Bypass-trust seems to be no longer feasible for inherited IRA?

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Lazareth
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Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

We are mid-60’s and are one of those couples with "$2 million in IRA's, a house, and a Honda."

We are planning for the benefit of our two 20-something single children. We established protective trusts, to age 35, for after the second spouse dies.

Our attorney is proposing the usual bypass trust arrangement. At the first death the surviving spouse can direct up $1 million of the deceased spouse’s IRA (my t-IRA is about $1 million) into a bypass trust to capture the $1 million Massachusetts estate-tax exclusion. The rest of the inherited IRA goes into a marital trust.

But I think the SECURE Act is wreaking havoc on the bypass trust idea.

Considering the ten-year IRA distribution requirement, and 37% federal income tax on income retained in a trust, why would the surviving spouse chose to forfeit any of the inherited IRA and place it in a bypass trust, just to avoid Massachusetts estate tax (8% +/-) on $1 million?

Let's assume I, husband, die first; I think surviving spouse should forego the estate tax savings and simply elect to inherit the whole IRA and roll it into hers. Perhaps she'll enjoy a long lifetime stretch and those assets to grow un-taxed (tax-deferred <OP's edit>), or perhaps not. In either case she can chose to take only RMD's during her lifetime and pay taxes at her personal rate. Or she can take out whatever she wants to spend, give away, or place in taxable savings

Meanwhile we have been Roth-converting well into the 22% bracket but have depleted our small taxable savings account we use to pay the taxes. We both enjoy our jobs so there's no 12% tax bracket room for "cheap" Roth conversions.

The traditional bypass-trust solution seems to be no longer even feasible. What am I missing?
Last edited by Lazareth on Tue Aug 11, 2020 6:53 pm, edited 2 times in total.
a/66, retired, married, enjoy p/t employment.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

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This thread is now in the Personal Finance (Not Investing) forum (bypass-trust).
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by bsteiner »

You could leave the IRAs to each other, with a disclaimer trust as backup. That will let the surviving spouse decide after the first spouse dies. A disclaimer trust is essentially a credit shelter (bypass) trust, except the spouse can't have a power of appointment.

When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.

Instead of mandating distribution to the children at 35, you could provide that each child will gain control over his/her trust at 35. In other words, at 35, the child may become a trustee of his/her trust, and may remove and replace his/her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee).
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

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Lazareth wrote: Tue Aug 11, 2020 9:43 am Meanwhile we have been Roth-converting well into the 22% bracket but have depleted our small taxable savings account we use to pay the taxes. We both enjoy our jobs so there's no 12% tax bracket room for "cheap" Roth conversions.
Although typically considered "taboo" among financial advisors/planners/know-it-alls, you may consider withdrawing/converting from the tIRA to the top of the 22% bracket, increasing the Roth conversions while simultaneously paying the taxes with a portion of the tIRA withdrawals. Roth assets would work much better in the scenario you describe, as they could be retained in trust without any punitive income tax treatment. That said, $2M isn't necessarily a lot for somebody retiring in their 60s, especially if SS (and perhaps any pensions) are modest. If there's a reasonable chance that you'll spend a significant portion of the $2M if you both live to 90, than I would just leave the tIRAs to surviving spouse and skip the bypass trust idea. If you don't have LTC insurance (or it's not very good), than half of that ($1M) could easily be eaten up by extended SNF care. See my signature.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by chemocean »

Since you say your are in your mid-60s, you are within a year or two when your AGI income from Roth conversions at age 63 will take you over the IRMAA cliff for your first Medicare payments when you turn 65. Be cognizant of Medicare rules as early as age 62. By limiting AGI to $170,000-ish at 62-64, you could stay under the IRMMA threshold for the months of the year after you turn 65, without giving up much in Roth Conversions.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by afan »

Good consideration but the age at which this matters depends on when someone goes on Medicare. Those who are still working and covered under employer health insurance can delay Medicare until they retire.

The much feared IRMAA cliff is worth considering but if the Roth conversions are such a close call that moving up one bracket for IRMAA for one year it the wrong move, then think carefully whether you should convert at all. The long term tax savings should be much more than the IRMAA cost.
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Lazareth
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

bsteiner wrote: Tue Aug 11, 2020 11:23 am You could leave the IRAs to each other, with a disclaimer trust as backup. That will let the surviving spouse decide after the first spouse dies. A disclaimer trust is essentially a credit shelter (bypass) trust, except the spouse can't have a power of appointment.
Thank you Bruce. I believe that's what our attorney proposed but I'm not seeing any benefit of a bypass trust. It seems to us that surviving spouse should inherit the entire deceased's IRA to keep it out of trust, and roll it into her own IRA to enjoy lifetime tax-deferral and full discretion on spending, gifting and converting. She would forfeit the future estate-tax reduction, which is the reason for disclaiming and sheltering up to the $1 million Massachusetts estate-tax exemption level in the QTIP. Depending on the final estate, and it is relatively modest in trust terms, that MA estate-tax savings could be 8% to 10% (of up to the $1 million MA exemption).

Another question: Does the 10-year distribution requirement apply to the disclaimed t-IRA amount that goes into the bypass trust, during the surviving spouse's lifetime?

bsteiner wrote: Tue Aug 11, 2020 11:23 am When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
I read your excellent CRT article, and the forum discussions featuring you and the other esteemed and generous contributors helping me here. I think CRUT is the way to go. The two children are not age 27 yet, they are ages 22 and 23, single. Wife and I are 64 and 66 and healthy fwiw. So, meanwhile seems we would designate equal trusts as successor beneificary for children with instruction in the trust document (?) to establish the CRUT? We plan to use Schwab as bank co-trustee for the protective trusts and seems we use them for the CRT too but I've not inquired at Schwab about CRT.

bsteiner wrote: Tue Aug 11, 2020 11:23 am Instead of mandating distribution to the children at 35, you could provide that each child will gain control over his/her trust at 35...
I had learned that from your previous posts and I impressed our attorney and my wife (thank you) by suggesting that! It's in the trust draft.

FIREchief wrote: Tue Aug 11, 2020 11:41 am
Lazareth wrote: Tue Aug 11, 2020 9:43 am Meanwhile we have been Roth-converting well into the 22% bracket …but have depleted our small taxable savings…
Although typically considered "taboo" among financial advisors/planners/know-it-alls, you may consider withdrawing/converting from the tIRA to the top of the 22% bracket, increasing the Roth conversions while simultaneously paying the taxes with a portion of the tIRA withdrawals…
Thank you! I had considered paying the conversion income tax with IRA proceeds but recalled reading in the forum where that is indeed taboo. It does appear that Roth conversion could pay off nicely, especially in the future for the surviving spouse given in our current t-IRA situation.
FIREchief wrote: Tue Aug 11, 2020 11:41 am … $2M isn't necessarily a lot for somebody retiring in their 60s, especially if SS (and perhaps any pensions) are modest. If there's a reasonable chance that you'll spend a significant portion of the $2M if you both live to 90, than I would just leave the tIRAs to surviving spouse and skip the bypass trust idea. If you don't have LTC insurance (or it's not very good), than half of that ($1M) could easily be eaten up by extended SNF care. See my signature.
Yes, FIREchief, it is a modest estate and yes there is a good chance we’ll spend it down, but I want to prepare for our heirs in the event I misjudge a hairpin turn in Positano if we get to travel there next year. But seriously, as I responded to Bruce above, I am warming to your idea that we skip the bypass altogether and I would appreciate any and all input as I drill down on that thought. I’ll need a good case to present to our and local estate attorney. It would mean we forfeit a MA state estate tax savings (for our heirs) on the up-to-$1 million that the surviving spouse disclaims.
chemocean wrote: Tue Aug 11, 2020 3:23 pm Since you say your are in your mid-60s, you are within a year or two when your AGI income from Roth conversions at age 63 will take you over the IRMAA cliff for your first Medicare payments when you turn 65. Be cognizant of Medicare rules as early as age 62. By limiting AGI to $170,000-ish at 62-64, you could stay under the IRMMA threshold for the months of the year after you turn 65, without giving up much in Roth Conversions.
afan wrote: Tue Aug 11, 2020 5:25 pm Good consideration but the age at which this matters depends on when someone goes on Medicare. Those who are still working and covered under employer health insurance can delay Medicare until they retire. The much feared IRMAA cliff is worth considering but if the Roth conversions are such a close call that moving up one bracket for IRMAA for one year it the wrong move, then think carefully whether you should convert at all. The long term tax savings should be much more than the IRMAA cost.
I have not paid attention to IRMAA because I never thought it would affect me, but perhaps I should. I am still employed but because it’s a small firm, and I am over 65 (I’m 66) the plan requires I be on Medicare with employer providing a supplement coverage (Blue Cross MA). I pay the $140 or whatever per month.

As usual, excellent information here in the forum. Thank you all so much!
a/66, retired, married, enjoy p/t employment.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

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Lazareth wrote: Wed Aug 12, 2020 1:10 pm I’ll need a good case to present to our and local estate attorney. It would mean we forfeit a MA state estate tax savings (for our heirs) on the up-to-$1 million that the surviving spouse disclaims.
I'm confused. As I understand it, you would experience no MA estate tax savings for the first $1M disclaimed. It would only (potentially) generate an estate tax savings if when the second to die spouse dies the residual estate of that spouse is over $1M. In other words, if all $2M is left to surviving spouse, and that spouse consumes $1M during their remaining years, than $1M is ultimately left to heirs and none of it is subject to MA estate tax. Is this correct? If so, I'm just not seeing a compelling case for a bypass trust.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

FIREchief wrote: Wed Aug 12, 2020 1:27 pm
Lazareth wrote: Wed Aug 12, 2020 1:10 pm I’ll need a good case to present to our and local estate attorney. It would mean we forfeit a MA state estate tax savings (for our heirs) on the up-to-$1 million that the surviving spouse disclaims.
I'm confused. As I understand it, you would experience no MA estate tax savings for the first $1M disclaimed. It would only (potentially) generate an estate tax savings if when the second to die spouse dies the residual estate of that spouse is over $1M. In other words, if all $2M is left to surviving spouse, and that spouse consumes $1M during their remaining years, than $1M is ultimately left to heirs and none of it is subject to MA estate tax. Is this correct? If so, I'm just not seeing a compelling case for a bypass trust.
As I understand, if all $2M is left to surviving spouse and her final estate at her death is one dollar over the Massachusetts $1 million exemption "cliff" amount, then the entire inheritance is subject to MA estate tax. To your question, yes, if she spends or gifts her estate down to under one million, which I agree with you is very possible, there will be no estate tax anyway.
The disclaiming strategy, disclaim up to $1 million of her deceased spouse's IRA and pass it directly to the heirs via the bypass trust, guarantees that that amount will pass to the children free of MA estate tax regardless of the size of the final estate. It seems like an expensive and complicated hedge for a not-so-significant, even unlikely, state estate tax savings.
Your observation has merit, that there is not a compelling case for the bypass. We'll write it into the estate plan as an option for the surviving spouse and not a requirement.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

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Lazareth wrote: Wed Aug 12, 2020 1:10 pm ...
bsteiner wrote: Tue Aug 11, 2020 11:23 am When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
I read your excellent CRT article, and the forum discussions featuring you and the other esteemed and generous contributors helping me here. I think CRUT is the way to go. The two children are not age 27 yet, they are ages 22 and 23, single. Wife and I are 64 and 66 and healthy fwiw. So, meanwhile seems we would designate equal trusts as successor beneificary for children with instruction in the trust document (?) to establish the CRUT? We plan to use Schwab as bank co-trustee for the protective trusts and seems we use them for the CRT too but I've not inquired at Schwab about CRT.
...
You would create whatever trusts you want, either in your Wills or in one or more other trust instruments. Whether you put these trusts in your Wills or in one or more other trust instruments is a matter of style rather than substance.

You would put the instructions as to who gets what (and under what circumstances) in the beneficiary designations.
Lazareth wrote: Thu Aug 13, 2020 7:47 am
FIREchief wrote: Wed Aug 12, 2020 1:27 pm
Lazareth wrote: Wed Aug 12, 2020 1:10 pm I’ll need a good case to present to our and local estate attorney. It would mean we forfeit a MA state estate tax savings (for our heirs) on the up-to-$1 million that the surviving spouse disclaims.
I'm confused. As I understand it, you would experience no MA estate tax savings for the first $1M disclaimed. It would only (potentially) generate an estate tax savings if when the second to die spouse dies the residual estate of that spouse is over $1M. In other words, if all $2M is left to surviving spouse, and that spouse consumes $1M during their remaining years, than $1M is ultimately left to heirs and none of it is subject to MA estate tax. Is this correct? If so, I'm just not seeing a compelling case for a bypass trust.
As I understand, if all $2M is left to surviving spouse and her final estate at her death is one dollar over the Massachusetts $1 million exemption "cliff" amount, then the entire inheritance is subject to MA estate tax. To your question, yes, if she spends or gifts her estate down to under one million, which I agree with you is very possible, there will be no estate tax anyway.
The disclaiming strategy, disclaim up to $1 million of her deceased spouse's IRA and pass it directly to the heirs via the bypass trust, guarantees that that amount will pass to the children free of MA estate tax regardless of the size of the final estate. It seems like an expensive and complicated hedge for a not-so-significant, even unlikely, state estate tax savings.
Your observation has merit, that there is not a compelling case for the bypass. We'll write it into the estate plan as an option for the surviving spouse and not a requirement.
Agreed. You could include disclaimer trusts in your Wills, and then, in the beneficiary designation forms, leave the IRAs to each other, except that if the surviving spouse disclaims, the disclaimed portion goes to the disclaimer trust. It won't add much complexity. Wills that provide for the spouse outright with a disclaimer trust as backup are common, especially in states that have a state estate tax.

That will allow the surviving spouse to decide after the first spouse's death.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

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Lazareth wrote: Thu Aug 13, 2020 7:47 am
FIREchief wrote: Wed Aug 12, 2020 1:27 pm
Lazareth wrote: Wed Aug 12, 2020 1:10 pm I’ll need a good case to present to our and local estate attorney. It would mean we forfeit a MA state estate tax savings (for our heirs) on the up-to-$1 million that the surviving spouse disclaims.
I'm confused. As I understand it, you would experience no MA estate tax savings for the first $1M disclaimed. It would only (potentially) generate an estate tax savings if when the second to die spouse dies the residual estate of that spouse is over $1M. In other words, if all $2M is left to surviving spouse, and that spouse consumes $1M during their remaining years, than $1M is ultimately left to heirs and none of it is subject to MA estate tax. Is this correct? If so, I'm just not seeing a compelling case for a bypass trust.
As I understand, if all $2M is left to surviving spouse and her final estate at her death is one dollar over the Massachusetts $1 million exemption "cliff" amount, then the entire inheritance is subject to MA estate tax.
Yikes!!! Please disregard my previous comments (and also see my signature! 8-) ). I had never heard of such a thing or imagined that it could exist. That said, it appears that you are absolutely correct:
Unlike many other estate taxes, the Massachusetts estate tax applies to the entire estate, not just the amount above the exemption. This means if your estate is worth $1.5 million, the tax applies to all $1.5 million, not just the $500,000 above the exemption.

https://smartasset.com/estate-planning/ ... at%2016%25.

I certainly now better understand your concerns.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

bsteiner wrote: Tue Aug 11, 2020 11:23 am When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
Bruce, in your T&E article you state:
"Because there’s no way to know what the [IRC] rate will be when the IRA owner dies, the IRA owner could provide that the payout rate will be the highest permissible rate at the time of his death .... Alternatively, the IRA owner could provide for the minimum 5% payout rate."

My question, if we are using the CRUT as a surrogate lifetime IRA stretch, and since we do not know at what age the beneficiaries will begin receiving payouts, wouldn't we typically instruct the trustee to use the highest permissible payout rate that will satisfy the 10% minimum remainder? I ask because our trust document draft instructs the trustee to use a 5% lifetime payout rate. Our two children are currently ages 22 and 23. My wife and I are healthy mid 60's.

Thank you!
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by bsteiner »

Lazareth wrote: Mon Sep 14, 2020 9:10 pm
bsteiner wrote: Tue Aug 11, 2020 11:23 am When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
Bruce, in your T&E article you state:
"Because there’s no way to know what the [IRC] rate will be when the IRA owner dies, the IRA owner could provide that the payout rate will be the highest permissible rate at the time of his death .... Alternatively, the IRA owner could provide for the minimum 5% payout rate."

My question, if we are using the CRUT as a surrogate lifetime IRA stretch, and since we do not know at what age the beneficiaries will begin receiving payouts, wouldn't we typically instruct the trustee to use the highest permissible payout rate that will satisfy the 10% minimum remainder? I ask because our trust document draft instructs the trustee to use a 5% lifetime payout rate. Our two children are currently ages 22 and 23. My wife and I are healthy mid 60's.
If they're not yet 27, the charitable remainder trust won't work. In order to satisfy the 5% minimum payout rate, the value of the charity's remainder interest won't be at least 10% of the initial value of the trust.

If they're over 27 but relatively young, they might be as well off or a little better off with a 5% payout than with the highest payout rate that will satisfy the 10% requirement. The additional deferral may offset the reduced payout rate. But the difference probably won't be very much one way or the other. As a practical matter, it's simpler to say, as you propose, that the payout rate will be such that the value of the charity's remainder interest is equal to 10% of the initial value. That way, you won't have to revise it when the children reach a point where that payout rate is clearly better than a 5% payout rate.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by halfnine »

Just thinking out loud here but could an SPIA possibly make sense here for assets above the exemption? Removes those assets from the estate, protects against longevity, and still would likely provide an inheritance with the remaining assets. Not perfect, but does this potentially eliminate both the right and left tails in your planning.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

bsteiner wrote: Mon Sep 14, 2020 9:59 pm
Lazareth wrote: Mon Sep 14, 2020 9:10 pm
bsteiner wrote: Tue Aug 11, 2020 11:23 am When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
Bruce, in your T&E article you state:
"Because there’s no way to know what the [IRC] rate will be when the IRA owner dies, the IRA owner could provide that the payout rate will be the highest permissible rate at the time of his death .... Alternatively, the IRA owner could provide for the minimum 5% payout rate."

My question, if we are using the CRUT as a surrogate lifetime IRA stretch, and since we do not know at what age the beneficiaries will begin receiving payouts, wouldn't we typically instruct the trustee to use the highest permissible payout rate that will satisfy the 10% minimum remainder? I ask because our trust document draft instructs the trustee to use a 5% lifetime payout rate. Our two children are currently ages 22 and 23. My wife and I are healthy mid 60's.
If they're not yet 27, the charitable remainder trust won't work. In order to satisfy the 5% minimum payout rate, the value of the charity's remainder interest won't be at least 10% of the initial value of the trust.

If they're over 27 but relatively young, they might be as well off or a little better off with a 5% payout than with the highest payout rate that will satisfy the 10% requirement. The additional deferral may offset the reduced payout rate. But the difference probably won't be very much one way or the other. As a practical matter, it's simpler to say, as you propose, that the payout rate will be such that the value of the charity's remainder interest is equal to 10% of the initial value. That way, you won't have to revise it when the children reach a point where that payout rate is clearly better than a 5% payout rate.
Thank you Bruce. I hope this discussion will help others who are exploring CRUT’s in light of recent tax changes.

1. I should have acknowledged that you had been clear about the age 27 requirement in your article. Our new estate plan may be the first such CRUT/t-IRA inheritance strategy that our attorney has been asked to draft. The CRUT draft they provided this week, for my review, did not address the age 27 issue so I will have to research how we deal with that.

2. They set up the CRUT as a single trust for both kids, as follows (is this typical?):

“The Trustee shall hold the trust property as a single trust for the sole and exclusive benefit of the Donors’ children, X and Y, (hereinafter “the Unitrust Recipients”). The ‘Unitrust Period,” as defined in Article III, is from the date of trust funding through the end of the Unitrust Recipients’ combined lifetimes.”

3. As for the bank trustee’s powers and discretion, I have a concern: We have chosen Schwab as the corporate trustee for the CRUT. Schwab provided several pages of required language to be included in our Trust document which pretty much gives them a scary level of carte-blanche to invest anyway they want, in whatever they want, and to hire any services needed.

I’ve been assured, by the Schwab trust rep I talked with on the phone, that the investment team uses the Schwab Intelligent Portfolios (SIP) robo-advisor service as a guide, and he reiterated in his email that, “the investment team has flexibility to use other investments based on the language of the trust and individual circumstances of the beneficiary. With that said, the actual portfolio can be changed as the situation of the beneficiary changes.”

Bruce, do you typically push-back on such “carte-blanche” language by the bank trustee, and insert your own “language of the trust” that states the client’s preference for, as an example, using a minimal number of low-cost index funds? I want to give the corporate trustee all the leeway they’ll need since I cannot predict future tax, legal, or investment product considerations, or my kids’ future needs. But I have that nagging desire to insert a bit of restraint.

Thank you again.
a/66, retired, married, enjoy p/t employment.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by FIREchief »

halfnine wrote: Tue Sep 15, 2020 6:32 am Just thinking out loud here but could an SPIA possibly make sense here for assets above the exemption? Removes those assets from the estate, protects against longevity, and still would likely provide an inheritance with the remaining assets. Not perfect, but does this potentially eliminate both the right and left tails in your planning.
If a SPIA has a guaranteed minimum number of payments (i.e. if both spouses die, there are named beneficiaries who receive "x" years of remaining payments), wouldn't it be included in the estate?
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by bsteiner »

Lazareth wrote: Tue Sep 15, 2020 10:37 am ...
Thank you Bruce. I hope this discussion will help others who are exploring CRUT’s in light of recent tax changes.

1. I should have acknowledged that you had been clear about the age 27 requirement in your article. Our new estate plan may be the first such CRUT/t-IRA inheritance strategy that our attorney has been asked to draft. The CRUT draft they provided this week, for my review, did not address the age 27 issue so I will have to research how we deal with that.

2. They set up the CRUT as a single trust for both kids, as follows (is this typical?):

“The Trustee shall hold the trust property as a single trust for the sole and exclusive benefit of the Donors’ children, X and Y, (hereinafter “the Unitrust Recipients”). The ‘Unitrust Period,” as defined in Article III, is from the date of trust funding through the end of the Unitrust Recipients’ combined lifetimes.”

3. As for the bank trustee’s powers and discretion, I have a concern: We have chosen Schwab as the corporate trustee for the CRUT. Schwab provided several pages of required language to be included in our Trust document which pretty much gives them a scary level of carte-blanche to invest anyway they want, in whatever they want, and to hire any services needed.

I’ve been assured, by the Schwab trust rep I talked with on the phone, that the investment team uses the Schwab Intelligent Portfolios (SIP) robo-advisor service as a guide, and he reiterated in his email that, “the investment team has flexibility to use other investments based on the language of the trust and individual circumstances of the beneficiary. With that said, the actual portfolio can be changed as the situation of the beneficiary changes.”

Bruce, do you typically push-back on such “carte-blanche” language by the bank trustee, and insert your own “language of the trust” that states the client’s preference for, as an example, using a minimal number of low-cost index funds? I want to give the corporate trustee all the leeway they’ll need since I cannot predict future tax, legal, or investment product considerations, or my kids’ future needs. But I have that nagging desire to insert a bit of restraint.
1. Charitable remainder trusts don't come up every day, but they come up from time to time. Before the proposed regulations on required distributions were overhauled in 2001, IRA owners had to choose between term certain and recalculation, and if an IRA owner elected recalculation and didn't have a spouse, and died, the balance had to be paid out by the end of the following year. A CRT was the workaround.

Also, occasionally someone has a large ordinary income item that's payable upon death, such as a large nonqualified deferred compensation payment. A CRT would sometimes be the beneficiary of that.

2. It was common to have a series of beneficiaries before the 10% requirement (for the actuarial value of the charity's interest) came into effect in 1997. However, the 10% requirement limits how many beneficiaries you may have. For example, with two children a year apart, they would have to be at least 40 and 39 in order to have the payments from one child's share continue for the other child.

3. I doubt that you'll be able to negotiate this with Schwab. You could set forth your preferences. You might want to give someone the power to change the trustees. Since there's no discretion as to distributions in a CRT, so you might want to consider whether you need a corporate trustee.
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Lazareth
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

bsteiner wrote: Tue Sep 15, 2020 5:56 pm 2. It was common to have a series of beneficiaries before the 10% requirement (for the actuarial value of the charity's interest) came into effect in 1997. However, the 10% requirement limits how many beneficiaries you may have. For example, with two children a year apart, they would have to be at least 40 and 39 in order to have the payments from one child's share continue for the other child.

3. .... Since there's no discretion as to distributions in a CRT, so you might want to consider whether you need a corporate trustee.
Thanks again Bruce. So I can assume we can use one single "family" CRUT for the combined lifetimes our our two children (once they reach whatever age satisfies the 10% minimum remainder, currently age 27)?

Your last sentence here is most significant! That a CRUT might not need a corporate trustee since the payments are fixed. I had just assumed that complexities of a lifelong CRUT, and splitting the payments between two beneficiaries, would require one so we named Schwab as trustee in the draft. Eliminating that would represent a .5% annual significant savings. Your comment prompted some further research and I read elsewhere here in the forum that some charities offer trustee service for free, so I'll look into that too. If so, the charity would be incentivized to maximize the remainder value, which is probably a good thing... got to think that through.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by bsteiner »

Lazareth wrote: Wed Sep 16, 2020 1:33 pm
bsteiner wrote: Tue Sep 15, 2020 5:56 pm 2. It was common to have a series of beneficiaries before the 10% requirement (for the actuarial value of the charity's interest) came into effect in 1997. However, the 10% requirement limits how many beneficiaries you may have. For example, with two children a year apart, they would have to be at least 40 and 39 in order to have the payments from one child's share continue for the other child.

3. .... Since there's no discretion as to distributions in a CRT, so you might want to consider whether you need a corporate trustee.
Thanks again Bruce. So I can assume we can use one single "family" CRUT for the combined lifetimes our our two children (once they reach whatever age satisfies the 10% minimum remainder, currently age 27)?

Your last sentence here is most significant! That a CRUT might not need a corporate trustee since the payments are fixed. I had just assumed that complexities of a lifelong CRUT, and splitting the payments between two beneficiaries, would require one so we named Schwab as trustee in the draft. Eliminating that would represent a .5% annual significant savings. Your comment prompted some further research and I read elsewhere here in the forum that some charities offer trustee service for free, so I'll look into that too. If so, the charity would be incentivized to maximize the remainder value, which is probably a good thing... got to think that through.
If you have a single trust and you want the payments to go in full to the survivor, they have to be much older than 27. If they're one year apart, they would have to be 40 and 39. If each child's share ends at death (so that after one dies, half of the trust goes to charity), you can put them into a single trust if they're both 27, though you might still want separate trusts in case they want their shares invested differently.

I would avoid having a charity as trustee. If your children are trustees, they could take trustees' commissions (fees). The charity might serve for free but they might hire someone to "manage" the assets. The charity might not want you to give each child the right to change the charity or charities that receive the remainder. The charity might not give sufficient consideration to the tax consequences to the children of how the assets are invested.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

FIREchief wrote: Tue Sep 15, 2020 11:54 am
halfnine wrote: Tue Sep 15, 2020 6:32 am Just thinking out loud here but could an SPIA possibly make sense here for assets above the exemption? Removes those assets from the estate, protects against longevity, and still would likely provide an inheritance with the remaining assets. Not perfect, but does this potentially eliminate both the right and left tails in your planning.
If a SPIA has a guaranteed minimum number of payments (i.e. if both spouses die, there are named beneficiaries who receive "x" years of remaining payments), wouldn't it be included in the estate?
Thank you for contributing further to the discussion. We are age mid-60's with majority of our wealth currently in t-IRA's invested in a boglehead 3-fund portfolio. I will have to learn more about SPIA's to understand how purchasing a SPIA now with those t-IRA assets is an inheritance strategy to provide for long-term tax-advantage payout, or stretch, to our two adult children upon the death of the surviving spouse.

We have about $1.3 million in the t-IRA's, that's after 2020 Roth conversions of $80K which should fill up the 22% bracket,
a/66, retired, married, enjoy p/t employment.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by afan »

If you have an accumulation trust, can the trustee have authority to create a charitable remainder trust if that appears to be appropriate? Could the trustee do this down the road, years after the grantor's death, in response to tax laws and the circumstances of the beneficiaries?

If so, then one might want to use an accumulation trust to preserve the asset protection, particularly for younger beneficiaries for whom the charitable trust is not an option, then go the charitable trust later. Is this an option?
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FIREchief
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by FIREchief »

afan wrote: Thu Sep 17, 2020 9:16 am If you have an accumulation trust, can the trustee have authority to create a charitable remainder trust if that appears to be appropriate? Could the trustee do this down the road, years after the grantor's death, in response to tax laws and the circumstances of the beneficiaries?

If so, then one might want to use an accumulation trust to preserve the asset protection, particularly for younger beneficiaries for whom the charitable trust is not an option, then go the charitable trust later. Is this an option?
I'm guessing it would have to be a non-qualified discretionary trust (five year tIRA payout). If it included a charitable beneficiary, than I don't think it would qualify as a qualified accumulation trust (ten year tIRA payout). That said, you ask an interesting question. If the children were within five years of the minimum age at which they could be named beneficiaries of a CRUT, than your approach might have merit.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by afan »

It would be more whether the trustee could add a beneficiary (the charity). I agree that, since this is not a person, it might not be permitted to change the trust at that point.

With regard to writing into the trust language that greatly restricted the discretion of the trustee in how to invest the assets- Firechief on this board has been advocating for this for quite some time. So far, we have not heard of a traditional trustee who would agree.

I gather trustees have been subjected to long and painful lawsuits for investing trust assets exactly the way the grantor wanted, as opposed to "prudently." If they are going to be held responsible for following standard expectations of how trustees are to behave, they are going to be reluctant to behave differently.

An alternative would be to name a bank or trust company as a directed trustee with no investment responsibilities. Then have an individual or firm, including if appropriate the beneficiaries themselves, handle the investing. You would still need to find someone who would agree to be limited to a few minimal cost index funds, but the world of potential asset managers would be larger than the universe of conventional trustees. So far, I have been putting off doing this in hopes that more companies will enter the business and handle the investments the boglehead way. I suspect the cash drag of the Schwab intelligent portfolios would be worse than the 5 extra basis points one would pay Vanguard.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by afan »

Purely speculation on my part, regarding how the trustee invests the money:

In the trust world there seem to be two different ways of handling accounts. One for "poor" people like bogleheads. These get a standard product that a bank can produce at low incremental cost. In spite of what they will claim, nothing is personalized because doing so would cost too much to be worth the while of the bank.

At much higher trust sizes- I don't know how high but there are some companies that will not take a trust less than $25M- everything is negotiable. If you had, say $50M, you might find a bank that was willing to put it all in a 2-4 fund portfolio. I doubt they would also charge a minimal flat fee for the administrative work. They might charge their standard fee for a trust of that size with simple investments. But they might indulge the crazy grantor who did not want to take advantage of their world-beating investment brilliance.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by FIREchief »

afan wrote: Thu Sep 17, 2020 12:50 pm It would be more whether the trustee could add a beneficiary (the charity). I agree that, since this is not a person, it might not be permitted to change the trust at that point.
I think this is pretty cut and dried. If a trustee is allowed to add a non-individual beneficiary, than the trust will not be considered a qualified accumulation trust by the IRS and the stretch would be limited to five years.
With regard to writing into the trust language that greatly restricted the discretion of the trustee in how to invest the assets- Firechief on this board has been advocating for this for quite some time. So far, we have not heard of a traditional trustee who would agree.

I gather trustees have been subjected to long and painful lawsuits for investing trust assets exactly the way the grantor wanted, as opposed to "prudently." If they are going to be held responsible for following standard expectations of how trustees are to behave, they are going to be reluctant to behave differently.
I'm not so sure that trustees have been subjected to "long and painful lawsuits for investing trust assets exactly the way the grantor wanted." It's really not about what the Grantor "wanted," except to the extent that the trust document requires it. I believe (purely one man's opinion) that independent trustees will not accept a trust with Boglehead investing directions because a) it limits their ability to make excess profits and b) it simply doesn't match their normal way of doing business. I know we've been told many times that a respectable trustee will credit fund expenses against their fees, but we've also read many reports of less reputable trustees piling on layers of fees simply because they can.

Also, you seem to be implying an independent trustee. That's certainly one scenario, but there is also the scenario where a beneficiary is allowed to serve as his/her own trustee, and would benefit from the trust requiring Boglehead investing. It would somewhat protect them from being challenged by successor beneficiaries with respect to how they are investing trust assets. This may actually be the more common scenario (or would be if more people followed Bruce's excellent advice 8-) ).
An alternative would be to name a bank or trust company as a directed trustee with no investment responsibilities. Then have an individual or firm, including if appropriate the beneficiaries themselves, handle the investing. You would still need to find someone who would agree to be limited to a few minimal cost index funds, but the world of potential asset managers would be larger than the universe of conventional trustees. So far, I have been putting off doing this in hopes that more companies will enter the business and handle the investments the boglehead way. I suspect the cash drag of the Schwab intelligent portfolios would be worse than the 5 extra basis points one would pay Vanguard.
I believe this may parallel the exact situation that I just described. In this situation, if the trust required the "Boglehead way," it may make it much smoother to execute.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by FIREchief »

afan wrote: Thu Sep 17, 2020 1:03 pm But they might indulge the crazy grantor who did not want to take advantage of their world-beating investment brilliance.
LOL. You would certainly think so, but it's a strange world (especially in this realm). Maybe you and I should start the "afan and FIREchief" independent trustee LLC, undercut the big guys, and make a fortune just plowing everything into a three fund portfolio while our 0.5% AUM rolls in every year. :beer
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by Lazareth »

Regarding children as CRUT trustees:
bsteiner wrote: Tue Sep 15, 2020 5:56 pm If your children are trustees, they could take trustees' commissions (fees). The charity might serve for free but they might hire someone to "manage" the assets. The charity might not want you to give each child the right to change the charity or charities that receive the remainder. The charity might not give sufficient consideration to the tax consequences to the children of how the assets are invested.
Thanks Bruce, that’s a good argument for passing up the charity’s offer of free trustee services. But, making the beneficiaries, our adult children, the trustees of the CRUT, is that common? Do your clients express a concern that the beneficiary as trustee could, either inadvertently or if under financial duress, violate the integrity of the trust by perhaps an incorrect or premature withdrawal amount? Does the IRC call for some more robust CRT oversight other than the from the beneficiaries?

afan wrote: Thu Sep 17, 2020 12:50 pm … but there is also the scenario where a beneficiary is allowed to serve as his/her own trustee, and would benefit from the trust requiring Boglehead investing. It would somewhat protect them from being challenged by successor beneficiaries with respect to how they are investing trust assets. This may actually be the more common scenario (or would be if more people followed Bruce's excellent advice 8-) ).
While Schwab's SIP is not ideal (a 3-fund portfolio as I have now would be ideal) I’d be okay with the CRT benficiaries-as-trustee using Schwab’s Intelligent Portfolios despite the cash drag. I would leave the investment management to the beneficiaries with my from-the-grave suggestion to follow the Boglehead way. My larger concern is protecting the beneficiaries from themselves with regard to properly self-administering their life-long CRUT payments.
a/66, retired, married, enjoy p/t employment.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by JBTX »

bsteiner wrote: Tue Aug 11, 2020 11:23 am You could leave the IRAs to each other, with a disclaimer trust as backup. That will let the surviving spouse decide after the first spouse dies. A disclaimer trust is essentially a credit shelter (bypass) trust, except the spouse can't have a power of appointment.

When the children reach age 27, you might name charitable remainder trusts for the children as the beneficiaries of the IRAs after the spouse and the disclaimer trust. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.

Instead of mandating distribution to the children at 35, you could provide that each child will gain control over his/her trust at 35. In other words, at 35, the child may become a trustee of his/her trust, and may remove and replace his/her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee).
Very helpful link.
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Re: Bypass-trust seems to be no longer feasible for inherited IRA?

Post by SuzBanyan »

How does the Section 7520 Interest Rate for September 2020 effect the minimum age of the beneficiaries needed for a CRUT to pass the 10% to charity test? I believe Bruce stated that the age 27 minimum was based on the February 2020 Section 7520 Interest Rate of 2.2%.
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