

Again, there may be reasons why a trustee for life makes sense for some kids and in some circumstances, but for me the default position should be complete distribution at some relatively young age. Requiring my sons to request money from a trustee for, potentially, the rest of their lives would, to me, be cruel.
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Re: Should we create a testamentary trust for $6M estate?

Post by bayview »

cowdogman wrote: Mon May 11, 2020 2:45 pm
2020content wrote: Mon May 11, 2020 2:12 pm
We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I get this, but I am hopeful that if the money goes into a trust managed by an entity I trust (for me, Vanguard) for a certain period of time before being distributed, then that gives my sons a "cool down" period and a period where they can follow the decisions of the trustee and learn from them--before the money is distributed in full. If they don't learn and make serious mistakes, then ok, that's on them.

I also made the decision a few weeks ago to wrap my sons more into our financial situation and the way we deal with money--saving, investing, living below our means--usual Bogleheads stuff. I can't expect them to handle a significant sum of money without teaching them what I can.

Again, there may be reasons why a trustee for life makes sense for some kids and in some circumstances, but for me the default position should be complete distribution at some relatively young age. Requiring my sons to request money from a trustee for, potentially, the rest of their lives would, to me, be cruel.
But they can be co-trustee and set their own distributions, correct? The protection is having the ability to appoint a co-trustee and temporarily step down.
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Re: Should we create a testamentary trust for $6M estate?

Post by tibbitts »

2020content wrote: Mon May 11, 2020 2:12 pm
tibbitts wrote: Mon May 11, 2020 1:43 pm
So it seems that somethng pretty dramatically changed. You were seemingly content with your daughter's judgement until now. What has made you less confident in her ability to manage the inheritance?

In terms of taxes there is still (even after taking some hits from recent legislation) some deferral capability for your deferred investments, and of course discretion for when to take capital gains on taxable investments.
The significant change is the size of our estate since we last updated our wills. What prompted the review of our wills was the desire to remove a family member. It was then that we were kind of "struck" by the size of the inheritance to our daughter... which prompted the question about establishing a trust.

We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I think I would try to work on improving her decision-making assuming you trust her basic intentions. Saying you trust her and then using the word "misappropriate" is an indication to most of us that something else is going on here. "Misapprpriate" is a very strong word. As for future generations, normally the greater risk would be there - with the money harming future generations that you have no way of knowing anything about now. Realistically a corporate trustee isn't going to know anything about the people involved either and may make decisions that cause more harm than good.

Around here people tend to consider "effective money management" as only investing in a strict Boglehead style. That's not really the point. There are reasonable things to do that aren't Boglehead-like. I don't think my beneficiary would do exactly what I would with the funds I'm leaving her, but that doesn't mean her choices would be better or worse than mine. I trust that they'd be reasonable, not the same as mine.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

bayview wrote: Mon May 11, 2020 2:59 pm
cowdogman wrote: Mon May 11, 2020 2:45 pm
2020content wrote: Mon May 11, 2020 2:12 pm
We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I get this, but I am hopeful that if the money goes into a trust managed by an entity I trust (for me, Vanguard) for a certain period of time before being distributed, then that gives my sons a "cool down" period and a period where they can follow the decisions of the trustee and learn from them--before the money is distributed in full. If they don't learn and make serious mistakes, then ok, that's on them.

I also made the decision a few weeks ago to wrap my sons more into our financial situation and the way we deal with money--saving, investing, living below our means--usual Bogleheads stuff. I can't expect them to handle a significant sum of money without teaching them what I can.

Again, there may be reasons why a trustee for life makes sense for some kids and in some circumstances, but for me the default position should be complete distribution at some relatively young age. Requiring my sons to request money from a trustee for, potentially, the rest of their lives would, to me, be cruel.
But they can be co-trustee and set their own distributions, correct? The protection is having the ability to appoint a co-trustee and temporarily step down.
You want the beneficiary to be co-trustee and set their own distributions. I can't imagine this would hold up in court in terms of asset protection.
To immunize trust assets from the creditor claims of the beneficiaries, the most prudent approach is to use an independent trustee and not use the beneficiary as trustee.
https://fredfranke.com/articles/8-5-ben ... ty-trusts/
Last edited by oldfort on Mon May 11, 2020 3:19 pm, edited 1 time in total.
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cowdogman
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

bayview wrote: Mon May 11, 2020 2:59 pm
cowdogman wrote: Mon May 11, 2020 2:45 pm
2020content wrote: Mon May 11, 2020 2:12 pm
We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I get this, but I am hopeful that if the money goes into a trust managed by an entity I trust (for me, Vanguard) for a certain period of time before being distributed, then that gives my sons a "cool down" period and a period where they can follow the decisions of the trustee and learn from them--before the money is distributed in full. If they don't learn and make serious mistakes, then ok, that's on them.

I also made the decision a few weeks ago to wrap my sons more into our financial situation and the way we deal with money--saving, investing, living below our means--usual Bogleheads stuff. I can't expect them to handle a significant sum of money without teaching them what I can.

Again, there may be reasons why a trustee for life makes sense for some kids and in some circumstances, but for me the default position should be complete distribution at some relatively young age. Requiring my sons to request money from a trustee for, potentially, the rest of their lives would, to me, be cruel.
But they can be co-trustee and set their own distributions, correct? The protection is having the ability to appoint a co-trustee and temporarily step down.
From what I understand, each son can be a co-trustee for his trust (if the trust permits) but CANNOT set his own distributions. Any distribution will need to be approved by the co-trustee, and the only recourse for non-approval is to replace the co-trustee. Is this not correct?

I agree the trustee options outlined by bsteiner above make the trust more livable, but they do not mean that the beneficiary is able unilaterally to make distributions to himself.
delamer
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Re: Should we create a testamentary trust for $6M estate?

Post by delamer »

tibbitts wrote: Mon May 11, 2020 3:08 pm
2020content wrote: Mon May 11, 2020 2:12 pm
tibbitts wrote: Mon May 11, 2020 1:43 pm
So it seems that somethng pretty dramatically changed. You were seemingly content with your daughter's judgement until now. What has made you less confident in her ability to manage the inheritance?

In terms of taxes there is still (even after taking some hits from recent legislation) some deferral capability for your deferred investments, and of course discretion for when to take capital gains on taxable investments.
The significant change is the size of our estate since we last updated our wills. What prompted the review of our wills was the desire to remove a family member. It was then that we were kind of "struck" by the size of the inheritance to our daughter... which prompted the question about establishing a trust.

We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
I think I would try to work on improving her decision-making assuming you trust her basic intentions. Saying you trust her and then using the word "misappropriate" is an indication to most of us that something else is going on here. "Misapprpriate" is a very strong word. As for future generations, normally the greater risk would be there - with the money harming future generations that you have no way of knowing anything about now. Realistically a corporate trustee isn't going to know anything about the people involved either and may make decisions that cause more harm than good.
Agreed. Your statement appears to be contradictory — we trust her, but we don’t want her to misappropriate her inheritance.

If you trust her to make good spending decisions but don’t think she has the ability to manage the investing side of the money well, those are two separate issues. As is the another potential issue of a SIL who you are afraid would exert undue influence.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
HomeStretch
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Re: Should we create a testamentary trust for $6M estate?

Post by HomeStretch »

If it is your strong desire that the inheritance last more than one generation, consider whether a portion should be left to an educational trust or fund 529 accounts in your lifetime for the benefit of your grandchildren.
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