Trust Asset Allocation, tax efficiency

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JoinToday
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Trust Asset Allocation, tax efficiency

Post by JoinToday » Sun Nov 12, 2017 11:38 am

What is the most tax efficient placement of assets into the various trusts when one spouse passes away?

For example: Lets say total assets are $5M ($4M financial assets plus $1M house). Husband passes away, $2.5M goes into the Exemption Trust, and $2.5M goes in the Survivor's Trust. Wife decides to disclaim $1.5M of her portion, so the resulting division of assets is:

$2.5M in Exemption Trust (deceased husband's portion)
$1M in Survivor's Trust (wife's portion)
$1.5M in Disclaimer Trust

For tax efficiency (both year to year distributions and stepped up basis when wife passes), I am thinking that
1. bonds would go into the Exemption Trust (low appreciation, surviving wife receives distributions)
2. higher appreciating equity goes into Survivor's trust (favorable tax treatment of qualified dividends plus stepped up basis upon death of survivor),
3. house plus some financial assets goes into the Disclaimer Trust (assume house beats inflation by 1-2% per year, better than bonds, but lower than stock funds)

Does this sound right?
I wish I had learned about index funds 25 years ago

lsp12
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Re: Trust Asset Allocation, tax efficiency

Post by lsp12 » Sun Nov 12, 2017 3:58 pm

I imagine I won't answer your question exactly, but here's a thought.

With the 'portability' of a spouse's estate tax exemption, why do you need to do these trusts at all? It seems to me that the best thing is to delay, as long as possible, the 'step-up' in basis of the assets that will be passed to the next generation/the heirs of the (deceased) husband and his wife. The way to do that is to have the wife get the portability of the husband's estate tax exemption. Between her exemption and the portable exemption of her late husband, she currently would have north of $10mm of estate tax exemption, so most likely her entire estate will pass down tax-free when she dies. And, the step-up in basis occurs then on the total value of her estate.

Is there a reason to get this stuff into a trust now?

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Re: Trust Asset Allocation, tax efficiency

Post by JoinToday » Sun Nov 12, 2017 6:06 pm

1. I used the $5M number just for illustration purposes, not my estate size

2. Having said that, I live in California. If someone in California had a $5M estate, and it went through probate (assuming husband & wife pass at the same time without assets in a trust, or husband passes and wife doesn't set up a trust before she passes), the probate costs allowed for by law in California would be $63K. A $10M estate would be $113K. You read right. Not cheap.

A few $K for a trust is in the noise.

I don't have enough to worry about exceeding the $10M estate exemption amount, but I don't want my heirs to pay $10's of $K in probate fees when it can be avoided easily. Plus probate time and hassle is much worse than dealing with a trust.

3. I am trying to guard against 2 things: (a) surviving spouse remarries, and gives entire estate to new spouse, leaving offspring with no inheritance, and (b) protect assets against lawsuits. I think (b) is a really low probability event. (a) is probably a relatively low probability event, but more likely than lawsuits.

For what it is worth, I hate paying taxes
I wish I had learned about index funds 25 years ago

lsp12
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Re: Trust Asset Allocation, tax efficiency

Post by lsp12 » Sun Nov 12, 2017 9:57 pm

1. I would suggest you spend a few hundred dollars and speak with a Trusts and Estates attorney.

2. If you set up a revocable trust, that trust keeps those assets out of probate (at least I believe this to be the case). If that is the issue, I would think that would suffice. The revocable trust can handle the distribution of assets upon your death. Depending on the beneficiaries, not clear you need to have subsequent trusts set up, but you can certainly have the terms of the revocable trust include new trusts to be set up when the assets are conveyed.

3. Certainly you would want to give the lower basis assets to your heirs so they get a big step up in basis at the time of your demise. Not sure that the basis of the assets in the survivor trust would get a second step up in basis upon the death of your wife.

4. If you don't entirely trust your wife's judgement, do you believe she will actually disclaim the portion of the inheritance designed to fund the disclaimer trust?

5. If your assets are anywhere in the range of $5mm, speak with a Trusts and Estates lawyer. (repeated for emphasis!)

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Re: Trust Asset Allocation, tax efficiency

Post by JoinToday » Sun Nov 12, 2017 11:12 pm

lsp12 wrote:
Sun Nov 12, 2017 9:57 pm
1. I would suggest you spend a few hundred dollars and speak with a Trusts and Estates attorney.

2. If you set up a revocable trust, that trust keeps those assets out of probate (at least I believe this to be the case). If that is the issue, I would think that would suffice. The revocable trust can handle the distribution of assets upon your death. Depending on the beneficiaries, not clear you need to have subsequent trusts set up, but you can certainly have the terms of the revocable trust include new trusts to be set up when the assets are conveyed.
I have read, agree, and implemented Bruce Steiner's advice to have inheritance for heirs to be put in a trust.

3. Certainly you would want to give the lower basis assets to your heirs so they get a big step up in basis at the time of your demise. Not sure that the basis of the assets in the survivor trust would get a second step up in basis upon the death of your wife.
Survivor's trust gets a stepped up basis (if I understand it correctly).

4. If you don't entirely trust your wife's judgement, do you believe she will actually disclaim the portion of the inheritance designed to fund the disclaimer trust?
The disclaimer trust is included in my trust document. I am not sure if it will actually be used, but included it in the example for completeness
5. If your assets are anywhere in the range of $5mm, speak with a Trusts and Estates lawyer. (repeated for emphasis!)
With respect to point #5, I should probably discuss this with the attorney at the next revision.

I update documents yearly, and wanted to write down my guidance to my wife. Just looking for guidance from the group on advice I should give.
I wish I had learned about index funds 25 years ago

Theoretical
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Re: Trust Asset Allocation, tax efficiency

Post by Theoretical » Mon Nov 13, 2017 11:48 pm

Regarding Trust Asset Allocation:

For tax efficiency (both year to year distributions and stepped up basis when wife passes), I am thinking that
1. bonds would go into the Exemption Trust (low appreciation, surviving wife receives distributions)
2. higher appreciating equity goes into Survivor's trust (favorable tax treatment of qualified dividends plus stepped up basis upon death of survivor),
3. house plus some financial assets goes into the Disclaimer Trust (assume house beats inflation by 1-2% per year, better than bonds, but lower than stock funds)

A couple of things here. You absolutely need to consider community property rules in doing this. Community property houses should never be given to irrevocable trusts. It creates an absolute nightmare of two owners. If it's your separate property, then that is a different situation. Also, make sure you are aware of the tax consequences of doing this as some trusts may not qualify for your local state's property tax homestead exemption, if applicable. There can also be serious federal gift tax consequences to paying the taxes/expenses for the house using non-trust funds for such an irrevocable-trust held property.

Regarding investment strategy:

1. Bonds A mix of California muni bonds, non-California muni bonds, and treasuries or a high yield savings account are in order. You could get a LOT of benefits using individual bonds a la Swedroe/bond ladders in order to tax loss harvest with that amount of money. Or for simplicity, use the funds. If I were doing this, I'd do a combination of intermediate-longish Cali municipals (max tax-free yield), intermediate non-Cali munis (for muni diversification), and short treasuries/t-bills/savings account (for the safety and exemption from California income tax, along with partial inflation tracking with t-bills/savings account).

Stocks - Vanguard or iShares, with Total Stock Market, S&P 600 small cap funds (IJS/VIOV for value or IJR/VIOO for blend).
Alternatives - Vanguard Market Neutral Fund - one of the most tax efficient funds out there, bar none. It's been basically correlated to nothing for almost 7 years.

2. Higher appreciating assets should go into the step-up trust.

3. See above.

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