Do I need start using trusts, LLCs, etc

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RlxDude
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Joined: Sat Feb 17, 2018 1:56 pm

Do I need start using trusts, LLCs, etc

Post by RlxDude » Tue Jun 30, 2020 3:14 pm

I have been struggling with a financial issue for many years, and honestly I can't figure out if I'm running my financial life correctly or not, because my setup is WAY different than many of my neighbors and business colleagues.

My wife and I live in a upper middle class neighborhood in Texas, houses in my area run from $500K to $2M, ours is worth about $750K. We have no debt, house and cars all paid in full. Approx $3.1M in taxable account, approx $2.4M in IRA/ROTH, and 400K in college fund for kids. We also have an umbrella policy to cover the value of our taxable accounts, against lawsuits from our house or cars.

Over the years, I noticed that quite a few of our neighbors and colleagues have all kinds of complex financial structures. Multiple trusts, holding investment accounts, checking account, even their home. Some have multiple LLC's, family limited partnership, in addition to trusts, and S-Corps. This just all seems like huge over kill to me, and also adds a lot of extra expense to create and maintain.

Over the last ten years, my wife and I have discussed our situation with four different estate planning attorneys. The first one ten years ago, was recommending a Christmas tree of different complex expensive entities. The last four we discussed our situation with, recommended we keep things the way we have them, which begs the question why would many of our neighbors be advised to create these Christmas trees of complexity?

Right now we only have a will which I created, and my wife has an S-Corp as she owns her own business. I do all the payroll, state, and federal filings for her S-Corp so I'm well versed on what it means to own/operate a corporate entity, but we just don't understand how using some quasi corporate entity like a LLC or creating one or more trusts would gain us much, what are we missing?

I contacted my investment company about having trust assets invested in one of their accounts. I was told on two separate phone calls, that they wouldn't hold trust assets unless they were the administrator of the trust, which also includes using them as an investment picker/advisor. Once I add up the administrative and advisor fees, in addition to the government reporting fees, it just seems like I'm paying a lot for little to no real value to me.

Admittedly I'm a cheap skate, and have always been a do it myself investor. Guess my bottom line question is do we really need all this extra complexity and expense, at a certain level of net worth, and how do you know what that level is really?

While I understand the pluses of different types of trusts and corporate structures, they also come with a lot of minuses as well. At what point do the pluses out weigh the minuses, based on my current situation / net worth?

We are looking to retire in five years, so I really want to have all I financial ducks in a row by that time, any help would be greatly appreciated.

oldfort
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Re: Do I need start using trusts, LLCs, etc

Post by oldfort » Tue Jun 30, 2020 3:34 pm

The internet is a terrible place to get legal advice. Nevertheless here are some reasons people may consider using trusts or other complex structures:
1) Taxes - specifically estate and inheritance taxes
2) Divorce - The main one would be if their kids get a divorce and they want to keep assets out of the hands of a DIL or SIL.
3) Control from the grave - They for whatever reason believe their kids are either too irresponsible to manage their inheritance on their own or too stupid to invest it reasonably

fabdog
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Re: Do I need start using trusts, LLCs, etc

Post by fabdog » Tue Jun 30, 2020 4:56 pm

We set up a Living trust back when we lived in MA and the limits on the estate tax were much different and MA also has a very low threshold for inheritance tax. We have all our investment accounts and our house in it. We have it set up so if needed when one passes the assets can be split to take advantage of whatever estate tax limits are in place, and if we both go, one of our older kids will manage the assets for the benefit of all 4 kids, and everyone gets their share when the youngest hits 25. Obviously as we get older and the kids pass those age ranges, our needs could change
I contacted my investment company about having trust assets invested in one of their accounts. I was told on two separate phone calls, that they wouldn't hold trust assets unless they were the administrator of the trust, which also includes using them as an investment picker/advisor. Once I add up the administrative and advisor fees, in addition to the government reporting fees, it just seems like I'm paying a lot for little to no real value to me.
Contact a different investment company. We have all our investment accounts in the living trust at Schwab, and before that we had some at Vanguard as well. No extra fees, they do not demand to be trustes. There is extra paperwork (sending in specific pages of the trust) when setting up the account, but after that, smooth sailing

We have no need for LLC's, family partnerships, etc that you mentioned

The reasons I would look at this are potential issues on estate tax, and funding (and guidance) for whoever will be the guardian of your kids if you were to pass unexpectedly.

Everyone's needs vary. I would not worry too much about your neighbors assortment of things... and lay out what's important to your family... and select options that accomplish that

Mike

afan
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Re: Do I need start using trusts, LLCs, etc

Post by afan » Tue Jun 30, 2020 5:01 pm

Some of your neighbors may be using these structures to reduce estate taxes at their deaths. From your description, your estates would not face estate taxes, so that would not apply to you.

Some of your neighbors may own multiple small businesses and keep each business in a separate LLC or other business entity. This is good planning but would only apply to people who have such businesses. If you do not then there is no need for them.

Some people use these structures because they have a high risk of being involved in business lawsuits. This seems particularly common for those who put up personal assets or business assets as collateral for business loans. When the business goes bad there can be a web of suits as everyone points the finger at someone else.
Again, if you are not in this position then it does not apply to you.

Trust assets in an investment account. There may have been a misunderstanding or you are dealing with highly unusual brokers or financial advisers. If you were to have a trust with yourself as trustee, you could open an account in the name of the trust at almost any bank or broker you choose. You could manage the money or hire someone else to manage it.
If you WANT a trust company or trust department of a bank to manage the investments for you then of course, you would have to pay them and they might insist on being trustee to do that. But there is no need to hire such a trustee just because you have a trust.

If you have consulted 4 qualified estate planning attorneys, given them your information, reviewed with them your goals and they agree you do not need any of these things then they are almost certainly right.

Perhaps ask some of your neighbors what they use all this for? If you are a W2 wage slave and they are all small business people then their needs could be quite different than yours, even if you are at the same overall level of assets.
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

Spirit Rider
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Re: Do I need start using trusts, LLCs, etc

Post by Spirit Rider » Tue Jun 30, 2020 5:03 pm

RlxDude wrote:
Tue Jun 30, 2020 3:14 pm
Over the last ten years, my wife and I have discussed our situation with four different estate planning attorneys. The first one ten years ago, was recommending a Christmas tree of different complex expensive entities. The last four we discussed our situation with, recommended we keep things the way we have them, which begs the question; "why would many of our neighbors be advised to create these Christmas trees of complexity?"
Ask yourself; "in which scenario will the estate & trust attorney make far more money?" While that is not always the reason, there is an inherent conflict of interest.

bluebolt
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Re: Do I need start using trusts, LLCs, etc

Post by bluebolt » Tue Jun 30, 2020 5:07 pm

oldfort wrote:
Tue Jun 30, 2020 3:34 pm
The internet is a terrible place to get legal advice. Nevertheless here are some reasons people may consider using trusts or other complex structures:
1) Taxes - specifically estate and inheritance taxes
2) Divorce - The main one would be if their kids get a divorce and they want to keep assets out of the hands of a DIL or SIL.
3) Control from the grave - They for whatever reason believe their kids are either too irresponsible to manage their inheritance on their own or too stupid to invest it reasonably
4) Provide for minor children in the event of death (though #3 could be made more broad to include this case)

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tadamsmar
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Re: Do I need start using trusts, LLCs, etc

Post by tadamsmar » Tue Jun 30, 2020 5:07 pm

Does your wife have an employees or partners or anything similar?

Is she the only person who does anything in the business?

oldfort
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Re: Do I need start using trusts, LLCs, etc

Post by oldfort » Tue Jun 30, 2020 5:21 pm

bluebolt wrote:
Tue Jun 30, 2020 5:07 pm
oldfort wrote:
Tue Jun 30, 2020 3:34 pm
The internet is a terrible place to get legal advice. Nevertheless here are some reasons people may consider using trusts or other complex structures:
1) Taxes - specifically estate and inheritance taxes
2) Divorce - The main one would be if their kids get a divorce and they want to keep assets out of the hands of a DIL or SIL.
3) Control from the grave - They for whatever reason believe their kids are either too irresponsible to manage their inheritance on their own or too stupid to invest it reasonably
4) Provide for minor children in the event of death (though #3 could be made more broad to include this case)
If the OP is looking to retire within the next five years, I'm guessing his kids are close to being grown and legal adults.

bluebolt
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Joined: Sat Jan 14, 2017 9:01 am

Re: Do I need start using trusts, LLCs, etc

Post by bluebolt » Tue Jun 30, 2020 5:25 pm

oldfort wrote:
Tue Jun 30, 2020 5:21 pm
bluebolt wrote:
Tue Jun 30, 2020 5:07 pm
oldfort wrote:
Tue Jun 30, 2020 3:34 pm
The internet is a terrible place to get legal advice. Nevertheless here are some reasons people may consider using trusts or other complex structures:
1) Taxes - specifically estate and inheritance taxes
2) Divorce - The main one would be if their kids get a divorce and they want to keep assets out of the hands of a DIL or SIL.
3) Control from the grave - They for whatever reason believe their kids are either too irresponsible to manage their inheritance on their own or too stupid to invest it reasonably
4) Provide for minor children in the event of death (though #3 could be made more broad to include this case)
If the OP is looking to retire within the next five years, I'm guessing his kids are close to being grown and legal adults.
Understood. You were providing general guidance "...here are some reasons people may consider..." and I was adding to that, so that it would be useful to people other than OP.

bsteiner
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Location: NYC/NJ/FL

Re: Do I need start using trusts, LLCs, etc

Post by bsteiner » Tue Jun 30, 2020 6:04 pm

Your neighbors' net worths may be the same as yours but with another zero at the end.

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patrick013
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Re: Do I need start using trusts, LLCs, etc

Post by patrick013 » Tue Jun 30, 2020 6:10 pm

RlxDude wrote:
Tue Jun 30, 2020 3:14 pm

Over the last ten years, my wife and I have discussed our situation with four different estate planning attorneys. The first one ten years ago, was recommending a Christmas tree of different complex expensive entities. The last four we discussed our situation with, recommended we keep things the way we have them, which begs the question why would many of our neighbors be advised to create these Christmas trees of complexity?

I've seen them too. Partnerships that own partnerships, family members that own
S-Corps and then own partnerships, and on and on.......

Basically the real estate looks good in an LLC and the business looks good
in an S-Corp usually. If you want Roth contributions max'd then salary
limits need to be considered. I do not pretend to be a tax expert so the
business plan for taxes should be a one time setup with knowledgeable
advise. Thankfully the setup can be adjusted if later it is not the setup
desired for some reason.

Investment companies have pretty good trust service. VG, Fidelity, Schwab,
with Schwab having the most flexibility with AA the last time I looked. Use
the best tax benefit directly, even multi-entity businesses have simple tax-effective
structures. If the complex "trees" were that good tax law would eventually
eliminate the loophole if any. Mostly just extra bookkeeping, tax accounting,
and legal fees IMO.
age in bonds, buy-and-hold, 10 year business cycle

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