Trusting Up Sheltered Account For Wife and Heirs

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Leesbro63
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Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

I have a very good friend who has been working on an estate plan and an interesting question came up. First the background is that both my friend and his wife are about age 75, married for many years. She has two adult children from a prior marriage and there are 3 grandchildren from those adult children. My friend considers her children and grandchildren as his, but has no biological children of his own. About half of his 7 figure+ estate is in retirement accounts. Can that (tax sheltered accounts) money be left in trust for his wife (they are in their 70s) and then later for her kids and grandkids? His concern is that his wife and/or her adult kids will be able to take too much too fast.

My guess is that there's no easy way to do this. If he makes a standard/common Revocable Living Trust the beneficiary of the tax sheltered monies, the rules of Required Minimum Distributions will apply to his wife, and the 10 year rule of the Secure Act will apply to the children/grandchildren once she is gone. To be honest, it's not clear that the lawyer with whom he has been working understands this. The lawyer wrote a Revocable Living Trust, which appears to this layman will work for my friend's non-retirement assets (mainly publicly traded securities in a few brokerage accounts). But I can't see how it can work if the Trust is the beneficiary of retirement accounts.

To sum it up, how can someone in their mid 70's "trust up" significant retirement assets so that his/her spouse can't get "the mother lode"? Put another way, how can one protect retirement assets against a spendthrift spouse (perhaps influenced by adult children)?
123
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by 123 »

Leesbro63 wrote: Thu Jan 13, 2022 4:57 pm ...His concern is that his wife and/or her adult kids will be able to take too much too fast..
If his wife and/or her adult kids are the trustee(s) they have the "keys to the kingdom". An alternative may be a corporate trustee but there can be a considerable cost to that.
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Leesbro63
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

123 wrote: Thu Jan 13, 2022 5:16 pm
Leesbro63 wrote: Thu Jan 13, 2022 4:57 pm ...His concern is that his wife and/or her adult kids will be able to take too much too fast..
If his wife and/or her adult kids are the trustee(s) they have the "keys to the kingdom". An alternative may be a corporate trustee but there can be a considerable cost to that.
He has responsible 3rd party trustees.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Grt2bOutdoors »

Trust documents states beneficiaries are to receive x% of the total assets in the trust each year, the trust will pay the taxes on the distribution and hold the remainder in the asset allocation as determined by the trustee. Isn’t that feasible?
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Leesbro63
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

Grt2bOutdoors wrote: Thu Jan 13, 2022 6:51 pm Trust documents states beneficiaries are to receive x% of the total assets in the trust each year, the trust will pay the taxes on the distribution and hold the remainder in the asset allocation as determined by the trustee. Isn’t that feasible?
I think this conflicts with the IRA rules. IRA rules require distribution faster than the goals of the trust. Hence my question.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by bsteiner »

He has 3 choices with respect to his IRA:

1. He could leave it to her outright. That would allow her to roll it over, take distributions at a slower rate, and possibly do some Roth conversions. However, it would give her control over it.

2. He could leave it to her in a conduit trust in which all of the distributions from the IRA have to be paid out to her. That would allow more of a stretch than leaving it in a discretionary trust (the distributions would be over her life expectancy, recalculated annually), but would give her control over a portion of it (a larger portion if she lives a long time).

3. He could leave it to a discretionary trust for her, or for her and her issue. That would allow the least amount of stretch, since the trustees would have to take all of the IRA benefits by the end of the 10th calendar year following his death. However, she need not have any control over the trust.

In order to have a sense of which of these is likely to be best, it would help to know the size of the IRA, the size of the other assets, and how amenable he would be to having her control the IRA, or have some control over it. His view as to control might depend at least in part on the size of the IRA and the size of the other assets.

The revocable trust has nothing to do with this. Even if he creates a revocable trust (we don't have any information that would suggest that one would or wouldn't make sense in this case), such a trust is an administrative trust. So he wouldn't name it as the beneficiary of his IRA. Rather, if he wants to leave the IRA in trust, he would leave it either to a conduit trust for her, or to a discretionary trust for her, or for her and her issue.
Leesbro63 wrote: Thu Jan 13, 2022 6:55 pm
Grt2bOutdoors wrote: Thu Jan 13, 2022 6:51 pm Trust documents states beneficiaries are to receive x% of the total assets in the trust each year, the trust will pay the taxes on the distribution and hold the remainder in the asset allocation as determined by the trustee. Isn’t that feasible?
I think this conflicts with the IRA rules. IRA rules require distribution faster than the goals of the trust. Hence my question.
If it's a discretionary trust, the trustees have to take the entire IRA by the end of the 10th calendar year following his death, but don't have to make distributions to the beneficiaries of the trust.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

bsteiner wrote: Thu Jan 13, 2022 10:54 pm He has 3 choices with respect to his IRA:

1. He could leave it to her outright. That would allow her to roll it over, take distributions at a slower rate, and possibly do some Roth conversions. However, it would give her control over it.

2. He could leave it to her in a conduit trust in which all of the distributions from the IRA have to be paid out to her. That would allow more of a stretch than leaving it in a discretionary trust (the distributions would be over her life expectancy, recalculated annually), but would give her control over a portion of it (a larger portion if she lives a long time).

3. He could leave it to a discretionary trust for her, or for her and her issue. That would allow the least amount of stretch, since the trustees would have to take all of the IRA benefits by the end of the 10th calendar year following his death. However, she need not have any control over the trust.

In order to have a sense of which of these is likely to be best, it would help to know the size of the IRA, the size of the other assets, and how amenable he would be to having her control the IRA, or have some control over it. His view as to control might depend at least in part on the size of the IRA and the size of the other assets.

The revocable trust has nothing to do with this. Even if he creates a revocable trust (we don't have any information that would suggest that one would or wouldn't make sense in this case), such a trust is an administrative trust. So he wouldn't name it as the beneficiary of his IRA. Rather, if he wants to leave the IRA in trust, he would leave it either to a conduit trust for her, or to a discretionary trust for her, or for her and her issue.
Leesbro63 wrote: Thu Jan 13, 2022 6:55 pm
Grt2bOutdoors wrote: Thu Jan 13, 2022 6:51 pm Trust documents states beneficiaries are to receive x% of the total assets in the trust each year, the trust will pay the taxes on the distribution and hold the remainder in the asset allocation as determined by the trustee. Isn’t that feasible?
I think this conflicts with the IRA rules. IRA rules require distribution faster than the goals of the trust. Hence my question.
If it's a discretionary trust, the trustees have to take the entire IRA by the end of the 10th calendar year following his death, but don't have to make distributions to the beneficiaries of the trust.
Thank you for replying, Mr. Steiner. I was hoping you would. I will be sure my friend sees your reply.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by bsteiner »

It might help to know what state they’re in, and to have a better sense of the approximate size of his estate and of her estate.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by LSLover »

bsteiner wrote: Thu Jan 13, 2022 10:54 pm He has 3 choices with respect to his IRA:

1. He could leave it to her outright. That would allow her to roll it over, take distributions at a slower rate, and possibly do some Roth conversions. However, it would give her control over it.

2. He could leave it to her in a conduit trust in which all of the distributions from the IRA have to be paid out to her. That would allow more of a stretch than leaving it in a discretionary trust (the distributions would be over her life expectancy, recalculated annually), but would give her control over a portion of it (a larger portion if she lives a long time).

3. He could leave it to a discretionary trust for her, or for her and her issue. That would allow the least amount of stretch, since the trustees would have to take all of the IRA benefits by the end of the 10th calendar year following his death. However, she need not have any control over the trust.
Bsteiner, can you elaborate on the bolded part? Not sure I understand the significance of it.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Lee_WSP »

LSLover wrote: Fri Jan 14, 2022 9:07 am
bsteiner wrote: Thu Jan 13, 2022 10:54 pm He has 3 choices with respect to his IRA:

1. He could leave it to her outright. That would allow her to roll it over, take distributions at a slower rate, and possibly do some Roth conversions. However, it would give her control over it.

2. He could leave it to her in a conduit trust in which all of the distributions from the IRA have to be paid out to her. That would allow more of a stretch than leaving it in a discretionary trust (the distributions would be over her life expectancy, recalculated annually), but would give her control over a portion of it (a larger portion if she lives a long time).

3. He could leave it to a discretionary trust for her, or for her and her issue. That would allow the least amount of stretch, since the trustees would have to take all of the IRA benefits by the end of the 10th calendar year following his death. However, she need not have any control over the trust.
Bsteiner, can you elaborate on the bolded part? Not sure I understand the significance of it.
You don't name her as trustee. You can specifically exclude her or limit the class of acceptable trustees.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by bsteiner »

LSLover wrote: Fri Jan 14, 2022 9:07 am
bsteiner wrote: Thu Jan 13, 2022 10:54 pm He has 3 choices with respect to his IRA:

1. He could leave it to her outright. That would allow her to roll it over, take distributions at a slower rate, and possibly do some Roth conversions. However, it would give her control over it.

2. He could leave it to her in a conduit trust in which all of the distributions from the IRA have to be paid out to her. That would allow more of a stretch than leaving it in a discretionary trust (the distributions would be over her life expectancy, recalculated annually), but would give her control over a portion of it (a larger portion if she lives a long time).

3. He could leave it to a discretionary trust for her, or for her and her issue. That would allow the least amount of stretch, since the trustees would have to take all of the IRA benefits by the end of the 10th calendar year following his death. However, she need not have any control over the trust.
Bsteiner, can you elaborate on the bolded part? Not sure I understand the significance of it.
If he wants her to be a beneficiary but not have any control over the trust, the trustees could be persons other than her, she need not have a power of appointment over the trust, and she need not have the power to remove and replace trustees.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by celia »

Don’t forget that the wife (or friend) could have higher expenses in their final years, such as assisted living or home care, that could be more than the RMDs. The trustee needs some discretion to pay out what is needed. And they can always pull out more than the RMDs before then. They don’t have to spend it, but need to pay taxes on it, whether it is converted or not.

I’m assuming that the “sheltered” accounts primarily refers to tax-deferred accounts, rather than Roths in this case.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Trusting Up Sheltered Account For Wife and Heirs

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celia wrote: Fri Jan 14, 2022 12:28 pm Don’t forget that the wife (or friend) could have higher expenses in their final years, such as assisted living or home care, that could be more than the RMDs. The trustee needs some discretion to pay out what is needed. And they can always pull out more than the RMDs before then. They don’t have to spend it, but need to pay taxes on it, whether it is converted or not.

I’m assuming that the “sheltered” accounts primarily refers to tax-deferred accounts, rather than Roths in this case.
Correct. There are no Roth accounts.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by celia »

Leesbro63 wrote: Fri Jan 14, 2022 1:31 pm Correct. There are no Roth accounts.
Has your friend ever considered doing Roth conversions after the RMDs are taken? They don’t make sense for everyone, but if he has over a million in tax-deferred, the balance is still growing each year, and his tax bracket is lower than his kids’, it could be beneficial in the long run.

But, at this point, he wouldn’t be able to withdraw any earnings in the Roths until the Roths are 5 years old. But he can always withdraw the converted amount at any time.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by celia »

Leesbro63 wrote: Thu Jan 13, 2022 4:57 pm To sum it up, how can someone in their mid 70's "trust up" significant retirement assets so that his/her spouse can't get "the mother lode"? Put another way, how can one protect retirement assets against a spendthrift spouse (perhaps influenced by adult children)?
I didn’t notice anywhere if this would be a joint or individual trust. What about the wife’s assets being left to her husband (assumedly)? Does she have her own trust? Her own IRAs or retirement accounts?

This should be a two-way street except for any assets that either inherited from someone else and have been kept separate from their joint accounts.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by bsteiner »

celia wrote: Fri Jan 14, 2022 12:28 pm ...
I’m assuming that the “sheltered” accounts primarily refers to tax-deferred accounts, rather than Roths in this case.
It probably refers to the credit shelter trust.
celia wrote: Fri Jan 14, 2022 2:47 pm ...
I didn’t notice anywhere if this would be a joint or individual trust. What about the wife’s assets being left to her husband (assumedly)? Does she have her own trust? Her own IRAs or retirement accounts?
...
It would probably be a trust under his Will.

Her Will could provide for him in trust as well if desired.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

celia wrote: Fri Jan 14, 2022 2:47 pm
Leesbro63 wrote: Thu Jan 13, 2022 4:57 pm To sum it up, how can someone in their mid 70's "trust up" significant retirement assets so that his/her spouse can't get "the mother lode"? Put another way, how can one protect retirement assets against a spendthrift spouse (perhaps influenced by adult children)?
I didn’t notice anywhere if this would be a joint or individual trust. What about the wife’s assets being left to her husband (assumedly)? Does she have her own trust? Her own IRAs or retirement accounts?

This should be a two-way street except for any assets that either inherited from someone else and have been kept separate from their joint accounts.
This is a second marriage situation where the husband has most of the assets and the wife has little. It's not a two way street at all, but it's because it's a bit more complicated that I wish to post here. Bsteiner answered my basic question. It appears that the Secure Act will force distribution of the tax sheltered accounts by the end of 10 years after my friend and his wife are gone. He wants to have the money last for years for grandkids, but that option doesn't seem possible. Jim Langue calls it "the end of the stretch IRA". It does seem possible that he can prevent his wife from "having the keys to the kingdom" while receiving only the required annual RMD.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

bsteiner wrote: Fri Jan 14, 2022 3:21 pm
celia wrote: Fri Jan 14, 2022 12:28 pm ...
I’m assuming that the “sheltered” accounts primarily refers to tax-deferred accounts, rather than Roths in this case.
It probably refers to the credit shelter trust.
Actually I used the word "sheltered" to mean SOLO401K or SimpleSEP. Honestly I don't know exactly which, but he has an IRA-like account as the result of being a business owner. Probably I should have just used the words "traditional IRA" for purposes of this post.
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Re: Trusting Up Sheltered Account For Wife and Heirs

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Leesbro63 wrote: Fri Jan 14, 2022 3:51 pm
celia wrote: Fri Jan 14, 2022 2:47 pm
Leesbro63 wrote: Thu Jan 13, 2022 4:57 pm To sum it up, how can someone in their mid 70's "trust up" significant retirement assets so that his/her spouse can't get "the mother lode"? Put another way, how can one protect retirement assets against a spendthrift spouse (perhaps influenced by adult children)?
I didn’t notice anywhere if this would be a joint or individual trust. What about the wife’s assets being left to her husband (assumedly)? Does she have her own trust? Her own IRAs or retirement accounts?

This should be a two-way street except for any assets that either inherited from someone else and have been kept separate from their joint accounts.
This is a second marriage situation where the husband has most of the assets and the wife has little. It's not a two way street at all, but it's because it's a bit more complicated that I wish to post here. Bsteiner answered my basic question. It appears that the Secure Act will force distribution of the tax sheltered accounts by the end of 10 years after my friend and his wife are gone. He wants to have the money last for years for grandkids, but that option doesn't seem possible. Jim Langue calls it "the end of the stretch IRA". It does seem possible that he can prevent his wife from "having the keys to the kingdom" while receiving only the required annual RMD.
It can go to the kids. It just will be taxed at trust tax rates.
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Re: Trusting Up Sheltered Account For Wife and Heirs

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bsteiner wrote: Thu Jan 13, 2022 10:54 pm If it's a discretionary trust, the trustees have to take the entire IRA by the end of the 10th calendar year following his death, but don't have to make distributions to the beneficiaries of the trust.
Leesbro63, did you understand this part? The RMDs need to be taken and taxes paid. But that doesn’t have anything to do with the payouts to the beneficiaries. The trust can define when and how much the beneficiaries receive.

Keep in mind that the spouse will likely need more in later years as health declines.
Last edited by celia on Fri Jan 14, 2022 5:18 pm, edited 2 times in total.
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Re: Trusting Up Sheltered Account For Wife and Heirs

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Leesbro63 wrote: Thu Jan 13, 2022 4:57 pmCan that (tax sheltered accounts) money be left in trust for his wife (they are in their 70s) and then later for her kids and grandkids? His concern is that his wife and/or her adult kids will be able to take too much too fast.

To sum it up, how can someone in their mid 70's "trust up" significant retirement assets so that his/her spouse can't get "the mother lode"? Put another way, how can one protect retirement assets against a spendthrift spouse (perhaps influenced by adult children)?
He should work with a good estate attorney. Trusts can be structured to meet all sorts of needs and goals. It may require more than a single trust.

He can also Google for "Spendthrift Trusts".
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

celia wrote: Fri Jan 14, 2022 5:13 pm
bsteiner wrote: Thu Jan 13, 2022 10:54 pm If it's a discretionary trust, the trustees have to take the entire IRA by the end of the 10th calendar year following his death, but don't have to make distributions to the beneficiaries of the trust.
Leesbro63, did you understand this part? The RMDs need to be taken and taxes paid. But that doesn’t have anything to do with the payouts to the beneficiaries. The trust can define when and how much the beneficiaries receive.

Keep in mind that the spouse will likely need more in later years as health declines.
The big issue is the 10 year thing.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Lee_WSP »

Leesbro63 wrote: Fri Jan 14, 2022 6:33 pm
celia wrote: Fri Jan 14, 2022 5:13 pm
bsteiner wrote: Thu Jan 13, 2022 10:54 pm If it's a discretionary trust, the trustees have to take the entire IRA by the end of the 10th calendar year following his death, but don't have to make distributions to the beneficiaries of the trust.
Leesbro63, did you understand this part? The RMDs need to be taken and taxes paid. But that doesn’t have anything to do with the payouts to the beneficiaries. The trust can define when and how much the beneficiaries receive.

Keep in mind that the spouse will likely need more in later years as health declines.
The big issue is the 10 year thing.
It just means the distributions would be taxed at ~35%. It’s that or let the beneficiary have complete control over. Neither is ideal, but it’s the price for control.
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by celia »

Leesbro63 wrote: Fri Jan 14, 2022 6:33 pm The big issue is the 10 year thing.
How is that an issue? Taxes will be due on the tax-deferred accounts one way or another or they can be given to charities using a QCD. Have they considered paying the taxes spread out over many year starting now? Paying them over 20 or 30 years is likely better than 10 years. As long as the accounts keep growing, so will the RMDs. If they convert the yearly growth each year (above and beyond RMDs), that should keep that account balance(s) fairly level.

Or does your friend just have too much wealth?
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Re: Trusting Up Sheltered Account For Wife and Heirs

Post by Leesbro63 »

celia wrote: Fri Jan 14, 2022 9:21 pm
Leesbro63 wrote: Fri Jan 14, 2022 6:33 pm The big issue is the 10 year thing.
How is that an issue? Taxes will be due on the tax-deferred accounts one way or another or they can be given to charities using a QCD. Have they considered paying the taxes spread out over many year starting now? Paying them over 20 or 30 years is likely better than 10 years. As long as the accounts keep growing, so will the RMDs. If they convert the yearly growth each year (above and beyond RMDs), that should keep that account balance(s) fairly level.

Or does your friend just have too much wealth?
He's not mega wealth, no, but it's a very nice sized nest egg. "Mature Boglehead sized." This thread has been very helpful. I'll help him figure out where to go from here.
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