your inheritance for young kids
your inheritance for young kids
How do you set up inheritance for young kids? Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child. Would you designate that a portion should be used on education or not be accessed until 21? Can this be done with a will by setting up rules and a custodian?
Re: your inheritance for young kids
You need to do this using a trust. It does not need to be difficult or expensive to setup. You might even be able to do it yourself using Nolo or Intuit products. The trust can have very detailed instructions, such as that the trustee should use the funds for support and education through age 22, then distribute 30% in a lump sum at 25, then the balance at 35. You get the idea. The trust will need to be listed as beneficiary on the policy -- contact the insurance company. If it says that it's payable directly to the child, then things will get interesting quickly when he or she turns 18.
Re: your inheritance for young kids
A trust can be created by a will (a testamentary trust). You will want a will in any case as you need to name a guardian of the person for the child. You can name the same person or another as the guardian of the child's estate (the trustee of the trust created at your death).
See Nolo:
Guardian of person: http://www.nolo.com/legal-encyclopedia/ ... 30227.html
Guardian of estate: http://www.nolo.com/legal-encyclopedia/ ... 29633.html
About a trust for a child established by will:
I wouldn't trust this to the internet; I would use a lawyer. I did when my children were young, and we used wills with a testamentary trust provision. I did again when I established my living trust. If it's important to you to get it right, use a professional.
See Nolo:
Guardian of person: http://www.nolo.com/legal-encyclopedia/ ... 30227.html
Guardian of estate: http://www.nolo.com/legal-encyclopedia/ ... 29633.html
About a trust for a child established by will:
I am not sure about insurance proceeds. If they go straight to the child, the child will need a trustee. If your will names a trustee, I can't imagine a court naming a different trustee or the insurance company not accepting that trustee. However, if not paid to the trust, the insurance proceeds may not be restricted by the terms of the trust, e.g., the child gets it all at majority, since insurance passes outside your will (the beneficiary designation trumps anything your will might say, like leaving it to a charity rather than your child).Another approach is to establish a trust for each child. With this arrangement, you use your will or living trust to name a trustee (usually a trusted relative or friend), who will handle money or property the child inherits until the child reaches the age you specify.
I wouldn't trust this to the internet; I would use a lawyer. I did when my children were young, and we used wills with a testamentary trust provision. I did again when I established my living trust. If it's important to you to get it right, use a professional.
Re: your inheritance for young kids
If you ever have a need for these arrangements, it will be too late to fix anything. sscritic has it exactly right. Get professional advice.sscritic wrote: I wouldn't trust this to the internet; I would use a lawyer... If it's important to you to get it right, use a professional.
Jeff
Re: your inheritance for young kids
A good way to do this is to set up an irrevocable life insurance trust (ILIT). The ILIT owns the policy and is the sole beneficiary of the policy. To pay for the insurance premiums the parents make annual gifts to the ILIT (the ILIT will probably have to be a Crummey trust). The child (and future children?) will be the beneficiaries of the ILIT. While the parents are alive they can be the ILIT trustee and successor trustees will be named in the document. Terms and conditions of distributions to the the beneficiaries can be written into the ILIT.sunnyday wrote:How do you set up inheritance for young kids? Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child. Would you designate that a portion should be used on education or not be accessed until 21? Can this be done with a will by setting up rules and a custodian?
The parents will still need to have wills to name guardians and deal with other issues, but if done correctly the life insurance policy and proceeds will fall completely outside of the will and parents' estates. It should not be subject to estate tax or probate.
This is definitely a project where an experienced estates and trusts attorney should be used.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
Re: your inheritance for young kids
I'm in agreement that you need professional help setting up trust to do what you want with your money when you're gone.jsl11 wrote:If you ever have a need for these arrangements, it will be too late to fix anything. sscritic has it exactly right. Get professional advice.sscritic wrote: I wouldn't trust this to the internet; I would use a lawyer... If it's important to you to get it right, use a professional.
Jeff
Even educators need education. And some can be hard headed to the point of needing time out.
Re: your inheritance for young kids
Thanks for the replies. It should be pretty standard for us, but we'll likely go with a professional. We like our lawyer, I think he charges about $1,500 -- does that sound right? The only thing is, is that I'm not sure how familiar he is with all of the tax laws. We'll keep him in mind, but probably shop around a bit.
What is typically considered living expenses in the trust? Are housing expenses (or a portion) typically included? We'd like to leave plenty for the caregiver (my sister in law) too so she could stay at home with the children if preferred.
What is typically considered living expenses in the trust? Are housing expenses (or a portion) typically included? We'd like to leave plenty for the caregiver (my sister in law) too so she could stay at home with the children if preferred.
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Re: your inheritance for young kids
Thanks for the suggestion - my current attorney conversation went something like this:smackboy1 wrote:A good way to do this is to set up an irrevocable life insurance trust (ILIT). The ILIT owns the policy and is the sole beneficiary of the policy. To pay for the insurance premiums the parents make annual gifts to the ILIT (the ILIT will probably have to be a Crummey trust). The child (and future children?) will be the beneficiaries of the ILIT. While the parents are alive they can be the ILIT trustee and successor trustees will be named in the document. Terms and conditions of distributions to the the beneficiaries can be written into the ILIT.sunnyday wrote:How do you set up inheritance for young kids? Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child. Would you designate that a portion should be used on education or not be accessed until 21? Can this be done with a will by setting up rules and a custodian?
The parents will still need to have wills to name guardians and deal with other issues, but if done correctly the life insurance policy and proceeds will fall completely outside of the will and parents' estates. It should not be subject to estate tax or probate.
This is definitely a project where an experienced estates and trusts attorney should be used.
Me: How can I set up a trust to hold the life insurance proceeds in the event of our death for our minor child?
Attrny: Call up life insurance company and tell them you want to change the beneficiary to "in trust for your child".
Me: Isn't it better to set up a life insurance trust?
Attrny: The will has a provision for a trust to be created upon death that will hold all assets on behalf of the child and make distributions at ages you set.
Me: What about if I want to name investment manager trustees like Vanguard?
Attrny: It's better that the guardian of child and trustee of assets be the same, you don't want to have the guardian constantly having to send letters to investment manager saying "give me money".
Me and wife: Okay, thanks.
Me and wife walking out of office: we need to find an experienced trust and estates attorney, after getting the 2 minute shitck on other services provided by law office.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: your inheritance for young kids
I believe you can dictate in the terms how much you would pay or what expenses would be covered by assets under the trust. Remember, child will also receive Social Security benefits if they are minors should you pre-decease them - that can be a good chunk of change on a monthly basis in addition to life insurance and any other assets after paying residual debt.sunnyday wrote:Thanks for the replies. It should be pretty standard for us, but we'll likely go with a professional. We like our lawyer, I think he charges about $1,500 -- does that sound right? The only thing is, is that I'm not sure how familiar he is with all of the tax laws. We'll keep him in mind, but probably shop around a bit.
What is typically considered living expenses in the trust? Are housing expenses (or a portion) typically included? We'd like to leave plenty for the caregiver (my sister in law) too so she could stay at home with the children if preferred.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: your inheritance for young kids
Good to know about the Social Security Survivors benefit. I wasn't thinking about thatGrt2bOutdoors wrote: I believe you can dictate in the terms how much you would pay or what expenses would be covered by assets under the trust. Remember, child will also receive Social Security benefits if they are minors should you pre-decease them - that can be a good chunk of change on a monthly basis in addition to life insurance and any other assets after paying residual debt.
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Re: your inheritance for young kids
I should add a caveat - the above is assuming one of you have or are paying into Social Security. For an estimate of potential monthly benefit, check out your estimate at www.ssa.gov. Or if you have additional questions on this, our resident guru, SSCritic can point you in the right direction.sunnyday wrote:Good to know about the Social Security Survivors benefit. I wasn't thinking about thatGrt2bOutdoors wrote: I believe you can dictate in the terms how much you would pay or what expenses would be covered by assets under the trust. Remember, child will also receive Social Security benefits if they are minors should you pre-decease them - that can be a good chunk of change on a monthly basis in addition to life insurance and any other assets after paying residual debt.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: your inheritance for young kids
This is how we set it up. Some of this depends on how complex/time-consuming/expensive probate is in your state. In our state it is apparently cheap and simple and therefore we have not done a living trust yet.sunnyday wrote:Thanks for the replies. It should be pretty standard for us, but we'll likely go with a professional. We like our lawyer, I think he charges about $1,500 -- does that sound right? The only thing is, is that I'm not sure how familiar he is with all of the tax laws. We'll keep him in mind, but probably shop around a bit.
What is typically considered living expenses in the trust? Are housing expenses (or a portion) typically included? We'd like to leave plenty for the caregiver (my sister in law) too so she could stay at home with the children if preferred.
All our accounts have beneficiaries: surviving spouse is primary, then "Trust as set forth in will of xyz" is the contingent. This is called a testamentary trust.
Insurance goes to our testamentary trust as well. Though typically not recommended because it subjects it to probate, in our case it allows the testamentary trust to come into effect.
Our testamentary trust says:
1/3 to each child (we have two) upon graduating from college, or turning 25, whichever comes first.
1/3 to each child upon getting married, or turning 31, whichever comes first, but not before the first 1/3.
1/3 to each child upon turning 35.
We figure they get three chances to get it right. Hopefully by age 35 they will be making good decisions and have something that helps their family out.
The will is also set up to minimize state and federal estate taxes, so that the surivivng spouse gets receives only up to the amount that will not trigger estate taxes upon his/her death. The rest automatically goes to the trusts. I think this is called a disclaimer trust.
(I'm not a lawyer. This is all my understanding based on hiring a lawyer).
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Re: your inheritance for young kids
We did this, but named a brother of mine as the executor and trustee, and my wife's sister (my children's godmother) as guardian.Grt2bOutdoors wrote:Thanks for the suggestion - my current attorney conversation went something like this:smackboy1 wrote:A good way to do this is to set up an irrevocable life insurance trust (ILIT). The ILIT owns the policy and is the sole beneficiary of the policy. To pay for the insurance premiums the parents make annual gifts to the ILIT (the ILIT will probably have to be a Crummey trust). The child (and future children?) will be the beneficiaries of the ILIT. While the parents are alive they can be the ILIT trustee and successor trustees will be named in the document. Terms and conditions of distributions to the the beneficiaries can be written into the ILIT.sunnyday wrote:How do you set up inheritance for young kids? Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child. Would you designate that a portion should be used on education or not be accessed until 21? Can this be done with a will by setting up rules and a custodian?
The parents will still need to have wills to name guardians and deal with other issues, but if done correctly the life insurance policy and proceeds will fall completely outside of the will and parents' estates. It should not be subject to estate tax or probate.
This is definitely a project where an experienced estates and trusts attorney should be used.
Me: How can I set up a trust to hold the life insurance proceeds in the event of our death for our minor child?
Attrny: Call up life insurance company and tell them you want to change the beneficiary to "in trust for your child".
Me: Isn't it better to set up a life insurance trust?
Attrny: The will has a provision for a trust to be created upon death that will hold all assets on behalf of the child and make distributions at ages you set.
Me: What about if I want to name investment manager trustees like Vanguard?
Attrny: It's better that the guardian of child and trustee of assets be the same, you don't want to have the guardian constantly having to send letters to investment manager saying "give me money".
Me and wife: Okay, thanks.
Me and wife walking out of office: we need to find an experienced trust and estates attorney, after getting the 2 minute shitck on other services provided by law office.
Just pick people you are comfortable with, and who have plenty of money of their own.
I trust my brother's judgement better than any institution.
Re: your inheritance for young kids
Just remember, if you use a person as a trustee, as opposed to an institution, then that person can do whatever they want with the money in the trust after you die, and there are no checks and balances to prevent it after you are gone. Yes, yes, I know the trust says that they have to use it for the benefit of the beneficiary, and yes I know the trust will specify when and how much to give to the beneficiary, but that is not the point of what I am saying. I am saying that when you are dealing with an individual trustee, the individual trustee will hold the checkbook and they can spend the money how they like after you are gone. They can write a check to themselves or anyone they want, and the check will clear. They shouldn't do it, and if you really trust them, they probably won't do it, but they can do it. Most people don't understand this.
Re: your inheritance for young kids
So are you saying there's no legal obligation for the individual trustee? The individual trustee could blow all the money in Vegas if he or she preferred?mptfan wrote:Just remember, if you use a person as a trustee, as opposed to an institution, then that person can do whatever they want with the money in the trust after you die, and there are no checks and balances to prevent it after you are gone. Yes, yes, I know the trust says that they have to use it for the benefit of the beneficiary, and yes I know the trust will specify when and how much to give to the beneficiary, but that is not the point of what I am saying. I am saying that when you are dealing with an individual trustee, the individual trustee will hold the checkbook and they can spend the money how they like after you are gone. They can write a check to themselves or anyone they want, and the check will clear. They shouldn't do it, and if you really trust them, they probably won't do it, but they can do it. Most people don't understand this.
Surprisingly, I may actually prefer that type of setup because I would have complete trust in our guardian doing what is best for our children.
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Re: your inheritance for young kids
I understood it, my lawyer on the other hand was more of the opinion - if you trust them to be the minor's guardian, wouldn't you trust them to be the manager of the money? This is why I am now searching for an experienced trust and estates attorney who will walk me through the process and structure it in a way that will work seemlessly - the last thing I would want is for investment manager to dictate how much spending and for what goes on, i just want them to manage the investment because I know my selected guardians while well-intentioned will either just stick it in a bank cd (not the worse thing, I know) or sit down with a dreaded "financial advisor" at the same bank who tried to sell them an alternative fund a few months ago with an er of 2.24%. I talked them out of doing it, but if I pass away, who will be that sounding board?mptfan wrote:Just remember, if you use a person as a trustee, as opposed to an institution, then that person can do whatever they want with the money in the trust after you die, and there are no checks and balances to prevent it after you are gone. Yes, yes, I know the trust says that they have to use it for the benefit of the beneficiary, and yes I know the trust will specify when and how much to give to the beneficiary, but that is not the point of what I am saying. I am saying that when you are dealing with an individual trustee, the individual trustee will hold the checkbook and they can spend the money how they like after you are gone. They can write a check to themselves or anyone they want, and the check will clear. They shouldn't do it, and if you really trust them, they probably won't do it, but they can do it. Most people don't understand this.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: your inheritance for young kids
Yes, there is a legal obligation for the individual trustee, and yes the individual trustee could blow all the money in Vegas if he wanted.sunnyday wrote:So are you saying there's no legal obligation for the individual trustee? The individual trustee could blow all the money in Vegas if he or she preferred?
Consider this imperfect analogy... Bernie Madoff had a legal obligation not to spend his clients' money. Did that stop him? No, it didn't...when he wrote the checks, they cleared the bank.
Re: your inheritance for young kids
Thinking about things more, I'd like to give the guardian a set amount of money too along with the social security survivors benefit. Taking care of kids is a fulltime job and I would want to the guardian to be FI at least while raising my children.
I assume this can be stated in the trust too, is that correct?
I assume this can be stated in the trust too, is that correct?
Going with the analogy, couldn't the financial institution take the money and run too? In that case, I would trust the guardian over the a stranger working at the bank not to break the law.mptfan wrote:Yes, there is a legal obligation for the individual trustee, and yes the individual trustee could blow all the money in Vegas if he wanted.sunnyday wrote:So are you saying there's no legal obligation for the individual trustee? The individual trustee could blow all the money in Vegas if he or she preferred?
Consider this imperfect analogy... Bernie Madoff had a legal obligation not to spend his clients' money. Did that stop him? No, it didn't...when he wrote the checks, they cleared the bank.
Re: your inheritance for young kids
I am missing some facts. You have a child who will get $2 million.
Do you have a wife (or husband) who will get nothing? Is the child's mother an ex-? Even as an ex, there is a good chance she would get custody rather than the person you designate in your will (but that's what lawyers and courts are for). Or do you have another $10 million policy with your wife as beneficiary, in which case the $2 million policy paid to the child is just a little generation skipping up front to avoid the hit when your wife dies after you?
Enquiring minds and all that.
Edit: I am still trying to reconcile the singular with the plural.
Single parent adoption? Single parent surrogacy or artificial insemination?
Do you have a wife (or husband) who will get nothing? Is the child's mother an ex-? Even as an ex, there is a good chance she would get custody rather than the person you designate in your will (but that's what lawyers and courts are for). Or do you have another $10 million policy with your wife as beneficiary, in which case the $2 million policy paid to the child is just a little generation skipping up front to avoid the hit when your wife dies after you?
Enquiring minds and all that.
Edit: I am still trying to reconcile the singular with the plural.
2nd edit:Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child.
Single parent adoption? Single parent surrogacy or artificial insemination?
Re: your inheritance for young kids
Yes, it's possible the financial institution could take the money and run, but there are two very important differences. First, most reputable financial institutions would have checks and balances in place to make it unlikely that one person could take the money. It's possible, but unlikely. There are no such checks and balances for individuals who have total control on how to spend the trust with no oversight by anyone. The second important difference is, if a financial institution does take the money and run, then the beneficiary of the trust can bring a lawsuit against the financial institution and recover damages for their breach of the fiduciary duty, and the financial institution will probably have the resources or the insurance coverage to pay the damages. By contrast, it would be very difficult or impossible to recover any substantial sum of money from an individual after the money is long gone.sunnyday wrote: Going with the analogy, couldn't the financial institution take the money and run too? In that case, I would trust the guardian over the a stranger working at the bank not to break the law.
Re: your inheritance for young kids
Simple solution if you're concerned; Put a provision in the trust that the trustee must post a bond. In some states it's required, in fact, if not waived by the trust instrument.
John
John
Re: your inheritance for young kids
Well, it's somewhat hypothetical so sorry for the inconsistances.sscritic wrote:I am missing some facts. You have a child who will get $2 million.
Do you have a wife (or husband) who will get nothing? Is the child's mother an ex-? Even as an ex, there is a good chance she would get custody rather than the person you designate in your will (but that's what lawyers and courts are for). Or do you have another $10 million policy with your wife as beneficiary, in which case the $2 million policy paid to the child is just a little generation skipping up front to avoid the hit when your wife dies after you?
Enquiring minds and all that.
Edit: I am still trying to reconcile the singular with the plural.2nd edit:Say a parent has $2million in life insurance and the sole beneficiary is their 5 year old child.
Single parent adoption? Single parent surrogacy or artificial insemination?
Both my wife and I are traditionally married and will be having a biological child (and hopefully more years down the road). The first beneficiary will be our spouse. However if we both died at the same time or around the same time, our 2nd beneficiary will be our children. We would also like to leave some for the guardian so they don't need to work while they're raising the children. I would like that (the additional "income" for the guardian) to be included in the trust for our children. If myself, spouse and children died at the same time, we would like our estate split evenly amongst our siblings and parents.
No more questions or else you're going to bum me out thinking about the different doomsday possibilities
Re: your inheritance for young kids
My $0.02:
Nobody grows up dreaming of being a trustee. It can be thankless job. Your brother may have the best intentions but how many times have you had to nag him to do something, or he take forever to do something, or just plain forgot? For a small trust there may be no other option, but for a large enough trust there are advantages to using a corporate trustee including:
1) They don't die, get sick, become incapcitated, or become alcoholic;
2) They are licensed, insured, bonded, and can always be found;
3) They have many employees to respond to requests immediately;
4) They never get emotional or try to impose their moral values;
5) They can say "no" to a beneficiary without making Thanksgiving awkward;
6) They can be fired without ill will.
Vanguard provides trustee services.
In some jurisdictions a trust can have persons hold the role of advisor or protector or appointer. The administration of the trust is handled by the corporate trustee but these persons have special powers to direct things like distributions, investment, replacing the trustee or other major decisions. Sometimes this is called a "directed trust". This can be a win-win where the family members are still involved but there is also a professional level of service.
Nobody grows up dreaming of being a trustee. It can be thankless job. Your brother may have the best intentions but how many times have you had to nag him to do something, or he take forever to do something, or just plain forgot? For a small trust there may be no other option, but for a large enough trust there are advantages to using a corporate trustee including:
1) They don't die, get sick, become incapcitated, or become alcoholic;
2) They are licensed, insured, bonded, and can always be found;
3) They have many employees to respond to requests immediately;
4) They never get emotional or try to impose their moral values;
5) They can say "no" to a beneficiary without making Thanksgiving awkward;
6) They can be fired without ill will.
Vanguard provides trustee services.
In some jurisdictions a trust can have persons hold the role of advisor or protector or appointer. The administration of the trust is handled by the corporate trustee but these persons have special powers to direct things like distributions, investment, replacing the trustee or other major decisions. Sometimes this is called a "directed trust". This can be a win-win where the family members are still involved but there is also a professional level of service.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
Re: your inheritance for young kids
In response to aude and letsgobobby: we wouldn't mandate distribution at age 35. That would throw the assets into the beneficiary's estate for estate tax purposes, and expose the assets to the beneficiary's potential creditors, including spouses. We would have the client instead give the beneficiary effective control over the trust at the age he/she would have otherwise mandated distribution. In other words, at that point, the beneficiary could become a trustee, could remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), and could have the power to appoint (give) the trust assets to anyone he/she wants (except himself/herself or his/her estate or creditors).
In response to sunnyday: it might make more sense to pay a bit more and get a lawyer who was familiar with the tax law.
In response to letsgobobby: leaving insurance proceeds payable to a testamentary trust doesn't make them probate assets.
In response to sunnyday: it might make more sense to pay a bit more and get a lawyer who was familiar with the tax law.
In response to letsgobobby: leaving insurance proceeds payable to a testamentary trust doesn't make them probate assets.
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Re: your inheritance for young kids
bumping thread to ask bsteiner:bsteiner wrote: ↑Sun Dec 23, 2012 12:17 amwe wouldn't mandate distribution at age 35. That would throw the assets into the beneficiary's estate for estate tax purposes, and expose the assets to the beneficiary's potential creditors, including spouses. We would have the client instead give the beneficiary effective control over the trust at the age he/she would have otherwise mandated distribution. In other words, at that point, the beneficiary could become a trustee, could remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), and could have the power to appoint (give) the trust assets to anyone he/she wants (except himself/herself or his/her estate or creditors).
is the intent of the sentence I highlighted that the beneficiary not be able to use the trust assets for his/her own benefit?
thank you
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: your inheritance for young kids
No. It's to give the beneficiary the power to appoint (give or leave) the trust assets to anyone except the beneficiary or his/her estate or creditors. That power has no adverse tax consequences.Lieutenant.Columbo wrote: ↑Sun Dec 10, 2017 9:47 ambumping thread to ask bsteiner:bsteiner wrote: ↑Sun Dec 23, 2012 12:17 amwe wouldn't mandate distribution at age 35. That would throw the assets into the beneficiary's estate for estate tax purposes, and expose the assets to the beneficiary's potential creditors, including spouses. We would have the client instead give the beneficiary effective control over the trust at the age he/she would have otherwise mandated distribution. In other words, at that point, the beneficiary could become a trustee, could remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), and could have the power to appoint (give) the trust assets to anyone he/she wants (except himself/herself or his/her estate or creditors).
is the intent of the sentence I highlighted that the beneficiary not be able to use the trust assets for his/her own benefit?
thank you
If the beneficiary had the power to take the trust assets, then the protections of the trust would be lost. However, if appropriate (in other words, if you would have given the beneficiary outright but for the protections of the trust) the co-trustee can make distributions to the beneficiary, and the beneficiary can have the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), without losing the protections of the trust.
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Re: your inheritance for young kids
Thank you, bsteiner.bsteiner wrote: ↑Mon Dec 11, 2017 8:48 amNo. It's to give the beneficiary the power to appoint (give or leave) the trust assets to anyone except the beneficiary or his/her estate or creditors. That power has no adverse tax consequences.Lieutenant.Columbo wrote: ↑Sun Dec 10, 2017 9:47 ambumping thread to ask bsteiner:bsteiner wrote: ↑Sun Dec 23, 2012 12:17 amwe wouldn't mandate distribution at age 35. That would throw the assets into the beneficiary's estate for estate tax purposes, and expose the assets to the beneficiary's potential creditors, including spouses. We would have the client instead give the beneficiary effective control over the trust at the age he/she would have otherwise mandated distribution. In other words, at that point, the beneficiary could become a trustee, could remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), and could have the power to appoint (give) the trust assets to anyone he/she wants (except himself/herself or his/her estate or creditors).
is the intent of the sentence I highlighted that the beneficiary not be able to use the trust assets for his/her own benefit?
thank you
If the beneficiary had the power to take the trust assets, then the protections of the trust would be lost. However, if appropriate (in other words, if you would have given the beneficiary outright but for the protections of the trust) the co-trustee can make distributions to the beneficiary, and the beneficiary can have the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), without losing the protections of the trust.
Can we put this in practical terms, please?
Made-up example:
Say the trust beneficiary now acting as Sole trustee takes $30K from the trust and...
1. ...uses $10K for her own school tuition.
2. ...takes $10K for personal expenses (food, furniture/travel/language lessons/etc)
3. ...uses $10K for beneficiary's child's school tuition.
Is the protection of the trust against creditors and spouses lost with any of the above three $10K uses?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: your inheritance for young kids
I didn't say that the beneficiary would be the sole trustee. The beneficiary would be a trustee together with a co-trustee. The beneficiary can't participate in decisions to make distributions to himself/herself, or for the support of his/her children. Those decisions would be made by the co-trustee. However, the beneficiary would (if appropriate) have the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), so that the beneficiary would effectively control the trust.Lieutenant.Columbo wrote: ↑Mon Dec 11, 2017 8:31 pm ...
Made-up example:
Say the trust beneficiary now acting as Sole trustee takes $30K from the trust and...
1. ...uses $10K for her own school tuition.
2. ...takes $10K for personal expenses (food, furniture/travel/language lessons/etc)
3. ...uses $10K for beneficiary's child's school tuition.
Is the protection of the trust against creditors and spouses lost with any of the above three $10K uses?
The co-trustee would also have a fiduciary duty to act in an appropriate manner.
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Re: your inheritance for young kids
Thank you, sir.bsteiner wrote: ↑Tue Dec 12, 2017 7:58 amI didn't say that the beneficiary would be the sole trustee. The beneficiary would be a trustee together with a co-trustee. The beneficiary can't participate in decisions to make distributions to himself/herself, or for the support of his/her children. Those decisions would be made by the co-trustee. However, the beneficiary would (if appropriate) have the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), so that the beneficiary would effectively control the trust.Lieutenant.Columbo wrote: ↑Mon Dec 11, 2017 8:31 pm ...
Made-up example:
Say the trust beneficiary now acting as Sole trustee takes $30K from the trust and...
1. ...uses $10K for her own school tuition.
2. ...takes $10K for personal expenses (food, furniture/travel/language lessons/etc)
3. ...uses $10K for beneficiary's child's school tuition.
Is the protection of the trust against creditors and spouses lost with any of the above three $10K uses?
The co-trustee would also have a fiduciary duty to act in an appropriate manner.
I didn't realize the beneficiary cannot be a sole successor trustee if the trust is going to protect assets against spouses/creditors.
Since the beneficiary as trustee and the co-trustee would be managing the trust together probably for many years, I imagine it hard for grantors to pick a successor co-trustee other than a corporate trustee.
Thank you for your clarifications.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: your inheritance for young kids
Retired lawyer here
Firm believer in corporate trustees in this situation. Have seen too many difficulties between family members when money is involved. No one thinks it will ever happen to their family, but it does.
After the loss of both parents, guardian has enough to do raising the child without having to also deal with the burdens of being a trustee. Moreover, unless the Guardian is a professional trust officer, he/she does not have the requisite experience.
And outright distribution of a lump sum to the guardian to soften the financial blow on him/her personally can be a good idea
Believe their partial distributions at designated ages are beneficial. Say 25 – 30– 35.
Use a lawyer. Something like this is not a lot of heavy lifting for someone who regularly deals with wills and trusts
Good luck.
Firm believer in corporate trustees in this situation. Have seen too many difficulties between family members when money is involved. No one thinks it will ever happen to their family, but it does.
After the loss of both parents, guardian has enough to do raising the child without having to also deal with the burdens of being a trustee. Moreover, unless the Guardian is a professional trust officer, he/she does not have the requisite experience.
And outright distribution of a lump sum to the guardian to soften the financial blow on him/her personally can be a good idea
Believe their partial distributions at designated ages are beneficial. Say 25 – 30– 35.
Use a lawyer. Something like this is not a lot of heavy lifting for someone who regularly deals with wills and trusts
Good luck.
Re: your inheritance for young kids
A lawyer who does not know the tax laws cannot possibly be an expert in trusts and estates. This is a specialized field and anyone doing this sort of planning needs such an expert.
If you do name a corporate trustee make sure your documents include provisions to change the trustee. Once you find an attorney who is expert in this area you should be able to get some guidance about which institutions you might like TODAY. But the industry is changing. Some banks leave the business, get bought out and so forth. Vanguard charges low rates but is relatively new. Even the experienced estates attorneys who post on here seem to have limited insight into the quality of beneficiary service you get from them. That is not a criticism of Vanguard. But a reminder to make your plans flexible enough to respond to changes down the road.
If you do name a corporate trustee make sure your documents include provisions to change the trustee. Once you find an attorney who is expert in this area you should be able to get some guidance about which institutions you might like TODAY. But the industry is changing. Some banks leave the business, get bought out and so forth. Vanguard charges low rates but is relatively new. Even the experienced estates attorneys who post on here seem to have limited insight into the quality of beneficiary service you get from them. That is not a criticism of Vanguard. But a reminder to make your plans flexible enough to respond to changes down the road.
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- Lieutenant.Columbo
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Re: your inheritance for young kids
what's the intent of the law requiring that trust beneficiary acting as trustee have a co-trustee in order for the trust to protect beneficiary from spouse+creditors?
I mean, why would the Law not like/allow/grant trust spousal+creditor protection if beneficiary were sole successor trustee?
I mean, why would the Law not like/allow/grant trust spousal+creditor protection if beneficiary were sole successor trustee?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: your inheritance for young kids
A lawyer who specializes in estates and trust will typically also have an LLM in tax. An LLM is an additional law degree post JD. LLM and CPA are entirely different things. The field of estate and trusts is very tax intensive and has to take into account current and future tax laws.
Generally:
When a person owns an asset in their own name they have the ability to receive benefit from it and also have control over it. So if they own $100, they can spend it on themselves or decide to invest it or give it to their kids. A trust is a tool which splits ownership into 2 parts: 1) benefit (beneficiary) and; 2) legal control (trustee). So the same $100 held in trust, the money can be spent to pay for something which the beneficiary wants or needs, but the trustee has to make the decision to do it. A beneficiary has no ability to direct how the $100 might be invested. A trustee cannot spend the $100 on themselves (exception would be reasonable fee compensation for work done on behalf of the trust). The law recognizes the usefulness and value of the trust by granting certain tax and asset protection features. For example, the assets held in trust are not considered part of the estate of either the beneficiary or the trustee and are not subject to estate tax. Also, if the beneficiary owes money to a creditor, trust assets are not owned by the beneficiary and so are not reachable. If the creditor tries to collect against the trust, the trustee could just refuse to pay the creditor. A creditor could go after trust assets distributed directly to the beneficiary, but there are way the trustee can take care of the beneficiary's needs without giving them any money. Nor can a creditor of the person/company of the trustee reach trust assets to satisfy a judgement against the trustee because the trustee cannot benefit (except their fees once paid). To be able to reach trust assets, the creditor would have to have a judgement against the individual trust itself.
So what if the beneficiary and the trustee are the same person? Now, the 2 separate parts of benefit and control ownership are joined together again for that 1 person. That beneficiary/trustee can decide to spend the $100 on themselves. As trustee, they may even have other powers such as changing the distribution rules of the trust. It's starting to look a lot less like a trust and more like that person has the same power as if they owned the assets in their own name. A sham trust. This can weaken or completely negate any tax or asset protection benefits of the trust. The IRS might consider the trust asset to be part of the beneficiary/trustee's estate and tax it. A court might order the beneficiary/trustee to pay a creditor because they are the same person. Another problem is the appearance of conflict of interest. The other beneficiaries might get suspicious that the beneficiary/trustee is self dealing or biased. The whole reason for a trust has just collapsed in on itself.
One solution is to create the trust so the beneficiary/trustee can wear both hats, but not for themselves. The further the trust moves away from looking like that person has outright ownership, the better. The co-trustee acts a check against the beneficiary/trustee's powers so that the important tax and asset protection features are not weakened or lost. The co-trustee strategy lets the grantor create a cake-and-eat-it-too situation where the beneficiary/trustee can have some limited control over the trust without losing all the trust protections. The trust language has to be carefully tuned like Goldilocks to prevent undesirable outcomes. For example, if the beneficiary/trustee can unilaterally fire and appoint the co-trustee at will, that might not be such great drafting. In the future a judge could force the beneficiary/trustee to fire the co-trustee and appoint the creditor as the new co-trustee - oops But if a bad co-trustee cannot be replaced, that's not good either.
Generally:
When a person owns an asset in their own name they have the ability to receive benefit from it and also have control over it. So if they own $100, they can spend it on themselves or decide to invest it or give it to their kids. A trust is a tool which splits ownership into 2 parts: 1) benefit (beneficiary) and; 2) legal control (trustee). So the same $100 held in trust, the money can be spent to pay for something which the beneficiary wants or needs, but the trustee has to make the decision to do it. A beneficiary has no ability to direct how the $100 might be invested. A trustee cannot spend the $100 on themselves (exception would be reasonable fee compensation for work done on behalf of the trust). The law recognizes the usefulness and value of the trust by granting certain tax and asset protection features. For example, the assets held in trust are not considered part of the estate of either the beneficiary or the trustee and are not subject to estate tax. Also, if the beneficiary owes money to a creditor, trust assets are not owned by the beneficiary and so are not reachable. If the creditor tries to collect against the trust, the trustee could just refuse to pay the creditor. A creditor could go after trust assets distributed directly to the beneficiary, but there are way the trustee can take care of the beneficiary's needs without giving them any money. Nor can a creditor of the person/company of the trustee reach trust assets to satisfy a judgement against the trustee because the trustee cannot benefit (except their fees once paid). To be able to reach trust assets, the creditor would have to have a judgement against the individual trust itself.
So what if the beneficiary and the trustee are the same person? Now, the 2 separate parts of benefit and control ownership are joined together again for that 1 person. That beneficiary/trustee can decide to spend the $100 on themselves. As trustee, they may even have other powers such as changing the distribution rules of the trust. It's starting to look a lot less like a trust and more like that person has the same power as if they owned the assets in their own name. A sham trust. This can weaken or completely negate any tax or asset protection benefits of the trust. The IRS might consider the trust asset to be part of the beneficiary/trustee's estate and tax it. A court might order the beneficiary/trustee to pay a creditor because they are the same person. Another problem is the appearance of conflict of interest. The other beneficiaries might get suspicious that the beneficiary/trustee is self dealing or biased. The whole reason for a trust has just collapsed in on itself.
One solution is to create the trust so the beneficiary/trustee can wear both hats, but not for themselves. The further the trust moves away from looking like that person has outright ownership, the better. The co-trustee acts a check against the beneficiary/trustee's powers so that the important tax and asset protection features are not weakened or lost. The co-trustee strategy lets the grantor create a cake-and-eat-it-too situation where the beneficiary/trustee can have some limited control over the trust without losing all the trust protections. The trust language has to be carefully tuned like Goldilocks to prevent undesirable outcomes. For example, if the beneficiary/trustee can unilaterally fire and appoint the co-trustee at will, that might not be such great drafting. In the future a judge could force the beneficiary/trustee to fire the co-trustee and appoint the creditor as the new co-trustee - oops But if a bad co-trustee cannot be replaced, that's not good either.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
- Lieutenant.Columbo
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Re: your inheritance for young kids
excellent explanation, I understand now; thank you very much for taking the time to type it upsmackboy1 wrote: ↑Thu Dec 14, 2017 8:50 am A lawyer who specializes in estates and trust will typically also have an LLM in tax. An LLM is an additional law degree post JD. LLM and CPA are entirely different things. The field of estate and trusts is very tax intensive and has to take into account current and future tax laws.
Generally:
[...]
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!