Beneficiary as Trustee

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Topic Author
restingonmylaurels
Posts: 626
Joined: Tue Apr 14, 2015 11:02 am

Beneficiary as Trustee

Post by restingonmylaurels »

In several recent threads discussing trusts, quite a number of posters have advised having a beneficiary act as trustee. I believe this blanket advice needs to be re-considered.

While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.

According to the Restatement (Third) of Trusts, a creditor can reach the maximum amount of trust funds that a beneficiary-trustee can, within their discretion, distribute to themselves. For those states that have adopted the Uniform Trust Code, there appears to be protection to the extent of an ascertainable standard, such as HEMS, controlling distributions. State caselaw may of course vary.

So I think there should not be general advice to have a beneficiary act as trustee but to only consider doing so based on the creditor protections available to beneficiary-trustees in your state, leaving open the possibility that there should always be a corporate (co-)trustee when discretion is involved. Thoughts?
fourwheelcycle
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Re: Beneficiary as Trustee

Post by fourwheelcycle »

I have also noted the many comments advising significant inheritances should be left to beneficiaries in irrevocable trusts, with provisions that beneficiaries should become trustees, or gain power to change trustees, at a certian age rather than receiving their inheritances outright. I also understand, depending on state trust laws and case precedents, the degree of credit protection may depend on the degree of discretionary control of distributions allowed to the beneficiary.

My wife and I, and probably many potential grantors, have accumulated our savings without any form of credit protection, except the degree of federal and state protection for our employer-based retirement accounts or, now, for our rolled-over IRAs. Since my wife and I have no protection for our taxable savings, we are not particularly concerned that our two adult children may not have credit protection for their own taxable savings, or the half of our taxable savings they will each inherit (we are giving our IRAs to charity).

We have some concern about divorce protection, and we will encourage our children to avoid commingling their inheritances in joint accounts with their spouses. However, after 46 years of marriage, my wife and I now hold all of our taxable savings in a joint revocable trust. At present, we do not have any concerns related to spendthrift or special needs trust provisions.

Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate. Independent of professional trustee expenses, we view irrevocable trusts as a significant constraint that we would not impose on our adult children without their approval.
stan1
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Re: Beneficiary as Trustee

Post by stan1 »

restingonmylaurels wrote: Sun May 02, 2021 4:06 am In several recent threads discussing trusts, quite a number of posters have advised having a beneficiary act as trustee. I believe this blanket advice needs to be re-considered.
It probably needs to be situational. Leaving $500K to a child may be quite a different situation than leaving $3M to a child or leaving $10M or more to a child. Being Bogleheads we don't know which applies, estate planning advice on here usually seems to assume high net worth.
bsteiner
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Re: Beneficiary as Trustee

Post by bsteiner »

Absent a reason not to do so in a given case, most of our clients allow each beneficiary to become a trustee of his/her trust upon reaching a specified age such as 30 or 35 (or when the trust is set up, if later). At that point, unless there's a reason not to do so in a given case, the beneficiary will usually also have the power to remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and will have a special power of appointment. The power of appointment could allow the beneficiary to appoint the trust assets in favor of anyone other than the beneficiary or his/her estate or creditors, or only in favor of a narrower class such as the beneficiary's issue.

For the reasons the original poster mentions, as well as other reasons, we generally prohibit the beneficiary from making distributions in his/her own favor. If the beneficiary wants a distribution, the other trustee(s) will make that decision.

Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes. That's permissible for tax purposes (in other words, if the power is so limited, the trust assets won't be included in the beneficiary's estate). As the original poster points out, the extent to which that will make it available to creditors varies from state to state. That may also make the trust assets available for Medicaid.
eukonomos
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Re: Beneficiary as Trustee

Post by eukonomos »

bsteiner wrote: Sun May 02, 2021 9:25 am ...
Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes.
...
Interesting.

If the inheritance includes a large tax-deferred account which must be emptied within 10 years, a sole trustee/beneficiary would need to retain in the trust any distributions above HEMS, at the higher tax rates.
If there are no current asset-protection concerns, a co-trustee could be appointed to move all the distributions out of the trust.

I believe a large Roth account also needs to be emptied in 10 years, but the assets could be retained in the trust with no tax consequences.

Do I have this right?
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 4:06 am While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.
Thoughts?
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

eukonomos wrote: Sun May 02, 2021 10:03 am
bsteiner wrote: Sun May 02, 2021 9:25 am ...
Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes.
...
Interesting.

If the inheritance includes a large tax-deferred account which must be emptied within 10 years, a sole trustee/beneficiary would need to retain in the trust any distributions above HEMS, at the higher tax rates.
If there are no current asset-protection concerns, a co-trustee could be appointed to move all the distributions out of the trust.

I believe a large Roth account also needs to be emptied in 10 years, but the assets could be retained in the trust with no tax consequences.

Do I have this right?
Yes, but if you don't trust your beneficiary with the IRA outright, then what alternative is there? Rhetorical question, obviously the alternatives are worse. However, the tax hit can be mitigated by converting most or all to Roth before death.
eukonomos
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Re: Beneficiary as Trustee

Post by eukonomos »

Lee_WSP wrote: Sun May 02, 2021 10:26 am
eukonomos wrote: Sun May 02, 2021 10:03 am
bsteiner wrote: Sun May 02, 2021 9:25 am ...
Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes.
...
Interesting.

If the inheritance includes a large tax-deferred account which must be emptied within 10 years, a sole trustee/beneficiary would need to retain in the trust any distributions above HEMS, at the higher tax rates.
If there are no current asset-protection concerns, a co-trustee could be appointed to move all the distributions out of the trust.

I believe a large Roth account also needs to be emptied in 10 years, but the assets could be retained in the trust with no tax consequences.

Do I have this right?
Yes, but if you don't trust your beneficiary with the IRA outright, then what alternative is there? Rhetorical question, obviously the alternatives are worse. However, the tax hit can be mitigated by converting most or all to Roth before death.
I was just trying to work through the implications of bsteiner's point about the trustee/beneficiary with HEMS distribution powers (which is apparently not his recommendation).
While the trustee/beneficiary might be satisfied with HEMS distributions and never want "distributions in excess of those purposes", I think it would not be unusual for there to be a large tax deferred account, even after Roth conversions.
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

eukonomos wrote: Sun May 02, 2021 10:45 am
Lee_WSP wrote: Sun May 02, 2021 10:26 am
eukonomos wrote: Sun May 02, 2021 10:03 am
bsteiner wrote: Sun May 02, 2021 9:25 am ...
Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes.
...
Interesting.

If the inheritance includes a large tax-deferred account which must be emptied within 10 years, a sole trustee/beneficiary would need to retain in the trust any distributions above HEMS, at the higher tax rates.
If there are no current asset-protection concerns, a co-trustee could be appointed to move all the distributions out of the trust.

I believe a large Roth account also needs to be emptied in 10 years, but the assets could be retained in the trust with no tax consequences.

Do I have this right?
Yes, but if you don't trust your beneficiary with the IRA outright, then what alternative is there? Rhetorical question, obviously the alternatives are worse. However, the tax hit can be mitigated by converting most or all to Roth before death.
I was just trying to work through the implications of bsteiner's point about the trustee/beneficiary with HEMS distribution powers (which is apparently not his recommendation).
While the trustee/beneficiary might be satisfied with HEMS distributions and never want "distributions in excess of those purposes", I think it would not be unusual for there to be a large tax deferred account, even after Roth conversions.
The SECURE act is only slightly less than 2 years old.

Everyone's finances are slightly different, but there are groups and you can generalize within them.

The grantor first needs to decide whether he/she wants to keep the assets in the trust or not. If you distribute the income out, it is no longer in trust. As such, once the decision has been made to keep the assets within the trust, it does not matter much whether one uses the HEMS standard or co trustee standard. The tax bomb will strike over ten years and the trust will have the compressed brackets. There's nothing you can do about it other than choose to not keep the IRA in trust (ie distribute it directly).
Topic Author
restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

fourwheelcycle wrote: Sun May 02, 2021 8:19 am I have also noted the many comments advising significant inheritances should be left to beneficiaries in irrevocable trusts, with provisions that beneficiaries should become trustees, or gain power to change trustees, at a certian age rather than receiving their inheritances outright. I also understand, depending on state trust laws and case precedents, the degree of credit protection may depend on the degree of discretionary control of distributions allowed to the beneficiary.

My wife and I, and probably many potential grantors, have accumulated our savings without any form of credit protection, except the degree of federal and state protection for our employer-based retirement accounts or, now, for our rolled-over IRAs. Since my wife and I have no protection for our taxable savings, we are not particularly concerned that our two adult children may not have credit protection for their own taxable savings, or the half of our taxable savings they will each inherit (we are giving our IRAs to charity).

We have some concern about divorce protection, and we will encourage our children to avoid commingling their inheritances in joint accounts with their spouses. However, after 46 years of marriage, my wife and I now hold all of our taxable savings in a joint revocable trust. At present, we do not have any concerns related to spendthrift or special needs trust provisions.

Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate. Independent of professional trustee expenses, we view irrevocable trusts as a significant constraint that we would not impose on our adult children without their approval.
You have adult children who are apparently competent financially, you have no special needs or spendthrift concerns, have no creditor concerns for yourself or your children, are not concerned about incapacity, probate, privacy, or life insurance, and have no current estate tax concerns for yourself or your children and have no desire for dynasty funding for grandchildren and beyond. So I take it that you will be leaving your net taxable estate outright to your children upon the deaths of yourself and your wife. Don't forget that the current stratospheric level of the estate tax exemption is supposed to drop in half in 2026.
Last edited by restingonmylaurels on Sun May 02, 2021 12:16 pm, edited 1 time in total.
eukonomos
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Re: Beneficiary as Trustee

Post by eukonomos »

Lee_WSP wrote: Sun May 02, 2021 10:55 am ...
The tax bomb will strike over ten years...
...
Agreed.
If the IRA passes directly, the beneficiary has 10 years to distribute and pay the taxes.
If it goes into the trust, I would guess that in many cases - absent current or expected asset-protection concerns - the assets would distribute out of the trust over the first 10 years, with the same tax obligations. The advantage is that during those 10 years you can choose to retain the remaining assets in trust if circumstances change.
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 11:08 am
fourwheelcycle wrote: Sun May 02, 2021 8:19 am I have also noted the many comments advising significant inheritances should be left to beneficiaries in irrevocable trusts, with provisions that beneficiaries should become trustees, or gain power to change trustees, at a certian age rather than receiving their inheritances outright. I also understand, depending on state trust laws and case precedents, the degree of credit protection may depend on the degree of discretionary control of distributions allowed to the beneficiary.

My wife and I, and probably many potential grantors, have accumulated our savings without any form of credit protection, except the degree of federal and state protection for our employer-based retirement accounts or, now, for our rolled-over IRAs. Since my wife and I have no protection for our taxable savings, we are not particularly concerned that our two adult children may not have credit protection for their own taxable savings, or the half of our taxable savings they will each inherit (we are giving our IRAs to charity).

We have some concern about divorce protection, and we will encourage our children to avoid commingling their inheritances in joint accounts with their spouses. However, after 46 years of marriage, my wife and I now hold all of our taxable savings in a joint revocable trust. At present, we do not have any concerns related to spendthrift or special needs trust provisions.

Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate. Independent of professional trustee expenses, we view irrevocable trusts as a significant constraint that we would not impose on our adult children without their approval.
You have adult children who are apparently competent financially, you have no special needs or spendthrift concerns, have no creditor concerns for yourself or your children, are not concerned about incapacity, probate, privacy, or life insurance, and have no current estate tax concerns for yourself or your children and have no desire for dynasty funding for grandchildren and beyond. So I take it that you will be leaving your net taxable estate outright to your children upon the deaths of yourself and your wife. Don't forget that the current stratospheric level of the estate tax is supposed to drop in half in 2026.
While I understand your comment, you must realize that the vast majority of Americans and even the vast majority of board members will still not hit the lowered estate tax exemption. As such, in addition to that not being of great concern to most, their estates are also not sufficiently large enough to consider a dynasty trust.
Topic Author
restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

bsteiner wrote: Sun May 02, 2021 9:25 am For the reasons the original poster mentions, as well as other reasons, we generally prohibit the beneficiary from making distributions in his/her own favor. If the beneficiary wants a distribution, the other trustee(s) will make that decision.

Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes. That's permissible for tax purposes (in other words, if the power is so limited, the trust assets won't be included in the beneficiary's estate). As the original poster points out, the extent to which that will make it available to creditors varies from state to state. That may also make the trust assets available for Medicaid.
I read this as meaning that you have those beneficiary-trustees as co-trustee with a corporate co-trustee (or similar), not as sole trustee?

Has anyone surveyed the relative cost of co-trusteeship vs. sole trusteeship, as it would seem a corporate co-trustee would have to charge less?

I imagine that if the beneficiary-trustee in the other drafting style you mention gets into creditor trouble, the advice is to have the trustee-beneficiary resign unless the trust is under the laws of one of the UTC states that protect ascertainable standards-based distributions?
Lee_WSP
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Location: Arizona

Re: Beneficiary as Trustee

Post by Lee_WSP »

eukonomos wrote: Sun May 02, 2021 11:17 am
Lee_WSP wrote: Sun May 02, 2021 10:55 am ...
The tax bomb will strike over ten years...
...
Agreed.
If the IRA passes directly, the beneficiary has 10 years to distribute and pay the taxes.
If it goes into the trust, I would guess that in many cases - absent current or expected asset-protection concerns - the assets would distribute out of the trust over the first 10 years, with the same tax obligations. The advantage is that during those 10 years you can choose to retain the remaining assets in trust if circumstances change.
If the trust distributes it as income, it's possible and very likely the beneficiary's personal bracket is going to be lower and the tax bill will be much reduced. The problem is that the assets are now out of trust and distributed outright.
Lee_WSP
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Location: Arizona

Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 11:33 am
bsteiner wrote: Sun May 02, 2021 9:25 am For the reasons the original poster mentions, as well as other reasons, we generally prohibit the beneficiary from making distributions in his/her own favor. If the beneficiary wants a distribution, the other trustee(s) will make that decision.

Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes. That's permissible for tax purposes (in other words, if the power is so limited, the trust assets won't be included in the beneficiary's estate). As the original poster points out, the extent to which that will make it available to creditors varies from state to state. That may also make the trust assets available for Medicaid.
I read this as meaning that you have those beneficiary-trustees as co-trustee with a corporate co-trustee (or similar), not as sole trustee?

Has anyone surveyed the relative cost of co-trusteeship vs. sole trusteeship, as it would seem a corporate co-trustee would have to charge less?

I imagine that if the beneficiary-trustee in the other drafting style you mention gets into creditor trouble, the advice is to have the trustee-beneficiary resign unless the trust is under the laws of one of the UTC states that protect ascertainable standards-based distributions?
There is no reason the co trustee is needed past distribution decisions. If it's a one time thing, you can fire them shortly after. You may nominate anyone that isn't subordinate etc, ie family member, trusted friend, lawyer, paid fiduciary, etc.

If it is ongoing, the above list will still be cheaper than a full service corporate trustee.
Topic Author
restingonmylaurels
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Joined: Tue Apr 14, 2015 11:02 am

Re: Beneficiary as Trustee

Post by restingonmylaurels »

Lee_WSP wrote: Sun May 02, 2021 11:32 am
restingonmylaurels wrote: Sun May 02, 2021 11:08 am
fourwheelcycle wrote: Sun May 02, 2021 8:19 am I have also noted the many comments advising significant inheritances should be left to beneficiaries in irrevocable trusts, with provisions that beneficiaries should become trustees, or gain power to change trustees, at a certian age rather than receiving their inheritances outright. I also understand, depending on state trust laws and case precedents, the degree of credit protection may depend on the degree of discretionary control of distributions allowed to the beneficiary.

My wife and I, and probably many potential grantors, have accumulated our savings without any form of credit protection, except the degree of federal and state protection for our employer-based retirement accounts or, now, for our rolled-over IRAs. Since my wife and I have no protection for our taxable savings, we are not particularly concerned that our two adult children may not have credit protection for their own taxable savings, or the half of our taxable savings they will each inherit (we are giving our IRAs to charity).

We have some concern about divorce protection, and we will encourage our children to avoid commingling their inheritances in joint accounts with their spouses. However, after 46 years of marriage, my wife and I now hold all of our taxable savings in a joint revocable trust. At present, we do not have any concerns related to spendthrift or special needs trust provisions.

Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate. Independent of professional trustee expenses, we view irrevocable trusts as a significant constraint that we would not impose on our adult children without their approval.
You have adult children who are apparently competent financially, you have no special needs or spendthrift concerns, have no creditor concerns for yourself or your children, are not concerned about incapacity, probate, privacy, or life insurance, and have no current estate tax concerns for yourself or your children and have no desire for dynasty funding for grandchildren and beyond. So I take it that you will be leaving your net taxable estate outright to your children upon the deaths of yourself and your wife. Don't forget that the current stratospheric level of the estate tax exemption is supposed to drop in half in 2026.
While I understand your comment, you must realize that the vast majority of Americans and even the vast majority of board members will still not hit the lowered estate tax exemption. As such, in addition to that not being of great concern to most, their estates are also not sufficiently large enough to consider a dynasty trust.
If you read the poster's comments, he said "Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate."

I was replying to his comments that he could be bumping up against the current estate tax exemption threshold. When it drops in half, he may then have to trigger his alternative plans, which would bringing trust planning back in scope.
Last edited by restingonmylaurels on Sun May 02, 2021 12:17 pm, edited 1 time in total.
afan
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Re: Beneficiary as Trustee

Post by afan »

The effect on tax rates if distributed to the beneficiary depends on the beneficiary's income and the amounts distributed each year.

A beneficiary may already be in the top tax bracket. A beneficiary may be in the 35% bracket but pushed into 37 by the distribution. In either case, the total tax could be REDUCED by keeping the money in trust. If all distributions to the beneficiary would be taxed at 37 but the first 13,000 or so of income retained in the trust is taxes at lower rates, then you save by keeping it in trust.

The best solution is not the same for everyone, even if income taxes are the only consideration.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 11:45 am
Lee_WSP wrote: Sun May 02, 2021 11:32 am
restingonmylaurels wrote: Sun May 02, 2021 11:08 am
fourwheelcycle wrote: Sun May 02, 2021 8:19 am I have also noted the many comments advising significant inheritances should be left to beneficiaries in irrevocable trusts, with provisions that beneficiaries should become trustees, or gain power to change trustees, at a certian age rather than receiving their inheritances outright. I also understand, depending on state trust laws and case precedents, the degree of credit protection may depend on the degree of discretionary control of distributions allowed to the beneficiary.

My wife and I, and probably many potential grantors, have accumulated our savings without any form of credit protection, except the degree of federal and state protection for our employer-based retirement accounts or, now, for our rolled-over IRAs. Since my wife and I have no protection for our taxable savings, we are not particularly concerned that our two adult children may not have credit protection for their own taxable savings, or the half of our taxable savings they will each inherit (we are giving our IRAs to charity).

We have some concern about divorce protection, and we will encourage our children to avoid commingling their inheritances in joint accounts with their spouses. However, after 46 years of marriage, my wife and I now hold all of our taxable savings in a joint revocable trust. At present, we do not have any concerns related to spendthrift or special needs trust provisions.

Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate. Independent of professional trustee expenses, we view irrevocable trusts as a significant constraint that we would not impose on our adult children without their approval.
You have adult children who are apparently competent financially, you have no special needs or spendthrift concerns, have no creditor concerns for yourself or your children, are not concerned about incapacity, probate, privacy, or life insurance, and have no current estate tax concerns for yourself or your children and have no desire for dynasty funding for grandchildren and beyond. So I take it that you will be leaving your net taxable estate outright to your children upon the deaths of yourself and your wife. Don't forget that the current stratospheric level of the estate tax is supposed to drop in half in 2026.
While I understand your comment, you must realize that the vast majority of Americans and even the vast majority of board members will still not hit the lowered estate tax exemption. As such, in addition to that not being of great concern to most, their estates are also not sufficiently large enough to consider a dynasty trust.
If you read the poster's comments, he said "Although our savings are not beyond any estate tax thresholds, it is conceivable they might reach future thresholds if we live long enough. At that point, we might consider irrevocable trusts, or we may consider the preservation of basis step-up as a partial trade-off for significant estate taxes on a portion of our estate."

I was replying to his comments that he could be bumping up against the current estate tax exemption threshold. When it drops in half, he may then have to trigger his alternative plans, which would bringing trust planning back in scope.
I suppose, but is it really all that bad to pay the estate tax on $500,000 (or even 1 million) above the exemption? We'll be dead ourselves and our heirs will still receive 9.5-9/10 of the estate federal estate tax free.

I'm not saying it's not worth considering, but I think there are larger things to worry about such as having enough in retirement. Or needing end of life care or dementia.
Topic Author
restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

Lee_WSP wrote: Sun May 02, 2021 10:23 am
restingonmylaurels wrote: Sun May 02, 2021 4:06 am While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.
Thoughts?
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Not sure what has brought you to determine you should have a trust without beneficiary creditor/beneficiary spouse protections. What is the purpose of your trust that you would not include these type of risk-reduction techniques?
Topic Author
restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

Lee_WSP wrote: Sun May 02, 2021 11:39 am
restingonmylaurels wrote: Sun May 02, 2021 11:33 am
bsteiner wrote: Sun May 02, 2021 9:25 am For the reasons the original poster mentions, as well as other reasons, we generally prohibit the beneficiary from making distributions in his/her own favor. If the beneficiary wants a distribution, the other trustee(s) will make that decision.

Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes. That's permissible for tax purposes (in other words, if the power is so limited, the trust assets won't be included in the beneficiary's estate). As the original poster points out, the extent to which that will make it available to creditors varies from state to state. That may also make the trust assets available for Medicaid.
I read this as meaning that you have those beneficiary-trustees as co-trustee with a corporate co-trustee (or similar), not as sole trustee?

Has anyone surveyed the relative cost of co-trusteeship vs. sole trusteeship, as it would seem a corporate co-trustee would have to charge less?

I imagine that if the beneficiary-trustee in the other drafting style you mention gets into creditor trouble, the advice is to have the trustee-beneficiary resign unless the trust is under the laws of one of the UTC states that protect ascertainable standards-based distributions?
There is no reason the co trustee is needed past distribution decisions. If it's a one time thing, you can fire them shortly after. You may nominate anyone that isn't subordinate etc, ie family member, trusted friend, lawyer, paid fiduciary, etc. If it is ongoing, the above list will still be cheaper than a full service corporate trustee.
I was looking if anyone had actual experience in pricing for a co-trustee.

The concept of hiring a co-trustee just to make a single decision I would think would need all kinds of assurances built in to prevent the beneficiary-trustee from hiring someone who would favor their request, as the beneficiary is probably already the trust protector. The point of the co-trustee is to provide some assurance of independence and to help avoid creditors reaching trust assets that the beneficiary has de facto power over and if the one-time co-trustee does not meet high standards of independence, as a creditor I would argue that I should be able to reach all assets that the hired co-trustee is exerting power over.
bsteiner
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Re: Beneficiary as Trustee

Post by bsteiner »

restingonmylaurels wrote: Sun May 02, 2021 11:33 am
bsteiner wrote: Sun May 02, 2021 9:25 am For the reasons the original poster mentions, as well as other reasons, we generally prohibit the beneficiary from making distributions in his/her own favor. If the beneficiary wants a distribution, the other trustee(s) will make that decision.

Others allow a trustee/beneficiary to make distributions in his/her own favor for health, maintenance, support and education. That allows a beneficiary to serve as sole trustee, with the power to add a co-trustee if he/she ever wants distributions in excess of those purposes. That's permissible for tax purposes (in other words, if the power is so limited, the trust assets won't be included in the beneficiary's estate). As the original poster points out, the extent to which that will make it available to creditors varies from state to state. That may also make the trust assets available for Medicaid.
I read this as meaning that you have those beneficiary-trustees as co-trustee with a corporate co-trustee (or similar), not as sole trustee?

Has anyone surveyed the relative cost of co-trusteeship vs. sole trusteeship, as it would seem a corporate co-trustee would have to charge less?

I imagine that if the beneficiary-trustee in the other drafting style you mention gets into creditor trouble, the advice is to have the trustee-beneficiary resign unless the trust is under the laws of one of the UTC states that protect ascertainable standards-based distributions?
The co-trustee(s) (or the trustees if the beneficiary isn't a trustee) could be any one or more individuals and/or a bank or trust company. Each case is different. It depends on the situation, and on who's available.

In the alternative approach, the likely creditors are spouses and Medicaid. Perhaps a matrimonial or elder law (Medicaid) lawyer could comment on how it would work in those contexts.
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Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 12:04 pm
Lee_WSP wrote: Sun May 02, 2021 10:23 am
restingonmylaurels wrote: Sun May 02, 2021 4:06 am While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.
Thoughts?
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Not sure what has brought you to determine you should have a trust without beneficiary creditor/beneficiary spouse protections. What is the purpose of your trust that you would not include these type of risk-reduction techniques?
I don't understand your comment, or rather I don't think you understand what I said.

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.

If you're only leaving a $250k house to a beneficiary, it's hardly worth putting into a creditor protected trust.

Let me deflect your concerns back at you. Other than divorce or medicaid or extreme spendthriftiness have you ever heard of or experienced a beneficiary lose their inheritance via creditors?
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restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

Lee_WSP wrote: Sun May 02, 2021 12:16 pm
restingonmylaurels wrote: Sun May 02, 2021 12:04 pm
Lee_WSP wrote: Sun May 02, 2021 10:23 am
restingonmylaurels wrote: Sun May 02, 2021 4:06 am While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.
Thoughts?
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Not sure what has brought you to determine you should have a trust without beneficiary creditor/beneficiary spouse protections. What is the purpose of your trust that you would not include these type of risk-reduction techniques?
I don't understand your comment, or rather I don't think you understand what I said.

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.
Sure but we the accumulators had the wherewithal to accumulate, invest, plan for taxes, avoid credit situations, etc. There is no guarantee that the beneficiary is of that same mold, therefore the protections of the trust, pretty much by definition. And the amount accumulated at the end of the accumulation during the journey, so presents a bigger target more worthy of protection. That is just good risk reduction technique.
Lee_WSP wrote: Sun May 02, 2021 12:16 pm If you're only leaving a $250k house to a beneficiary, it's hardly worth putting into a creditor protected trust.
What is substantial in value to each grantor is really up to each person to decide for themselves. If the cost of the safeguard is low enough, then they can weigh the value of the risk reduction against its cost and decide for themselves.
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

restingonmylaurels wrote: Sun May 02, 2021 12:27 pm
Lee_WSP wrote: Sun May 02, 2021 12:16 pm
restingonmylaurels wrote: Sun May 02, 2021 12:04 pm
Lee_WSP wrote: Sun May 02, 2021 10:23 am
restingonmylaurels wrote: Sun May 02, 2021 4:06 am While a beneficiary acting as trustee is certainly less expensive and will clearly know the needs of the beneficiary, it can cause significant problems in creditor protection.
Thoughts?
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Not sure what has brought you to determine you should have a trust without beneficiary creditor/beneficiary spouse protections. What is the purpose of your trust that you would not include these type of risk-reduction techniques?
I don't understand your comment, or rather I don't think you understand what I said.

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.
Sure but we the accumulators had the wherewithal to accumulate, invest, plan for taxes, avoid credit situations, etc. There is no guarantee that the beneficiary is of that same mold, therefore the protections of the trust, pretty much by definition. And the amount accumulated at the end of the accumulation during the journey, so presents a bigger target more worthy of protection. That is just good risk reduction technique.
Lee_WSP wrote: Sun May 02, 2021 12:16 pm If you're only leaving a $250k house to a beneficiary, it's hardly worth putting into a creditor protected trust.
What is substantial in value to each grantor is really up to each person to decide for themselves. If the cost of the safeguard is low enough, then they can weigh the value of the risk reduction against its cost and decide for themselves.
We keep bumping into the personal aspect of the decision making process. You are obviously on the side of a lot of dead hand control, which is fine; I am not.

But these are not our estates either.

Edit
I'll add that for the most part, the people who post questions here do not want to tie their beneficiaries' hands either.
afan
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Re: Beneficiary as Trustee

Post by afan »

Lee_WSP wrote: Sun May 02, 2021 12:16 pm

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.
That may be true for some, but standard planning can well move some assets past some of these risks. People have cash value life insurance for this reason, at least in part. They have assets in protected retirement accounts. For many, the retirement accounts represent a large share of their total assets.

Far fewer have DAPTs, but they would have more protection from them.

The current generation has these protections for themselves. Leaving assets to the beneficiary outright prevents the heirs from protecting assets that were protected during the grantor's lifetime.
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afan
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Re: Beneficiary as Trustee

Post by afan »

Lee_WSP wrote: Sun May 02, 2021 12:16 pm
Other than divorce or medicaid or extreme spendthriftiness have you ever heard of or experienced a beneficiary lose their inheritance via creditors?
Strange way to address it. Other than the most common and biggest dollar amounts of losses, have you heard of someone losing a large share of their inheritance to creditors?

I would say that these are the biggest concerns. But depending on the beneficiary's line of work, they may be open to personal lawsuits arising from their business endeavors or malpractice suits. The latter may or may not be fully covered by insurance. The risk of losing personal assets can be a threat to get a defendant to settle a case when they would take it to court if they knew their assets were safe.

When someone does lose a big case, those of us who do not know the details of their financial lives may not know how much of the payments came from inherited money.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

afan wrote: Sun May 02, 2021 2:06 pm
Lee_WSP wrote: Sun May 02, 2021 12:16 pm
Other than divorce or medicaid or extreme spendthriftiness have you ever heard of or experienced a beneficiary lose their inheritance via creditors?
Strange way to address it. Other than the most common and biggest dollar amounts of losses, have you heard of someone losing a large share of their inheritance to creditors?

....

When someone does lose a big case, those of us who do not know the details of their financial lives may not know how much of the payments came from inherited money.
I don't think so. With the exception of medicaid (health), all the risks are behavioral issues that comes down to my constant question of whether or not your trust your beneficiary. Divorce only gets you if you commingle assets. Creditors only get you if you are a spendthrift or do not carry enough insurance. Health issues can strike randomly, so I concede that issue.

But this all sidesteps the fact that you can create a trust (for whatever purpose) without having to take all the controls away from the beneficiary. In fact, depending on the goals, you can give the beneficiary effective ownership over the assets all while maintaining divorce protection. Creditor protection varies on state, but again, that's an insurance and behavior issue.

Very little. As has been discussed ad naseum in the umbrella threads, personal assets are hardly ever actually up for grabs in lawsuits unless you do something heinous and/or insanely stupid (like not carry enough insurance to make the plaintiff go away).

Edit
Fun fact. While a 401k has greater bankruptcy protections, it's actually more vulnerable to divorce. Vice versa for an IRA
afan wrote: Sun May 02, 2021 1:56 pm
Lee_WSP wrote: Sun May 02, 2021 12:16 pm

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.
That may be true for some, but standard planning can well move some assets past some of these risks. People have cash value life insurance for this reason, at least in part. They have assets in protected retirement accounts. For many, the retirement accounts represent a large share of their total assets.

Far fewer have DAPTs, but they would have more protection from them.

The current generation has these protections for themselves. Leaving assets to the beneficiary outright prevents the heirs from protecting assets that were protected during the grantor's lifetime.
That is what liability insurance is for. Putting assets into trust for self protection is reserved for the uber wealthy, of whom I am not talking about.
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Re: Beneficiary as Trustee

Post by afan »

There are some liabilities one cannot insure.
Those whose business require personally guaranteeing loans, for example.
"Behavioral issues" can include things that are impossible to avoid. A suit with no valid case, for example. You do nothing wrong but are sued anyway.
Did you hear about the organization that lost a suit because their MRI scan had caused a patient to lose her psychic powers?

It can be difficult to avoid commingling assets in a marriage. Much of the interpretation depends on the judge, who may take a generous view of what constitutes marital property.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

The trust would protect you from none of those. You'd be more or less screwed. Your heirs may get the trust though.

And when you withdraw the funds from the trust to go buy the house it's commingled too.

It's not a perfect solution to all of life's ills.
afan
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Re: Beneficiary as Trustee

Post by afan »

None of what?

If you are a beneficiary of a trust with an independent trustee who has no obligation to make distributions, then that money would be protected from your personal creditors.

The question of marital property gets litigated in divorce and some judges have been aggressive in pulling trust assets in. Having them in a trust would make this less likely if not airtight. Pulling money from the trust to buy a family home would be a bad move from the asset protection perspective. Using the money routinely to support the family would also put it at risk.

If you leave assets to your heirs outright, then you deprive them of the possibility of these protections. The most they could do, at great expense and uncertain effectiveness, would be to set up their own DAPTs.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Lee_WSP
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Re: Beneficiary as Trustee

Post by Lee_WSP »

And if you're leaving ten thousand dollars what's the point?

I've never said a trust isn't worth it at all. I've said the beneficiary should have have control over their own destiny.

Edit: the only time I've suggested it is with a TIRA, but that's more or less to hammer the point of Roth conversions.
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restingonmylaurels
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

Lee_WSP wrote: Sun May 02, 2021 12:30 pm
restingonmylaurels wrote: Sun May 02, 2021 12:27 pm
Lee_WSP wrote: Sun May 02, 2021 12:16 pm
restingonmylaurels wrote: Sun May 02, 2021 12:04 pm
Lee_WSP wrote: Sun May 02, 2021 10:23 am
We don't have creditor or divorce protections. Depending on the size of the bequest, the number of safeguards matters more or less.
Not sure what has brought you to determine you should have a trust without beneficiary creditor/beneficiary spouse protections. What is the purpose of your trust that you would not include these type of risk-reduction techniques?
I don't understand your comment, or rather I don't think you understand what I said.

We personally, the accumulators, do not have creditor or divorce protection for the assets we are leaving to our beneficiaries.
Sure but we the accumulators had the wherewithal to accumulate, invest, plan for taxes, avoid credit situations, etc. There is no guarantee that the beneficiary is of that same mold, therefore the protections of the trust, pretty much by definition. And the amount accumulated at the end of the accumulation during the journey, so presents a bigger target more worthy of protection. That is just good risk reduction technique.
Lee_WSP wrote: Sun May 02, 2021 12:16 pm If you're only leaving a $250k house to a beneficiary, it's hardly worth putting into a creditor protected trust.
What is substantial in value to each grantor is really up to each person to decide for themselves. If the cost of the safeguard is low enough, then they can weigh the value of the risk reduction against its cost and decide for themselves.
We keep bumping into the personal aspect of the decision making process. You are obviously on the side of a lot of dead hand control, which is fine; I am not.

But these are not our estates either.

Edit
I'll add that for the most part, the people who post questions here do not want to tie their beneficiaries' hands either.
Clearly people have different views on the next generation, so we can leave those alone and just deal with what is objectively true.

You as the grantor have had the wherewithal, skill, stick-to-it-ness, whatever you wish to call it, to make, save, invest, tax manage, and succession plan for the assets that are going to the next generation. You feel the effort and sacrifice that went into all of that.

Conversely, the beneficiary, likely your offspring, has in almost all cases not had the time to do all of those same things and cannot by definition be at the experience level of the grantor. So the trust is allowing them the time in life to hopefully catch up.

It really has nothing to do with tying anyone's hands. It is about getting them to the point in life where they can manage and appreciate sufficiently a benefit that they did not earn. That takes quite a bit of life experience and the trust gives them that time.
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Re: Beneficiary as Trustee

Post by fourwheelcycle »

restingonmylaurels wrote: Mon May 03, 2021 2:33 am Conversely, the beneficiary, likely your offspring, has in almost all cases not had the time to do all of those same things and cannot by definition be at the experience level of the grantor. So the trust is allowing them the time in life to hopefully catch up.

It really has nothing to do with tying anyone's hands.
I think this is an overly broad generalization. Each individual's or couple's circumstance needs to be understood in context. In our case, our adult children are in their mid to late thirties, with families of their own, and with fifteen to twenty years of demonstrated experience managing their own finances. Neither child has ever incurred any debt except their mortgages, and they manage their savings with a mix of taxable and tax-deferred accounts in two or three fund portfolios with low ER index funds. They have already received significant gifts from us, and they have managed those funds well. By the time they receive any inheritance from us they will likely be in their early to mid fifties, with as much life experience as we had at that age.

Once you have saved in a two or three fund portfolio into your fifties, it really does not take a further level of experience or skill to continue doing do as the numbers get bigger. Everything is pretty much on auto-pilot. I have found the real complexity begins in your sixties when you start reading forums like this one and realize the breadth of choices related to estate planning. Some choices, like wills vs. revocable trusts, are not very critical. If you don't happen to live in a community property state, either solution will work OK. For us, it just came down to a desire to avoid probate requirements for our out-of-state executor. Other choices, like considering irrevocable trusts to protect your savings for your heirs in ways you have never protected them for yourselves, are very complex and intimidating.

Irrevocable trusts undoubtedly provide benefits if the grantors are very clear about what they want to accomplish, but I believe they do involve tying beneficiaries' hands. For now, I am following threads like this one to gain a better understanding of what can be accomplished with irrevocable trusts. At some point, when our children are older and potentially more interested in their own estate planning, we will explain the complexities ahead for them when they have the opportunity to add our savings to theirs. They may say give it all to charity, or give it all to us outright, or put it in a trust that gives us, and generations to come, a constrained relationship with a long-term professional trustee like Vanguard.

As I noted in my first post, all of this assumes we have no spendthrift or special needs issues. Any of those issues would very likely move us toward irrevocable trusts with local, compassionate, professional trustees who can adjust trust payouts, and contract for other humane life supports like social service professionals, to best meet specific beneficiary needs. We have close friends who have set up a special needs trust for a semi-independent adult child - their situation is very complex, and very trying.
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Re: Beneficiary as Trustee

Post by restingonmylaurels »

fourwheelcycle wrote: Mon May 03, 2021 7:37 am
restingonmylaurels wrote: Mon May 03, 2021 2:33 am Conversely, the beneficiary, likely your offspring, has in almost all cases not had the time to do all of those same things and cannot by definition be at the experience level of the grantor. So the trust is allowing them the time in life to hopefully catch up.

It really has nothing to do with tying anyone's hands.
I think this is an overly broad generalization. Each individual's or couple's circumstance needs to be understood in context. In our case, our adult children are in their mid to late thirties, with families of their own, and with fifteen to twenty years of demonstrated experience managing their own finances. Neither child has ever incurred any debt except their mortgages, and they manage their savings with a mix of taxable and tax-deferred accounts in two or three fund portfolios with low ER index funds. They have already received significant gifts from us, and they have managed those funds well. By the time they receive any inheritance from us they will likely be in their early to mid fifties, with as much life experience as we had at that age.

Once you have saved in a two or three fund portfolio into your fifties, it really does not take a further level of experience or skill to continue doing do as the numbers get bigger. Everything is pretty much on auto-pilot. I have found the real complexity begins in your sixties when you start reading forums like this one and realize the breadth of choices related to estate planning. Some choices, like wills vs. revocable trusts, are not very critical. If you don't happen to live in a community property state, either solution will work OK. For us, it just came down to a desire to avoid probate requirements for our out-of-state executor. Other choices, like considering irrevocable trusts to protect your savings for your heirs in ways you have never protected them for yourselves, are very complex and intimidating.

Irrevocable trusts undoubtedly provide benefits if the grantors are very clear about what they want to accomplish, but I believe they do involve tying beneficiaries' hands. For now, I am following threads like this one to gain a better understanding of what can be accomplished with irrevocable trusts. At some point, when our children are older and potentially more interested in their own estate planning, we will explain the complexities ahead for them when they have the opportunity to add our savings to theirs. They may say give it all to charity, or give it all to us outright, or put it in a trust that gives us, and generations to come, a constrained relationship with a long-term professional trustee like Vanguard.

As I noted in my first post, all of this assumes we have no spendthrift or special needs issues. Any of those issues would very likely move us toward irrevocable trusts with local, compassionate, professional trustees who can adjust trust payouts, and contract for other humane life supports like social service professionals, to best meet specific beneficiary needs. We have close friends who have set up a special needs trust for a semi-independent adult child - their situation is very complex, and very trying.
I as noted, trusts gives your beneficiaries time to catch up. You seem to believe that your children have already caught up. Therefore, you may not be one who needs to consider a trust. Given the unpredictability of life, I think trusts should always be considered when substantial assets are involved, because trusts are legal risk reduction devices. There are always risks to reduce, either those that currently exist and we are not aware of them or risks that will arise in the future that you cannot foresee. I am not so certain about knowing how the future plays out, so would error on the side of caution and prefer the protections of a trust over not having one.
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Re: Beneficiary as Trustee

Post by Lee_WSP »

If your children are minors, it would be unwise to not leave assets in trust. If they're adults, you should more or less know your children and have your own opinion about them. It is your estate and that is the key personal opinion question.
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