How to structure inheritance/trust

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christiek
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How to structure inheritance/trust

Post by christiek »

Any resources (articles, books, studies, general thoughts, etc) for thinking through how to set up an inheritance/trusts while not demotivating children from working hard and being entrepreneurial themselves?
123
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Re: How to structure inheritance/trust

Post by 123 »

Arrange for the inheritance to go entirely to charity. Probably the best motivator for the next generation to be self-sufficient.
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bsteiner
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Re: How to structure inheritance/trust

Post by bsteiner »

Give the trustees discretion. No one knows what the future will bring.
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

@bsteiner - Do irrevokable trusts allow for giving the trustee discretion? If the trustee has discretion and passes away will the amount in excess of $5m (the exemption) be subject to estate tax?
Bobby206
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Re: How to structure inheritance/trust

Post by Bobby206 »

bsteiner wrote: Wed Aug 05, 2020 8:08 pm Give the trustees discretion. No one knows what the future will bring.
+1
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arcticpineapplecorp.
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Re: How to structure inheritance/trust

Post by arcticpineapplecorp. »

give them enough that they can do anything, but not so much that they can do nothing.

i've heard the book "beyond the grave" is a good book to get you thinking about the issues before you see a lawyer who specializes in trusts and estates. don't want to run the clock there more than you need to if you get my drift.

https://www.google.com/search?client=fi ... CAs&uact=5
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FIREchief
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Re: How to structure inheritance/trust

Post by FIREchief »

christiek wrote: Wed Aug 05, 2020 9:30 pm @bsteiner - Do irrevokable trusts allow for giving the trustee discretion? If the trustee has discretion and passes away will the amount in excess of $5m (the exemption) be subject to estate tax?
I think you're confusing a few different issues. You mention inheritance/trusts, but it's not clear what you are referring to. Are you asking about a trust that is used to control/distribute your assets after your death? Or, are you referring to an irrevocable trust that you establish during your lifetime for the benefit of your children? Any trust can provide the trustee with discretionary distributions, but if the trustee is not an independent trustee, than any asset protections may be severely compromised. Also, the death of a trustee has nothing to do with any estate tax exclusions. (see my signature)
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

Full context:

I'm creating a GRAT and I want the beneficiary of the GRAT to be a trust for my children. In order to take advantage of not having to pay gift tax it needs to be an irrevocable trust that I am not in control of. I'm trying to figure out how to structure it (pay out at X age seems to incentivize them to wait until then and doing it too young also seems risky) and how much control the trustee can have.

For example if we make a close friend the trustee of the fund and structure it in a way that he can modify the terms (when it gets paid out, how much, add beneficiaries if we have more children, etc.) does the IRS have an argument that it's not actually an irrevocable trust and therefore subejct to estate/gift taxes?
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Re: How to structure inheritance/trust

Post by FIREchief »

christiek wrote: Thu Aug 06, 2020 12:22 am Full context:

I'm creating a GRAT and I want the beneficiary of the GRAT to be a trust for my children. In order to take advantage of not having to pay gift tax it needs to be an irrevocable trust that I am not in control of. I'm trying to figure out how to structure it (pay out at X age seems to incentivize them to wait until then and doing it too young also seems risky) and how much control the trustee can have.

For example if we make a close friend the trustee of the fund and structure it in a way that he can modify the terms (when it gets paid out, how much, add beneficiaries if we have more children, etc.) does the IRS have an argument that it's not actually an irrevocable trust and therefore subejct to estate/gift taxes?
Since you're concerned about gift tax, are you suggesting that your entire estate will exceed the current $11M+ exclusion? If so, I would think that you would be including more than a GRAT in your estate planning. :confused
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bsteiner
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Re: How to structure inheritance/trust

Post by bsteiner »

If it’s a GRAT you expect to have a taxable estate. In that case you may want to work with competent tax/trusts and estates counsel who can help design it.
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

@FIREchief - yes there will be more than the appreciation of the GRAT/this trust left to the children, but I'm less worried about that as it can be set up in a modifiable way and not urgent. I'm currently trying to work through how to set up the recipient of a the GRAT and general thoughts on how to pass money along since in my understanding it's not modifiable. It would be unfortunate if the GRAT left them enough money that it ruled out some potential future strategies (eg. only give them money based on how much they've earned themselves isn't much good for motivating them to work hard if they have a lot of money from this trust).

We will be working with tax/estate counsel but I prefer to do the research myself and come up with a plan and then go to them to confirm it. It seems like they help with drafting and advising buts things like "how do i want to distribute money to children" are more based on personal philosophy.
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Re: How to structure inheritance/trust

Post by oldfort »

christiek wrote: Wed Aug 05, 2020 7:33 pm Any resources (articles, books, studies, general thoughts, etc) for thinking through how to set up an inheritance/trusts while not demotivating children from working hard and being entrepreneurial themselves?
The median age to receive an inheritance from a parent is 60. Barring some premature death, and in the case of a married couple, the premature death of both parents, most people receive an inheritance from their parents far too late in life for it to affect their career choices.
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Re: How to structure inheritance/trust

Post by oldfort »

123 wrote: Wed Aug 05, 2020 8:06 pm Arrange for the inheritance to go entirely to charity. Probably the best motivator for the next generation to be self-sufficient.
This. Money is extremely fungible. Assuming someone gets an inheritance at an age and in an amount which would allow them to FIRE, there's no way to guarantee the inheritance won't be a de-motivator to work. The most effective way to achieve the OP's goal is to give them less.
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

We will be donating plenty to charity but I want them to have access to money they can leverage for entrepreneurial endeavors, research, investing, etc. but not alcohol, lazing about, etc. It seems like there should be some resources/books/studies on how to not "mess up" your children with money but still let them leverage it if they're doing good.

Beyond the grave seems like a good start, thank you @arcticpineapplecorp!
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Re: How to structure inheritance/trust

Post by FIREchief »

oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
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: How to structure inheritance/trust

Post by FIREchief »

christiek wrote: Thu Aug 06, 2020 2:45 pm We will be donating plenty to charity but I want them to have access to money they can leverage for entrepreneurial endeavors, research, investing, etc. but not alcohol, lazing about, etc. It seems like there should be some resources/books/studies on how to not "mess up" your children with money but still let them leverage it if they're doing good.
" leverage for entrepreneurial endeavors, research, investing, etc. but not alcohol, lazing about, etc." What?? :oops: Are those the only options? How about "providing a better life for the kids and their families?" You still haven't confirmed that you're using a GRAT because your total estate is expected to exceed the federal exclusion. If not, it's hard to understand what you're trying to accomplish. :confused
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FIREchief
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Re: How to structure inheritance/trust

Post by FIREchief »

christiek wrote: Thu Aug 06, 2020 1:47 pm It would be unfortunate if the GRAT left them enough money that it ruled out some potential future strategies (eg. only give them money based on how much they've earned themselves isn't much good for motivating them to work hard if they have a lot of money from this trust).
Are you really considering such a scheme? Trust will pay them $1 for each $1 they earn? Yikes!!
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Greenman72
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Re: How to structure inheritance/trust

Post by Greenman72 »

bsteiner wrote: Thu Aug 06, 2020 8:42 am If it’s a GRAT you expect to have a taxable estate. In that case you may want to work with competent tax/trusts and estates counsel who can help design it.
+1. If you have a taxable estate, you need to hire an actual estate planning attorney. Don't skimp out and ask a bunch of randos on the internet what to do or buy a book from Amazon. That "free" advice and $15 book may cost you millions.
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Re: How to structure inheritance/trust

Post by oldfort »

FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
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Re: How to structure inheritance/trust

Post by FIREchief »

oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
Really? All humans share this? I've known some folks who work extremely hard no matter how much they have and others who just really can't bring themselves to work despite how little they have. Is your experience different?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Pablov
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Re: How to structure inheritance/trust

Post by Pablov »

oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
You assume people only work to make money and that is not the case for a lot of people, specially once they make/have enough to feel financially secure. Yes i know..."enough" is relative....but you get my point.
oldfort
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Re: How to structure inheritance/trust

Post by oldfort »

FIREchief wrote: Thu Aug 06, 2020 3:41 pm
oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
Really? All humans share this? I've known some folks who work extremely hard no matter how much they have and others who just really can't bring themselves to work despite how little they have. Is your experience different?
Most people work because they have to in order to maintain the lifestyle they want. So a big law lawyer with $2M might seem rich to most people, but it's not sufficient for his lifestyle if he has a $300k annual spend rate. If he FIREd, true FIRE not FIRE and get blogging revenue or a side job, he would be bust in 7 years, ignoring investment returns. Are there some people with a net worth of 40-50x their annual expenses who keep working? Sure, but they tend to be a real minority.
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Re: How to structure inheritance/trust

Post by oldfort »

Pablov wrote: Thu Aug 06, 2020 3:49 pm
oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
You assume people only work to make money and that is not the case for a lot of people, specially once they make/have enough to feel financially secure. Yes i know..."enough" is relative....but you get my point.
Money is probably the primary motivator for 98%. How many Powerball winners keep their jobs?
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Re: How to structure inheritance/trust

Post by fourwheelcycle »

christiek wrote: Thu Aug 06, 2020 2:45 pm We will be donating plenty to charity but I want them to have access to money they can leverage for entrepreneurial endeavors, research, investing, etc. but not alcohol, lazing about, etc.
OP, you seem to have concerns about your children, but you have not told us their ages or where they are in their life development. Without further info it is difficult for me to appreciate your concern. Are you planning for young or early adult children who have not yet demonstrated their career interests or their level of responsibility with money?

My wife and I are in our early seventies and our children are approaching 40, well established in their careers, married, with children of their own. They are motivated, responsible with their money, not lazy, and don't have any drug, alcohol, or debt problems. Based on their demonstrated level of responsibility, my wife and I have no concerns leaving them about 75% of our money, with the rest to charity. We are not yet at the point of needing to set up our estate to shelter part of it from estate taxes, but if we get there we will structure anything we set up so our children will have the broadest possible access to the money. Their main challenge will be to teach their own children to be as responsible with money as they are.
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

I lumped together inheritance and trusts in my initial post which might have been the wrong approach. At the moment I'm trying to think through how much (while we're living) the children should be paid out from various trusts and in what form (at a certain age, annuities, salary matching, etc.).This is obviously closely related to inheritance and I'm guessing books/online resources/studies cover both topics. I know enough children of billionaires (we are not billionaires) to know how damaging annuities and getting pay outs at a certain age can potentially be and want to do better. It's hard to find real studies/science on the topic.

We have attorneys, I've learned over the years that the best way to work with attorneys is to have a plan and for them to execute it rather than open ended brainstorming. They are more than happy to chat (while billing crazy rates) and it ends up being a waste of everyone's time. And, as mentioned, I've seen the "standard" approaches they suggest not work over and over again and damage the children so would rather do our own homework.

@fourwheelcycle - your kids seem to be very well grounded and you sound very proud of them, I hope we are as fortunate when we are grandparents. Ours are all under 5. We are extremely frugal and I hope they learn from example but I know that is not always in the case.
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Re: How to structure inheritance/trust

Post by Lee_WSP »

christiek wrote: Thu Aug 06, 2020 11:31 pm
We have attorneys, I've learned over the years that the best way to work with attorneys is to have a plan and for them to execute it rather than open ended brainstorming. They are more than happy to chat (while billing crazy rates) and it ends up being a waste of everyone's time. And, as mentioned, I've seen the "standard" approaches they suggest not work over and over again and damage the children so would rather do our own homework.
Lol. Okay, fair enough. :beer It's a good idea to have a plan you want the lawyer to execute, but estate attorneys' bread & butter is coming up with plans to effectuate client's end goals. That said, you don't really get to see how well they ultimately do as it's then taken up by a different probate attorney. But I digress.

I think you're wanting something like the traditional 1/3 1/3 1/3 approach. 1/3 of the money at 25, 1/3 at 30, 1/3 at 35. It's a little outdated, but it should give you an idea of what questions to ask.

The thinking behind it is that you don't want to give a reckless 20 year old everything because they're likely to waste it away, but you don't want to make them wait for it because, well, they might need it and they might even be very responsible and have good plans (such as college (another provision you can put in)).

If they're in their 40's, their most likely at the zenith of whatever career they chose and you're not going to be able to exert much influence on them via a trust.
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christiek
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Re: How to structure inheritance/trust

Post by christiek »

Lee_WSP wrote: Thu Aug 06, 2020 11:42 pm
christiek wrote: Thu Aug 06, 2020 11:31 pm
We have attorneys, I've learned over the years that the best way to work with attorneys is to have a plan and for them to execute it rather than open ended brainstorming. They are more than happy to chat (while billing crazy rates) and it ends up being a waste of everyone's time. And, as mentioned, I've seen the "standard" approaches they suggest not work over and over again and damage the children so would rather do our own homework.
Lol. Okay, fair enough. :beer It's a good idea to have a plan you want the lawyer to execute, but estate attorneys' bread & butter is coming up with plans to effectuate client's end goals. That said, you don't really get to see how well they ultimately do as it's then taken up by a different probate attorney. But I digress.

I think you're wanting something like the traditional 1/3 1/3 1/3 approach. 1/3 of the money at 25, 1/3 at 30, 1/3 at 35. It's a little outdated, but it should give you an idea of what questions to ask.

The thinking behind it is that you don't want to give a reckless 20 year old everything because they're likely to waste it away, but you don't want to make them wait for it because, well, they might need it and they might even be very responsible and have good plans (such as college (another provision you can put in)).

If they're in their 40's, their most likely at the zenith of whatever career they chose and you're not going to be able to exert much influence on them via a trust.

Thank you for the suggestion! I've definitely considered that approach, and it's what many people I know decided to go with. The advantage of not having lots of money to squander when they're young is considerable, and the draw back I've seen is them knowing the next installment is coming and just waiting for it while not doing much in the mean time. Perhaps I'm overthinking that risk. It's hard to know how much of an outcome is due to getting money vs other factors.
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Re: How to structure inheritance/trust

Post by Lee_WSP »

christiek wrote: Thu Aug 06, 2020 11:54 pm Thank you for the suggestion! I've definitely considered that approach, and it's what many people I know decided to go with. The advantage of not having lots of money to squander when they're young is considerable, and the draw back I've seen is them knowing the next installment is coming and just waiting for it while not doing much in the mean time. Perhaps I'm overthinking that risk. It's hard to know how much of an outcome is due to getting money vs other factors.
You aren't wrong, but there's no way to mitigate that risk since eliminating it would require eliminating the incentive (the inheritance). Other quirky clauses are honestly just clunky and disrespectful of your children's financial abilities. At the end of the day, you need to decide what and how much you really want to give to them. And if you decide you want to give it to them, you have to let go of the control at some point. Unless you create a perpetual trust.
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Re: How to structure inheritance/trust

Post by fourwheelcycle »

christiek,

Your children are still very young, so I realize you may worry about how they will turn out. You have turned out fine and there is a great likelihood your children will turn out fine as well. Concerns about children using significant gift or inheritance money badly are very common on this forum, but my guess is that the incidence is much less frequent than the concerns.

I am also surprised by the number of people on this forum who post that they would not pay for their children's college education, or pay enough for them to attend the best colleges they can get into, because children should have the experience of paying or borrowing for their own college education. My parents, and my wife's, came of age during the depression. They passed on modest living values to us, but they saved to pay for our college education at the best colleges we could get into. We appreciate our education, and we also appreciate that we were never burdened with college debt or the need to work extensive part-time jobs during college, which enabled us to focus on our studies.

As far as money gifts to children before they receive their inheritance, we did not have enough savings to make this an issue when our children were young. By the time they finished college we did have a good level of savings, and we decided to gift annual pre-709 amounts to assist them during their early adult years, rather than waiting until they were sixty or more to receive money that could have benefitted them when they were younger.
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Re: How to structure inheritance/trust

Post by Sandi_k »

I think I would set up the trust for two primary things: college, and a first house.

So:

1) College: I would have a formula in the trust, something along the lines of "paying for 4 years of college, at the highest cost of a Top 10 public university with non-resident tuition."

So - if they get accepted to the most expensive public university in the country, and they attend as a non-resident of that state, it's paid for - for four years. That incentivizes the kids to focus on good grades, and getting admitted. Once that is encoded in their DNA, you'll be in pretty good shape for a future trajectory. If they go to a lower cost university, that would be paid for as well, but they wouldn't be allowed to pocket the difference.

2) First House: I would have a formula that said something like "funds for a first house purchase, not to exceed 3x the average household income for the state in which the trust is administered." So if they chose to live in a state more expensive than your state, they'd need to come up with the difference; if they chose a LCOL area, they could pocket the cash differential.

After that - I'd just leave it in the will to be funded to the trust, and disbursed at age 40.

So - if they're trying to leverage a future inheritance: they can't leverage a degree.

They could buy a house, and then sell it for cash-in-hand. But any big money would wait until they're 40. Still young enough to use it (to allow a stay-at-home parent, to upgrade a family home, to offset saving for your grandkids' college); but not so young as to waste it immediately.
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Re: How to structure inheritance/trust

Post by BestCoast123 »

GRATs can be a valuable tool. But before utilizing them are you taking advantage of annual gifts?

Just tell the kids / grandkids to invest the money. If they touch it (for anything but tuition or maybe a down payment), the annual gifts will stop.

Although if you're really worried about GRATs, you should pay for tuition directly - assuming you have a good chance at being alive - as tuition and medical expenses are not treated as gifts.
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Re: How to structure inheritance/trust

Post by Lee_WSP »

Sandi_k wrote: Fri Aug 07, 2020 12:13 pm I think I would set up the trust for two primary things: college, and a first house.

So:

1) College: I would have a formula in the trust, something along the lines of "paying for 4 years of college, at the highest cost of a Top 10 public university with non-resident tuition."

So - if they get accepted to the most expensive public university in the country, and they attend as a non-resident of that state, it's paid for - for four years. That incentivizes the kids to focus on good grades, and getting admitted. Once that is encoded in their DNA, you'll be in pretty good shape for a future trajectory. If they go to a lower cost university, that would be paid for as well, but they wouldn't be allowed to pocket the difference.

2) First House: I would have a formula that said something like "funds for a first house purchase, not to exceed 3x the average household income for the state in which the trust is administered." So if they chose to live in a state more expensive than your state, they'd need to come up with the difference; if they chose a LCOL area, they could pocket the cash differential.

After that - I'd just leave it in the will to be funded to the trust, and disbursed at age 40.

So - if they're trying to leverage a future inheritance: they can't leverage a degree.

They could buy a house, and then sell it for cash-in-hand. But any big money would wait until they're 40. Still young enough to use it (to allow a stay-at-home parent, to upgrade a family home, to offset saving for your grandkids' college); but not so young as to waste it immediately.
No possibility of disbursements from 18 through 40 other than those two? Seems a little harsh. IMO.
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Re: How to structure inheritance/trust

Post by Sandi_k »

Lee_WSP wrote: Fri Aug 07, 2020 2:26 pm
Sandi_k wrote: Fri Aug 07, 2020 12:13 pm I think I would set up the trust for two primary things: college, and a first house.

So:

1) College: I would have a formula in the trust, something along the lines of "paying for 4 years of college, at the highest cost of a Top 10 public university with non-resident tuition."

So - if they get accepted to the most expensive public university in the country, and they attend as a non-resident of that state, it's paid for - for four years. That incentivizes the kids to focus on good grades, and getting admitted. Once that is encoded in their DNA, you'll be in pretty good shape for a future trajectory. If they go to a lower cost university, that would be paid for as well, but they wouldn't be allowed to pocket the difference.

2) First House: I would have a formula that said something like "funds for a first house purchase, not to exceed 3x the average household income for the state in which the trust is administered." So if they chose to live in a state more expensive than your state, they'd need to come up with the difference; if they chose a LCOL area, they could pocket the cash differential.

After that - I'd just leave it in the will to be funded to the trust, and disbursed at age 40.

So - if they're trying to leverage a future inheritance: they can't leverage a degree.

They could buy a house, and then sell it for cash-in-hand. But any big money would wait until they're 40. Still young enough to use it (to allow a stay-at-home parent, to upgrade a family home, to offset saving for your grandkids' college); but not so young as to waste it immediately.
No possibility of disbursements from 18 through 40 other than those two? Seems a little harsh. IMO.
Why? I paid for my own college, and my own house. It seems pretty friggin' generous, AND it means that they have to WORK and embed those satisfactions in their character before they get character-ruining money in their 20's and 30's.

Sounds like exactly what the OP has asked for in terms of structure.
Zombies
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Re: How to structure inheritance/trust

Post by Zombies »

We structured our trust so that our offspring can access reasonable money at our trustee’s discretion, as long as they are a “productive member of society.” IIRC, this was defined as employed either at a for-profit or non-profit, not having a criminal record, etc. while in their 20s-early 30s.

I don’t recall the exact number where they get the whole shebang regardless but it was around 35.

We also put in a provision that if they want a large amount (like $1M plus) for an entrepreneurial venture, they have to have an equal or exceeding amount matched by arms-length investors. This prevents the “hey dude, let’s start a bar” mishap.

Ultimately we firmly believe that it is our duty to use our wealth to better the world, and leave it in a better place than where we started. Since we’re not extreme altruists (treating all people equally), I am fine with our offspring getting a “head start” — I did too, although to a much, much, smaller degree. In terms of making them turn out okay, my goal is to live long enough to model good behavior, be charitable and include them during life, and then trust that the lessons remain.

I think if they’re going to be irresponsible, you can’t control that too heavily through language you wrote decades ago while in good health. Trust the process - the process you created raising them.
Grt2bOutdoors
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Re: How to structure inheritance/trust

Post by Grt2bOutdoors »

oldfort wrote: Thu Aug 06, 2020 1:53 pm
christiek wrote: Wed Aug 05, 2020 7:33 pm Any resources (articles, books, studies, general thoughts, etc) for thinking through how to set up an inheritance/trusts while not demotivating children from working hard and being entrepreneurial themselves?
The median age to receive an inheritance from a parent is 60. Barring some premature death, and in the case of a married couple, the premature death of both parents, most people receive an inheritance from their parents far too late in life for it to affect their career choices.
Maybe, but if the parents had children late in life, are you suggesting that most people who leave inheritances are departing for another world at age 90+. Social Security actuarial tables suggest otherwise.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Bobby206
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Re: How to structure inheritance/trust

Post by Bobby206 »

christiek wrote: Thu Aug 06, 2020 12:22 am Full context:

I'm creating a GRAT and I want the beneficiary of the GRAT to be a trust for my children. In order to take advantage of not having to pay gift tax it needs to be an irrevocable trust that I am not in control of. I'm trying to figure out how to structure it (pay out at X age seems to incentivize them to wait until then and doing it too young also seems risky) and how much control the trustee can have.

For example if we make a close friend the trustee of the fund and structure it in a way that he can modify the terms (when it gets paid out, how much, add beneficiaries if we have more children, etc.) does the IRS have an argument that it's not actually an irrevocable trust and therefore subejct to estate/gift taxes?
Anybody talking about a grat should not be looking for free advice on the internet. If you are still in the free advice category of life then you don't need a grat and are just over-complicating things.
Grt2bOutdoors
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Re: How to structure inheritance/trust

Post by Grt2bOutdoors »

christiek wrote: Thu Aug 06, 2020 11:54 pm
Lee_WSP wrote: Thu Aug 06, 2020 11:42 pm
christiek wrote: Thu Aug 06, 2020 11:31 pm
We have attorneys, I've learned over the years that the best way to work with attorneys is to have a plan and for them to execute it rather than open ended brainstorming. They are more than happy to chat (while billing crazy rates) and it ends up being a waste of everyone's time. And, as mentioned, I've seen the "standard" approaches they suggest not work over and over again and damage the children so would rather do our own homework.
Lol. Okay, fair enough. :beer It's a good idea to have a plan you want the lawyer to execute, but estate attorneys' bread & butter is coming up with plans to effectuate client's end goals. That said, you don't really get to see how well they ultimately do as it's then taken up by a different probate attorney. But I digress.

I think you're wanting something like the traditional 1/3 1/3 1/3 approach. 1/3 of the money at 25, 1/3 at 30, 1/3 at 35. It's a little outdated, but it should give you an idea of what questions to ask.

The thinking behind it is that you don't want to give a reckless 20 year old everything because they're likely to waste it away, but you don't want to make them wait for it because, well, they might need it and they might even be very responsible and have good plans (such as college (another provision you can put in)).

If they're in their 40's, their most likely at the zenith of whatever career they chose and you're not going to be able to exert much influence on them via a trust.

Thank you for the suggestion! I've definitely considered that approach, and it's what many people I know decided to go with. The advantage of not having lots of money to squander when they're young is considerable, and the draw back I've seen is them knowing the next installment is coming and just waiting for it while not doing much in the mean time. Perhaps I'm overthinking that risk. It's hard to know how much of an outcome is due to getting money vs other factors.
If you let them get the 1/3, 1/3, 1/3 at various ages, how does that protect the assets from claims of creditors and potential spouses of the inheritors? What about this idea I've seen floating around of the trust being controlled by the child with a disinterested co-trustee? Instead of the money being "out there" it remains in the trust to be used for x...y...z or something along those lines but it can't be touched by far-reaching hands.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
oldfort
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Re: How to structure inheritance/trust

Post by oldfort »

Grt2bOutdoors wrote: Fri Aug 07, 2020 9:19 pm
oldfort wrote: Thu Aug 06, 2020 1:53 pm
christiek wrote: Wed Aug 05, 2020 7:33 pm Any resources (articles, books, studies, general thoughts, etc) for thinking through how to set up an inheritance/trusts while not demotivating children from working hard and being entrepreneurial themselves?
The median age to receive an inheritance from a parent is 60. Barring some premature death, and in the case of a married couple, the premature death of both parents, most people receive an inheritance from their parents far too late in life for it to affect their career choices.
Maybe, but if the parents had children late in life, are you suggesting that most people who leave inheritances are departing for another world at age 90+. Social Security actuarial tables suggest otherwise.
The Social Security period tables show a 50-year-old man has about a 30-year life expectancy, which gets you to 80. A 50-year-old woman has about a 33-year life expectancy, which gets you to 83. However, a married couple has a joint life expectancy approximately 4-7 years longer than either individual. So with a couple of 2 50-year-olds, it's entirely reasonable to expect one of the spouses to live to 87. If they had their kids in their 20s, and everything goes to the surviving spouse, then you would expect, their kids to be 57-67 when they finally receive an inheritance.
Lee_WSP
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Re: How to structure inheritance/trust

Post by Lee_WSP »

Sandi_k wrote: Fri Aug 07, 2020 7:32 pm
Why? I paid for my own college, and my own house. It seems pretty friggin' generous, AND it means that they have to WORK and embed those satisfactions in their character before they get character-ruining money in their 20's and 30's.

Sounds like exactly what the OP has asked for in terms of structure.
I think we'll agree to disagree on the age. But perhaps make the trust pay the monthly living expenses instead of a lump sum. Say mortgage + reasonable maintenance & repairs. Maybe throw in appliances. Or equivalent monthly rent if they're going to move around a lot.
gretah
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Re: How to structure inheritance/trust

Post by gretah »

Beyond the Grave is an excellent book. I read about it here on BH and found it at the library.
Oilcans
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Re: How to structure inheritance/trust

Post by Oilcans »

Another book that I found very helpful is "Savvy Estate Planning" by James L Cunningham, Jr.
Pablov
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Re: How to structure inheritance/trust

Post by Pablov »

oldfort wrote: Thu Aug 06, 2020 3:59 pm
Pablov wrote: Thu Aug 06, 2020 3:49 pm
oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm
oldfort wrote: Thu Aug 06, 2020 2:05 pm The most effective way to achieve the OP's goal is to give them less.
To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
You assume people only work to make money and that is not the case for a lot of people, specially once they make/have enough to feel financially secure. Yes i know..."enough" is relative....but you get my point.
Money is probably the primary motivator for 98%. How many Powerball winners keep their jobs?
Using that same logic, how many millionaires/billionaries/rich people have jobs (work)?

To your question, I assume most powerball winners quit their jobs, agreed. I also assume most of them do not have the "better" jobs since lottery players are usually people who are not well off economically.

People work for many reasons. self fulfillment, recognition. making a difference, not having anything else to do....you name it.
oldfort
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Re: How to structure inheritance/trust

Post by oldfort »

Pablov wrote: Fri Sep 25, 2020 1:58 pm
oldfort wrote: Thu Aug 06, 2020 3:59 pm
Pablov wrote: Thu Aug 06, 2020 3:49 pm
oldfort wrote: Thu Aug 06, 2020 3:37 pm
FIREchief wrote: Thu Aug 06, 2020 3:19 pm

To the extent that I understand the OP's goal, this makes little sense. The OP appears to want to help his/her kids, but is concerned about giving "too much" which will result in demotivation. We don't know the kids, so we don't know how to really provide advice.
Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
You assume people only work to make money and that is not the case for a lot of people, specially once they make/have enough to feel financially secure. Yes i know..."enough" is relative....but you get my point.
Money is probably the primary motivator for 98%. How many Powerball winners keep their jobs?
Using that same logic, how many millionaires/billionaries/rich people have jobs (work)?

To your question, I assume most powerball winners quit their jobs, agreed. I also assume most of them do not have the "better" jobs since lottery players are usually people who are not well off economically.

People work for many reasons. self fulfillment, recognition. making a difference, not having anything else to do....you name it.
A million isn't enough for a lot of people to quit and maintain their same standard of living. I don't know of any billionaires who have what I consider a normal job.
DoubleComma
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Re: How to structure inheritance/trust

Post by DoubleComma »

oldfort wrote: Fri Sep 25, 2020 6:10 pm
Pablov wrote: Fri Sep 25, 2020 1:58 pm
oldfort wrote: Thu Aug 06, 2020 3:59 pm
Pablov wrote: Thu Aug 06, 2020 3:49 pm
oldfort wrote: Thu Aug 06, 2020 3:37 pm

Then, the OP has an impossible goal. Human psychology is straightforward. The more money someone gets for free from trust distributions, the less incentive they have to work or to seek the highest paying career, assuming they get it at a young enough age for it to matter.
You assume people only work to make money and that is not the case for a lot of people, specially once they make/have enough to feel financially secure. Yes i know..."enough" is relative....but you get my point.
Money is probably the primary motivator for 98%. How many Powerball winners keep their jobs?
Using that same logic, how many millionaires/billionaries/rich people have jobs (work)?

To your question, I assume most powerball winners quit their jobs, agreed. I also assume most of them do not have the "better" jobs since lottery players are usually people who are not well off economically.

People work for many reasons. self fulfillment, recognition. making a difference, not having anything else to do....you name it.
A million isn't enough for a lot of people to quit and maintain their same standard of living. I don't know of any billionaires who have what I consider a normal job.
I don't know if its the best option, or even a wise option, but my family set up a generation skipping trust. I'm the generation being skipped. I doesn't mean I have zero inheritance, but it does me the the bulk of my kid's grandparents wealth will pass to them upon death. Should that happen when the kids are minors a trustee is set up to manage it, in fact I believe the trustee manages it until they are post college and launched.

I mention it because it has had some benefit to my wife and I. We certainly remain motivated in our careers and make what we believe to be sound financial decisions. However some of the pressure of paying for college, weddings, helping with first homes, etc have been partially alleviated.

I don't know tax law as well as many. Neither my, nor our parents estates, will be subject to estate tax based on the current levels and our projections so this might not work in the OPs situations. As well, this generation skipping trust is revocable so that by itself might make it useless for you. I just thought I would throw it out there as another thing to consider.

This trust was set up after the grandkids where born; since the OPs is talking about having very young kids it probably doesn't apply the them for that reason as well.

Personally it didn't sit well with me at first; but I quickly got my entitlement in check and began to see it from my parents perspective. They want to change generations of our family not incent my brothers and I from reaching our individual potential. I would say they found exactly what Buffet talked about; I know I can do anything and take risk that other might not because of their support, but I certainly can't do nothing.
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NewMoneyMustBeSmart
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Re: How to structure inheritance/trust

Post by NewMoneyMustBeSmart »

bsteiner wrote: Wed Aug 05, 2020 8:08 pm Give the trustees discretion. No one knows what the future will bring.
Agree in general and respect Mr. Steiner.

Recommend consider reading this book:


Beyond the Grave, Revised and Updated Edition: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others) by Jeffrey L. Condon
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
interwebopinion
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Re: How to structure inheritance/trust

Post by interwebopinion »

Zombies wrote: Fri Aug 07, 2020 8:40 pm We structured our trust so that our offspring can access reasonable money at our trustee’s discretion, as long as they are a “productive member of society.” IIRC, this was defined as employed either at a for-profit or non-profit, not having a criminal record, etc. while in their 20s-early 30s.

I don’t recall the exact number where they get the whole shebang regardless but it was around 35.

We also put in a provision that if they want a large amount (like $1M plus) for an entrepreneurial venture, they have to have an equal or exceeding amount matched by arms-length investors. This prevents the “hey dude, let’s start a bar” mishap.

Ultimately we firmly believe that it is our duty to use our wealth to better the world, and leave it in a better place than where we started. Since we’re not extreme altruists (treating all people equally), I am fine with our offspring getting a “head start” — I did too, although to a much, much, smaller degree. In terms of making them turn out okay, my goal is to live long enough to model good behavior, be charitable and include them during life, and then trust that the lessons remain.

I think if they’re going to be irresponsible, you can’t control that too heavily through language you wrote decades ago while in good health. Trust the process - the process you created raising them.
Great advice.
neverpanic
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Re: How to structure inheritance/trust

Post by neverpanic »

christiek wrote: Thu Aug 06, 2020 11:31 pm Ours are all under 5. We are extremely frugal
Live for the now - continue to set that example. Be extremely diligent in your trustee selection.
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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