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

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content » Tue May 12, 2020 3:01 pm

FIREchief wrote:
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.
Thank you.

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2020content
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Re: My personal experience with a Bank Trust

Post by 2020content » Tue May 12, 2020 3:06 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."
Taylor, thank you for sharing your story. This is one of issues we are concerned about.

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

Post by oldfort » Tue May 12, 2020 3:31 pm

If bonds return 0% real and stocks return 5% real, going forward, then a 50/50 portfolio should be expected to return on average 2.5% real. Ignoring sequence of returns, the trust should be expected to provide distributions of 2.5%. If you pay a trustee 1% a year to manage it, the distributions to heirs reduce to 1.5% a year. This is equivalent to leaving your heirs with a trust 40% smaller. This analysis ignores the loss of the step up in basis, which you get when the assets are out of the trust.

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

Post by celia » Tue May 12, 2020 3:40 pm

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.
I didn’t read the whole thread but want to address what the thread title is possibly asking.
Should We Create a Testamentary Trust...?

I’m not clear if you mean you are about to update your wills or just completed that. A testamentary trust, as you likely know, is one that is created by a will at the time you die. (I don’t know if this still happens if a spouse survives you.)

But I want to point out the benefits of a Revocable Living Trust that is created and funded now. I know that this decision may be state-dependant, but I am in CA. If the trust is funded now, instead of having the trustee fund it at death, you would control the assets and pay taxes just like you currently do. But with a trust funded now, life will be much easier for the successor trustee if you should become incapacitated or lose cognitive skills before you die. When you can no longer act (or don’t want to), the successor trustee can become a trustee and do everything you would have been able to do. If you have a co-trustee now (say, a spouse), the new co-trustee can ‘come up to speed’ while you or the co-trustee is still there to answer questions.

Regarding the insurance beneficiary, I think you want the payout to pass to your child directly without becoming part of your estate. Please look into the pros and cons of this.

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

Post by afan » Tue May 12, 2020 4:55 pm

senex wrote:
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.
Not following.
If you don't need a corporate trustee, which is what costs money for a trust, then don't hire one and save the money.

If you DO need a corporate trustee, then you have to pay for it. If you need the trustee, then you also need the trust.

Having the trust itself does not incur costs. Paying a trustee has costs. But you only pay if you need it.

So the trust is better. If you don't need a paid trustee then the trust is no more expensive.

If you need someone to manage the investments and control spending then you are paying for that service, not for having a trust.
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 afan » Tue May 12, 2020 4:59 pm

oldfort wrote:
Tue May 12, 2020 3:31 pm
If bonds return 0% real and stocks return 5% real, going forward, then a 50/50 portfolio should be expected to return on average 2.5% real. Ignoring sequence of returns, the trust should be expected to provide distributions of 2.5%. If you pay a trustee 1% a year to manage it, the distributions to heirs reduce to 1.5% a year. This is equivalent to leaving your heirs with a trust 40% smaller. This analysis ignores the loss of the step up in basis, which you get when the assets are out of the trust.
Right. So don't pay a trustee 1%.

Pay nothing unless you need a corporate trustee. If you need the services of a corporate trustee, then shop for a better deal.

If you need a corporate trustee, it would not be because you have a trust. It would be because you need their services.
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 oldfort » Tue May 12, 2020 5:31 pm

afan wrote:
Tue May 12, 2020 4:59 pm
If you need a corporate trustee, it would not be because you have a trust. It would be because you need their services.
Individual trustees have their own share of issues. If you want a trust to last for the rest of your kids lives, and perhaps thereafter, then someone has to be trustee after almost everyone you know is dead, senile, or in a nursing home. Bsteiner says there's reasons not to make a close relative a replacement trustee, which limits the pool of potential individual trustees. On the investing side, you may not trust the pool of potential family and friends trustees, to invest any smarter or even as well as your heirs would with the money.

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

Post by BillWalters » Tue May 12, 2020 6:03 pm

afan wrote:
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?
No. Beneficiaries can fire the trustee but the trust protector has to approve a new one, and has made clear the current corporate trustee is going to continue in that role. The trust protector drafted the documents and has a (surprise) very sweet deal where he has to approve any distributions and gets to bill a functionally unlimited amount to “review” requests.

The beneficiaries’ only recourse is litigation, but if that is initiated the trust protector and trustee get to hire any lawyer they want on the beneficiaries’ dime.

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

Post by senex » Tue May 12, 2020 6:14 pm

afan wrote:
Tue May 12, 2020 4:55 pm
If you don't need a corporate trustee, which is what costs money for a trust, then don't hire one and save the money.
So the trust is better. If you don't need a paid trustee then the trust is no more expensive.
I think you are misunderstanding the "lock-in" aspect of an asset protection trust, though please correct me if I'm wrong (I am also learning).

When you decide to leave assets in trust (you are alive & drafting your will), you name a suitable volunteer trustee. How do you guarantee a suitable volunteer will be available in 10 or 20 or 30 years? Without a volunteer, your heir must hire a trustee, yes?

If you have a method to guarantee that an excellent volunteer trustee will be available for the life of the trust, please share. If you think the trust could be dissolved when a volunteer is unavailable, please elaborate on how a dissolvable trust would provide asset protection. Otherwise, it seems a trust is locking one into a structure that traditionally has high costs, and may have high future costs. (The fixed-fee trustees seem to mitigate this problem considerably, but do you have actual experience with them? They seem relatively new on the scene and I've heard no direct feedback on them, nor am I certain their business model will remain unchanged for decades).
afan wrote:
Tue May 12, 2020 4:55 pm
Having the trust itself does not incur costs. Paying a trustee has costs. But you only pay if you need it.
Again, please elaborate how a trust can be operated with no costs indefinitely, after the initial trustee is dead, and when the beneficiary cannot find a suitable volunteer that meets the asset protection requirements.

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

Post by FIREchief » Tue May 12, 2020 6:57 pm

senex wrote:
Tue May 12, 2020 6:14 pm
afan wrote:
Tue May 12, 2020 4:55 pm
If you don't need a corporate trustee, which is what costs money for a trust, then don't hire one and save the money.
So the trust is better. If you don't need a paid trustee then the trust is no more expensive.
I think you are misunderstanding the "lock-in" aspect of an asset protection trust, though please correct me if I'm wrong (I am also learning).

When you decide to leave assets in trust (you are alive & drafting your will), you name a suitable volunteer trustee. How do you guarantee a suitable volunteer will be available in 10 or 20 or 30 years? Without a volunteer, your heir must hire a trustee, yes?

If you have a method to guarantee that an excellent volunteer trustee will be available for the life of the trust, please share. If you think the trust could be dissolved when a volunteer is unavailable, please elaborate on how a dissolvable trust would provide asset protection. Otherwise, it seems a trust is locking one into a structure that traditionally has high costs, and may have high future costs. (The fixed-fee trustees seem to mitigate this problem considerably, but do you have actual experience with them? They seem relatively new on the scene and I've heard no direct feedback on them, nor am I certain their business model will remain unchanged for decades).
afan wrote:
Tue May 12, 2020 4:55 pm
Having the trust itself does not incur costs. Paying a trustee has costs. But you only pay if you need it.
Again, please elaborate how a trust can be operated with no costs indefinitely, after the initial trustee is dead, and when the beneficiary cannot find a suitable volunteer that meets the asset protection requirements.
Have you missed the many posts by bsteiner where he suggests providing a responsible beneficiary with effective control of the trust at a desired point (perhaps immediately for responsible adult heirs)? In many states, the beneficiary may serve as their own trustee without risking the asset protection value of a trust. I'm not sure you have a valid concern if the beneficiary pays himself to serve as trustee (not sure that's even allowable, but the point remains.)

Why do so many posters insist upon assuming that all trusts require an expensive corporate trustee with suboptimal investing strategies?
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 7:09 pm

FIREchief wrote:
Tue May 12, 2020 6:57 pm
Have you missed the many posts by bsteiner where he suggests providing a responsible beneficiary with effective control of the trust at a desired point (perhaps immediately for responsible adult heirs)? In many states, the beneficiary may serve as their own trustee without risking the asset protection value of a trust. I'm not sure you have a valid concern if the beneficiary pays himself to serve as trustee (not sure that's even allowable, but the point remains.)

Why do so many posters insist upon assuming that all trusts require an expensive corporate trustee with suboptimal investing strategies?
I think bsteiner would be the first to say a beneficiary should never be the sole trustee of their own trust. So the problem remains, the beneficiary has to have a co-trustee.

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

Post by FIREchief » Tue May 12, 2020 7:18 pm

oldfort wrote:
Tue May 12, 2020 7:09 pm
FIREchief wrote:
Tue May 12, 2020 6:57 pm
Have you missed the many posts by bsteiner where he suggests providing a responsible beneficiary with effective control of the trust at a desired point (perhaps immediately for responsible adult heirs)? In many states, the beneficiary may serve as their own trustee without risking the asset protection value of a trust. I'm not sure you have a valid concern if the beneficiary pays himself to serve as trustee (not sure that's even allowable, but the point remains.)

Why do so many posters insist upon assuming that all trusts require an expensive corporate trustee with suboptimal investing strategies?
I think bsteiner would be the first to say a beneficiary should never be the sole trustee of their own trust. So the problem remains, the beneficiary has to have a co-trustee.
Well let's just let Bruce tell us what he would say!! :D

Certainly, in some states, it could jeopardize the asset protections if there were no independent trustee. Some of us, fortunately, don't live in one of those states. I believe that standard boilerplate language in at least some asset protection states is along the lines of "Joe-beneficiary may choose to serve as his own trustee or co-trustee and has the power to appoint or remove his sole trustee or co-trustee at any time." If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
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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FIREchief
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief » Tue May 12, 2020 7:19 pm

afan wrote:
Tue May 12, 2020 4:59 pm
oldfort wrote:
Tue May 12, 2020 3:31 pm
If bonds return 0% real and stocks return 5% real, going forward, then a 50/50 portfolio should be expected to return on average 2.5% real. Ignoring sequence of returns, the trust should be expected to provide distributions of 2.5%. If you pay a trustee 1% a year to manage it, the distributions to heirs reduce to 1.5% a year. This is equivalent to leaving your heirs with a trust 40% smaller. This analysis ignores the loss of the step up in basis, which you get when the assets are out of the trust.
Right. So don't pay a trustee 1%.

Pay nothing unless you need a corporate trustee. If you need the services of a corporate trustee, then shop for a better deal.

If you need a corporate trustee, it would not be because you have a trust. It would be because you need their services.
BINGO!!! :beer
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 7:34 pm

FIREchief wrote:
Tue May 12, 2020 7:18 pm
If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer

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

Post by afan » Tue May 12, 2020 7:41 pm

oldfort wrote:
Tue May 12, 2020 5:31 pm
afan wrote:
Tue May 12, 2020 4:59 pm
If you need a corporate trustee, it would not be because you have a trust. It would be because you need their services.
Individual trustees have their own share of issues. If you want a trust to last for the rest of your kids lives, and perhaps thereafter, then someone has to be trustee after almost everyone you know is dead, senile, or in a nursing home. Bsteiner says there's reasons not to make a close relative a replacement trustee, which limits the pool of potential individual trustees. On the investing side, you may not trust the pool of potential family and friends trustees, to invest any smarter or even as well as your heirs would with the money.
On the investing side, if you believe your heirs would be the best people to manage the finances, then they can manage the finances inside a trust.

It is fine to have a close relative be a trustee. The ONLY problem revolves around the ability to make discretionary distributions. For any other purpose a close relative is fine.
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 » Tue May 12, 2020 7:43 pm

BillWalters wrote:
Tue May 12, 2020 6:03 pm
afan wrote:
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?
No. Beneficiaries can fire the trustee but the trust protector has to approve a new one, and has made clear the current corporate trustee is going to continue in that role. The trust protector drafted the documents and has a (surprise) very sweet deal where he has to approve any distributions and gets to bill a functionally unlimited amount to “review” requests.

The beneficiaries’ only recourse is litigation, but if that is initiated the trust protector and trustee get to hire any lawyer they want on the beneficiaries’ dime.
Then you are a victim of a badly drawn trust. Sounds like self dealing on the part of the lawyer but I have no idea whether you have a case.

The beneficiaries should have the ability to change trustees. The drafting lawyer absolutely should not.
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 » Tue May 12, 2020 7:55 pm

senex wrote:
Tue May 12, 2020 6:14 pm
afan wrote:
Tue May 12, 2020 4:55 pm
If you don't need a corporate trustee, which is what costs money for a trust, then don't hire one and save the money.
So the trust is better. If you don't need a paid trustee then the trust is no more expensive.
I think you are misunderstanding the "lock-in" aspect of an asset protection trust, though please correct me if I'm wrong (I am also learning).

When you decide to leave assets in trust (you are alive & drafting your will), you name a suitable volunteer trustee. How do you guarantee a suitable volunteer will be available in 10 or 20 or 30 years? Without a volunteer, your heir must hire a trustee, yes?
You need a trustee. If you cannot find someone who will do it for free AND THE BENEFICIARIES CANNOT DO IT THEMSELVES, then you need to hire a trustee. You only need to hire a trustee under these circumstances. If you don't think the beneficiaries can manage the trust themselves, then they could not manage the assets if left to them directly.

If they cannot manage money left to them directly, then you need someone to do it for them. If there is someone who would do it for free, then great. If not, then you have to hire someone. The need to pay someone to do this arises not because there is a trust but because the beneficiaries cannot manage on their own. All the trust does is provide structure in case it is needed.
Otherwise, it seems a trust is locking one into a structure that traditionally has high costs, and may have high future costs. (The fixed-fee trustees seem to mitigate this problem considerably, but do you have actual experience with them? They seem relatively new on the scene and I've heard no direct feedback on them, nor am I certain their business model will remain unchanged for decades).
Again, you only hire a paid trustee if you need one. If the beneficiaries can manage in their own, then you don't need one. If the beneficiaries cannot manage on their own then you need someone else to do it, trust or no trust.

Again, please elaborate how a trust can be operated with no costs indefinitely, after the initial trustee is dead, and when the beneficiary cannot find a suitable volunteer that meets the asset protection requirements.
If the beneficiary needs some service that a trustee will provide, cannot do it themselves and cannot find someone to do it for free, then they need to hire someone to do it. They would be in exactly the same situation if there were no trust but they could not manage the affairs themselves. Except they would lack the asset protection a trust would provide.

HAVING A TRUST DOES NOT REQUIRE HAVING A PAID TRUSTEE.
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

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

Post by oldfort » Tue May 12, 2020 8:12 pm

afan wrote:
Tue May 12, 2020 7:55 pm
senex wrote:
Tue May 12, 2020 6:14 pm
afan wrote:
Tue May 12, 2020 4:55 pm
If you don't need a corporate trustee, which is what costs money for a trust, then don't hire one and save the money.
So the trust is better. If you don't need a paid trustee then the trust is no more expensive.
I think you are misunderstanding the "lock-in" aspect of an asset protection trust, though please correct me if I'm wrong (I am also learning).

When you decide to leave assets in trust (you are alive & drafting your will), you name a suitable volunteer trustee. How do you guarantee a suitable volunteer will be available in 10 or 20 or 30 years? Without a volunteer, your heir must hire a trustee, yes?
You need a trustee. If you cannot find someone who will do it for free AND THE BENEFICIARIES CANNOT DO IT THEMSELVES, then you need to hire a trustee. You only need to hire a trustee under these circumstances. If you don't think the beneficiaries can manage the trust themselves, then they could not manage the assets if left to them directly.

If they cannot manage money left to them directly, then you need someone to do it for them. If there is someone who would do it for free, then great. If not, then you have to hire someone. The need to pay someone to do this arises not because there is a trust but because the beneficiaries cannot manage on their own. All the trust does is provide structure in case it is needed.
Otherwise, it seems a trust is locking one into a structure that traditionally has high costs, and may have high future costs. (The fixed-fee trustees seem to mitigate this problem considerably, but do you have actual experience with them? They seem relatively new on the scene and I've heard no direct feedback on them, nor am I certain their business model will remain unchanged for decades).
Again, you only hire a paid trustee if you need one. If the beneficiaries can manage in their own, then you don't need one. If the beneficiaries cannot manage on their own then you need someone else to do it, trust or no trust.

Again, please elaborate how a trust can be operated with no costs indefinitely, after the initial trustee is dead, and when the beneficiary cannot find a suitable volunteer that meets the asset protection requirements.
If the beneficiary needs some service that a trustee will provide, cannot do it themselves and cannot find someone to do it for free, then they need to hire someone to do it. They would be in exactly the same situation if there were no trust but they could not manage the affairs themselves. Except they would lack the asset protection a trust would provide.

HAVING A TRUST DOES NOT REQUIRE HAVING A PAID TRUSTEE.
You need to get a beer or get off bogleheads for awhile. You are obviously getting stressed out. If you want the asset protection benefits of the trust, the beneficiary cannot be the sole trustee. There must always be a co-trustee, who is not a beneficiary. The beneficiaries can never have control over distributions to themselves.

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

Post by senex » Tue May 12, 2020 8:33 pm

afan wrote:
Tue May 12, 2020 7:55 pm
If you cannot find someone who will do it for free AND THE BENEFICIARIES CANNOT DO IT THEMSELVES, then you need to hire a trustee. You only need to hire a trustee under these circumstances.

HAVING A TRUST DOES NOT REQUIRE HAVING A PAID TRUSTEE.
My understanding is that you lose most of the asset protections when the beneficiary serves as sole trustee of his own trust [1, 2]. You and FIREchief seem to think the opposite (that asset protections remain fully or mostly intact). I would love an expert to straighten us out.

I apologize if my earnest desire for education, and my attempt to share my own understanding, has upset you. This is confusing stuff. Just trying to learn here.



[1] For instance, "There is little question but that a beneficiary may serve as the sole trustee of a trust established by a third person for his or her own benefit and not be treated as the owner of the trust assets for estate tax purposes as long as the distribution discretion is limited by an ascertainable standard. For asset protection purposes, however, such limitations on the beneficiary/trustee will probably not be respected and the entire trust will be exposed to the creditors of the beneficiary/trustee." https://fredfranke.com/articles/8-5-ben ... ty-trusts/

[2] bsteiner often mentions a beneficiary becoming co-trustee or having power to replace a (co-)trustee, and I extrapolated (assumed) that the obvious omission of "beneficiary becoming sole trustee" indicated that such a situation would defeat some features of the trust. I hope bsteiner can clarify this point.

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

Post by FIREchief » Tue May 12, 2020 8:36 pm

oldfort wrote:
Tue May 12, 2020 7:34 pm
FIREchief wrote:
Tue May 12, 2020 7:18 pm
If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer
Full control is the wrong reference. Are you familiar with the HEMS standard? In asset protection states a beneficiary can exercise effectively full control over the trust without “full discretion over distributions”. If limited by the HEMS standard, the assets are fully protected from creditors, but the trustee can freely distribute for health, education, maintenance and support; which can include a lot of “control” without risking asset protections. You of course are free to believe whatever you want.
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 FIREchief » Tue May 12, 2020 8:45 pm

senex wrote:
Tue May 12, 2020 8:33 pm
afan wrote:
Tue May 12, 2020 7:55 pm
If you cannot find someone who will do it for free AND THE BENEFICIARIES CANNOT DO IT THEMSELVES, then you need to hire a trustee. You only need to hire a trustee under these circumstances.

HAVING A TRUST DOES NOT REQUIRE HAVING A PAID TRUSTEE.
My understanding is that you lose most of the asset protections when the beneficiary serves as sole trustee of his own trust [1, 2]. You and FIREchief seem to think the opposite (that asset protections remain fully or mostly intact). I would love an expert to straighten us out.
Where did you obtain this “understanding?” Was it through working with a skilled attorney in you current state of residence? If so, why do you think it would apply to those in the other 49 states?
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort » Tue May 12, 2020 8:46 pm

FIREchief wrote:
Tue May 12, 2020 8:36 pm
oldfort wrote:
Tue May 12, 2020 7:34 pm
FIREchief wrote:
Tue May 12, 2020 7:18 pm
If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer
Full control is the wrong reference. Are you familiar with the HEMS standard? In asset protection states a beneficiary can exercise effectively full control over the trust without “full discretion over distributions”. If limited by the HEMS standard, the assets are fully protected from creditors, but the trustee can freely distribute for health, education, maintenance and support; which can include a lot of “control” without risking asset protections. You of course are free to believe whatever you want.
I don't believe this. Can you point to any court cases where the beneficiary was the sole trustee and the asset protection of the trust was upheld?

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

Post by FIREchief » Tue May 12, 2020 8:51 pm

oldfort wrote:
Tue May 12, 2020 8:46 pm
FIREchief wrote:
Tue May 12, 2020 8:36 pm
oldfort wrote:
Tue May 12, 2020 7:34 pm
FIREchief wrote:
Tue May 12, 2020 7:18 pm
If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer
Full control is the wrong reference. Are you familiar with the HEMS standard? In asset protection states a beneficiary can exercise effectively full control over the trust without “full discretion over distributions”. If limited by the HEMS standard, the assets are fully protected from creditors, but the trustee can freely distribute for health, education, maintenance and support; which can include a lot of “control” without risking asset protections. You of course are free to believe whatever you want.
I don't believe this. Can you point to any court cases where the beneficiary was the sole trustee and the asset protection of the trust was upheld?
Please review my signature. A great advantage of partnering with a competent attorney is that I don’t need to keep up on court cases. :D
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Re: Should we create a testamentary trust for $6M estate?

Post by spth » Tue May 12, 2020 11:33 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.
But you do want to control from the grave. It’s the sole purpose of the testamentary trust you are considering. We have said trusts created in our will for our four young children to get them through college. We feel we have financial responsibility to them and to their caretakers until then. Beyond that it’s their money and the only control we have is through their memories of us.

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

Post by FIREchief » Wed May 13, 2020 12:51 am

spth wrote:
Tue May 12, 2020 11:33 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.
But you do want to control from the grave. It’s the sole purpose of the testamentary trust you are considering. We have said trusts created in our will for our four young children to get them through college. We feel we have financial responsibility to them and to their caretakers until then. Beyond that it’s their money and the only control we have is through their memories of us.
I don't believe we've ever all agreed that "control from the grave" is an awful thing. I prefer to think of it as when a person is lying on their death bed they can take some comfort that they've provided well for their heirs (both immediately and, perhaps, for later in their lives). Is this a bad thing? :confused

Why do you just boil this down to "financial responsibility." Do you not care about your four children's well being beyond college? A lot of "stuff" happens in peoples lives far beyond that point. Is it an evil parent who wants to die with some assurances that their children will not be homeless in their fifties and beyond?
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Re: Should we create a testamentary trust for $6M estate?

Post by a_movable_life » Wed May 13, 2020 5:30 am

I've had patients who were not competent to hold money from an estate. Either because of severe mental illness or addiction problems. The trust was administrated by a competent sibling or family member. Some of them knew the money was there but that their sibling was "Keeping from getting it" so that it became a burden to the sibling or damaged the relationship. Even with the fees having someone at a trust company who only works 9-5 and won't be at Thanksgiving Dinner may be a benefit.

I think Taylor as always has a good idea. 15K or 30K for the responsible recipient with the gift exemption is a big boost to people starting out for contributing a large amount early to the 401K/Roth/HSA at a time that is most effective. Depending on the relationship, that can open a dialogue so that they come to Uncle Taylor for advice and guidance.

As someone else has said, getting the money at 65 has a lot less effect then at 20, 25-35, or 45-55.

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

Post by afan » Wed May 13, 2020 6:31 am

oldfort wrote:
Tue May 12, 2020 8:12 pm

If you want the asset protection benefits of the trust, the beneficiary cannot be the sole trustee. There must always be a co-trustee, who is not a beneficiary.
This is incorrect.
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Re: Should we create a testamentary trust for $6M estate?

Post by afan » Wed May 13, 2020 6:54 am

senex wrote:
Tue May 12, 2020 8:33 pm
afan wrote:
Tue May 12, 2020 7:55 pm
If you cannot find someone who will do it for free AND THE BENEFICIARIES CANNOT DO IT THEMSELVES, then you need to hire a trustee. You only need to hire a trustee under these circumstances.

HAVING A TRUST DOES NOT REQUIRE HAVING A PAID TRUSTEE.
My understanding is that you lose most of the asset protections when the beneficiary serves as sole trustee of his own trust [1, 2]. You and FIREchief seem to think the opposite (that asset protections remain fully or mostly intact). I would love an expert to straighten us out.

I apologize if my earnest desire for education, and my attempt to share my own understanding, has upset you. This is confusing stuff. Just trying to learn here.



[1] For instance, "There is little question but that a beneficiary may serve as the sole trustee of a trust established by a third person for his or her own benefit and not be treated as the owner of the trust assets for estate tax purposes as long as the distribution discretion is limited by an ascertainable standard. For asset protection purposes, however, such limitations on the beneficiary/trustee will probably not be respected and the entire trust will be exposed to the creditors of the beneficiary/trustee." https://fredfranke.com/articles/8-5-ben ... ty-trusts/

[2] bsteiner often mentions a beneficiary becoming co-trustee or having power to replace a (co-)trustee, and I extrapolated (assumed) that the obvious omission of "beneficiary becoming sole trustee" indicated that such a situation would defeat some features of the trust. I hope bsteiner can clarify this point.
There have been cases revolving around the exact wording of the HEMS power. If worded badly, that is not following the exact language that has passed muster, then courts have concluded that it is not really a limitation and the beneficiary has complete access and no asset protection.

An alternative is to give the beneficiary no power to make distributions. They can manage the money, but need an independent trustee to make distributions. All distributions would be discretionary and made only by the independent trustee.

I am an independent trustee for a beneficiary who cannot manage their own affairs. Initially I was worried that the beneficiary would be impossible to deal with. If so, I was going to hire a corporate trustee, probably Vanguard.
I started by working with the beneficiary to come up with a plan to pay some bills directly and send a monthly amount to the beneficiary. Once we had a number, I set up automatic payments. Setting that up took about 10 minutes. I have never charged a dime.

The beneficiary cannot make any withdrawals. Asset protection intact.
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Re: Should we create a testamentary trust for $6M estate?

Post by LadyGeek » Wed May 13, 2020 7:05 am

The discussion is getting a bit contentious. The points regarding "control from the grave" and "financial responsibility" have been made, let's move on.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief » Wed May 13, 2020 10:50 am

a_movable_life wrote:
Wed May 13, 2020 5:30 am
As someone else has said, getting the money at 65 has a lot less effect then at 20, 25-35, or 45-55.
I'm not sure that this is always true. We all know folks who spend everything (and more) that they can get their hands on their entire lives, and reach 65 with nothing but Social Security (hopefully) based upon their lifetime earnings. For many this is barely enough to cover the most basic essentials.
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Re: Should we create a testamentary trust for $6M estate?

Post by a_movable_life » Wed May 13, 2020 11:07 am

FIREchief wrote:
Wed May 13, 2020 10:50 am
a_movable_life wrote:
Wed May 13, 2020 5:30 am
As someone else has said, getting the money at 65 has a lot less effect then at 20, 25-35, or 45-55.
I'm not sure that this is always true. We all know folks who spend everything (and more) that they can get their hands on their entire lives, and reach 65 with nothing but Social Security (hopefully) based upon their lifetime earnings. For many this is barely enough to cover the most basic essentials.
I'm referring to the time value of money. I think the "They are going to spend it all wantonly" argument has been beat to death in this thread.

With especially us men living longer the inheritances show up later. Possibly after when they would or could have best effect.

I chose those ages because:

20: College expenses.
25-35: Down payment on a house and early childhood expenses like daycare, or establishing a small business.
45-55 College for the kids with also trying to ramp up their own retirement saving.

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

Post by oldfort » Wed May 13, 2020 11:08 am

The median age to receive an inheritance is 60.

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

Post by Gill » Wed May 13, 2020 11:17 am

LadyGeek wrote:
Wed May 13, 2020 7:05 am
The discussion is getting a bit contentious. The points regarding "control from the grave" and "financial responsibility" have been made, let's move on.
Exactly why I withdrew from this discussion...
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Re: Should we create a testamentary trust for $6M estate?

Post by TomatoTomahto » Wed May 13, 2020 11:51 am

Gill wrote:
Wed May 13, 2020 11:17 am
LadyGeek wrote:
Wed May 13, 2020 7:05 am
The discussion is getting a bit contentious. The points regarding "control from the grave" and "financial responsibility" have been made, let's move on.
Exactly why I withdrew from this discussion...
Gill
Well, Gill, please come back.
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 Leesbro63 » Wed May 13, 2020 11:59 am

oldfort wrote:
Wed May 13, 2020 11:08 am
The median age to receive an inheritance is 60.
Kinda makes sense in that life expectancy is into the 80s and more often than not it’s a traditional couple situation where both old dad AND old mom have to die before the money gets passed to children about 25 years younger.

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

Post by delamer » Wed May 13, 2020 12:38 pm

FIREchief wrote:
Wed May 13, 2020 10:50 am
a_movable_life wrote:
Wed May 13, 2020 5:30 am
As someone else has said, getting the money at 65 has a lot less effect then at 20, 25-35, or 45-55.
I'm not sure that this is always true. We all know folks who spend everything (and more) that they can get their hands on their entire lives, and reach 65 with nothing but Social Security (hopefully) based upon their lifetime earnings. For many this is barely enough to cover the most basic essentials.
I don’t think anyone claimed that it is always true.

But as someone who received an inheritance when I was 62 and already retired, I can tell you that it was certainly true in my case (not that I was unappreciative of receiving it at that age).

And I expect that most people spent everything they can get their hands on throughout their lives are going to blow through an inheritance quickly too.

Getting back to the original question: why would you hand over $6 million in assets to any heir — regardless of trustworthiness, intelligence, past behavior — without providing some protection from creditors, divorce, or miscellaneous bad actors?

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

Post by TomatoTomahto » Wed May 13, 2020 12:54 pm

delamer wrote:
Wed May 13, 2020 12:38 pm
Getting back to the original question: why would you hand over $6 million in assets to any heir — regardless of trustworthiness, intelligence, past behavior — without providing some protection from creditors, divorce, or miscellaneous bad actors?
+1

We have trusts for our 2 kids. We hope the frugal one who banked high 5 digits from college internships stays sensible and that the less mature one still in college grows into a good Boglehead sometime in the next few years.
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 afan » Wed May 13, 2020 1:13 pm

. because Debtor may not participate in making distributions to herself as a co-trustee, she, however, would be similarly limited as sole trustee and would not gain sufficient control over the Marital Trust. (Id., at 13.) Therefore, the bankruptcy court held that neither the trustees' enumerated powers nor their ability to make discretionary distributions gave Debtor sufficient dominion over the Marital Trust to invalidate the spendthrift provision, even in the face of the "one or more" clause. (Id., at 12-13.)

Although a debtor's role as a beneficiary and co-trustee of a trust does not per se invalidate a spendthrift provision, the ability of a beneficiary to exercise control over a trust will render a spendthrift clause ineffective. In re Hersloff, 147 B.R. at 265 (applying Maryland law but noting Florida law is identical regarding the validity of spendthrift trusts). In bankruptcy proceedings, the debtor's degree of control over the spendthrift trust is often the primary consideration in determining its validity. Kaplan v. Primerit Bank (In re Kaplan), 97 B.R. 572, 577 (B.A.P. 9th Cir. 1989); see also In re Gillett, 46 B.R. 642, 644 (Bankr. S.D. Fla. 1985) (noting the level of dominion and control that a beneficiary is able to exert may invalidate a spendthrift trust). This court concludes that any potential power Debtor may gain over the Marital Trust as the sole trustee, either via the enumerated powers or her position as a co-trustee, is insufficient to demonstrate a level of dominion and control that would invalidate the Marital Trust's spendthrift protection.
The existence of a discretionary maintenance and support standard over principal distributions from the Marital Trust adds another layer to Debtor's duties under the Barton Will and Florida law. As a trustee, Debtor must "exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust." FLA. STAT. § 736.0814(1). Under Florida law, a person who is both a beneficiary and trustee may not "make discretionary distributions of either principal or income to or for the benefit of that trustee, except to provide for that trustee's health, education, maintenance, or support." FLA. STAT. § 736.0814(2)(a). Thus, the discretionary standard set forth in Article TENTH of the Barton Will limits the extent of Debtor's control over the Marital Trust, even if she were to become the sole trustee and was not precluded by the terms of the Barton Will from participating in those decisions. With regard to the principal, her fiduciary duties would prohibit her from making distributions in the absence of a need for maintenance or support.
This is from a federal bankruptcy decision about a Florida trust. The issue discussed here is whether the ability of a beneficiary to become the sole trustee of the trust meant that the assets of the trust lose asset protection. The terms of the trust forbid the beneficiary from making any discretionary distributions.

https://casetext.com/case/elliott-v-pnc ... iesewetter
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Re: Should we create a testamentary trust for $6M estate?

Post by senex » Wed May 13, 2020 1:15 pm

afan wrote:
Wed May 13, 2020 6:54 am
There have been cases revolving around the exact wording of the HEMS power. If worded badly, that is not following the exact language that has passed muster, then courts have concluded that it is not really a limitation and the beneficiary has complete access and no asset protection.
Glad we have identified the lynchpin concept. If a properly worded trust can have sole beneficiary as sole trustee, with reasonable ability to access/use funds, AND provide asset protection against creditors, divorce, and estate tax, then your entire series of posts holds together. That is indeed quite a superpower.

I did not think it possible, partly because it seems too good to be true, and partly because it is inconsistent with things I've read and heard from other legal sources. But I'm not sure how to explore it further absent an authoritative source we both trust, so I'm happy to leave it as-is for now, and thank you for the discussion. Maybe we'll get lucky and obi-wan-bsteiner will drop in to clarify.

(edited to add: just saw your link to an actual case. Thanks).

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

Post by afan » Wed May 13, 2020 1:17 pm

a_movable_life wrote:
Wed May 13, 2020 11:07 am

With especially us men living longer the inheritances show up later. Possibly after when they would or could have best effect.

I chose those ages because:

20: College expenses.
25-35: Down payment on a house and early childhood expenses like daycare, or establishing a small business.
45-55 College for the kids with also trying to ramp up their own retirement saving.
If you are still alive, you can gift money to your children for these expenses.

Once you are gone, the trustee of a trust on their behalf can pay these bills or distribute money to them. Same thing as forcing the money out of the trust but maintain asset protection.
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Re: Should we create a testamentary trust for $6M estate?

Post by nimo956 » Wed May 13, 2020 1:18 pm

TomatoTomahto wrote:
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%.
One wonders how such a law with a cliff exclusion could have been written, given that Boston/Cambridge probably has the highest concentration of top economists in the US.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief » Wed May 13, 2020 1:20 pm

afan wrote:
Wed May 13, 2020 1:13 pm
. because Debtor may not participate in making distributions to herself as a co-trustee, she, however, would be similarly limited as sole trustee and would not gain sufficient control over the Marital Trust. (Id., at 13.) Therefore, the bankruptcy court held that neither the trustees' enumerated powers nor their ability to make discretionary distributions gave Debtor sufficient dominion over the Marital Trust to invalidate the spendthrift provision, even in the face of the "one or more" clause. (Id., at 12-13.)

Although a debtor's role as a beneficiary and co-trustee of a trust does not per se invalidate a spendthrift provision, the ability of a beneficiary to exercise control over a trust will render a spendthrift clause ineffective. In re Hersloff, 147 B.R. at 265 (applying Maryland law but noting Florida law is identical regarding the validity of spendthrift trusts). In bankruptcy proceedings, the debtor's degree of control over the spendthrift trust is often the primary consideration in determining its validity. Kaplan v. Primerit Bank (In re Kaplan), 97 B.R. 572, 577 (B.A.P. 9th Cir. 1989); see also In re Gillett, 46 B.R. 642, 644 (Bankr. S.D. Fla. 1985) (noting the level of dominion and control that a beneficiary is able to exert may invalidate a spendthrift trust). This court concludes that any potential power Debtor may gain over the Marital Trust as the sole trustee, either via the enumerated powers or her position as a co-trustee, is insufficient to demonstrate a level of dominion and control that would invalidate the Marital Trust's spendthrift protection.
The existence of a discretionary maintenance and support standard over principal distributions from the Marital Trust adds another layer to Debtor's duties under the Barton Will and Florida law. As a trustee, Debtor must "exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust." FLA. STAT. § 736.0814(1). Under Florida law, a person who is both a beneficiary and trustee may not "make discretionary distributions of either principal or income to or for the benefit of that trustee, except to provide for that trustee's health, education, maintenance, or support." FLA. STAT. § 736.0814(2)(a). Thus, the discretionary standard set forth in Article TENTH of the Barton Will limits the extent of Debtor's control over the Marital Trust, even if she were to become the sole trustee and was not precluded by the terms of the Barton Will from participating in those decisions. With regard to the principal, her fiduciary duties would prohibit her from making distributions in the absence of a need for maintenance or support.
This is from a federal bankruptcy decision about a Florida trust. The issue discussed here is whether the ability of a beneficiary to become the sole trustee of the trust meant that the assets of the trust lose asset protection. The terms of the trust forbid the beneficiary from making any discretionary distributions.

https://casetext.com/case/elliott-v-pnc ... iesewetter
Thanks for posting this afan. It certainly supports what we have been trying to explain throughout this thread.
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Re: Should we create a testamentary trust for $6M estate?

Post by NotWhoYouThink » Wed May 13, 2020 1:59 pm

Getting back to the original question: why would you hand over $6 million in assets to any heir — regardless of trustworthiness, intelligence, past behavior — without providing some protection from creditors, divorce, or miscellaneous bad actors?
Maybe I want my heirs to be able to
"make discretionary distributions of either principal or income to or for the benefit of that trustee, except to provide for that trustee's health, education, maintenance, or support."
and for those distributions to be at the sole discretion or whim of my heirs and not subject to approval by an independent trustee.

Maybe I don't care if my 7 figure expected legacy lasts very long, and certainly don't want it to be the way future generations remember me.

Maybe I know the beneficiary would consider the extra tax reporting due to the trust structure to be a burden, and would not consider the protection from creditors/spouse to be a likely benefit. If you don't get married and you have umbrella insurance you can cover those bases.

You might not agree on the cost/benefit analysis, and you don't need to. But that's why I will do it.

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

Post by oldfort » Wed May 13, 2020 2:07 pm

FIREchief wrote:
Wed May 13, 2020 1:20 pm
Thanks for posting this afan. It certainly supports what we have been trying to explain throughout this thread.
The case, cited by afan, isn't exactly the situation you were discussing. For one, there is a co-trustee PNC Bank in this case. The beneficiary was never the sole trustee. In the event the debtor became the sole trustee, the debtor would not be able to make principal distributions to herself. This would create the very strange situation where no trustee had the ability to make principal distributions to one of the beneficiaries or in the event the debtor was the sole beneficiary, to any of the beneficiaries.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.

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

Post by bsteiner » Wed May 13, 2020 2:21 pm

nimo956 wrote:
Wed May 13, 2020 1:18 pm
TomatoTomahto wrote:
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%.
One wonders how such a law with a cliff exclusion could have been written, given that Boston/Cambridge probably has the highest concentration of top economists in the US.
Before 2002, the state estate tax was a credit against the Federal estate tax, up to a specified percentage. Here is the table: https://irc.bloombergtax.com/public/usc ... ction_2011. "Adjusted taxable estate" means the taxable estate minus $60,000. Every state had a state estate tax equal to the state death tax credit. In effect, the IRS paid the state estate tax. A U.S. citizen living outside the U.S. paid the same total tax, but paid all of it to the IRS. An estate too small to pay Federal estate tax didn't pay any state estate tax.

The Economic Recovery Tax Act of 2001 phased out the credit. The state estate tax is now a deduction rather than a credit. About 2/3 of the states allowed their state estate taxes to lapse. The remaining states retained their state estate taxes, though they have varying exclusion amounts and a few have increased or decreased the rates. Most have them have increased their exclusion amounts over the years. I think Massachusetts has the smallest exclusion amount at $1 million. A couple of states have inheritance taxes with much lower thresholds, though these vary in several ways from state to state.

The Massachusetts estate tax is what it would have been under pre-2002 law, as if the Federal exclusion amount were $1 million. Massachusetts allows a separate state-only QTIP election. As a result, many married people in Massachusetts have a $1 million credit shelter trust. Before Federal portability, they would usually have a gap trust for the difference between the Massachusetts and the Federal exclusion amounts, for which they would elect QTIP for state but not Federal purposes. With portability, there's more flexibility for the excess over $1 million.

The Massachusetts estate tax isn't a cliff, though the marginal rate between $1 million and about $1.1 million is about 40%. It then drops to 6.4%, and goes up to 16% on taxable estates above $10.1 million.

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

Post by FIREchief » Wed May 13, 2020 2:33 pm

oldfort wrote:
Wed May 13, 2020 2:07 pm
FIREchief wrote:
Wed May 13, 2020 1:20 pm
Thanks for posting this afan. It certainly supports what we have been trying to explain throughout this thread.
The case, cited by afan, isn't exactly the situation you were discussing. For one, there is a co-trustee PNC Bank in this case. The beneficiary was never the sole trustee. In the event the debtor became the sole trustee, the debtor would not be able to make principal distributions to herself. This would create the very strange situation where no trustee had the ability to make principal distributions to one of the beneficiaries or in the event the debtor was the sole beneficiary, to any of the beneficiaries.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.
Do you understand what a "marital trust" is? Those are typically not the types of trusts that we discuss here, I believe largely because the increase in the federal estate tax exemption, plus the addition of portability, has largely invalidated these archaic A/B trust approaches that were popular many years ago. This has nothing to do with the main point that I, and I believe afan, have been trying to make.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Pu239
Posts: 262
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Re: Should we create a testamentary trust for $6M estate?

Post by Pu239 » Wed May 13, 2020 3:01 pm

Just a quick thanks to all those who have taken the time to post answers and opinions about this topic. We are considering a testamentary trust as one will option; this discussion has been very enlightening. Thanks also to the mods for keeping it going. We have many new questions for our lawyer!
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

smackboy1
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Re: Should we create a testamentary trust for $6M estate?

Post by smackboy1 » Wed May 13, 2020 3:19 pm

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

-- total value of our estate estimated to be $6.5M

. . .

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?
Some thoughts for the OP:

- With this much $ it should be obvious but use experienced professionals i.e. lawyers, CPA, trustees, financial advisors. $65K is a mere 1% which can buy a lot of good advice which is specific to your particular situation. TBH the internet is not the best place to get anything more than the most general advice. Some of the information either misinformed or wrong.

- IMHO you should use the anecdotes and recommendations you've read here to question your professionals' recommendations in detail. Half the battle is finding an experienced trusts and estates lawyer. Sometimes it pays to find one that has a deeper understanding of asset protection and divorce law.

- Nobody knows what the future brings, and nobody knows what they don't know. Whatever the estate plan, ensure it is flexible and has checks and balances. There has to be mechanisms in case the situation changes e.g. tax laws change; beneficiaries relocate to a different country. There has to be governance structure to allow adding and removing a trustee, protector, financial advisor, maybe even a beneficiary.

- Testamentary trust just means a trust that is created by a will upon the grantor's death. It has no existence until then. It doesn't bypass probate and doesn't minimize grantor's estate taxes. A living trust is created while grantor is alive. Living trust could be revocable or irrevocable. IDK which is best for you. Laypeople sometimes think these are the only types of trusts, but there are actually a lot more than that for different purposes and some with odd names e.g. QTIP, GRUT, GRAT, GRIT, Intentionally Defective Grantor Trust, Accidentally Perfect Non-Grantor Trust. This is why you need a pro.

- I don't know much about Vanguard's trust or family legacy services. But I assume they are designed to support Vanguard the mutual fund company. Their services might be good for some situations. In my work I have made some inquiries of Vanguard National Trust and found them lacking in certain respects e.g. they won't invest in assets not available at Vanguard brokerage; it's pretty much restricted to publicly traded investments and they will not hold real estate or shares of private companies. VNT is located in PA and I believe PA law would apply when it comes to asset protection (PA is not particularly known as an asset protection state compared to DE, NV, SD, AK).

- I believe Vanguard Personal Advisor Services (PAS) will work with outside trustees. So having a SD directed trustee with trust assets custodied at Vanguard under the direction of PAS is possible. Of course there are other RIAs that will work with trusts and invest in a Boglehead way with low fees. You can find them discussed elsewhere on this forum.

- An irrevocable trust can save estate taxes because a trust cannot die. Subsequent to grantor's death the death of beneficiaries or even the trustee does not subject the trust principal to estate tax. Income tax is a different story. Generally, irrevocable trusts are taxed on income on an accelerated schedule compared to a person. A person doesn't pay the highest marginal tax rate until over $500K income. Trusts hit that rate at $12,750 income. To minimize trust taxes the trustee should work with a CPA and financial advisor to reduce ordinary income e.g. tax exempt bonds. Another strategy is to distribute the net income to beneficiaries so it is taxed at the personal tax schedule and not the accelerated trust schedule. There are other specialized trusts that shift the tax burden between the grantor, trust and beneficiaries, but that's not for this simplified discussion.

- I agree with the recommendation not to mandate distributions. It may make sense when the trust becomes small not cost effective e.g. $100K, and the idea is to spread out the $ and terminate the trust. The risk is that assets distributed to the beneficiary become available to their creditors, spouses, grifters,and even the beneficiary themselves if they develop an incapacity. There are some asset protection specialists that would argue that any ascertainable standard weakens a trust's asset protection. In those trusts the there is not even a HEMS (health, education, maintenance, support) standard. Trustee has full discretion. The fear is that a court rule that the trustee's ascertainable standard creates a property interest in the beneficiary and allow a beneficiary's creditor to reach trust assets.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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

Post by oldfort » Wed May 13, 2020 3:40 pm

FIREchief wrote:
Wed May 13, 2020 2:33 pm
oldfort wrote:
Wed May 13, 2020 2:07 pm
FIREchief wrote:
Wed May 13, 2020 1:20 pm
Thanks for posting this afan. It certainly supports what we have been trying to explain throughout this thread.
The case, cited by afan, isn't exactly the situation you were discussing. For one, there is a co-trustee PNC Bank in this case. The beneficiary was never the sole trustee. In the event the debtor became the sole trustee, the debtor would not be able to make principal distributions to herself. This would create the very strange situation where no trustee had the ability to make principal distributions to one of the beneficiaries or in the event the debtor was the sole beneficiary, to any of the beneficiaries.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.
Do you understand what a "marital trust" is? Those are typically not the types of trusts that we discuss here, I believe largely because the increase in the federal estate tax exemption, plus the addition of portability, has largely invalidated these archaic A/B trust approaches that were popular many years ago. This has nothing to do with the main point that I, and I believe afan, have been trying to make.
afan was the first one to bring a marital trust into the conversation. Your questions and comments would be better directed toward him.

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

Post by FIREchief » Wed May 13, 2020 3:49 pm

oldfort wrote:
Wed May 13, 2020 3:40 pm
FIREchief wrote:
Wed May 13, 2020 2:33 pm
oldfort wrote:
Wed May 13, 2020 2:07 pm
FIREchief wrote:
Wed May 13, 2020 1:20 pm
Thanks for posting this afan. It certainly supports what we have been trying to explain throughout this thread.
The case, cited by afan, isn't exactly the situation you were discussing. For one, there is a co-trustee PNC Bank in this case. The beneficiary was never the sole trustee. In the event the debtor became the sole trustee, the debtor would not be able to make principal distributions to herself. This would create the very strange situation where no trustee had the ability to make principal distributions to one of the beneficiaries or in the event the debtor was the sole beneficiary, to any of the beneficiaries.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.
Do you understand what a "marital trust" is? Those are typically not the types of trusts that we discuss here, I believe largely because the increase in the federal estate tax exemption, plus the addition of portability, has largely invalidated these archaic A/B trust approaches that were popular many years ago. This has nothing to do with the main point that I, and I believe afan, have been trying to make.
afan was the first one to bring a marital trust into the conversation. Your questions and comments would be better directed toward him.
No. His post was highly relevant, as it clearly supported our points that a beneficiary can serve as trustee without jeopardizing asset protections in the state where that court ruled. The fact that this example involved a marital trust was irrelevant to the point being made.
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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