Administration of Testamentary Trusts

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mptness
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Administration of Testamentary Trusts

Post by mptness »

If I leave my estate to my adult children by way of testamentary trusts and name them as the trustees of their own trusts (with the primary objective of protecting from creditors and divorce, while giving them full control), is it correct that any future costs to them would be the same as if I left the money outright?
In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
JimInIllinois
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Re: Administration of Testamentary Trusts

Post by JimInIllinois »

They will need to file annual income tax returns for the trusts. Free if they do it themselves, otherwise it's an expense.
Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

mptness wrote: Tue Oct 20, 2020 4:44 pm (with the primary objective of protecting from creditors and divorce, while giving them full control),
That is what is called an oxymoron. You don’t get protection from creditors and full control.
Topic Author
mptness
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Re: Administration of Testamentary Trusts

Post by mptness »

Lee_WSP wrote: Tue Oct 20, 2020 5:21 pm
mptness wrote: Tue Oct 20, 2020 4:44 pm (with the primary objective of protecting from creditors and divorce, while giving them full control),
That is what is called an oxymoron. You don’t get protection from creditors and full control.
Please explain as I am new to this and do not have experience with these sort of trusts. Are the trustees not able to freely use $ however they please?
Gill
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Re: Administration of Testamentary Trusts

Post by Gill »

mptness wrote: Tue Oct 20, 2020 6:00 pm
Lee_WSP wrote: Tue Oct 20, 2020 5:21 pm
mptness wrote: Tue Oct 20, 2020 4:44 pm (with the primary objective of protecting from creditors and divorce, while giving them full control),
That is what is called an oxymoron. You don’t get protection from creditors and full control.
Please explain as I am new to this and do not have experience with these sort of trusts. Are the trustees not able to freely use $ however they please?
A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all.
Gill
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Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

Gill wrote: Tue Oct 20, 2020 6:32 pm
mptness wrote: Tue Oct 20, 2020 6:00 pm
Lee_WSP wrote: Tue Oct 20, 2020 5:21 pm
mptness wrote: Tue Oct 20, 2020 4:44 pm (with the primary objective of protecting from creditors and divorce, while giving them full control),
That is what is called an oxymoron. You don’t get protection from creditors and full control.
Please explain as I am new to this and do not have experience with these sort of trusts. Are the trustees not able to freely use $ however they please?
A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all.
Gill
This. At best you've just created a revocable living trust (RVT) for your beneficiaries, but if the point was to protect the trust from creditors/divorce, well, RVT's don't do that.
Topic Author
mptness
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Re: Administration of Testamentary Trusts

Post by mptness »

Gill wrote: Tue Oct 20, 2020 6:32 pm A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all
So what are the typical restrictions in this type of testamentary trust with adult children? I was under the impression that there was a way to do this that was similar to leaving the money outright only with the added protections.
Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

mptness wrote: Tue Oct 20, 2020 8:12 pm
Gill wrote: Tue Oct 20, 2020 6:32 pm A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all
So what are the typical restrictions in this type of testamentary trust with adult children? I was under the impression that there was a way to do this that was similar to leaving the money outright only with the added protections.
I hate citing Wikipedia, but this is the best overview that is mostly correct that isn’t a book you’d have to buy. That I could find in five minutes.

https://en.m.wikipedia.org/wiki/Asset-protection_trust
bsteiner
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Re: Administration of Testamentary Trusts

Post by bsteiner »

mptness wrote: Tue Oct 20, 2020 8:12 pm
Gill wrote: Tue Oct 20, 2020 6:32 pm A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all
So what are the typical restrictions in this type of testamentary trust with adult children? I was under the impression that there was a way to do this that was similar to leaving the money outright only with the added protections.
You could give the child, upon reaching a specified age, the right to become a trustee, the power to remove and replace his/her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and the power to appoint (give or leave) the trust assets to anyone he/she wants (other than the child or his/her estate or creditors).
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FIREchief
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Re: Administration of Testamentary Trusts

Post by FIREchief »

mptness wrote: Tue Oct 20, 2020 4:44 pm If I leave my estate to my adult children by way of testamentary trusts and name them as the trustees of their own trusts (with the primary objective of protecting from creditors and divorce, while giving them full control), is it correct that any future costs to them would be the same as if I left the money outright?
In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
I think others are getting hung up on your use of the term "full control." You may have meant "effective control within a HEMS standard." What's the difference?? I'll let the experts/lawyers weigh in, but I think it can mean something close to "full control" without jeopardizing asset protections. The lawyers have even come up with boilerplate language that further enables what you seem to be desiring.

To answer your question, I believe that it would be "yes," as long as the tax returns were simple or completed by the beneficiary/trustee. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

FIREchief wrote: Tue Oct 20, 2020 11:03 pm
mptness wrote: Tue Oct 20, 2020 4:44 pm If I leave my estate to my adult children by way of testamentary trusts and name them as the trustees of their own trusts (with the primary objective of protecting from creditors and divorce, while giving them full control), is it correct that any future costs to them would be the same as if I left the money outright?
In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
I think others are getting hung up on your use of the term "full control."
That is because the more control over distributions beneficiaries have, the less protection they receive.
MikeG62
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Re: Administration of Testamentary Trusts

Post by MikeG62 »

mptness wrote: Tue Oct 20, 2020 8:12 pm
Gill wrote: Tue Oct 20, 2020 6:32 pm A trustee in managing any trust is governed by state law and the terms of the trust instrument and manages a trust for the benefit of the trust beneficiaries. If a trustee is totally unrestricted in managing a trust you really have no trust at all
So what are the typical restrictions in this type of testamentary trust with adult children? I was under the impression that there was a way to do this that was similar to leaving the money outright only with the added protections.
Generally speaking, distributions would need to be limited to HEMS standard. Having said that, I think this standard can be sufficiently broad. Also, use of a co-trustee (unrelated) would help with protecting the assets. This would add some annual costs. Keep in mind that income tax rates applicable to trusts are different than those applicable to individuals. Beneficiary trustees would need to ensure that annual income is distributed to avoid very high trust income tax rates. Need for annual trust returns also add some costs.

Just so you know, bsteiner is a distinguished legal expert in the area of estates and trusts (and he has responded above). You should weigh his comments much more than any other responses to this thread.
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NotWhoYouThink
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Re: Administration of Testamentary Trusts

Post by NotWhoYouThink »

IRL observations vs. Theory of Trust Management

If you assign an independent corporate trustee, with your beneficiaries as co-trustees, the corporate trustee will charge a fee, but the trust will likely be managed the way you intend. Your beneficiaries may or may not be happy with that, and may or may not resent the fee and restrictions imposed by the corporate trustee.

If you assign only your beneficiary as trustee, there are no checks and balances on how the trust is managed, and there is a substantial likelihood that your beneficiary will drain the trust without regard to the trust document restrictions. Not a certainty by any means, but it is on the honor system at that point.

My favorite case with 2 beneficiaries as co-trustees, and no corporate trustee is linked below. In this case, the widow was able to recruit big name help to sue Wells Fargo, but my opinion (as not a lawyer even on the internet) is that the case was wrongly decided and Wells Fargo, as the custodian only and not a trustee, was not at fault. So the message is that most of us can't afford retired US Senators to represent us and it's better not to leave a trust to 2 beneficiaries and co-trustees and expect them to share.

Best quote from the article.
She only learned of the losses in late 2011, when her credit card was declined at Neiman Marcus, according to court documents.
https://www.questia.com/newspaper/1P2-3 ... uis-county
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Re: Administration of Testamentary Trusts

Post by bsteiner »

MikeG62 wrote: Wed Oct 21, 2020 8:04 am ...
Generally speaking, distributions would need to be limited to HEMS standard. Having said that, I think this standard can be sufficiently broad. Also, use of a co-trustee (unrelated) would help with protecting the assets. This would add some annual costs. Keep in mind that income tax rates applicable to trusts are different than those applicable to individuals. Beneficiary trustees would need to ensure that annual income is distributed to avoid very high trust income tax rates. Need for annual trust returns also add some costs.

Just so you know, bsteiner is a distinguished legal expert in the area of estates and trusts (and he has responded above). You should weigh his comments much more than any other responses to this thread.
Thanks for the kind words.

While we generally don't allow it, you may allow a trustee who's a beneficiary to make distributions to himself/herself without throwing the trust into the beneficiary's estate provided they're limited to an ascertainable standard such as health, maintenance, support and education.

You may not allow a trustee who's a beneficiary to make distributions to himself/herself other than for an ascertainable standard without throwing the trust into the beneficiary's estate for estate tax purposes. If a beneficiary wants a distribution for other than an ascertainable standard (or if the Will doesn't allow a trustee who's a beneficiary to make distributions to himself/herself even for an ascertainable standard), he/she will need a co-trustee.
senex
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Re: Administration of Testamentary Trusts

Post by senex »

It is notable that on trust threads, some non-attorneys suggest that a trust can offer both control and protection from creditors+divorce, while the actual subject matter experts are masterfully nuanced.

As a layman, my best reading on expert opinion is:

1) If you have unconstrained ability to spend trust money on yourself, the creditor protections are slim to none.
2) If you have zero ability to spend trust money on yourself (I.e. a trustee who is not yourself, not a close relative, and not a subordinate, makes *all* distribution decisions), the creditor protections are maximal
3) If you have a limited ability to spend trust money on yourself (something like, you can distribute to yourself under a HEMS standard), it's hazy.

A common contention on bogleheads is bickering about #3 by non-attorneys. I haven't found a definitive statement by bsteiner about it (if I correctly understand his corpus of posts, it seems that most of his clients avoid #3, which is telling). I haven't found a definitive statement in books I've read.

With option 2, it seems the "industry standard" practice is to require a trustee or co-trustee who is not yourself to make all distribution decisions, yet allow the beneficiary to change that trustee/co-trustee at will. Thus the beneficiary has no first-order control, but has second-order control by his ability to trustee-shop for someone that will do what he wants.

As NotWho said, if you decide to use an independent trustee, the big decision is whether to use a professional or a non-professional. A professional will cost money, possibly a lot of money, and is highly likely to follow the law & the trust instructions. On the downside, a memorable quote on another trust thread is:
Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading.
A non-professional trustee may work for cheap or free, but there are some alarming threads about abuses by such trustees. There are no trust police, and if the non-professional trustee decides to steal your money, often your only two choices are (a) to let him, or (b) to file a lawsuit, in which you pay your legal costs out of pocket, and the thief hires expensive attorneys billed to your trust, draining the trust in the process. If such malfeasance occurs, it's lose-lose for you.

Final note, OP, you only mentioned creditors & divorce in your initial email. If you care about the estate tax and/or medicare implications, there is even more nuance. I think bsteiner made a few comments upthread about estate tax stuff.
clemrick
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Re: Administration of Testamentary Trusts

Post by clemrick »

mptness wrote: Tue Oct 20, 2020 4:44 pm In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
Trust income is taxed (generally) at a higher tax rate than individuals and they have to file tax returns. Your children will be responsible for two tax returns each year.
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Re: Administration of Testamentary Trusts

Post by bsteiner »

senex wrote: Wed Oct 21, 2020 9:52 am It is notable that on trust threads, some non-attorneys suggest that a trust can offer both control and protection from creditors+divorce, while the actual subject matter experts are masterfully nuanced.

As a layman, my best reading on expert opinion is:

1) If you have unconstrained ability to spend trust money on yourself, the creditor protections are slim to none.
2) If you have zero ability to spend trust money on yourself (I.e. a trustee who is not yourself, not a close relative, and not a subordinate, makes *all* distribution decisions), the creditor protections are maximal
3) If you have a limited ability to spend trust money on yourself (something like, you can distribute to yourself under a HEMS standard), it's hazy.

A common contention on bogleheads is bickering about #3 by non-attorneys. I haven't found a definitive statement by bsteiner about it (if I correctly understand his corpus of posts, it seems that most of his clients avoid #3, which is telling). I haven't found a definitive statement in books I've read.

With option 2, it seems the "industry standard" practice is to require a trustee or co-trustee who is not yourself to make all distribution decisions, yet allow the beneficiary to change that trustee/co-trustee at will. Thus the beneficiary has no first-order control, but has second-order control by his ability to trustee-shop for someone that will do what he wants.
...
Whether a trustee/beneficiary's power to make distributions to himself/herself for an ascertainable standard exposes the trust assets to creditors to the extent of the ascertainable standard probably varies from state to state.

I don't think there's an industry standard on this. I prefer to have a co-trustee from the inception. However, many good lawyers allow a trustee/beneficiary to have this power. That enables a beneficiary to act as sole trustee until there comes a time that he/she wants a distribution beyond the ascertainable standard, whereupon he/she would add a co-trustee. Even if there's a co-trustee, it allows the trustee/beneficiary to make distributions to himself/herself within an ascertainable standard, with the co-trustee being responsible for distributions beyond the ascertainable standard.
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Re: Administration of Testamentary Trusts

Post by afan »

Note on taxes:
The trust tax rates are the same as the individual tax rates. They differ in that one moves through the brackets faster for trusts than for individuals. Whether the taxes on income held in the trust will be higher than if distributed to beneficiaries depends on the beneficiaries' individual brackets. If a beneficiary is in the 37% bracket then any income distributed to them would be taxed at that rate and there would be no increase above the rate if the income where held in the trust.

If the beneficiary were in the 35% bracket, then all income distributed to them would be taxed at 35%, unless the distributions caused them to move to the 37% bracket. That 2% difference might be worth it to preserve assets in trust. Beneficiaries in the 35% bracket often would not need the money.

If the money is held in trust, then some of it is taxed at lower than the top rates.

If one wanted to minimize income taxes, one would distribute only the income, if any, that would be taxed at a lower rate on the individual return. That usually would not be all the income. Depending on the tax situation of each beneficiary, there might be no taxes saved by sending them some of the money. Unless the beneficiary is in a zero tax bracket and would remain there after receiving the trust income, distributing all the trust income would result in higher taxes.

Active management: there is an alternative to having one organization serve as both administrative trustee and asset manager. One can separate these two jobs. A bank hold the assets and handles administrative duties. A separate asset manager is hired. That can be an individual who has not ability to invade the trust. Could be a trusted friend, could be a relative, could be one or more beneficiaries. As I understand it, this asset manager would not risk the asset and estate tax protection of the trust, since they would be unable to spend the money.
The asset manager could be a flat fee manager who would be happy to run a three fund portfolio.
There are banks who will serve as administrative trustee for a low flat fee.
This could easily be less expensive than a traditional trustee who charges an AUM fee.

If the beneficiaries can change trustees then they can avoid the over charging and excessive trading that plague some accounts.
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Re: Administration of Testamentary Trusts

Post by bsteiner »

afan wrote: Wed Oct 21, 2020 11:40 am ...
If the beneficiary were in the 35% bracket, then all income distributed to them would be taxed at 35%, unless the distributions caused them to move to the 37% bracket. That 2% difference might be worth it to preserve assets in trust. Beneficiaries in the 35% bracket often would not need the money.
...
Each trustee has to make that decision for each trust. However, in most cases, I think that the protection of the trust is worth more than 2%.

Note that there could be a difference one way or the other in state income taxes.

When the kiddie tax only applied to persons under age 14, I had one trust for a grandchild where the trustees distributed the income to the over age 14 great-grandchildren to save income tax. They knew it would throw the money into the great-grandchildren's estates, but said that they would have many years to deal with that.

But I had another a trust for a child where the trustees didn't want to distribute the income to the over age 14 grandchildren because they said that the grandchildren (after reaching 18 or 21) might spend the money unwisely whereas if the trust retained the income it would remain available in case a beneficiary ever needed it.
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mptness
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Re: Administration of Testamentary Trusts

Post by mptness »

Lots of great information in this discussion.This is all very helpful to me in understanding this type of arrangement. I now see that "full control" does make for an oxymoron and that control needs to be limited to an ascertainable standard such as health, maintenance, support and education. The need for annual trust returns and co-trustee adds cost as Mike and others pointed out. I am in awe of the legal knowledge here and am extremely grateful to experts like bsteiner, Lee, Gill, Firechief and others for sharing!
senex wrote: Wed Oct 21, 2020 9:52 am Final note, OP, you only mentioned creditors & divorce in your initial email. If you care about the estate tax and/or medicare implications, there is even more nuance. I think bsteiner made a few comments upthread about estate tax stuff.
Not enough money to cause any estate tax issues for them. No clue about medicare implications. Maybe most who are doing this are leaving multimillion dollar legacies.
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Re: Administration of Testamentary Trusts

Post by bsteiner »

mptness wrote: Wed Oct 21, 2020 1:23 pm ...
Not enough money to cause any estate tax issues for them. No clue about medicare implications. Maybe most who are doing this are leaving multimillion dollar legacies.
Medicaid may be more of a potential issue than creditors or estate taxes, especially for those with smaller estates. The power to remove and replace the co-trustee (provided the replacement trustee isn't a close relative or subordinate employee) is usually sufficient control as a practical matter.
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

Issues such as co trustee, trust protector, trustee selection and removal, and creditor/spouse protection is where the true value of great legal advice lies.
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FIREchief
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Re: Administration of Testamentary Trusts

Post by FIREchief »

senex wrote: Wed Oct 21, 2020 9:52 am It is notable that on trust threads, some non-attorneys suggest that a trust can offer both control and protection from creditors+divorce, while the actual subject matter experts are masterfully nuanced.

As a layman, my best reading on expert opinion is:

3) If you have a limited ability to spend trust money on yourself (something like, you can distribute to yourself under a HEMS standard), it's hazy.
If you're looking for a definitive global answer it is worse than hazy. It is pitch black. The main reason is that many state laws differ, so any book or article written to the masses will likely over generalize and perhaps skew towards the conservative. While many who comment are not attorneys, at least some of them have an established relationship with a competent estate attorney who practices in their own state of residence and has provided accurate legal advice. Please keep in mind that what some non-attorneys are posting may in fact be highly accurate for their own state but not for another's.
I haven't found a definitive statement in books I've read.
Even if you did find a definitive statement in a book, wouldn't you instead rely on advice from an attorney in your own state of residence?
On the downside, a memorable quote on another trust thread is:
Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading.
That said, if that's the way the Grantor wanted it, than what the beneficiary wants really doesn't matter.
A non-professional trustee may work for cheap or free, but there are some alarming threads about abuses by such trustees. There are no trust police, and if the non-professional trustee decides to steal your money, often your only two choices are (a) to let him, or (b) to file a lawsuit, in which you pay your legal costs out of pocket, and the thief hires expensive attorneys billed to your trust, draining the trust in the process. If such malfeasance occurs, it's lose-lose for you.
I think this is a very valid concern.
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: Administration of Testamentary Trusts

Post by FIREchief »

afan wrote: Wed Oct 21, 2020 11:40 am Note on taxes:
The trust tax rates are the same as the individual tax rates. They differ in that one moves through the brackets faster for trusts than for individuals. Whether the taxes on income held in the trust will be higher than if distributed to beneficiaries depends on the beneficiaries' individual brackets. If a beneficiary is in the 37% bracket then any income distributed to them would be taxed at that rate and there would be no increase above the rate if the income where held in the trust.

If the beneficiary were in the 35% bracket, then all income distributed to them would be taxed at 35%, unless the distributions caused them to move to the 37% bracket. That 2% difference might be worth it to preserve assets in trust. Beneficiaries in the 35% bracket often would not need the money.
Would a capital gains tax example be more meaningful for most trusts? (with the notable exemption of trusts that are substantially comprised of inherited tIRA assets)
The maximum tax rate for long-term capital gains and qualified dividends is 20%. For tax year 2020, the 20% rate applies to amounts above $13,150. The 0% and 15% rates continue to apply to amounts below certain threshold amounts. The 0% rate applies to amounts up to $2,650. The 15% rate applies to amounts between the two thresholds.
https://www.irs.gov/pub/irs-prior/f1041es--2020.pdf

Also:
Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e)
So we might be comparing a beneficiary paying 15% LTCG tax vs. the trust paying 23.8% LTCG taxes plus NIIT for qualified earnings retained within the trust over the relevant trust thresholds.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

FIREchief wrote: Wed Oct 21, 2020 2:44 pm
afan wrote: Wed Oct 21, 2020 11:40 am Note on taxes:
The trust tax rates are the same as the individual tax rates. They differ in that one moves through the brackets faster for trusts than for individuals. Whether the taxes on income held in the trust will be higher than if distributed to beneficiaries depends on the beneficiaries' individual brackets. If a beneficiary is in the 37% bracket then any income distributed to them would be taxed at that rate and there would be no increase above the rate if the income where held in the trust.

If the beneficiary were in the 35% bracket, then all income distributed to them would be taxed at 35%, unless the distributions caused them to move to the 37% bracket. That 2% difference might be worth it to preserve assets in trust. Beneficiaries in the 35% bracket often would not need the money.
Would a capital gains tax example be more meaningful for most trusts? (with the notable exemption of trusts that are substantially comprised of inherited tIRA assets)
The maximum tax rate for long-term capital gains and qualified dividends is 20%. For tax year 2020, the 20% rate applies to amounts above $13,150. The 0% and 15% rates continue to apply to amounts below certain threshold amounts. The 0% rate applies to amounts up to $2,650. The 15% rate applies to amounts between the two thresholds.
https://www.irs.gov/pub/irs-prior/f1041es--2020.pdf

Also:
Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e)
So we might be comparing a beneficiary paying 15% LTCG tax vs. the trust paying 23.8% LTCG taxes plus NIIT for qualified earnings retained within the trust over the relevant trust thresholds.
It’s the dividends and rental income and business income that get trusts. You can’t just switch to stocks from real estate, or sell a family business.

That said a wise drafter will insert language allowing or encouraging trustee to manage discretionary distributions In a way that both minimizes taxes and meets the other defined goals of the trust.
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Re: Administration of Testamentary Trusts

Post by afan »

Capital gains would be a consideration but a boglehead type trust should be throwing off little in the way of capital gains. Particularly if they are not realized for the purpose of sending money to the beneficiary.

If there were capital gains, the the trustee should look at the overall financial circumstances of the beneficiary and decide whether it was better to distribute or remain in trust. As noted above, sometimes minimizing taxes is not the only or even the most important consideration.
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FIREchief
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Re: Administration of Testamentary Trusts

Post by FIREchief »

afan wrote: Wed Oct 21, 2020 3:21 pm Capital gains would be a consideration but a boglehead type trust should be throwing off little in the way of capital gains. Particularly if they are not realized for the purpose of sending money to the beneficiary.

If there were capital gains, the the trustee should look at the overall financial circumstances of the beneficiary and decide whether it was better to distribute or remain in trust. As noted above, sometimes minimizing taxes is not the only or even the most important consideration.
I probably should have said long term capital gains and qualified dividends (I was thinking more the later). I'm generally of the opinion that for most simple situations (i.e. no business or real estate holdings), the "ideal" strategy is to leave Roth assets to a non-qualified discretionary trust. After five years, the assets are withdrawn from the inherited Roth IRA and invested in tax efficient total market funds (e.g. VTI). This would allow the vast majority of the assets to remain within the trust for asset protection purposes, with less than 2% needing to be distributed annually for tax efficiency.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

FIREchief wrote: Wed Oct 21, 2020 3:47 pm
afan wrote: Wed Oct 21, 2020 3:21 pm Capital gains would be a consideration but a boglehead type trust should be throwing off little in the way of capital gains. Particularly if they are not realized for the purpose of sending money to the beneficiary.

If there were capital gains, the the trustee should look at the overall financial circumstances of the beneficiary and decide whether it was better to distribute or remain in trust. As noted above, sometimes minimizing taxes is not the only or even the most important consideration.
I probably should have said long term capital gains and qualified dividends (I was thinking more the later). I'm generally of the opinion that for most simple situations (i.e. no business or real estate holdings), the "ideal" strategy is to leave Roth assets to a non-qualified discretionary trust. After five years, the assets are withdrawn from the inherited Roth IRA and invested in tax efficient total market funds (e.g. VTI). This would allow the vast majority of the assets to remain within the trust for asset protection purposes, with less than 2% needing to be distributed annually for tax efficiency.
Well, LTCG would only occur is the asset manager decided for some reason (whether it was a beneficiary request or whatever) to re-balance the stocks portfolio. Otherwise, it would be a distribution of principal.
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mptness
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Re: Administration of Testamentary Trusts

Post by mptness »

bsteiner wrote: Wed Oct 21, 2020 1:26 pm Medicaid may be more of a potential issue than creditors or estate taxes, especially for those with smaller estates. The power to remove and replace the co-trustee (provided the replacement trustee isn't a close relative or subordinate employee) is usually sufficient control as a practical matter.
Do you mind elaborating on the potential issue of medicaid? senex mentioned medicare. What are the issue(s) that arise especially for those with smaller estates (me)?
bsteiner
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Re: Administration of Testamentary Trusts

Post by bsteiner »

mptness wrote: Wed Oct 21, 2020 5:18 pm
bsteiner wrote: Wed Oct 21, 2020 1:26 pm Medicaid may be more of a potential issue than creditors or estate taxes, especially for those with smaller estates. The power to remove and replace the co-trustee (provided the replacement trustee isn't a close relative or subordinate employee) is usually sufficient control as a practical matter.
Do you mind elaborating on the potential issue of medicaid? senex mentioned medicare. What are the issue(s) that arise especially for those with smaller estates (me)?
If the child may withdraw for health, support and maintenance without needing the consent of a co-trustee, Medicaid could say it’s an available resource, in which case it wouldn’t be protected from Medicaid.
neverpanic
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Re: Administration of Testamentary Trusts

Post by neverpanic »

mptness wrote: Tue Oct 20, 2020 4:44 pm If I leave my estate to my adult children by way of testamentary trusts and name them as the trustees of their own trusts (with the primary objective of protecting from creditors and divorce, while giving them full control), is it correct that any future costs to them would be the same as if I left the money outright?
In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
IANAL

To the professionals, are "protection from creditors" and "protection from divorce" the same thing? Or are they generally 2 entirely separate elements in most states?
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

neverpanic wrote: Wed Oct 21, 2020 10:11 pm
mptness wrote: Tue Oct 20, 2020 4:44 pm If I leave my estate to my adult children by way of testamentary trusts and name them as the trustees of their own trusts (with the primary objective of protecting from creditors and divorce, while giving them full control), is it correct that any future costs to them would be the same as if I left the money outright?
In other words After I have the original paperwork prepared are there any administrative or other costs that they would be responsible for?
IANAL

To the professionals, are "protection from creditors" and "protection from divorce" the same thing? Or are they generally 2 entirely separate elements in most states?
Similar idea, but they're held to different standards.

A big consideration is whether the state is a community or separate property state. Another is how the "equitable split" is actually defined.

Here's the best overview I could find with 5 minutes of googling. It gives examples from a few states and briefly covers separate and community property.

https://www.stangelawfirm.com/articles/ ... n-divorce/

Onto creditors.

Surprise, surprise: It is also state specific. But on two ends of the spectrum is the complete lockdown trust where the trustee has full & complete discretion as to whether any funds are distributed, and on the other side of the spectrum is the revocable living trust which is more or less completely controlled by the settlors.

https://lawrepository.ualr.edu/cgi/view ... =lawreview

https://beachcitiesestatelaw.com/could- ... 20property.

https://kinglawoffices.com/blog/estate- ... creditors/

https://www.nolo.com/legal-encyclopedia ... itors.html

https://www.grossmanlaw.net/why-can-cre ... ng-trusts/

https://www.sandiegoelderlawandestatepl ... of-trusts/

As always, you'll need to consult with a practicing attorney in your area for specific advice on any specific topics.
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FIREchief
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Re: Administration of Testamentary Trusts

Post by FIREchief »

Lee_WSP wrote: Wed Oct 21, 2020 10:48 pm on the other side of the spectrum is the revocable living trust which is more or less completely controlled by the settlors.
I wouldn't even mix a living trust into the discussion of asset protection. As you (accurately) suggest, it provides none and exists for other good reasons.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
smackboy1
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Re: Administration of Testamentary Trusts

Post by smackboy1 »

Late 30s beneficiary here. Ivy League education plus MBA plus corporate trustee. It is annoying and humiliating to have to request distributions. Not to mention the infuriating fees and active trading.
Not sure what conclusions should be drawn from this anecdotal observation.

Corporate trustees have committees that review beneficiary's requests for distributions. It's not a rubber stamp, but it's not an inquisition either. They draw upon the trust language, the law, objective facts, and professional wisdom. The trustee provides a professional service, so it's not their role to impose personal feelings or biases. It's a business transaction that is typically no more annoying and humiliating as a applying for a bank withdrawal or loan.

Contrast with a relative or friend of the family as trustee. Is there the benefit of institutional procedures and wisdom? Is there a risk that the trustee may bring things that are not present in the trust language or the law into the distribution process, such as personal judgment or bias?

Properly planned, trust fees can be less than 1% of total assets. Active trading of trust assets is a choice. There is no reason why a properly planned trust cannot invest entirely in passive index funds with minimal fees.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
Lee_WSP
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Re: Administration of Testamentary Trusts

Post by Lee_WSP »

FIREchief wrote: Thu Oct 22, 2020 2:13 am
Lee_WSP wrote: Wed Oct 21, 2020 10:48 pm on the other side of the spectrum is the revocable living trust which is more or less completely controlled by the settlors.
I wouldn't even mix a living trust into the discussion of asset protection. As you (accurately) suggest, it provides none and exists for other good reasons.
I used it as the example, because if I said "transparent trust" it probably would have gone over some readers heads. Since the transparent trust allows the trustee beneficiary to distribute the entire trust at his/her discretion, it provides the same level of protection against creditors as the revocable living trust.

The differences between the two have more to do with construction and who settled it as opposed to how they function in practice. I'm painting this with a very broad brush to keep the discussion accessible.

The reality is that terms such as living revocable, transparent, protection, SIPT, TPIT, are not exactly well defined terms, they're just the terms used to describe a class of clauses inserted into the trust document to achieve certain goals of the settlor. Again, I'm probably butchering the definitions here, someone else may come along and give further clarification if necessary.
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