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

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

Post by Luckywon » Mon May 11, 2020 3:50 pm

2020content wrote:
Mon May 11, 2020 6:49 am

-- total value of our estate estimated to be $6.5M
Is a significant portion of your assets in retirement accounts? This portion will have to be given special consideration in your estate plan. If you want to control/protect these assets via a trust, you could set up a retirement trust but make sure this is done properly so that the IRA distributions to the retirement trust are not subject to adverse tax consequences.

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

Post by oldfort » Mon May 11, 2020 3:52 pm

Assume the inflation adjusted SWR rate for a perpetual trust is 3%, then your $6M estate could produce $180k/year. If you had four grandkids and eight great-grandkids, then at some point, your trust might be supporting 12 beneficiaries. Split among 12 heirs, then $180k/year results in $15k/year for each beneficiary. If the family tree grows faster than the trust, at some point the per beneficiary distributions start to be less significant. In their other thread, the OP referred to kids, plural.

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

Post by cchrissyy » Mon May 11, 2020 4:12 pm

if I'm reading between the lines properly, you previously wanted your daughter and her husband to inherit, but something happened and now you don't want the husband to reach it. is that the point here? you trust her, but as long as he is around you want a 3rd party to make sure only she and the kid(s) get it? that makes sense to me, and i think you need a lawyer. it would be shortsighted to limit your daughter's control only to turn everything over to the grandkids someday, who have much less of your influence and more of their parents. also you need to plan for what if she passes away before you.

it also sounds like you previously thought her inheritance was well-sized and doubling feels like too much money. maybe you want to leave her a fixed dollar amount instead of a percent.

this is an opportunity to think about who else you would like to give to. Charity, extended family, etc.

And consider stopping life insurance, if you already have more assets than you feel comfortable leaving behind.

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

Post by afan » Mon May 11, 2020 4:36 pm

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



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
This assumes your kids go along with such gifting. Our kids will gratefully accept a "thought that counts" gift of token value at a birthday or seasonal holidays.

They will not accept anything that hints of paying their expenses for them. Obsessed with standing on their own feet. If they need our help to buy something, then they conclude they cannot afford it and do without.

By the same token, they pay the taxes on the income from the funds we have given them over time but otherwise never touch that money.

Their independence lead to some difficult discussions about annual exclusion gifts, which we ended up discontinuing when they insisted we stop. We are not worried about them squandering what we may leave to them. They know they are our heirs and will get what is left eventually. They expect that at least one of us will live for many decades to come. The kids are not holding their breath to get their hands on the money. All families are different, I suppose.

I assume, certainly hope, that they would accept our help if they needed it.

But giving them any significant amount of money now is off the table.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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

Post by afan » Mon May 11, 2020 4:44 pm

It is perfectly reasonable to respect your child as a responsible person but also to believe that they do not look at the world in a way that would let them manage the investments well. One of our kids is frugal and responsible. Would never blow an inheritance on fast living. Wonderful loyal friend and relative. Generous of their time and energy. A delightful person. But far too trusting. Endearing but worrisome.
I would be terrified if some stockbrokers or insurance salespeople were to get their hooks into them. For this one, having a more skeptical family member or a corporate trustee may be the best way to ensure that money for them does not end up in the hands of some crook.

To treat everyone fairly, all the assets will go to trusts on behalf of the kids. The non-financial person is unlikely to be interested in managing the money anyway.
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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2020content
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Joined: Sun Jan 12, 2020 10:34 am

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

Post by 2020content » Mon May 11, 2020 4:57 pm

tibbitts wrote:
Mon May 11, 2020 3:08 pm

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.
tibbitts - I would rather not go into intimate detail over why we don't wish to give our daughter $6.5M in one lump sum or without certain conditions. Perhaps if you knew her entire history and her probable future, you would agree... perhaps you wouldn't. I'm sure you can imagine, if you use your imagination, a plethora of reasons why it might not be wise to bequeath someone a large sum of money. Trusting someone will be reasonable may be possible with some people, but not all.

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

Post by 2020content » Mon May 11, 2020 4:58 pm

Luckywon wrote:
Mon May 11, 2020 3:50 pm
2020content wrote:
Mon May 11, 2020 6:49 am

-- total value of our estate estimated to be $6.5M
Is a significant portion of your assets in retirement accounts? This portion will have to be given special consideration in your estate plan. If you want to control/protect these assets via a trust, you could set up a retirement trust but make sure this is done properly so that the IRA distributions to the retirement trust are not subject to adverse tax consequences.
Very good point!

Topic Author
2020content
Posts: 38
Joined: Sun Jan 12, 2020 10:34 am

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

Post by 2020content » Mon May 11, 2020 5:00 pm

cchrissyy wrote:
Mon May 11, 2020 4:12 pm
if I'm reading between the lines properly, you previously wanted your daughter and her husband to inherit, but something happened and now you don't want the husband to reach it. is that the point here? you trust her, but as long as he is around you want a 3rd party to make sure only she and the kid(s) get it? that makes sense to me, and i think you need a lawyer. it would be shortsighted to limit your daughter's control only to turn everything over to the grandkids someday, who have much less of your influence and more of their parents. also you need to plan for what if she passes away before you.

it also sounds like you previously thought her inheritance was well-sized and doubling feels like too much money. maybe you want to leave her a fixed dollar amount instead of a percent.

this is an opportunity to think about who else you would like to give to. Charity, extended family, etc.

And consider stopping life insurance, if you already have more assets than you feel comfortable leaving behind.
All very good points.

Topic Author
2020content
Posts: 38
Joined: Sun Jan 12, 2020 10:34 am

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

Post by 2020content » Mon May 11, 2020 5:02 pm

afan wrote:
Mon May 11, 2020 4:44 pm
It is perfectly reasonable to respect your child as a responsible person but also to believe that they do not look at the world in a way that would let them manage the investments well. One of our kids is frugal and responsible. Would never blow an inheritance on fast living. Wonderful loyal friend and relative. Generous of their time and energy. A delightful person. But far too trusting. Endearing but worrisome.
I would be terrified if some stockbrokers or insurance salespeople were to get their hooks into them. For this one, having a more skeptical family member or a corporate trustee may be the best way to ensure that money for them does not end up in the hands of some crook.

To treat everyone fairly, all the assets will go to trusts on behalf of the kids. The non-financial person is unlikely to be interested in managing the money anyway.
Thank you, afan. I appreciate your response.

SouthernFIRE
Posts: 71
Joined: Tue Jul 10, 2018 1:24 pm

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

Post by SouthernFIRE » Mon May 11, 2020 6:25 pm

Gill wrote:
Mon May 11, 2020 7:59 am
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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.

SouthernFIRE
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Joined: Tue Jul 10, 2018 1:24 pm

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

Post by SouthernFIRE » Mon May 11, 2020 6:27 pm

Leesbro63 wrote:
Mon May 11, 2020 7:44 am
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!
Not magic. The basic purpose for a trust for those with assets exceeding estate tax threshold. But there are other good reasons as have been mentioned in the thread.

Gill
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Location: Florida

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

Post by Gill » Mon May 11, 2020 6:38 pm

SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am
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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
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

bsteiner
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Location: NYC/NJ/FL

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

Post by bsteiner » Mon May 11, 2020 7:12 pm

cowdogman wrote:
Mon May 11, 2020 12:49 pm
...
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?
It could. Our clients' Wills do.

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

Post by bsteiner » Mon May 11, 2020 7:18 pm

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.
In about 3/4 of the states, gifts and inheritances aren't subject to equitable distribution (division) upon divorce (assuming the assets can be traced), though the income that the trust produces or could produce might be taken into account in determining alimony and child support, especially if the child was receiving distributions.

However, in about 1/4 of the states, gifts are inheritances are in the pot for equitable distribution upon divorce.

There's no way to know where a child might live at the time of divorce.

oldfort
Posts: 1024
Joined: Mon Mar 02, 2020 8:45 pm

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

Post by oldfort » Mon May 11, 2020 7:33 pm

Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am
SouthernFIRE wrote:
Mon May 11, 2020 7:41 am
Leesbro63 wrote:
Mon May 11, 2020 7:30 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Right, I always thought if the OP wanted to avoid estate taxes on their own estate, he would need to create an irrevocable trust now. They could put money in the trust now, which would count against their lifetime exemption. However, any appreciation on the assets of the trust between now and his death would be kept out of the OP's estate. The tradeoff is losing the step up in basis at death.

oldfort
Posts: 1024
Joined: Mon Mar 02, 2020 8:45 pm

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

Post by oldfort » Mon May 11, 2020 7:44 pm

afan wrote:
Mon May 11, 2020 12:16 pm
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".
It's not completely free. Because the assets are in the trust, there is no step up in basis when the heirs pass away, creating higher capital gains taxes.

SouthernFIRE
Posts: 71
Joined: Tue Jul 10, 2018 1:24 pm

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

Post by SouthernFIRE » Mon May 11, 2020 7:48 pm

Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am
SouthernFIRE wrote:
Mon May 11, 2020 7:41 am
Leesbro63 wrote:
Mon May 11, 2020 7:30 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.

Gill
Posts: 6369
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

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

Post by Gill » Mon May 11, 2020 8:11 pm

SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am
SouthernFIRE wrote:
Mon May 11, 2020 7:41 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
Counselor, I know you’re an attorney but clearly not a T & E attorney. With all due respect, you are dead wrong. I wish it were so easy to avoid estate taxes. The taxes on your hypothetical estate would be the same, regardless of how it is left. Also, what makes you think an income beneficiary is taxed at capital gains rates? Are you also aware of generation skipping taxes? We are not talking past each other. I suspect most laymen reading your post will know it’s wrong. Stick with your personal injury practice. I’m sure it’s more profitable than T & E.😀
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

oldfort
Posts: 1024
Joined: Mon Mar 02, 2020 8:45 pm

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

Post by oldfort » Mon May 11, 2020 8:23 pm

afan wrote:
Mon May 11, 2020 12:16 pm
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.
In 2026, it drops to $5 million adjusted for inflation. However, with portability, the surviving spouse in a married couple can have an exemption of $10 million.

Luckywon
Posts: 947
Joined: Tue Mar 28, 2017 10:33 am

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

Post by Luckywon » Mon May 11, 2020 8:34 pm

SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am
SouthernFIRE wrote:
Mon May 11, 2020 7:41 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
Layman here but very clearly advised by my trust attorney that assets in a revocable living trust are included in the estate of the grantor so do not minimize estate taxes of the grantor.

Gill
Posts: 6369
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

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

Post by Gill » Mon May 11, 2020 8:35 pm

Leesbro63 wrote:
Mon May 11, 2020 7:44 am
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!
No, not magic. Wrong information.
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

Gill
Posts: 6369
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Location: Florida

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

Post by Gill » Mon May 11, 2020 8:36 pm

Luckywon wrote:
Mon May 11, 2020 8:34 pm
SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
Layman here but very clearly advised by my trust attorney that assets in a revocable living trust are included in the estate of the grantor so do not minimize estate taxes of the grantor.
Correct. Please ignore the information I’ve advised is in error.
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

tibbitts
Posts: 10678
Joined: Tue Feb 27, 2007 6:50 pm

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

Post by tibbitts » Mon May 11, 2020 8:46 pm

This thread is almost making me glad I'll never have close to the amount of the OP's estate, and very glad that I'm leaving everything to just one person I trust will do something reasonable with

BillWalters
Posts: 99
Joined: Sun Aug 11, 2019 5:21 pm

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

Post by BillWalters » Mon May 11, 2020 8:51 pm

Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading. That said, probably still worth it as the money will be out of my generations estate.

Luckywon
Posts: 947
Joined: Tue Mar 28, 2017 10:33 am

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

Post by Luckywon » Mon May 11, 2020 9:25 pm

Gill wrote:
Mon May 11, 2020 8:36 pm
Luckywon wrote:
Mon May 11, 2020 8:34 pm
SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm


No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
Layman here but very clearly advised by my trust attorney that assets in a revocable living trust are included in the estate of the grantor so do not minimize estate taxes of the grantor.
Correct. Please ignore the information I’ve advised is in error.
Gill
Thanks Gill. One thing I am not quite clear on is step up in a RLT. My understanding is that there is still a step-up in basis of the assets on the grantor's death, but none subsequent to that, while they are in the trust. Can anyone here confirm that?

MathIsMyWayr
Posts: 1790
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

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

Post by MathIsMyWayr » Mon May 11, 2020 9:57 pm

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".
I consider the Taylor's idea is another gem of his. If you live a long life, your beneficiaries may be well past the retirement ages. What is the point in giving help after the game is over? Money is an enabler. I consider giving while they are active is the best bang for the buck. A little money may open up some opportunities for them which are beyond their dreams otherwise. I don't want to keep what I have until my kids turn 70 or 80. Do you know that Prince Charles is 71? He may be a prince for all his life.

bsteiner
Posts: 4916
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

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

Post by bsteiner » Mon May 11, 2020 10:09 pm

SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
...
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
If you created it during lifetime it wouldn't be a testamentary trust since a testamentary trust is one that you create by Will.

If you gave away $100 million you would pay $40 million of gift tax (ignoring your $11,580,000 exclusion amount). So if you only had $100 million and you already used your $11,580,000 exclusion amount you could only give away $71,428,571. You would pay gift tax of $28,571,428 of gift tax, which would use the remaining portion of your $100 million.

The estate and gift tax savings is that, assuming you live for 3 years from the date of the gift, the gift tax is excluded from your estate. In other words, if you do this during lifetime, your family gets $71,428,571 and the IRS gets $28,571,428, whereas if you wait until death your family gets $60 million and the IRS gets $40 million.

The tradeoff is that you give up the basis step-up on what you give away.

You would probably want to give away at least $11,580,000 since once the exclusion reverts to pre-2017 law in 2026, the opportunity to use the larger exclusion amount will be lost.

The gift could be to a trust that's out of your estate but is a grantor trust for income tax purposes. By having to pay the income tax on the trust's income and gains, you're effectively shifting additional wealth, free of transfer tax.

There are other techniques available, such as sales, loans, grantor retained annuity trusts.

SouthernFIRE
Posts: 71
Joined: Tue Jul 10, 2018 1:24 pm

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

Post by SouthernFIRE » Mon May 11, 2020 10:25 pm

Gill wrote:
Mon May 11, 2020 8:11 pm
SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
Gill wrote:
Mon May 11, 2020 6:38 pm
SouthernFIRE wrote:
Mon May 11, 2020 6:25 pm
Gill wrote:
Mon May 11, 2020 7:59 am


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
No, you are confused. I didn’t say anything about the beneficiary of a trust. Not sure where you got that. The main benefit of a trust for the ultra wealthy is avoiding estate taxes. The reason is that assets in a trust are not disbursed/taxable on death. OP is not quite to the level where estate tax is a current concern but the threshold may return to historical levels. The discussion has moved on so I don’t think further discussion is helpful to the OP.
Maybe I am confused, even though I’ve been in trusts and estates most of my life. Please elaborate how leaving assets in trust reduces the estate taxes at death. Aside from marital trusts and charitable trusts, I don’t know what you are describing. My reference to beneficiaries of trusts was that there are tax savings to them through the use of trusts but you insist you are referring to decedents’estates. I don’t follow your explanation and feel it is misleading others. Federal estate tax has nothing to do with disbursements as you describe.
Gill
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
Counselor, I know you’re an attorney but clearly not a T & E attorney. With all due respect, you are dead wrong. I wish it were so easy to avoid estate taxes. The taxes on your hypothetical estate would be the same, regardless of how it is left. Also, what makes you think an income beneficiary is taxed at capital gains rates? Are you also aware of generation skipping taxes? We are not talking past each other. I suspect most laymen reading your post will know it’s wrong. Stick with your personal injury practice. I’m sure it’s more profitable than T & E.😀
Gill
Not PI but yes more lucrative than T&E. I concede you are correct that my example was a bad one. That is what I get for cooking up a hypothetical on the spot in an area outside my expertise. But the original point still stands that one of the primary purposes of a trust is tax minimization.

https://www.investmentnews.com/dynasty- ... ever-37813

“Jeffrey Thomasson, 52, may pass on more than $100 million to heirs using an estate-planning strategy for avoiding gift and estate taxes.

Thomasson, who lives in Indianapolis, said he’s funding a so-called dynasty trust set up in Delaware with $8 million of equity from the expanding financial advisory business he owns, Oxford Financial Group. Putting the assets in a trust, which he figures could be worth more than $100 million by the time he dies, means the money should go to his heirs without triggering federal gift, estate or generation-skipping transfer taxes.”

SouthernFIRE
Posts: 71
Joined: Tue Jul 10, 2018 1:24 pm

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

Post by SouthernFIRE » Mon May 11, 2020 10:27 pm

bsteiner wrote:
Mon May 11, 2020 10:09 pm
SouthernFIRE wrote:
Mon May 11, 2020 7:48 pm
...
Perhaps we are saying the same thing and talking past each other. Let’s use an example so others can follow in the future. Assume someone with a $100 million estate and no trust. At death, the estate would be subject to federal estate taxes, perhaps $40 million, if this person simply disbursed the estate out to various beneficiaries by will or died intestate.

Now assume that prior to or at death, this person transferred the $100 million into a testamentary trust. There would be no estate taxes due. The trust would be taxed on income generated by its assets over time. The trust beneficiaries would be taxed as they received income from the trust over time. Likely at capital gains rates. So rather than the estate being depleted by 40% or so in taxes off the bat, it would continue to grow and fund the settlor’s estate plan for generations. This is the most basic purpose of testamentary trusts for the ultra wealthy as I understand it. Many disclaimers apply. State law differs. I am an attorney but not an estate planning attorney. This is not legal advice to anyone.
If you created it during lifetime it wouldn't be a testamentary trust since a testamentary trust is one that you create by Will.

If you gave away $100 million you would pay $40 million of gift tax (ignoring your $11,580,000 exclusion amount). So if you only had $100 million and you already used your $11,580,000 exclusion amount you could only give away $71,428,571. You would pay gift tax of $28,571,428 of gift tax, which would use the remaining portion of your $100 million.

The estate and gift tax savings is that, assuming you live for 3 years from the date of the gift, the gift tax is excluded from your estate. In other words, if you do this during lifetime, your family gets $71,428,571 and the IRS gets $28,571,428, whereas if you wait until death your family gets $60 million and the IRS gets $40 million.

The tradeoff is that you give up the basis step-up on what you give away.

You would probably want to give away at least $11,580,000 since once the exclusion reverts to pre-2017 law in 2026, the opportunity to use the larger exclusion amount will be lost.

The gift could be to a trust that's out of your estate but is a grantor trust for income tax purposes. By having to pay the income tax on the trust's income and gains, you're effectively shifting additional wealth, free of transfer tax.

There are other techniques available, such as sales, loans, grantor retained annuity trusts.
Much stronger analysis than my poor example/analysis.

tibbitts
Posts: 10678
Joined: Tue Feb 27, 2007 6:50 pm

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

Post by tibbitts » Mon May 11, 2020 10:34 pm

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".
Remember "long term financial health" isn't always the goal. Maybe the adult children are so financially responsible that they aren't buying the bigger house or new car or vacation that they'd really enjoy, but the gift would push them to do that. And maybe you'd enjoy seeing them enjoy those things during your lifetime.

Seasonal
Posts: 1659
Joined: Sun May 21, 2017 1:49 pm

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

Post by Seasonal » Tue May 12, 2020 5:01 am

bsteiner wrote:
Mon May 11, 2020 10:09 pm
If you gave away $100 million you would pay $40 million of gift tax (ignoring your $11,580,000 exclusion amount). So if you only had $100 million and you already used your $11,580,000 exclusion amount you could only give away $71,428,571. You would pay gift tax of $28,571,428 of gift tax, which would use the remaining portion of your $100 million.

The estate and gift tax savings is that, assuming you live for 3 years from the date of the gift, the gift tax is excluded from your estate. In other words, if you do this during lifetime, your family gets $71,428,571 and the IRS gets $28,571,428, whereas if you wait until death your family gets $60 million and the IRS gets $40 million.
How did you compute $28,571,428 and how is the scenario in the first sentence (40%) different from that in the second sentence?

afan
Posts: 4908
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan » Tue May 12, 2020 8:31 am

In the first sentence the grantor has already used up their gift tax exclusion amount, so the entire $100 million would be subject to gift tax.

In the second sentence, the grantor has not used any of the exclusion, so the first $11,580,000 would not be taxed.

Losing the stepped up basis is a drawback of keeping assets outside of someone's taxable estate. However, given the level of estate taxes and the ability to invest in a tax efficient way, it is worth it. If you have your money in VIT, for example, the capital gains distributions are close to or exactly zero. If you take dividends if you want money but never sell to realize capital gains, the money can accumulate forever without paying any capital gains taxes at all.

In the example of the person who gifted ownership of a growing business to a trust, it may not be possible for the trust to hold that business forever. Without the founder and owner around, it may not be a going concern. The value of that business may be nothing decades from now.
If it were as valuable as the grantor expects and he kept it in his name, his estate would pay estate taxes as bsteiner outlined. By gifting it into the trust now there would be no estate taxes at his death. If the trust then had to sell the business at his death, the capital gains taxes would be less than the estate taxes would have been. Still a win for him.

The big risk is that his business might not be the huge success he imagines. He may have used his gift tax exclusion but not realize any estate tax savings if the business is worth far less that he hopes by the time he dies.
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

bsteiner
Posts: 4916
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

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

Post by bsteiner » Tue May 12, 2020 8:33 am

Seasonal wrote:
Tue May 12, 2020 5:01 am
bsteiner wrote:
Mon May 11, 2020 10:09 pm
If you gave away $100 million you would pay $40 million of gift tax (ignoring your $11,580,000 exclusion amount). So if you only had $100 million and you already used your $11,580,000 exclusion amount you could only give away $71,428,571. You would pay gift tax of $28,571,428 of gift tax, which would use the remaining portion of your $100 million.

The estate and gift tax savings is that, assuming you live for 3 years from the date of the gift, the gift tax is excluded from your estate. In other words, if you do this during lifetime, your family gets $71,428,571 and the IRS gets $28,571,428, whereas if you wait until death your family gets $60 million and the IRS gets $40 million.
How did you compute $28,571,428 and how is the scenario in the first sentence (40%) different from that in the second sentence?
The estate tax is on the gross amount, including the tax. In my example, the estate tax on $100 million is $40 million.

The gift tax (assuming you live for 3 years following the gift) is on the net amount, not including the tax. In my example, if you make a $71,428,571 gift, the gift tax is 40% of $71,428,571, or $28,571,428. The total of the gift and the gift tax is $100 million. So, everything else being equal, it's better to make gifts.

However, assets in the estate get a basis step-up, but gifts don't.

There's more benefit to making gifts in states with high state estate taxes but low or no state income tax. For example, in Washington State, the top combined Federal and state estate tax rate is 52% and the top combined Federal and state capital gain and net investment income tax rate is 23.8%, whereas in California the top combined estate tax rate is 40% and the top combined capital gain and net investment income tax rate is 37.1%.

bsteiner
Posts: 4916
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

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

Post by bsteiner » Tue May 12, 2020 8:36 am

SouthernFIRE wrote:
Mon May 11, 2020 10:25 pm
...
https://www.investmentnews.com/dynasty- ... ever-37813

“Jeffrey Thomasson, 52, may pass on more than $100 million to heirs using an estate-planning strategy for avoiding gift and estate taxes.

Thomasson, who lives in Indianapolis, said he’s funding a so-called dynasty trust set up in Delaware with $8 million of equity from the expanding financial advisory business he owns, Oxford Financial Group. Putting the assets in a trust, which he figures could be worth more than $100 million by the time he dies, means the money should go to his heirs without triggering federal gift, estate or generation-skipping transfer taxes.”
He expects that this asset, now worth $8 million, will be worth $100 million at his death. If he's correct, and he gives it away now and uses $8 million of his exclusion amount, the entire $100 will be free of estate tax, at the cost of giving up the basis step-up (unless he gives it to a trust that's a grantor trust for income tax purposes and buys it back before his death).

afan
Posts: 4908
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan » Tue May 12, 2020 8:37 am

BillWalters wrote:
Mon May 11, 2020 8:51 pm
Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading. That said, probably still worth it as the money will be out of my generations estate.
Do you have the ability to change trustees? Shop for one that will do more responsible investing and charge prices at the Vanguard or Schwab level?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

afan
Posts: 4908
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan » Tue May 12, 2020 8:46 am

bsteiner wrote:
Tue May 12, 2020 8:36 am
SouthernFIRE wrote:
Mon May 11, 2020 10:25 pm
...
https://www.investmentnews.com/dynasty- ... ever-37813

“Jeffrey Thomasson, 52, may pass on more than $100 million to heirs using an estate-planning strategy for avoiding gift and estate taxes.

Thomasson, who lives in Indianapolis, said he’s funding a so-called dynasty trust set up in Delaware with $8 million of equity from the expanding financial advisory business he owns, Oxford Financial Group. Putting the assets in a trust, which he figures could be worth more than $100 million by the time he dies, means the money should go to his heirs without triggering federal gift, estate or generation-skipping transfer taxes.”
He expects that this asset, now worth $8 million, will be worth $100 million at his death. If he's correct, and he gives it away now and uses $8 million of his exclusion amount, the entire $100 will be free of estate tax, at the cost of giving up the basis step-up (unless he gives it to a trust that's a grantor trust for income tax purposes and buys it back before his death).
Can you walk us through that example? Being a grantor trust, does the grantor pay the capital gains taxes when he buys the business from the trust? To make this work, he has another $100 million to pay to the trust in return for the business. Now he owns the $100 million-dollar business at death and it is subject to estate taxes as you explained above. The trust now has $100 in cash. The trust would have owed capital gains taxes on the sale but the grantor pays this.
How does this play out so that he benefits from buying it back?
Assuming it does work, would that be something he could do multiple times? Gift part of the business to the trust. Buy it back and pay the capital gains. Then sell part of the business to the trust again later and buy it back still later? This would keep flushing capital gains tax obligations out of the trust? Would it be more efficient to just gift to the trust the amount of the taxes?

Pure curiosity. Unfortunately I will never have to worry about relieving my trust of $92 million of capital gains.
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Re: Should we create a testamentary trust for $6M estate?

Post by afan » Tue May 12, 2020 8:53 am

tibbitts wrote:
Mon May 11, 2020 10:34 pm

Remember "long term financial health" isn't always the goal. Maybe the adult children are so financially responsible that they aren't buying the bigger house or new car or vacation that they'd really enjoy, but the gift would push them to do that. And maybe you'd enjoy seeing them enjoy those things during your lifetime.
Well, that is their decision whether they would buy the house or car if they had more money. One could always buy these things for the adult children, assuming they would accept the gift. But this means the parent is deciding on behalf of the adult kids that this would be the best use of the money.

Whether we will be permitted to help pay for grandchildren's educations is still under negotiation. Our kids might view that as different than simply helping them buy a bigger house or fancier car. Fortunately, there is time to sort that out.
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: Should we create a testamentary trust for $6M estate?

Post by MathIsMyWayr » Tue May 12, 2020 9:04 am

bsteiner wrote:
Tue May 12, 2020 8:33 am
Seasonal wrote:
Tue May 12, 2020 5:01 am
bsteiner wrote:
Mon May 11, 2020 10:09 pm
If you gave away $100 million you would pay $40 million of gift tax (ignoring your $11,580,000 exclusion amount). So if you only had $100 million and you already used your $11,580,000 exclusion amount you could only give away $71,428,571. You would pay gift tax of $28,571,428 of gift tax, which would use the remaining portion of your $100 million.

The estate and gift tax savings is that, assuming you live for 3 years from the date of the gift, the gift tax is excluded from your estate. In other words, if you do this during lifetime, your family gets $71,428,571 and the IRS gets $28,571,428, whereas if you wait until death your family gets $60 million and the IRS gets $40 million.
How did you compute $28,571,428 and how is the scenario in the first sentence (40%) different from that in the second sentence?
The estate tax is on the gross amount, including the tax. In my example, the estate tax on $100 million is $40 million.

The gift tax (assuming you live for 3 years following the gift) is on the net amount, not including the tax. In my example, if you make a $71,428,571 gift, the gift tax is 40% of $71,428,571, or $28,571,428. The total of the gift and the gift tax is $100 million. So, everything else being equal, it's better to make gifts.

However, assets in the estate get a basis step-up, but gifts don't.

There's more benefit to making gifts in states with high state estate taxes but low or no state income tax. For example, in Washington State, the top combined Federal and state estate tax rate is 52% and the top combined Federal and state capital gain and net investment income tax rate is 23.8%, whereas in California the top combined estate tax rate is 40% and the top combined capital gain and net investment income tax rate is 37.1%.
It is very interesting. I will regurgitate bteiner's calculation (highlighted in blue):
  • gtx_rate * gift = gross - gift
    gift = gross / (1 + tx_rate)

    where gtx_rate is the gift tax rate
In the case of estate tax, the net proceed is given by
  • net = (1 - etx_rate) * gross
Notice that the following relationship holds
  • 1 / (1 + x) > 1 - x, for 0<|x|<1.

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

Post by bsteiner » Tue May 12, 2020 10:46 am

afan wrote:
Tue May 12, 2020 8:46 am
bsteiner wrote:
Tue May 12, 2020 8:36 am
SouthernFIRE wrote:
Mon May 11, 2020 10:25 pm
...
https://www.investmentnews.com/dynasty- ... ever-37813

“Jeffrey Thomasson, 52, may pass on more than $100 million to heirs using an estate-planning strategy for avoiding gift and estate taxes.

Thomasson, who lives in Indianapolis, said he’s funding a so-called dynasty trust set up in Delaware with $8 million of equity from the expanding financial advisory business he owns, Oxford Financial Group. Putting the assets in a trust, which he figures could be worth more than $100 million by the time he dies, means the money should go to his heirs without triggering federal gift, estate or generation-skipping transfer taxes.”
He expects that this asset, now worth $8 million, will be worth $100 million at his death. If he's correct, and he gives it away now and uses $8 million of his exclusion amount, the entire $100 will be free of estate tax, at the cost of giving up the basis step-up (unless he gives it to a trust that's a grantor trust for income tax purposes and buys it back before his death).
Can you walk us through that example? Being a grantor trust, does the grantor pay the capital gains taxes when he buys the business from the trust? To make this work, he has another $100 million to pay to the trust in return for the business. Now he owns the $100 million-dollar business at death and it is subject to estate taxes as you explained above. The trust now has $100 in cash. The trust would have owed capital gains taxes on the sale but the grantor pays this.
How does this play out so that he benefits from buying it back?
Assuming it does work, would that be something he could do multiple times? Gift part of the business to the trust. Buy it back and pay the capital gains. Then sell part of the business to the trust again later and buy it back still later? This would keep flushing capital gains tax obligations out of the trust? Would it be more efficient to just gift to the trust the amount of the taxes?

Pure curiosity. Unfortunately I will never have to worry about relieving my trust of $92 million of capital gains.
If the trust is a grantor trust, while it's respected for estate and gift tax purposes, it's disregarded for income tax purposes. So when he's older, he could buy the trust's highly appreciated assets. There wouldn't be any income tax consequences. When he dies, his estate will get a basis step-up for the assets. Marty Shenkman and I wrote an article on this in the December 2015 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... states.pdf.

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

Post by oldfort » Tue May 12, 2020 11:05 am

If you have decided to leave money in a trust, why not create it now and add yearly amounts at least up to the annual gift tax exclusion?

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

Post by FIREchief » Tue May 12, 2020 11:36 am

tibbitts wrote:
Mon May 11, 2020 8:46 pm
This thread is almost making me glad I'll never have close to the amount of the OP's estate, and very glad that I'm leaving everything to just one person I trust will do something reasonable with
In fairness to others in the thread, these trust threads are usually very informative and useful in removing some of the mystery and misunderstandings around trusts as estate planning tools. This thread was a bit choppier mainly due to a) some very inaccurate statements regarding trust taxation and b) that unavoidable paradigm that all trusts are intended to control from beyond the grave. Certainly some poorly drafted trusts have caused problems, but that just means that people need to listen to advice from the good experts such as bsteiner and not what "their guy" or their friends are telling them.

Many people refuse to learn or acknowledge that a well drafted trust can provide many benefits to an heir without in any way imposing undesirable control. If you have a single heir that you can 100% guarantee will never face divorce and will never be sued, than you are in a very small minority.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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

Post by oldfort » Tue May 12, 2020 12:03 pm

FIREchief wrote:
Tue May 12, 2020 11:36 am
If you have a single heir that you can 100% guarantee will never face divorce and will never be sued, than you are in a very small minority.
There are no 100% guarantees for anything in life. In the future, the government could pass new laws eliminating all asset protection for trusts. Most people can go their whole lives without being sued. Most personal lawsuits, excluding divorce and child support, could fall into one or more of these categories: 1) could be covered by insurance, 2) the heir engaging in criminal behavior, intentional torts which are uninsurable, ex. sexual assault like Weinstein, 3) the heir doing something stupid, like personally guaranteeing a multi-million dollar business loan, 4) the heir doing something stupid, like living beyond their means and running up credit card debt, 5) are won by the defendant, or 6) are about relatively small amounts of money relative to your wealth, ex. paying a $60k claim with a $6M net worth doesn't materially affect your lifestyle in any way.

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

Post by senex » Tue May 12, 2020 12:11 pm

FIREchief wrote:
Tue May 12, 2020 11:36 am
In fairness to others in the thread, these trust threads are usually very informative and useful in removing some of the mystery and misunderstandings around trusts as estate planning tools.
Agree. This is the best trust thread in a while.
FIREchief wrote:
Tue May 12, 2020 11:36 am
Many people refuse to learn or acknowledge that a well drafted trust can provide many benefits to an heir without in any way imposing undesirable control. If you have a single heir that you can 100% guarantee will never face divorce and will never be sued, than you are in a very small minority.
The "100% guarantee" argument is a bit misleading, I think, unless you have extreme aversion to variance.

For instance, if someone estimates a young inheritor has 9% chance of divorce and 1% chance of sued-into-bankruptcy, a non-trust situation has substantially higher expected value than a corporate trustee situation (in which, say, best case is inheritor gets 70% of assets, the rest being consumed by fees). The variance is higher, the expected value is higher. It's a tradeoff. Also, practicing extreme risk aversion (some may call it fear-based planning) is not mentally healthful for everyone, nor philosophically/religiously optimal for all. (I recognize the fine line between fear and prudence).

The trust situation is dramatically bolstered if you have an ultra-responsible, boglehead-oriented, sufficiently young friend/relative to serve as free trustee. Or, if the flat-fee administrative trustee situation works for you (as I understand, these are just now becoming modestly widespread). But none of the trustee situations are without potential conflict or cost, monetary and psychological.

I really appreciate these threads, both the experts and the experience of laymen (the comment by the Ivy-educated MBA about the "humiliating" aspect of trusts is a common theme among trust fund kids). Good stuff. Thanks all.

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

Post by afan » Tue May 12, 2020 12:22 pm

Nine percent chance of divorce seems overly optimistic. I would put that figure much higher. Last I heard it was around 40% for first marriages. Hardly negligible.
You do not have to hire a corporate trustee. The times when one would use a corporate trustee would be those when that level of knowledge and independence are needed. In those cases, one would want a trust and a corporate trustee and be glad to have the structure in place.
If you don't need one, don't hire one. Then the cost is zero.
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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My personal experience with a Bank Trust

Post by Taylor Larimore » Tue May 12, 2020 12:41 pm

2020content:

In 1954 my dear grandmother made a testamentary trust naming Southeast Bank as trustee. Southeast Bank was the largest State bank, with the largest trust department, and was located at the top of the tallest building in Miami. Grandmother died in 1962. My brother and I were beneficiaries of the trusts stocks & bonds, with my mother to receive all their income. Our mother died in 1989 and my brother and I received the trust investments.

I was just beginning to learn about personal investing and was shocked to find how badly the fund had been managed by the bank's very elaborate and expensive trust department. We filed suit against the bank (the only lawsuit I ever filed). This is part of the lawsuit:
During the period of time that the trust funds were being managed and invested by Southeast Bank, the corpus of the trusts experienced an increase in value of approximately one half percent per year. -- During the seventeen year period preceding the distribution of the trust assets the Dow Jones Industrial Average rose approximately three hundred percent.
The bank went into bankruptcy shortly afterwards. Our attorney failed to file a claim and we received nothing but aggravation.

Lesson learned: Beware of bank trust departments. For many, their primary purpose is to make money for the bank.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “Our corporations, pension managers, and mutual fund managers have too often put their own financial interests ahead of the interest of the principals whom they are duty-bound to represent."
"Simplicity is the master key to financial success." -- Jack Bogle

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

Post by cowdogman » Tue May 12, 2020 1:22 pm

BillWalters wrote:
Mon May 11, 2020 8:51 pm
Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading. That said, probably still worth it as the money will be out of my generations estate.
I'm sure you get a lot of "that's a nice problem to have" comments, but I totally see your point, and I'm a little surprised a number of people on this thread don't have empathy for the adult beneficiary who has to justify his/her expenses to some ever-changing office worker who may live a very different life and have very different values and priorities.

My parents weren't wealthy and so I never had to experience what you have gone thru, but having on a regular basis to justify my decisions to someone else (other than my wife) would infuriate me.

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Re: My personal experience with a Bank Trust

Post by abuss368 » Tue May 12, 2020 1:53 pm

Taylor Larimore wrote:
Tue May 12, 2020 12:41 pm
2020content:

In 1954 my dear grandmother made a testamentary trust naming Southeast Bank as trustee. Southeast Bank was the largest State bank, with the largest trust department, and was located at the top of the tallest building in Miami. Grandmother died in 1962. My brother and I were beneficiaries of the trusts stocks & bonds, with my mother to receive all their income. Our mother died in 1989 and my brother and I received the trust investments.

I was just beginning to learn about personal investing and was shocked to find how badly the fund had been managed by the bank's very elaborate and expensive trust department. We filed suit against the bank (the only lawsuit I ever filed). This is part of the lawsuit:
During the period of time that the trust funds were being managed and invested by Southeast Bank, the corpus of the trusts experienced an increase in value of approximately one half percent per year. -- During the seventeen year period preceding the distribution of the trust assets the Dow Jones Industrial Average rose approximately three hundred percent.
The bank went into bankruptcy shortly afterwards. Our attorney failed to file a claim and we received nothing but aggravation.

Lesson learned: Beware of bank trust departments. For many, their primary purpose is to make money for the bank.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “Our corporations, pension managers, and mutual fund managers have too often put their own financial interests ahead of the interest of the principals whom they are duty-bound to represent."
Wow! Thanks Taylor. That is a sad and unfortunate story.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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

Post by senex » Tue May 12, 2020 2:04 pm

afan wrote:
Tue May 12, 2020 12:22 pm
Nine percent chance of divorce seems overly optimistic. I would put that figure much higher. Last I heard it was around 40% for first marriages.
If you don't know anything about your children, sure, maybe I would use 40%. Even at 40%, in my example the expected value of non-trust is higher. If you know the age, education level, race, marriage history, personality, and other things about your children, you can fine-tune your estimate, and 9% is reasonable for some demographics.

The particular number wasn't the point. The point was that the "trusts are strictly better" idea is mathematically incorrect in some circumstances, and that one really needs to think through all the costs and benefits, rather than assuming "trust is always better."

afan wrote:
Tue May 12, 2020 12:22 pm
If you don't need one, don't hire one. Then the cost is zero.
Lucky you, who has virtuous, honest, responsible persons, able to manage large amounts of money for free. I was providing info for people who may not have so fortuitous of a situation.

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

Post by TomatoTomahto » Tue May 12, 2020 2:52 pm

oldfort wrote:
Tue May 12, 2020 11:05 am
If you have decided to leave money in a trust, why not create it now and add yearly amounts at least up to the annual gift tax exclusion?
That’s what we have done, and Vanguard did not object to us locating it there. We give $30k annually to each child, which doesn’t seem like that much, but it is easy to do, and if we live as long as we hope to, it will add up.

The trusts as currently defined will have Vanguard as administrator, and one of our children responsible for investments. He is qualified. Vanguard will also administer much larger trusts eventually and has considerable assets of ours in house, which is possibly why they didn’t object to the relatively small trusts. We send out a Crummey letter when the gift is given, and file a gift tax return annually (not truly necessary, I guess, but just in case ...).
Okay, I get it; I won't be political or controversial. The Earth is flat.

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

Post by TomatoTomahto » Tue May 12, 2020 2:55 pm

This is probably the part of the program where I remind viewers that, however generous the Federal exclusion currently is, some states are much stingier. MA’s lifetime exclusion is $1M, and it’s a cliff exclusion with a tax rate that quickly climbs to 16%.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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