Design of Testamentary Trust

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Topic Author
Mackster
Posts: 27
Joined: Sun Jun 07, 2020 7:13 pm

Design of Testamentary Trust

Post by Mackster »

Basic information:
Age 70 couple
PA residents w/FL property
Approx. $5MM gross estate including investments, real estate, life insurance. FL property value $500k.
Family Situation:
Son#1: Age 33, unmarried, $40k gross income (history of low hourly wages), living at home, negligible savings/assets, $15k high interest auto loan, new 401k (2% funding), discussions indicate no interest in marriage/children;
Son#2: Age 29, unmarried, living with fiance (age 23), marriage tentative Aug, 2020, plans to have children, owns recently purchased home ($170k market value), $40k equity(his down payment) in home, parents hold $125k 30 yr mortgage, $50k savings, approx. $40k gross income (history of low hourly wages), access to 401k plan:

We have strongly advised son #2 to have a pre-nup and one was drafted, however, fiance has refused to sign anything other than a home-made statement which she would have notarized. We have cautioned that this may not hold up in court should a divorce occur. She has apparently not disclosed her assets/liabilities although she claims $100k student debt that requires over $1000/m payments. Her income is also approx. $40k but she has not contributed to rent/utilities in the year prior to our son's home purchase or to mortgage/utilities/taxes in the year since the home purchase citing the student loan payment requirement. She has also stated that she will have a child as soon as possible after the wedding going as far as setting up a baby registry for 9 months after the anticipated wedding date. We are extremely wary of her intent and fear she is anticipating 50% home ownership and child support plus alimony based on any future trust income.

We had planned to set up the trust to equally distribute all income annually to our sons since their job prospects will likely keep them in low income situations. Assuming 3% being achievable, that would generate $75k incomes using a portfolio of index funds (stock, bond, REIT, etc., and possibly a guaranteed immediate annuity). Additional distributions for education, home purchase, health needs would be at the discretion of the trustees (contemplate a level-headed niece age 35, and my sister and her husband both age 72) guided by a letter providing our thinking on discretionary distribution. and perhaps an attorney 'trust protector' and CPA. We have considered a corporate trustee (like Vanguard) however even at their 'low' .50% admin fee this does not seem prudent on a small trust ($250k in fees per 10 years of admin). In addition, a good friend who worked in a bank trust department for 30 years indicated that a small trust account like ours would likely end up in the portfolio of a very junior trust officer and receive minimal 'cookie cutter' attention. Not sure that's worth $25k per year.

Our dilemma is centered around maximizing income to the beneficiaries while preventing trust income from being used to determine alimony should son #2 divorce. We also have read that specifying annual income distribution as opposed to making distributions totally discretionary and including any type of HEMS language, may increase the liklihood that trust income and even principal could successfully be considered in determining alimony/child support or marital assets. Secondly, if only income is distributed, we're not sure how we'd allow a substantial distribution around retirement (age 55-65) with any amounts remaining passing to son #2's children. And we're at a loss of how to deal with son #1's likely marriage and child-less future relative to future distributions (we're mindful that he will need somewhere to live). Neither child has demonstrated an ability to wisely handle even much smaller amounts of money (we've bailed both out of credit card debt in the past and small amounts inherited from relatives have been quickly squandered) so a 'spendthrift' approach is a necessity. We would anticipate a Lamborghini in each driveway should a substantial lump sum be made available.

Apologize for the length of this question but wanted to provide as much fact information as possible for the very talented and experienced 'bogleheads' that may review to get their heads around the issues. We are working with a trust/estate attorney now but had expected a pre-nup to be signed which now appears unlikely. He is very pro-corporate trustee and initially described an income distribution, modified HEMS approach requiring benes to be gainfully employed and limiting their access to trust principal. We have separate questions about the trust portfolio itself but will take those to another area of the board. Thanks in advance for any help you can provide!
62nc
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Re: Design of Testamentary Trust

Post by 62nc »

Following...
oldfort
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Re: Design of Testamentary Trust

Post by oldfort »

This court case from MA may interest you. If nothing else, it illustrates the incredible complexity to how trusts are treated in divorce cases.
We further conclude that the wife's entire interest in the trust is part of the marital estate for purposes of § 34.

However, the mere fact that a trustee's discretion is "uncontrolled" (i.e., not governed by an ascertainable standard) does not necessarily preclude a trust's inclusion in the marital estate. See Davidson v. Davidson, 19 Mass. App. Ct. 364, 371-372 (1985). Indeed, in Pfannenstiehl, supra at 113-115, the
inquiry did not turn on whether the trust contained an ascertainable standard.
https://cases.justia.com/massachusetts/ ... 1557230520
bsteiner
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Location: NYC/NJ/FL

Re: Design of Testamentary Trust

Post by bsteiner »

No one knows what the future will bring. Why wouldn’t each child’s trust be fully discretionary? In addition to providing better asset protection, that will provide more flexibility.

You should also give more thought to who should control. If your niece will control, what is the purpose of the attorney protector?

Whether to have your niece or a corporate trustee may depend on her relationship with your children. A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

bsteiner wrote: Mon Jun 08, 2020 10:51 pm A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
Hard no. The sons have the power to do whatever they want with what they receive. While it's true that we don't know the future and that anyone is capable of change, the best predictor of future behavior is past behavior. They've seen it for the past 30 years. Having more money will normally make people more of what they already are. The niece has an understanding of the parents' intent for this trust. As long as she's alive, she's probably the best person for the job. Let's hope she accepts the role and that there's a competent corporate successor trustee.

OP, I don't know anything about trusts in FL, but if they're anything like CA or NV, those assets can be protected for your heirs. Assuming a grandchild, there is a chance that the fiancée could end up with control over some portion of the proceeds if there is a divorce and she's got primary custody while the child(ren) is still a minor. As for the home, it's separate property that he's bringing into the marriage. Having sole title is the next best thing to a pre-nup.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Topic Author
Mackster
Posts: 27
Joined: Sun Jun 07, 2020 7:13 pm

Re: Design of Testamentary Trust

Post by Mackster »

oldfort wrote: Mon Jun 08, 2020 9:27 pm This court case from MA may interest you. If nothing else, it illustrates the incredible complexity to how trusts are treated in divorce cases.
We further conclude that the wife's entire interest in the trust is part of the marital estate for purposes of § 34.

However, the mere fact that a trustee's discretion is "uncontrolled" (i.e., not governed by an ascertainable standard) does not necessarily preclude a trust's inclusion in the marital estate. See Davidson v. Davidson, 19 Mass. App. Ct. 364, 371-372 (1985). Indeed, in Pfannenstiehl, supra at 113-115, the
inquiry did not turn on whether the trust contained an ascertainable standard.
https://cases.justia.com/massachusetts/ ... 1557230520
Well, that's disconcerting! So much for just setting the trust up with total trustee discretion. I don't know if PA courts take a similar view and will have to see what the circumstances of the MA case were. It's possible that the trust income and principal protection we thought achievable has been eroded and that we just won't have certainty about that.
Appreciate your bringing the case to our attention!
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LilyFleur
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Re: Design of Testamentary Trust

Post by LilyFleur »

Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
Topic Author
Mackster
Posts: 27
Joined: Sun Jun 07, 2020 7:13 pm

Re: Design of Testamentary Trust

Post by Mackster »

LilyFleur wrote: Tue Jun 09, 2020 5:01 am Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
We would certainly compensate her although I'm not sure what a reasonable amount would be.
bsteiner
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Location: NYC/NJ/FL

Re: Design of Testamentary Trust

Post by bsteiner »

Mackster wrote: Tue Jun 09, 2020 4:49 am
oldfort wrote: Mon Jun 08, 2020 9:27 pm This court case from MA may interest you. If nothing else, it illustrates the incredible complexity to how trusts are treated in divorce cases.
We further conclude that the wife's entire interest in the trust is part of the marital estate for purposes of § 34.

However, the mere fact that a trustee's discretion is "uncontrolled" (i.e., not governed by an ascertainable standard) does not necessarily preclude a trust's inclusion in the marital estate. See Davidson v. Davidson, 19 Mass. App. Ct. 364, 371-372 (1985). Indeed, in Pfannenstiehl, supra at 113-115, the
inquiry did not turn on whether the trust contained an ascertainable standard.
https://cases.justia.com/massachusetts/ ... 1557230520
Well, that's disconcerting! So much for just setting the trust up with total trustee discretion. I don't know if PA courts take a similar view and will have to see what the circumstances of the MA case were. It's possible that the trust income and principal protection we thought achievable has been eroded and that we just won't have certainty about that.
Appreciate your bringing the case to our attention!
Note that the court nevertheless said that the wife's interest in the trust had to be assigned to her. In other words, while it would be taken into account in dividing the other assets, the husband didn't get anything from the trust.

Also note that Massachusetts is at one end of the spectrum on this. Compare the New Jersey case Tannen v. Tannen: https://scholar.google.com/scholar_case ... i=scholarr.

Even in other states, equitable distribution doesn't have to be equal. For example, if one spouse has $10 million of separate property and the couple has $1 million of marital property, dividing the marital property equally might not be equitable.

The Massachusetts case might have been better for the wife if she didn't have the 5% withdrawal right.

Matrimonial cases often turn on the particular facts. Notwithstanding Tannen, it's best to assume that the income that the trust produces or could produce will be taken into account in determining alimony and child support, especially if there has been a history of distributions.

Conclusion: regardless of what the court may do, the child is likely to be better off, and won't be worse off, if his/her share is in a discretionary trust.
Topic Author
Mackster
Posts: 27
Joined: Sun Jun 07, 2020 7:13 pm

Re: Design of Testamentary Trust

Post by Mackster »

bsteiner wrote: Mon Jun 08, 2020 10:51 pm No one knows what the future will bring. Why wouldn’t each child’s trust be fully discretionary? In addition to providing better asset protection, that will provide more flexibility.

You should also give more thought to who should control. If your niece will control, what is the purpose of the attorney protector?

Whether to have your niece or a corporate trustee may depend on her relationship with your children. A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
You make a good point regarding the futility of trying to predict future circumstances...anything really is possible. I suppose I'm concerned that total discretion could easily replace our intent with the trustee's intent unless there is some guidance (HEMS?). We'd definitely want some amount of income to be distributed, to provide funds for education if desired, to provide for a comfortable retirement, to assist with home ownership, etc. Is it possible to combine trustee discretion with some form of guidance? Also, are spendthrift provisions incompatible with the trust being discretionary?

Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed. We also would discuss our situation and intent with all of them. I guess the attorney protector idea was a 'belt and suspenders' approach to ensure that if a trustee totally ignored intent or laws changed that the appropriate changes could be made. Perhaps, as you suggest, that's unnecessarily redundant. Her relationship with the children has been good. She is highly organized, responsible, and stable.

Really appreciate your insight. Making us think about a number of issues we hadn't considered before. Thx.
Topic Author
Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 2:35 am
bsteiner wrote: Mon Jun 08, 2020 10:51 pm A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
Hard no. The sons have the power to do whatever they want with what they receive. While it's true that we don't know the future and that anyone is capable of change, the best predictor of future behavior is past behavior. They've seen it for the past 30 years. Having more money will normally make people more of what they already are. The niece has an understanding of the parents' intent for this trust. As long as she's alive, she's probably the best person for the job. Let's hope she accepts the role and that there's a competent corporate successor trustee.

OP, I don't know anything about trusts in FL, but if they're anything like CA or NV, those assets can be protected for your heirs. Assuming a grandchild, there is a chance that the fiancée could end up with control over some portion of the proceeds if there is a divorce and she's got primary custody while the child(ren) is still a minor. As for the home, it's separate property that he's bringing into the marriage. Having sole title is the next best thing to a pre-nup.
I agree that giving children the power to remove the trustee could be problematic. Would not want them 'shopping' for a pliable trustee.
The trust would be in PA (we are PA residents, just have the property in FL). While he is bringing the home into the marriage, once they are married doesn't the home become a marital asset in the absence of an agreement separating assets in the same way that an IRA could be divided up as a result of a divorce?
BillWalters
Posts: 148
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Re: Design of Testamentary Trust

Post by BillWalters »

The parents’ insistence on a prenup is controlling and inappropriate.
Topic Author
Mackster
Posts: 27
Joined: Sun Jun 07, 2020 7:13 pm

Re: Design of Testamentary Trust

Post by Mackster »

bsteiner wrote: Tue Jun 09, 2020 6:47 am
Mackster wrote: Tue Jun 09, 2020 4:49 am
oldfort wrote: Mon Jun 08, 2020 9:27 pm This court case from MA may interest you. If nothing else, it illustrates the incredible complexity to how trusts are treated in divorce cases.
We further conclude that the wife's entire interest in the trust is part of the marital estate for purposes of § 34.

However, the mere fact that a trustee's discretion is "uncontrolled" (i.e., not governed by an ascertainable standard) does not necessarily preclude a trust's inclusion in the marital estate. See Davidson v. Davidson, 19 Mass. App. Ct. 364, 371-372 (1985). Indeed, in Pfannenstiehl, supra at 113-115, the
inquiry did not turn on whether the trust contained an ascertainable standard.
https://cases.justia.com/massachusetts/ ... 1557230520
Well, that's disconcerting! So much for just setting the trust up with total trustee discretion. I don't know if PA courts take a similar view and will have to see what the circumstances of the MA case were. It's possible that the trust income and principal protection we thought achievable has been eroded and that we just won't have certainty about that.
Appreciate your bringing the case to our attention!
Note that the court nevertheless said that the wife's interest in the trust had to be assigned to her. In other words, while it would be taken into account in dividing the other assets, the husband didn't get anything from the trust.

Also note that Massachusetts is at one end of the spectrum on this. Compare the New Jersey case Tannen v. Tannen: https://scholar.google.com/scholar_case ... i=scholarr.

Even in other states, equitable distribution doesn't have to be equal. For example, if one spouse has $10 million of separate property and the couple has $1 million of marital property, dividing the marital property equally might not be equitable.

The Massachusetts case might have been better for the wife if she didn't have the 5% withdrawal right.

Matrimonial cases often turn on the particular facts. Notwithstanding Tannen, it's best to assume that the income that the trust produces or could produce will be taken into account in determining alimony and child support, especially if there has been a history of distributions.

Conclusion: regardless of what the court may do, the child is likely to be better off, and won't be worse off, if his/her share is in a discretionary trust.
So in that MA case it appears that the beneficiary had an actual interest in the trust which allowed the court to at least take the trust into account in determining the division of marital assets. That's good to know. I did see the Tannen v. Tannen case in NJ but don't have any idea whether PA is closer to MA or NJ on the spectrum. Based on your cautionary note on Tannen, however, it looks like without the pre-nup even a purely discretionary trust will probably not protect income from being taken into account for support and alimony. Not what I wanted to hear but it is what it is.
Thanks for puting the MA case in context.
bsteiner
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Re: Design of Testamentary Trust

Post by bsteiner »

Mackster wrote: Tue Jun 09, 2020 7:11 am
bsteiner wrote: Mon Jun 08, 2020 10:51 pm No one knows what the future will bring. Why wouldn’t each child’s trust be fully discretionary? In addition to providing better asset protection, that will provide more flexibility.

You should also give more thought to who should control. If your niece will control, what is the purpose of the attorney protector?

Whether to have your niece or a corporate trustee may depend on her relationship with your children. A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
You make a good point regarding the futility of trying to predict future circumstances...anything really is possible. I suppose I'm concerned that total discretion could easily replace our intent with the trustee's intent unless there is some guidance (HEMS?). We'd definitely want some amount of income to be distributed, to provide funds for education if desired, to provide for a comfortable retirement, to assist with home ownership, etc. Is it possible to combine trustee discretion with some form of guidance? Also, are spendthrift provisions incompatible with the trust being discretionary?

Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed. We also would discuss our situation and intent with all of them. I guess the attorney protector idea was a 'belt and suspenders' approach to ensure that if a trustee totally ignored intent or laws changed that the appropriate changes could be made. Perhaps, as you suggest, that's unnecessarily redundant. Her relationship with the children has been good. She is highly organized, responsible, and stable.
...
You could include guidance, preferably in broad terms since you don't know what the future will bring.

Pretty much all trusts are spendthrift, though that's superfluous when a trust is discretionary.

By niece I meant sister, brother-in-law and niece, or sister and brother-in-law followed by niece.

If the relationship between your niece and your children doesn't work (which from what you say won't be likely), your niece will probably pick a successor and resign. Nevertheless, you could give each child the power to remove the trustee(s) and replace them with a corporate trustee. There won't be much opportunity for shopping around. Corporate trustees have processes and committees, and generally do a good job since if one didn't, the word would get around in the trusts and estates bar and we would discourage appointing that one.
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

BillWalters wrote: Tue Jun 09, 2020 7:27 am The parents’ insistence on a prenup is controlling and inappropriate.
I understand your statement, however, the parents have a right to act in the interests of their potential heirs. Absent a proper agreement, a significant portion of their estate might possibly be transferred to another family who did nothing to earn it and against the intentions of those who did earn it.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
neverpanic
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Joined: Sun May 10, 2020 12:26 am

Re: Design of Testamentary Trust

Post by neverpanic »

Mackster wrote: Tue Jun 09, 2020 7:24 am
neverpanic wrote: Tue Jun 09, 2020 2:35 am
bsteiner wrote: Mon Jun 08, 2020 10:51 pm A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
Hard no. The sons have the power to do whatever they want with what they receive. While it's true that we don't know the future and that anyone is capable of change, the best predictor of future behavior is past behavior. They've seen it for the past 30 years. Having more money will normally make people more of what they already are. The niece has an understanding of the parents' intent for this trust. As long as she's alive, she's probably the best person for the job. Let's hope she accepts the role and that there's a competent corporate successor trustee.

OP, I don't know anything about trusts in FL, but if they're anything like CA or NV, those assets can be protected for your heirs. Assuming a grandchild, there is a chance that the fiancée could end up with control over some portion of the proceeds if there is a divorce and she's got primary custody while the child(ren) is still a minor. As for the home, it's separate property that he's bringing into the marriage. Having sole title is the next best thing to a pre-nup.
I agree that giving children the power to remove the trustee could be problematic. Would not want them 'shopping' for a pliable trustee.
The trust would be in PA (we are PA residents, just have the property in FL). While he is bringing the home into the marriage, once they are married doesn't the home become a marital asset in the absence of an agreement separating assets in the same way that an IRA could be divided up as a result of a divorce?
You should ask a couple of attorneys in your state to be sure, but from what I've read, the home is considered separate property in PA. The title remains his, but what's not clear is whether the spouse would have a claim to any amount of the equity in the event of divorce.

IRAs are a little different. Take the sum total of the marital assets, divide in half, and that's what each gets. So, if the marriage has 10 accounts they've funded during the marriage, each gets half of all of them. If there's only 1 IRA that was opened after they married, he would owe her 1/2 of the value on the date they filed for separation. If it was opened and he began funding it before the marriage, then she would be entitled to 1/2 of the increase in value during the marriage.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

Mackster wrote: Tue Jun 09, 2020 6:35 am
LilyFleur wrote: Tue Jun 09, 2020 5:01 am Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
We would certainly compensate her although I'm not sure what a reasonable amount would be.
Your referenced HEMS. When you set up your trust, one suggestion is to assign shares for different parties and purposes. One of those shares should be for the expenses of the trust, which would include compensation for the trustee, accounting/tax preparation, etc. My estate is significantly smaller than yours and I'm in NV, so I'm not a reasonable comp, but we decided on a flat fee of $8000-10000/year, with appropriate increases if investments performed well and grew the pot. Just throwing a number out, I would imagine a starting point of about 0.5%. You will shop around, of course, but you have to figure that a corporate trustee would cost you no less than 1%/year, maybe a little more.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Topic Author
Mackster
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Joined: Sun Jun 07, 2020 7:13 pm

Re: Design of Testamentary Trust

Post by Mackster »

bsteiner wrote: Tue Jun 09, 2020 9:08 am
Mackster wrote: Tue Jun 09, 2020 7:11 am
bsteiner wrote: Mon Jun 08, 2020 10:51 pm No one knows what the future will bring. Why wouldn’t each child’s trust be fully discretionary? In addition to providing better asset protection, that will provide more flexibility.

You should also give more thought to who should control. If your niece will control, what is the purpose of the attorney protector?

Whether to have your niece or a corporate trustee may depend on her relationship with your children. A possible middle ground if you pick your niece would be to give each child the power to remove your niece and replace her with a corporate trustee.
You make a good point regarding the futility of trying to predict future circumstances...anything really is possible. I suppose I'm concerned that total discretion could easily replace our intent with the trustee's intent unless there is some guidance (HEMS?). We'd definitely want some amount of income to be distributed, to provide funds for education if desired, to provide for a comfortable retirement, to assist with home ownership, etc. Is it possible to combine trustee discretion with some form of guidance? Also, are spendthrift provisions incompatible with the trust being discretionary?

Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed. We also would discuss our situation and intent with all of them. I guess the attorney protector idea was a 'belt and suspenders' approach to ensure that if a trustee totally ignored intent or laws changed that the appropriate changes could be made. Perhaps, as you suggest, that's unnecessarily redundant. Her relationship with the children has been good. She is highly organized, responsible, and stable.
...
You could include guidance, preferably in broad terms since you don't know what the future will bring.

Pretty much all trusts are spendthrift, though that's superfluous when a trust is discretionary.

By niece I meant sister, brother-in-law and niece, or sister and brother-in-law followed by niece.

If the relationship between your niece and your children doesn't work (which from what you say won't be likely), your niece will probably pick a successor and resign. Nevertheless, you could give each child the power to remove the trustee(s) and replace them with a corporate trustee. There won't be much opportunity for shopping around. Corporate trustees have processes and committees, and generally do a good job since if one didn't, the word would get around in the trusts and estates bar and we would discourage appointing that one.
So some broad guidance wouldn't destroy the discretionary nature of the trust. Would the HEMS language be permissable as long as it used "may" instead of "shall" and used other discretionary language?
At this point it appears that there will not be a pre-nup. I guess our options are to go the discretionary route you suggest and hope that trust income and assets will be protected in a future divorce or to do something draconian like not allow any distributions until 20 years out (not at all what we desire), although even that doesn't solve anything regarding a future divorce.
oldfort
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Re: Design of Testamentary Trust

Post by oldfort »

Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
Topic Author
Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 9:09 am
BillWalters wrote: Tue Jun 09, 2020 7:27 am The parents’ insistence on a prenup is controlling and inappropriate.
I understand your statement, however, the parents have a right to act in the interests of their potential heirs. Absent a proper agreement, a significant portion of their estate might possibly be transferred to another family who did nothing to earn it and against the intentions of those who did earn it.
Almost by definition the trust itself is "controlling". I suppose that anything short of lump sum distribution by will could be labeled "controlling". "Inappropriate" would be a value judgement. In my judgement it would be inappropriate not to suggest a pre-nup to a child who is about bring significant assets into a marriage.
Topic Author
Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

oldfort wrote: Tue Jun 09, 2020 10:19 am
Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
That's a very valid point. We were hoping we could set it up so that initially all 3 would be co-trustees with a transition to the niece as the sole trustee at some point in the future. I don't know if we'd be able to specify the duration of their trustee status such as: the earlier of age 80 or upon physical or cognitive impairment. We thought that approach would ease the niece into the role and provide valuable insight and support based on the sister and brother-in-law's years of experience in business and financial matters as well as their long relationship with our sons.
Topic Author
Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 9:47 am
Mackster wrote: Tue Jun 09, 2020 6:35 am
LilyFleur wrote: Tue Jun 09, 2020 5:01 am Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
We would certainly compensate her although I'm not sure what a reasonable amount would be.
Your referenced HEMS. When you set up your trust, one suggestion is to assign shares for different parties and purposes. One of those shares should be for the expenses of the trust, which would include compensation for the trustee, accounting/tax preparation, etc. My estate is significantly smaller than yours and I'm in NV, so I'm not a reasonable comp, but we decided on a flat fee of $8000-10000/year, with appropriate increases if investments performed well and grew the pot. Just throwing a number out, I would imagine a starting point of about 0.5%. You will shop around, of course, but you have to figure that a corporate trustee would cost you no less than 1%/year, maybe a little more.
I just assumed that admin costs including CPA, attorney, and compensation would be paid by the trustee as warranted. Did not realize that it would be necessary to create shares for each bene and for each of the possible recipients of admin fees.
We've looked at Schwab (.50%) and Vanguard (.55%) as corporate trustees. As I noted elsewhere, that seemed almost confiscatory for a small estate ($250k-$275k per 10 years) since we'd expect the trust to last possibly 50 years. Since our expectation was for income distribution I'm not sure we'd see substantial growth of trust principal. At any rate we certainly agree that there needs to be provision for reasonable comp to retain the trustee's services.
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

Mackster wrote: Tue Jun 09, 2020 10:36 am
oldfort wrote: Tue Jun 09, 2020 10:19 am
Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
That's a very valid point. We were hoping we could set it up so that initially all 3 would be co-trustees with a transition to the niece as the sole trustee at some point in the future. I don't know if we'd be able to specify the duration of their trustee status such as: the earlier of age 80 or upon physical or cognitive impairment. We thought that approach would ease the niece into the role and provide valuable insight and support based on the sister and brother-in-law's years of experience in business and financial matters as well as their long relationship with our sons.
The beauty of a trust is that it can be modified as needed fairly easily while the grantor is alive. Different state, but when my trust was opened, it was based on "if I should die tomorrow" (today, even). And the succession order is spelled out in the trust. So, your sister and BIL are old now, but if you collapsed and were suddenly gone tomorrow, they might be the best to manage your affairs for some number of months while your niece is brought up to speed and then your sister/BIL could elect to resign their role at any time. But if you live another 10 years, that would provide ample time for you to educate your niece so that she'll feel confident with the duties. And when you're both ready, you would simply modify the order of succession.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 10:56 am
Mackster wrote: Tue Jun 09, 2020 10:36 am
oldfort wrote: Tue Jun 09, 2020 10:19 am
Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
That's a very valid point. We were hoping we could set it up so that initially all 3 would be co-trustees with a transition to the niece as the sole trustee at some point in the future. I don't know if we'd be able to specify the duration of their trustee status such as: the earlier of age 80 or upon physical or cognitive impairment. We thought that approach would ease the niece into the role and provide valuable insight and support based on the sister and brother-in-law's years of experience in business and financial matters as well as their long relationship with our sons.
The beauty of a trust is that it can be modified as needed fairly easily while the grantor is alive. Different state, but when my trust was opened, it was based on "if I should die tomorrow" (today, even). And the succession order is spelled out in the trust. So, your sister and BIL are old now, but if you collapsed and were suddenly gone tomorrow, they might be the best to manage your affairs for some number of months while your niece is brought up to speed and then your sister/BIL could elect to resign their role at any time. But if you live another 10 years, that would provide ample time for you to educate your niece so that she'll feel confident with the duties. And when you're both ready, you would simply modify the order of succession.
Great points! So we can spell out the succession order and have them phased out as health and age dictate while grooming the niece. Thx!
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

Mackster wrote: Tue Jun 09, 2020 10:49 am
neverpanic wrote: Tue Jun 09, 2020 9:47 am
Mackster wrote: Tue Jun 09, 2020 6:35 am
LilyFleur wrote: Tue Jun 09, 2020 5:01 am Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
We would certainly compensate her although I'm not sure what a reasonable amount would be.
Your referenced HEMS. When you set up your trust, one suggestion is to assign shares for different parties and purposes. One of those shares should be for the expenses of the trust, which would include compensation for the trustee, accounting/tax preparation, etc. My estate is significantly smaller than yours and I'm in NV, so I'm not a reasonable comp, but we decided on a flat fee of $8000-10000/year, with appropriate increases if investments performed well and grew the pot. Just throwing a number out, I would imagine a starting point of about 0.5%. You will shop around, of course, but you have to figure that a corporate trustee would cost you no less than 1%/year, maybe a little more.
I just assumed that admin costs including CPA, attorney, and compensation would be paid by the trustee as warranted. Did not realize that it would be necessary to create shares for each bene and for each of the possible recipients of admin fees.
We've looked at Schwab (.50%) and Vanguard (.55%) as corporate trustees. As I noted elsewhere, that seemed almost confiscatory for a small estate ($250k-$275k per 10 years) since we'd expect the trust to last possibly 50 years. Since our expectation was for income distribution I'm not sure we'd see substantial growth of trust principal. At any rate we certainly agree that there needs to be provision for reasonable comp to retain the trustee's services.
I didn't mean to mislead you, I apologize for that. Your statement is correct - it's the trustee's job to manage those expenses and you can organize the distributions however you wish. I was only offering that suggestion as one method of keeping the accounting simple and clean, and also limiting any potential challenges by entitled beneficiaries.

At those prices, I would argue Schwab and Vanguard make great options for corporate trustee when your niece resigns or passes. With a 50-year plan, you would have taken care of your sons and left a nice gift for future grandchildren. I have to take a moment to say that my heart is warmed by this.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 11:08 am
Mackster wrote: Tue Jun 09, 2020 10:49 am
neverpanic wrote: Tue Jun 09, 2020 9:47 am
Mackster wrote: Tue Jun 09, 2020 6:35 am
LilyFleur wrote: Tue Jun 09, 2020 5:01 am Will the niece be compensated for her time? It sounds like it has the possibility of being a stressful job.
We would certainly compensate her although I'm not sure what a reasonable amount would be.
Your referenced HEMS. When you set up your trust, one suggestion is to assign shares for different parties and purposes. One of those shares should be for the expenses of the trust, which would include compensation for the trustee, accounting/tax preparation, etc. My estate is significantly smaller than yours and I'm in NV, so I'm not a reasonable comp, but we decided on a flat fee of $8000-10000/year, with appropriate increases if investments performed well and grew the pot. Just throwing a number out, I would imagine a starting point of about 0.5%. You will shop around, of course, but you have to figure that a corporate trustee would cost you no less than 1%/year, maybe a little more.
I just assumed that admin costs including CPA, attorney, and compensation would be paid by the trustee as warranted. Did not realize that it would be necessary to create shares for each bene and for each of the possible recipients of admin fees.
We've looked at Schwab (.50%) and Vanguard (.55%) as corporate trustees. As I noted elsewhere, that seemed almost confiscatory for a small estate ($250k-$275k per 10 years) since we'd expect the trust to last possibly 50 years. Since our expectation was for income distribution I'm not sure we'd see substantial growth of trust principal. At any rate we certainly agree that there needs to be provision for reasonable comp to retain the trustee's services.
I didn't mean to mislead you, I apologize for that. Your statement is correct - it's the trustee's job to manage those expenses and you can organize the distributions however you wish. I was only offering that suggestion as one method of keeping the accounting simple and clean, and also limiting any potential challenges by entitled beneficiaries.

At those prices, I would argue Schwab and Vanguard make great options for corporate trustee when your niece resigns or passes. With a 50-year plan, you would have taken care of your sons and left a nice gift for future grandchildren. I have to take a moment to say that my heart is warmed by this.
Ok. I understand that that would be one way of organizing the accounting and other expenses. I think I agree that Schwab or Vanguard could be options after my niece is no longer available. Regarding the 50 years, who knows? If the trust is there for them to their normal life expectancy, great! And if grandchildren can benefit after that, even better. But as bsteiner noted, no one can predict the future so if my wife and I are hit by a bus tomorrow and the children die in a car accident on the way to the funeral...whoops, guess I haven't thought that one through! Hopefully, when we have things set up, we'll benefit from having some peace of mind and will feel that we've done what we can to make life a little better for our survivors. Thx.
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Re: Design of Testamentary Trust

Post by bsteiner »

Mackster wrote: Tue Jun 09, 2020 10:14 am ...
So some broad guidance wouldn't destroy the discretionary nature of the trust. Would the HEMS language be permissable as long as it used "may" instead of "shall" and used other discretionary language?
At this point it appears that there will not be a pre-nup. I guess our options are to go the discretionary route you suggest and hope that trust income and assets will be protected in a future divorce or to do something draconian like not allow any distributions until 20 years out (not at all what we desire), although even that doesn't solve anything regarding a future divorce.
May distribute for HEMS is better than shall distribute for HEMS from an asset protection standpoint. However, depending on state law, there could be a claim for items falling within HEMS. There could also be an issue as to whether a proposed distribution falls within HEMS.

Don't worry about the pre-nup.

Don't preclude distributions for a period of time. What if the child needs money?

Don't worry about the income being considered in determining alimony and child support. You would want your grandchildren to be provide for. Also, your grandchildren will be beneficiaries of the trust, so the trustees should consider their interests.
oldfort wrote: Tue Jun 09, 2020 10:19 am
Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
It's fine to have all 3. That will allow for a smooth transition. Over time, the niece will probably play a larger role. You could let the last one pick co-trustees or successor trustees.
Mackster wrote: Tue Jun 09, 2020 10:49 am ...
I just assumed that admin costs including CPA, attorney, and compensation would be paid by the trustee as warranted. Did not realize that it would be necessary to create shares for each bene and for each of the possible recipients of admin fees.
...
Your Will would create separate trusts for each child. That way, they could have different trustees, they could be invested differently, and distributions to one would come out of his/her trust.

After your estate is wound up (which is relatively simple in Pennsylvania) your children's trusts won't have much if anything in the way of legal fees except perhaps when there are trustee changes. The accounting fees will be modest. Each trust will file annual income tax returns. Your sister, brother-in-law and niece may want to take compensation, but they'll have some work to do and they'll have some responsibliity.
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LilyFleur
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Re: Design of Testamentary Trust

Post by LilyFleur »

I would encourage you to work with a very competent attorney. You are very focused on your children at the moment, but much can happen before an estate is available for children. My parent's trust included language protective of the estate should one of them remarry. Also, when one of you dies and the other is possibly alone, the work of taking care of everything if that person is incapacitated can be quite demanding. Hospital bills, nursing home bills, making sure Medicare pays for what it can, filing LTC claims (if available), quality of care, hiring additional caregivers and making sure they do a good job, having an estate sale, etc. It is a lot of work. My mom did it for my grandmother, and her siblings did not trust her nor did they understand how hard she worked at it. She was a CFP and very qualified to do the work, and she was the only child who lived near my grandmother, so it was doubly challenging for her. Being a trustee carries a fiduciary responsibility, and it is important that they understand their own personal liability should they undertake the job.
neverpanic
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Re: Design of Testamentary Trust

Post by neverpanic »

LilyFleur wrote: Tue Jun 09, 2020 12:41 pm I would encourage you to work with a very competent attorney. You are very focused on your children at the moment, but much can happen before an estate is available for children. My parent's trust included language protective of the estate should one of them remarry. Also, when one of you dies and the other is possibly alone, the work of taking care of everything if that person is incapacitated can be quite demanding. Hospital bills, nursing home bills, making sure Medicare pays for what it can, filing LTC claims (if available), quality of care, hiring additional caregivers and making sure they do a good job, having an estate sale, etc. It is a lot of work. My mom did it for my grandmother, and her siblings did not trust her nor did they understand how hard she worked at it. She was a CFP and very qualified to do the work, and she was the only child who lived near my grandmother, so it was doubly challenging for her. Being a trustee carries a fiduciary responsibility, and it is important that they understand their own personal liability should they undertake the job.
100%. Assume that either you or your wife will survive the other and have a framework outlined.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

neverpanic wrote: Tue Jun 09, 2020 12:57 pm
LilyFleur wrote: Tue Jun 09, 2020 12:41 pm I would encourage you to work with a very competent attorney. You are very focused on your children at the moment, but much can happen before an estate is available for children. My parent's trust included language protective of the estate should one of them remarry. Also, when one of you dies and the other is possibly alone, the work of taking care of everything if that person is incapacitated can be quite demanding. Hospital bills, nursing home bills, making sure Medicare pays for what it can, filing LTC claims (if available), quality of care, hiring additional caregivers and making sure they do a good job, having an estate sale, etc. It is a lot of work. My mom did it for my grandmother, and her siblings did not trust her nor did they understand how hard she worked at it. She was a CFP and very qualified to do the work, and she was the only child who lived near my grandmother, so it was doubly challenging for her. Being a trustee carries a fiduciary responsibility, and it is important that they understand their own personal liability should they undertake the job.
100%. Assume that either you or your wife will survive the other and have a framework outlined.
That's excellent advice and easy to forget about as we focus on the trust and children. Really appreciate bringing up those considerations!
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

bsteiner wrote: Tue Jun 09, 2020 11:49 am
Mackster wrote: Tue Jun 09, 2020 10:14 am ...
So some broad guidance wouldn't destroy the discretionary nature of the trust. Would the HEMS language be permissable as long as it used "may" instead of "shall" and used other discretionary language?
At this point it appears that there will not be a pre-nup. I guess our options are to go the discretionary route you suggest and hope that trust income and assets will be protected in a future divorce or to do something draconian like not allow any distributions until 20 years out (not at all what we desire), although even that doesn't solve anything regarding a future divorce.
May distribute for HEMS is better than shall distribute for HEMS from an asset protection standpoint. However, depending on state law, there could be a claim for items falling within HEMS. There could also be an issue as to whether a proposed distribution falls within HEMS.

Don't worry about the pre-nup.

Don't preclude distributions for a period of time. What if the child needs money?

Don't worry about the income being considered in determining alimony and child support. You would want your grandchildren to be provide for. Also, your grandchildren will be beneficiaries of the trust, so the trustees should consider their interests.
oldfort wrote: Tue Jun 09, 2020 10:19 am
Mackster wrote: Tue Jun 09, 2020 7:11 am Our initial thoughts were to have my sister and brother-in-law and their daughter (the niece) as trustees with the niece being the successor trustee upon their deaths or incapacity (they are ages 72/73). Maybe a successor corporate trustee is also needed.
Are you sure you want your sister and brother-in-law to be trustees? In the not too distant future, they'll be in their eighties. For those of us who make it that long, both physical and cognitive decline is common.
It's fine to have all 3. That will allow for a smooth transition. Over time, the niece will probably play a larger role. You could let the last one pick co-trustees or successor trustees.
Mackster wrote: Tue Jun 09, 2020 10:49 am ...
I just assumed that admin costs including CPA, attorney, and compensation would be paid by the trustee as warranted. Did not realize that it would be necessary to create shares for each bene and for each of the possible recipients of admin fees.
...
Your Will would create separate trusts for each child. That way, they could have different trustees, they could be invested differently, and distributions to one would come out of his/her trust.

After your estate is wound up (which is relatively simple in Pennsylvania) your children's trusts won't have much if anything in the way of legal fees except perhaps when there are trustee changes. The accounting fees will be modest. Each trust will file annual income tax returns. Your sister, brother-in-law and niece may want to take compensation, but they'll have some work to do and they'll have some responsibliity.
I take all your points and am gradually coming to the realization that it's not possible to design a trust that will anticipate and remedy every conceivable problem that may arise. We can't control whether a pre-nup will be in place so the best we can do is design the trust to minimize the consequences in a divorce. If alimony and support are elevated due to trust income, so be it. And, as you said, the support piece is about the grandchild anyway. The primary objective of elevating the childrens' standard of living and being a financial resource for whatever the future holds is still achievable. I really appreciate you being able to provide some clarity on these issues and helping us to see the big picture. Thanks so much!
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marklearnsbogle
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Design of Testamentary Trust

Post by marklearnsbogle »

Have son #2 watch or read Suze Orman on the particular topic of communication of money matters PRIOR to getting married. There is no amount of love that will compensate for financial discord. Once they are married, the financial differences will be amplified, an by virtue of marriage, extremely complicated.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.
NotWhoYouThink
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Re: Design of Testamentary Trust

Post by NotWhoYouThink »

You could not pay me enough to be a trustee for a trust benefitting my cousins. That is just asking for family conflict.

If it is important to you to preserve the trust value so that it continues to provide income to your sons and their descendants, then pay a trust company to do it. Take the emotion and family relationships out of it, and acknowledge that you are asking the trustee to be the "bad guy" when your sons want their money. People should be paid for doing a job. I'd want a lot of money for that one, doing it for strangers.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

marklearnsbogle wrote: Tue Jun 09, 2020 2:23 pm Have son #2 watch or read Suze Orman on the particular topic of communication of money matters PRIOR to getting married. There is no amount of love that will compensate for financial discord. Once they are married, the financial differences will be amplified, an by virtue of marriage, extremely complicated.
I hear you! We have directed him to some on-line sources where he could learn about their importance (I've seen Orman's comments), talked with him about his situation, taken him to a family law attorney to discuss all the components. Unfortunately, the fiance has raised a series of objections based on ignorance and claimed that the agreement would violate state laws and even dictate how she must file her tax returns. Ironically, she's said that she would sign a document composed by her with a notary witness but not the draft prepared by the attorney. We've suggested that she meet with the attorney to discuss each part she disagrees with or has questions about but she has refused. That's about as far as we can go without giving her a 'coercion' defense at the time of a divorce.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

NotWhoYouThink wrote: Tue Jun 09, 2020 2:28 pm You could not pay me enough to be a trustee for a trust benefitting my cousins. That is just asking for family conflict.

If it is important to you to preserve the trust value so that it continues to provide income to your sons and their descendants, then pay a trust company to do it. Take the emotion and family relationships out of it, and acknowledge that you are asking the trustee to be the "bad guy" when your sons want their money. People should be paid for doing a job. I'd want a lot of money for that one, doing it for strangers.
Yes, there is potential for conflict. But there is a downside to a corporate trustee as well, especially with a small trust like ours. I'm not convinced that a small trust would get any hands on attention and it would be impossible for the junior trust officer assigned to our trust to get to know the details of our sons' lives, needs, and challenges. I envision a basket of index funds and the annual tax returns being the extent of the admin along with a 'safe' occasional distribution. As I noted earlier, that comes at a steep price ($250k-$275k per 10 yrs of the trust). Over its lifetime, the trust would lose 25-30% of its assets.
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Re: Design of Testamentary Trust

Post by delamer »

Mackster wrote: Tue Jun 09, 2020 3:04 pm
marklearnsbogle wrote: Tue Jun 09, 2020 2:23 pm Have son #2 watch or read Suze Orman on the particular topic of communication of money matters PRIOR to getting married. There is no amount of love that will compensate for financial discord. Once they are married, the financial differences will be amplified, an by virtue of marriage, extremely complicated.
I hear you! We have directed him to some on-line sources where he could learn about their importance (I've seen Orman's comments), talked with him about his situation, taken him to a family law attorney to discuss all the components. Unfortunately, the fiance has raised a series of objections based on ignorance and claimed that the agreement would violate state laws and even dictate how she must file her tax returns. Ironically, she's said that she would sign a document composed by her with a notary witness but not the draft prepared by the attorney. We've suggested that she meet with the attorney to discuss each part she disagrees with or has questions about but she has refused. That's about as far as we can go without giving her a 'coercion' defense at the time of a divorce.
She needs her own attorney to review any documents drafted by your attorney. I would refuse to meet with your attorney (without my own representation) under the same circumstances.

Not that a document that she composes and has notarized is a solution that protects her interests either.
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Mackster
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Re: Design of Testamentary Trust

Post by Mackster »

delamer wrote: Tue Jun 09, 2020 3:20 pm
Mackster wrote: Tue Jun 09, 2020 3:04 pm
marklearnsbogle wrote: Tue Jun 09, 2020 2:23 pm Have son #2 watch or read Suze Orman on the particular topic of communication of money matters PRIOR to getting married. There is no amount of love that will compensate for financial discord. Once they are married, the financial differences will be amplified, an by virtue of marriage, extremely complicated.
I hear you! We have directed him to some on-line sources where he could learn about their importance (I've seen Orman's comments), talked with him about his situation, taken him to a family law attorney to discuss all the components. Unfortunately, the fiance has raised a series of objections based on ignorance and claimed that the agreement would violate state laws and even dictate how she must file her tax returns. Ironically, she's said that she would sign a document composed by her with a notary witness but not the draft prepared by the attorney. We've suggested that she meet with the attorney to discuss each part she disagrees with or has questions about but she has refused. That's about as far as we can go without giving her a 'coercion' defense at the time of a divorce.
She needs her own attorney to review any documents drafted by your attorney. I would refuse to meet with your attorney (without my own representation) under the same circumstances.

Not that a document that she composes and has notarized is a solution that protects her interests either.
Agreed. We have also told her to take the draft to her own lawyer and correct anything she sees as a problem. Won't do that either.
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Re: Design of Testamentary Trust

Post by NotWhoYouThink »

I would especially refuse to be the trustee of a trust for a family member whose parents were at all involved in his possible prenup negotiations.

Yes, the trust administration will be costly. But if you want a service you pay for it. I pay for a first class ticket, or I put up with flying coach, or I save money by staying home. I don't decide to pay nothing and expect first class service.
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Re: Design of Testamentary Trust

Post by TomatoTomahto »

NotWhoYouThink wrote: Tue Jun 09, 2020 4:06 pm I would especially refuse to be the trustee of a trust for a family member whose parents were at all involved in his possible prenup negotiations.

Yes, the trust administration will be costly. But if you want a service you pay for it. I pay for a first class ticket, or I put up with flying coach, or I save money by staying home. I don't decide to pay nothing and expect first class service.
I think OP is worried that even paying “full freight,” the size of the trust will not get first class service. I have no experience either way.
I get the FI part but not the RE part of FIRE.
NotWhoYouThink
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Re: Design of Testamentary Trust

Post by NotWhoYouThink »

Fun family story. FIL's living trust specified that the money would be divided into 3 trusts, beneficiaries were to be his 3 direct descendants, then their descendants. Made it clear at the time that the reason was to keep the money away from his DILs.

The successor trustee in charge of dividing up the trusts instead liquidated everything and wrote 3 checks, no successor trusts were ever formed. All 3 sons effectively turned over the money to their wives to invest, manage, squander, or whatever they chose.

If you want your wishes followed, have a corporate trustee. They'll do what you say (at a high fee) because they know they can be sued if they don't.
delamer
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Re: Design of Testamentary Trust

Post by delamer »

NotWhoYouThink wrote: Tue Jun 09, 2020 4:13 pm Fun family story. FIL's living trust specified that the money would be divided into 3 trusts, beneficiaries were to be his 3 direct descendants, then their descendants. Made it clear at the time that the reason was to keep the money away from his DILs.

The successor trustee in charge of dividing up the trusts instead liquidated everything and wrote 3 checks, no successor trusts were ever formed. All 3 sons effectively turned over the money to their wives to invest, manage, squander, or whatever they chose.

If you want your wishes followed, have a corporate trustee. They'll do what you say (at a high fee) because they know they can be sued if they don't.
Well, the successor trustee could have been sued in the above if one of the sons (or grandkids) had been so inclined — right?
NotWhoYouThink
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Re: Design of Testamentary Trust

Post by NotWhoYouThink »

The grandkids could have sued if they knew about it in time to sue before Statute of Limitations for such suits. But in practice no one ever does that because either they don't know about it, or the money is gone so there is no way to recover the money. I told my kids they could sue (really just joking around), but we're holding the money for them anyway. Unless we decide to spend it on our next house.
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Re: Design of Testamentary Trust

Post by marklearnsbogle »

Mackster wrote: Tue Jun 09, 2020 3:04 pm
marklearnsbogle wrote: Tue Jun 09, 2020 2:23 pm Have son #2 watch or read Suze Orman on the particular topic of communication of money matters PRIOR to getting married. There is no amount of love that will compensate for financial discord. Once they are married, the financial differences will be amplified, an by virtue of marriage, extremely complicated.
I hear you! We have directed him to some on-line sources where he could learn about their importance (I've seen Orman's comments), talked with him about his situation, taken him to a family law attorney to discuss all the components. Unfortunately, the fiance has raised a series of objections based on ignorance and claimed that the agreement would violate state laws and even dictate how she must file her tax returns. Ironically, she's said that she would sign a document composed by her with a notary witness but not the draft prepared by the attorney. We've suggested that she meet with the attorney to discuss each part she disagrees with or has questions about but she has refused. That's about as far as we can go without giving her a 'coercion' defense at the time of a divorce.
wowie. it's so blatant. anytime there are topics that are off the table/one refuses to discuss/etc., you know you are in the territory of discord and misunderstanding. she sounds very young and as though she is digging her heals in, unfortunately based on nothing/actual financial/legal information. marriage and money are not for the faint of heart, and definitely not for the young and defensive. i knew i picked the right partner to marry when i suggested we get a pre-nup, and he said "I was thinking the exact same thing!" And we were on the same page legally and financially from that point forward. Makes all the difference embarking as a legally bound couple.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.
jajlrajrf
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Re: Design of Testamentary Trust

Post by jajlrajrf »

Mackster wrote: Tue Jun 09, 2020 3:17 pmAs I noted earlier, that comes at a steep price ($250k-$275k per 10 yrs of the trust). Over its lifetime, the trust would lose 25-30% of its assets.
Earlier you mentioned that you're "not sure what a reasonable amount would be" to pay your niece as a trustee.

I'd like to point out that the market is telling you very clearly that a fair price is $250k-$275k per 10 years of the trust, and if you want her to do this very difficult and stressful work for you, you should consider paying her that.
$=WxTxI
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Re: Design of Testamentary Trust

Post by $=WxTxI »

Why are your children limited to low income jobs?

They are both still relatively young.

You have significant assets. Make the inheritance contigent on them getting education that has a higher income than 40k.

This would be a far better gift and would ensure your grandchildren have a brighter future.

I apologize if I overstepped, but you were both successful and I don't understand why your children can't be as well.
jajlrajrf
Posts: 152
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Re: Design of Testamentary Trust

Post by jajlrajrf »

I'll also say - without any judgment implied on what you actually end up deciding! - that if I honestly felt my children could not be trusted to manage their own money at age 40, I'd consider making them a minimal bequest that would keep them housed, and donate the rest to charity. There are lots of people out there in need and no shortage of good causes to support.

Philosophically it's enough work managing my own financial life that it would be too tiring to contemplate managing other people's financial lives after I'm dead.
senex
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Re: Design of Testamentary Trust

Post by senex »

If children are likely to squander the money, you could consider alternatives: spend down your wealth, leave some/most/all to deserving relatives or charities, etc.

I always liked the idea of only allowing trust distributions to "match" personal savings. I.e. if personal balance sheet of child increased by, say $10k in 2019, then the trust would distribute $10k (or you could do 2:1, 3:1, whatever). After the distribution, you take a snapshot of the child's new net worth, and use it as the baseline to evaluate next year's distribution.

There is nice feedback. If the child spends the distribution on consumption, it will be hard to have net savings by next year, so he may get nothing next year. If he invests it wisely, and net worth goes up a bunch, he gets a larger distribution.

I don't know how legally possible this is, or if it is practical to specify/enforce in trust documents. I just like the idea in theory.

edited to add:
- this may throw all kinds of monkey wrenches into asset protection
- the child could probably cheat the personal balance sheet
- this is just a crazy thought exercise I find interesting
Last edited by senex on Wed Jun 10, 2020 10:54 am, edited 1 time in total.
Luckywon
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Re: Design of Testamentary Trust

Post by Luckywon »

Mackster wrote: Mon Jun 08, 2020 4:07 pm

We had planned to set up the trust to equally distribute all income annually to our sons since their job prospects will likely keep them in low income situations. Assuming 3% being achievable, that would generate $75k incomes using a portfolio of index funds (stock, bond, REIT, etc., and possibly a guaranteed immediate annuity). Additional distributions for education, home purchase, health needs would be at the discretion of the trustees (contemplate a level-headed niece age 35, and my sister and her husband both age 72) guided by a letter providing our thinking on discretionary distribution. and perhaps an attorney 'trust protector' and CPA. We have considered a corporate trustee (like Vanguard) however even at their 'low' .50% admin fee this does not seem prudent on a small trust ($250k in fees per 10 years of admin). In addition, a good friend who worked in a bank trust department for 30 years indicated that a small trust account like ours would likely end up in the portfolio of a very junior trust officer and receive minimal 'cookie cutter' attention. Not sure that's worth $25k per year.

I'd suggest not naming a specific successor trustee after you and your spouse and instead consider appointing your niece, sister and her husband "trust protectors" with the power to appoint and replace trustees and/or co-trustees. You could allow them to appoint any of themselves trustees/cotrustees, or a corporate trustee.

The problem with nominating a corporate trustee is that you do not know whether that trustee will accept the role or function satisfactorily when needed. The same applies for any individual trustee. With the design I suggest above your family members will have maximum flexibility to appoint and modify able and willing trustee(s) as circumstances warrant.
oldfort
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Re: Design of Testamentary Trust

Post by oldfort »

senex wrote: Wed Jun 10, 2020 10:47 am If children are likely to squander the money, you could consider alternatives: spend down your wealth, leave some/most/all to deserving relatives or charities, etc.

I always liked the idea of only allowing trust distributions to "match" personal savings. I.e. if personal balance sheet of child increased by, say $10k in 2019, then the trust would distribute $10k (or you could do 2:1, 3:1, whatever). After the distribution, you take a snapshot of the child's new net worth, and use it as the baseline to evaluate next year's distribution.

There is nice feedback. If the child spends the distribution on consumption, it will be hard to have net savings by next year, so he may get nothing next year. If he invests it wisely, and net worth goes up a bunch, he gets a larger distribution.

I don't know how legally possible this is, or if it is practical to specify/enforce in trust documents. I just like the idea in theory.

edited to add:
- this may throw all kinds of monkey wrenches into asset protection
- the child could probably cheat the personal balance sheet
- this is just a crazy thought exercise I find interesting
There may be tax reasons to avoid doing this, if the beneficiary doesn't save anything. When the beneficiary is in a low tax bracket, it's tax efficient for the trust to distribute all the trust income, above the first $2600 each year, to the beneficiary. Otherwise, the trust would have to pay taxes on the retained income at higher rates.
oldfort
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Re: Design of Testamentary Trust

Post by oldfort »

$=WxTxI wrote: Wed Jun 10, 2020 10:25 am Why are your children limited to low income jobs?

They are both still relatively young.

You have significant assets. Make the inheritance contigent on them getting education that has a higher income than 40k.

This would be a far better gift and would ensure your grandchildren have a brighter future.

I apologize if I overstepped, but you were both successful and I don't understand why your children can't be as well.
At 33, getting more education may be challenging. The application deadline for the fall is past, so you would need to start in 2021. If you don't have an undergrad degree and start undergrad at 34, finish undergrad at 38, and then go to law school, you can finish law school at 41. You can be a first year associate at 41. If they do have undergrad degrees, their GPAs may be too low to get admitted to a tier I or tier II law school.
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