Trusts for adult Children

[FIREchief]

The big one seems to be keeping it from a spouse, which I think is kind of icky, but they can get a pre-nup if they want. What else?

Is a pre-nup NOT "icky?"

[FIREchief]

I don't buy warranties for electronics or carry collision/comprehensive on paid for cars after the first year or two, because I don't want to pay for insurance if I can afford to take the risk. I don't plan to leave my estate in trust because there is a cost (we can argue about how much, some say it is negligible but at least one of my kids would differ) to having the trusts, and I still don't see the payoff that I would value.

Can you name specific "options" they would have with the trust and not without that I would value? The big one seems to be keeping it from a spouse, which I think is kind of icky, but they can get a pre-nup if they want. What else?

keep it out of the hands of creditors if they go bankrupt, or are sued, or have a business deal go bad.

keep it out of their estate to minimize or avoid estate taxes.

these points have been made repeatedly.

letsgobobby - you have done a commendable job of answering questions and providing accurate and meaningful answers. Just thought you might want to hear that.

[FIREchief]

I ask a lot of questions which annoy attorneys, then make my own decisions.

Interesting. Can you provide examples of these questions that your attorneys find annoying?

(I can fully relate to your background. "Almost" like looking in a mirror, except no MBA. )

[NotWhoYouThink]

Yes, a pre-nup would be "icky", but if my kids do it that's on them, it wasn't me putting money in a trust to keep it from the spouse.

In some situations (like a fixed price agreement to develop an estate plan) attorneys seem to want to gather some pre-determined data points, plug them into their document generator, and present me with "the answer". That's kind of the business model. There is room in there for some discussion, but mostly they consider themselves to be the experts, and they expect me to follow their advice. Same with doctors to some extent. And Financial Advisors.

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.

[DarthSage]

I just wanted to address a couple questions that came up on the last page, that have come up as issues while settling MIL's estate:

(1) MIL did have a joint checking account with BIL, which was enough to cover immediate bills, such as cremation costs.

(2) when the account ran low, the estate lawyer recommended that DH/BIL each "loan" the estate several thousand dollars to cover ongoing costs (lawyer fees, etc.). Each brother kicked in identical amounts. This was no problem at all, since they'd each received a large insurance payout--which actually arrived within a few weeks of MIL's death. We were surprised at how quickly the check came.

(3) I expect the estate will need to borrow more, unless the revocable trust is dissolved quickly. We have 2 different estate attorneys--one that MIL worked with when she was alive, another in the state where she died. Plus an estate accountant. MIL had multiple accounts spread out over 3 companies, including 7 (!!!) IRAs with RMDs. It's more complicated than we anticipated. I want to add that MIL was very financially savvy, and would be among friends here on this site. I'm sure she believed she made things as easy as possible for her sons. Which scares me a bit.

[NotWhoYouThink]

(3) I expect the estate will need to borrow more, unless the revocable trust is dissolved quickly.

Can't money from the revocable trust be used to settle estate issues? Are the investments too illiquid to sell easily to fund near term expenses?

[PatrickA5]

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.

I tend to over analyze things like this myself - almost to a point where I can't make a decision. I've read probably a half dozen books on pros/cons of Wills vs Trusts. I'm a CPA and last year did my entire 40 hours of continuing education on Estates and Trusts education. Yuck! Right now, I'm leaning toward just keeping my Will as it is and work on making the rest of my estate probate-proof.

BUT, I do have a meeting with one of the supposedly better estate lawyers in town, so I'm sure he'll have something different to suggest. If I do go with a Trust, I'll probably just do something simple where the sucessor trustee is the beneficiary and has power to do whatever. But, I'm not sure that does any more good than a Will that doesn't go through probate?

[WannabeAgAlum]

NotWhoYouThink: You asked if I was an attorney - not sure whether I should be offended or flattered. Yes, I am. I have come to accept it. "Hi, my name is WannabeAgAlum, and I'm an attorney..."

I am comfortable with mandatory outright distributions from trusts as long as the client understands the alternatives and rejects them. You clearly do and have. When kid or kid's attorney comes to me later after mom/dad have died and ask why on earth the trust mandated distributions at a set age when in today's world 50% of people divorce, creditors lurk, etc. etc. (don't want to rehash it all TOO much), I want to be able to point to the note in the file that we had the conversation and it was rejected. If it were your kid, I'd point to this lovely thread. You've been raked through the coals on this issue.

I imagine it's hard trusting other professionals when you're the smartest person in the room (not trying to take a jab at you; smart people often know they're smart). I knew a fellow who after he reviewed his trust crossed out about half of the language in the document and directed the attorney to draft it another way that would have been disastrous. The guy was much smarter than the attorney (generally), but had no clue about the tax code or estate planning. He didn't understand the provisions he was crossing out, which is probably why he crossed them out. Brilliant in his field (PhD), but did a pretty boneheaded thing. Attorneys can't just do whatever their clients want - they have to act in their clients' best interests.

As a parting thought, I'll share one more experience. Client came to attorney and asked for mandatory outright distributions immediately after death for kids' shares because he had bad experience with parents' trust. Conversation about alternatives occurred, then client wanted to involve children in the discussion (not always a good idea). Attorney and client and client's children had discussion, and children basically said "why wouldn't we want continuing trusts?" Attorney explained hassle factor, extra income tax return, learning curve, involving professionals for big decisions, etc. Given size of shares, and children's input, client went with lifetime trusts. If they would have gone with outright, then fine. At least they could make an informed decision.

Wannabe

[WannabeAgAlum]

NotWhoYouThink: Just one more question. Is there a share value where you would want to go with a continuing trust for kids? E.g., you have $1 billion, and 1 kid, and want it all to go to kid. Would you leave it outright? Remember you've virtually guaranteed will kid will pay hundreds of millions in estate tax at his/her death if you do so. If you'd leave it in trust, then what value is low enough to ditch the trust and have it go outright?

Wannabe

[DrGoogle2017]

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.

I tend to over analyze things like this myself - almost to a point where I can't make a decision. I've read probably a half dozen books on pros/cons of Wills vs Trusts. I'm a CPA and last year did my entire 40 hours of continuing education on Estates and Trusts education. Yuck! Right now, I'm leaning toward just keeping my Will as it is and work on making the rest of my estate probate-proof.

BUT, I do have a meeting with one of the supposedly better estate lawyers in town, so I'm sure he'll have something different to suggest. If I do go with a Trust, I'll probably just do something simple where the sucessor trustee is the beneficiary and has power to do whatever. But, I'm not sure that does any more good than a Will that doesn't go through probate?

My understanding where the trust is better than the will is the in between stage before you get to death. Will deals with what happens at death. What about being incapacitated? Who will take care of things. I have a sister who has nothing. I’m not worrying about her estate when she dies, but what happens to everything when she can’t talk, can’t think, who will pay for her bills, will she lose her house if she has nobody to pay her mortgage or property tax, basically the in between phase.

[DarthSage]

(3) I expect the estate will need to borrow more, unless the revocable trust is dissolved quickly.

Can't money from the revocable trust be used to settle estate issues? Are the investments too illiquid to sell easily to fund near term expenses?

Possibly. The lawyer suggested the loan to the estate. The assets may not have been touchable at the time--it was fairly soon after MIL died. I "think" the sons can access the revocable trust now. It's kind of hard to keep up--there's a 3-page punch list of items to be completed. We've mostly been focusing on getting the 2017 RMDs. Plus, MIL's 1041 has to be filed next month. Did I mention that DH is in grad school, as well as having one of those pesky "job" things? I try to help him as much as I can--ironically, I love this stuff--but unfortunately, this is primarily DH's burden.

[delamer]

NotWhoYouThink: You asked if I was an attorney - not sure whether I should be offended or flattered. Yes, I am. I have come to accept it. "Hi, my name is WannabeAgAlum, and I'm an attorney..."

I am comfortable with mandatory outright distributions from trusts as long as the client understands the alternatives and rejects them. You clearly do and have. When kid or kid's attorney comes to me later after mom/dad have died and ask why on earth the trust mandated distributions at a set age when in today's world 50% of people divorce, creditors lurk, etc. etc. (don't want to rehash it all TOO much), I want to be able to point to the note in the file that we had the conversation and it was rejected. If it were your kid, I'd point to this lovely thread. You've been raked through the coals on this issue.

I imagine it's hard trusting other professionals when you're the smartest person in the room (not trying to take a jab at you; smart people often know they're smart). I knew a fellow who after he reviewed his trust crossed out about half of the language in the document and directed the attorney to draft it another way that would have been disastrous. The guy was much smarter than the attorney (generally), but had no clue about the tax code or estate planning. He didn't understand the provisions he was crossing out, which is probably why he crossed them out. Brilliant in his field (PhD), but did a pretty boneheaded thing. Attorneys can't just do whatever their clients want - they have to act in their clients' best interests.

As a parting thought, I'll share one more experience. Client came to attorney and asked for mandatory outright distributions immediately after death for kids' shares because he had bad experience with parents' trust. Conversation about alternatives occurred, then client wanted to involve children in the discussion (not always a good idea). Attorney and client and client's children had discussion, and children basically said "why wouldn't we want continuing trusts?" Attorney explained hassle factor, extra income tax return, learning curve, involving professionals for big decisions, etc. Given size of shares, and children's input, client went with lifetime trusts. If they would have gone with outright, then fine. At least they could make an informed decision.

Wannabe

Many people have a tendency to overestimate how unique or special their personal, and family, situation is. Probably natural enough to want to believe that you are a rose among thorns, or whatever.

But my experience is that long-practicing professionals in their respective fields (law, medicine, therapy, etc.) have seen a lot of situations similar to your own play out and get very good at identifying the pluses and minuses of different approaches.

Not to say that anyone should abdicate their personal decison-making, just to recognize that we human beings tend to follow certain patterns.

[PatrickA5]

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.

I tend to over analyze things like this myself - almost to a point where I can't make a decision. I've read probably a half dozen books on pros/cons of Wills vs Trusts. I'm a CPA and last year did my entire 40 hours of continuing education on Estates and Trusts education. Yuck! Right now, I'm leaning toward just keeping my Will as it is and work on making the rest of my estate probate-proof.

BUT, I do have a meeting with one of the supposedly better estate lawyers in town, so I'm sure he'll have something different to suggest. If I do go with a Trust, I'll probably just do something simple where the sucessor trustee is the beneficiary and has power to do whatever. But, I'm not sure that does any more good than a Will that doesn't go through probate?

My understanding where the trust is better than the will is the in between stage before you get to death. Will deals with what happens at death. What about being incapacitated? Who will take care of things. I have a sister who has nothing. I’m not worrying about her estate when she dies, but what happens to everything when she can’t talk, can’t think, who will pay for her bills, will she lose her house if she has nobody to pay her mortgage or property tax, basically the in between phase.

I'll ask the lawyer about the incapacity issues. I've read that Trusts are better than POA's when dealing with banks. But, I've also read where POA's are just fine. I don't know for sure. We currently have POA's, but they are "springing" POA's that don't take affect until proven incapcitated by doctors. I want to change those to "immediate" POA's. We've been married 38 years and don't see the need for the complexity in having doctors involved in our situation.

[Sandtrap]

. . .
In some situations (like a fixed price agreement to develop an estate plan) attorneys seem to want to gather some pre-determined data points, plug them into their document generator, and present me with "the answer". That's kind of the business model. drive thru window? There is room in there for some discussion, but mostly they consider themselves to be the experts, and they expect me to follow their advice. Same with doctors to some extent. And Financial Advisors.

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.Yes!

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.Indeed!

Outstanding!
I wonder if the majority of "Bogles" apply this actionable "logic'?

great post, very informative.
j

[NotWhoYouThink]

WannabeAgAlum, an engineer friend used the phrase "square peg in a square hole" to describe someone whose job in life fit his personality well. He'd probably say that about you being a lawyer, it seems to fit. People doing what they enjoy are usually pretty good at it.

Maybe I should print this thread out and file it with the will/trust documents so the kids see my reasoning.

One of the great things about Megacorp was that there were so many very smart people around that only the least perceptive ever felt like they were the smartest people in the room. It's fun to work around brains. But as far as questioning expert advice, I just always felt that advice was more actionable to me if I understood why. Bogleheads can tell newbies to go with a 3 fund portfolio and will have given good advice, but this site has a huge wiki that is constantly being updated and a lot of discussion about why it's a good idea. And still there are Target Date Fund posters, slicers/dicers/tilters, 2 Fund portfolios, 4 fund portfolios, and real estate investors around here. Taking good basic advice and running with it works, but so does taking good basic advice and adjusting it to fit your situation and preferences. I enjoy the discussions around here. Most of the time.

[Dinosaur Dad]

Right now our will leaves everything to a trust, managed by my brother-in-law, who we consider to be trustworthy and knowledgeable. He would have the ability to move the assets to our son at his discretion (no set timetable).

Lately, quite frankly, I've been having second thoughts - specifically about trust tax rates, which are astronomical. It would pain this Boglehead to lose all that.

OTOH, I don't think my son (age 23) would be able to handle a large ($5 million plus) estate right now. So what we may do is change the will so that there's a clearer, more specific path e.g. x% at age 30, y% at age 40. The tax bite will still be bad, but that seems to be the right compromise.

The trust tax rates only matter to the extent that the income is retained in the trust. Any income paid out to the beneficiary is taxed at the beneficiary's rates on the individual tax return. To minimize the income tax hit one can distribute any income that would be taxed at a higher rate for the trust than for the individual. The higher the beneficiary's tax rate the less difference it makes. If the beneficiary is in the top tax bracket then it saves taxes to keep the income in the trust.

Even for that large a trust the combination of low current dividend rates and low interest rates on Muni bonds means relatively low taxable income.

As long as you have an independent trustee making decisions about distributions the trustee can decide each year whether to make distributions and if so how much. This is almost certainly better than forcing the money out of the trust at set ages.

Thank you afan for your thoughtful post - I guess I need to do more homework here about how this would work. I understand your point about relatively low taxable income, and passing that through (his tax bracket's pretty low right now). But I guess the question then is, when you look at the long-term growth in the value of the assets, is keeping them in a trust a significant disadvantage? I suppose if you limit income and focus on long term capital gains, it's not as much of a difference as I'm thinking.

[afan]

Keeping money in the trust vs distributing.
Probably taxes should not be the primary consideration. If the beneficiary needs the money, then the trustee should spend it for the beneficiary or distribute it to them.

If the beneficiary does not need the money, then there are, often, income tax advantages of distributing those amounts of income that would be taxed at lower rates on the individual return.

But any money that leaves the trust loses the protections it has from being in the trust. Regularly taking money from the trust can make it more difficult to invoke the separation between what the trust owns and what the individual owns. This gets into law that is far above my head (I am not a lawyer).

I have a friend whose parents left the bequest in trust. Initially friend was upset as some of the others on this thread have indicated. "Why did they make my life more complicated? Why do I have to deal with the hassle of having a trust???""

I read it and told her that it said exactly what it should say. We went over the advantages of having it in trust vs owned outright. Friend is the sole trustee. As written, friend would need an independent trustee to do discretionary distributions. Friend has a good job and has saved throughout career. Does not need to spend any of the money. So it sits in the trust and accumulates. It will be available later in life if friend needs it. If not, and I suspect none of it will be needed, it will pass to friend's children with no state or federal estate taxes. Friend is solidly in state estate tax regime and the taxes, while lower than federal, would be substantial.

Now friend is setting up an estate plan to be identical to the one from friend's parents.

Since friend is the trustee and the trust assets are all in a single brokerage account there are no expenses associated with having the trust. There is the need for the trust to file a tax return, since friend does not distribute any income. But the tax return is simple. The only forms are a single one from the brokerage account. There are no expenses, no charitable deductions, nothing else to complicate matters.

When people talk about the complexity, hassle and cost of having the money in trust I suspect they have never actually been in that situation. There is nothing to it.

[afan]

Power of attorney vs trust.
Having dealt with this once for a declining elderly person there was no comparison. For assets held in the person's revocable living trust, all I had to do was prove that I was the trustee and I was able to manage things with no more hassle.

I would compare this to my experience with a perfectly legal durable power of attorney, but I cannot compare them. I cannot because not a single institution would accept the DPOA. Not one. I had it, but it was completely useless. Fortunately at the time we realized this the person was still able to transfer money into the trust. That was more than enough to take care of the person as their health declined. It would have been a real problem if we needed that money to pay bills and it was locked up in individual accounts at places that would not accept the POA. I suppose we could have hired a lawyer and tried to force the issue. But that would have taken time and cost money. With the trust it just worked.

The person had appointed me trustee, not successor trustee, so I did not have to prove that the event that would have triggered succession had occurred. I do not know how that would have gone if it had been necessary.

When we set up our estate planning our lawyer said not to use springing powers since those lead to arguments about the event needed to spring the power had taken place. Spouse and I have DPOA's for each other and the same two relatives who can step in if neither of us is functional. We are lucky in that we completely trust each other and the two relatives. We realize that not everyone is in that position.

[afan]

Maybe I should print this thread out and file it with the will/trust documents so the kids see my reasoning.

Our kids are analytical types. The one who will be tasked with taking over when we are too enfeebled to manage our affairs is also very knowledgeable financially. This adult child has sat patiently through explanations of the estate planning and has copies of the documents. I am fully confident that everything will be handled correctly and our attorney included an extremely helpful layperson's explanation of how this work.

But even the analytical/financially savvy heir is not interested in reading the details. Some of it is an endearing reluctance to discuss parents' deaths. Part of it is reluctance to consider spending money they did not earn. Already have received significant assets to avoid estate taxes. The money is invested, income taxes paid, and has never been touched.

The way things are going, maybe the money will be used to pay for our grandchildren's educations, although our kids know we hope to pay for that ourselves. Maybe to buy houses. Maybe to supplement our kids retirements.

But the notion of using it to buy a car or take a vacation is as far out of the question for them as it would be for me.

As I said, we are lucky.

[NotWhoYouThink]

afan, your description of the difference between a perfectly drafted POA and a trustee are consistent with what I have seen in my extended family and heard about on other forums. The POA should work, but mostly doesn't. Being a co-trustee works slick as...well, as very slick stuff.

I'm still figuring out at what level of assets I'd consider allowing the kids to be their own trustees rather than turning the money over outright. Higher than 7 figures, probably lower than 10. I'll consider families I know directly or indirectly and think about it. People even on this thread aren't always talking about the same thing, of course. Some talk about the kids becoming sole trustees with ability but not requirement to appoint co-trustee, and some are talking about kids always having the co-trustee in the loop. There are a lot of options.

[FIREchief]

In some situations (like a fixed price agreement to develop an estate plan) attorneys seem to want to gather some pre-determined data points, plug them into their document generator, and present me with "the answer". That's kind of the business model. There is room in there for some discussion, but mostly they consider themselves to be the experts, and they expect me to follow their advice. Same with doctors to some extent. And Financial Advisors.

LOL. Thanks for this explanation. Many of your prior comments now make a whole lot more sense to me.

At the dawn of my estate planning phase, I spent a lot of time researching everything I could find about trusts of all kinds. As with you, that "prepared" me with a LOT of questions to keep in mind as I started to screen attorneys. That process was itself highly educational, although where you apparently found it annoying, I actually found it more amusing. Maybe because I was recently FIREd and had plenty of time to "waste." I met with two firms that match your descriptions to a tee! (gather pre-determined data, plug into document generator, present answer in big fancy binder, cash check, see you in another life.....) So, I started looking into the website for the fancy sounding national estate attorney "society" that they proudly advertised their memberships in. I found a section geared towards selling their software product to member law firms. Then I found a video "turorial" sales pitch on why law firms should buy their all-encompassing software (this includes the document generator you describe). I was really surprised and enlightened. It described the entire sales process from registration and the introductory seminar through cashing the checks. All laid out as a business model like you described. Basically, the process was a) sign up clients to attend hotel seminar, b) meet with junior attorney/salesperson who asks for check and assigns homework, c) office staff plugs numbers from homework into mega-computer and spits out 500 pages of fancy looking documents, d) office staff stuffs all this into the biggest, nicest gold embossed binder you have ever seen, e) client returns and signs their name 50 times and walks out with binder. It took me about two of my long list of questions to determine that I needed a "real" estate attorney. Did I mention that the snacks at the hotel seminar were very tasty?

I like to analyze things to death, and ask a lot of questions, and am seldom so over-awed by the intelligence and expertise of the exalted professional that I take advice without a lot of questions about why that's the best path and what other possible solutions were rejected to come up with this answer. Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship

This is encouraging, because I believe it is exactly how everybody should approach something as important as estate planning. I will say that your experience departs from mine at this point. I've found the pricing structure to be more tied to my geographical area than which attorney a person uses. I think there are competent estate attorneys who have package pricing, and I think there are also hourly attorneys who are just selling a canned product.

And when someone who really really thinks he is giving me good advice won't accept that the course of action he is advising doesn't fit my needs and keeps insisting it really does I just don't understand, it kind of makes us both cranky.

Don't get cranky, find a better attorney!! (they are out there)

[FIREchief]

Power of attorney vs trust.

I would compare this to my experience with a perfectly legal durable power of attorney, but I cannot compare them. I cannot because not a single institution would accept the DPOA. Not one. I had it, but it was completely useless.

First, I agree with everything afan has shared regarding a trust being superior to use of a DPOA. That said, there is one situation where this really isn't possible:

"LIving person has most assets in qualified retirment plans, and becomes incapacitated. Assets within living trust are readily available to successor trustee who is looking out for inapacitated individual. From time to time, assets run low and money must be withdrawn from qulified retirement plan to replenish trust."

Since qualified retirment plans can not be put into trust (during a person's lifetime), a working DPOA must be crafted to allow funds to be withdrawn for the care of the incapacitated individual. Okay, so that's the problem. I think I have found at least one solution (hopefully). I have taken my DPOA to my borkerage and asked them to have their legal department review it. They archived a copy and provided postitive feedback that it WILL be accepted in the event of my incapacitation. I won't know for certain until the time may come, but I am at least hopeful. I'm curious if anybody else has attempted this type of proactive approach.

[WannabeAgAlum]

Power of attorney vs trust.

I would compare this to my experience with a perfectly legal durable power of attorney, but I cannot compare them. I cannot because not a single institution would accept the DPOA. Not one. I had it, but it was completely useless.

First, I agree with everything afan has shared regarding a trust being superior to use of a DPOA. That said, there is one situation where this really isn't possible:

"LIving person has most assets in qualified retirment plans, and becomes incapacitated. Assets within living trust are readily available to successor trustee who is looking out for inapacitated individual. From time to time, assets run low and money must be withdrawn from qulified retirement plan to replenish trust."

Since qualified retirment plans can not be put into trust (during a person's lifetime), a working DPOA must be crafted to allow funds to be withdrawn for the care of the incapacitated individual. Okay, so that's the problem. I think I have found at least one solution (hopefully). I have taken my DPOA to my borkerage and asked them to have their legal department review it. They archived a copy and provided postitive feedback that it WILL be accepted in the event of my incapacitation. I won't know for certain until the time may come, but I am at least hopeful. I'm curious if anybody else has attempted this type of proactive approach.

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

[FIREchief]

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

Thanks. You are correct, however if a person's situation requires a springing POA, the banks/brokerages don't offer those. Correct?

[MikeG62]

I think I'm in the minority here (pretty sure actually), but I will never be comfortable approaching end of life thinking, "once I'm gone, I won't care anymore so none of this matters any more."

+1. We seem to go through endless machinations on this forum about how best to prepare spouse for our eventual passing, but it's somehow different when it comes to our kids? C'est la vie? I'm gone so who cares? I don't want to control what happens, except to minimize the odds that any potential inheritance ends up with schemers or scammers. Seems like there are some pretty easy steps that can be taken.

Another +1 here.

Just amazing to me how many responders to this thread could not seem to care less about what happens to the hard earned money they bequeath to their children. Folks, sometimes people need to be protected from their own actions, especially young and inexperienced people (regardless of how much schooling they may or may not have). I would have counted myself in this group in my 20's and yet I accumulated enough money for DW and I to fully retire in our early 50's with no pension. WAY too much credit being heaped upon kids here to manage (be responsible for) a far greater sum of money than our kids have any experience managing or perhaps ever thought they'd manage (some exceptions to this obviously, but true for the vast majority).

Personally, my biggest worry is what happens in the event of divorce. Seen way too much divorce in my extended family. It's just so common nowadays. So for this, among the other very compelling reasons offered up by others on this thread (special shout out to WannabeAgAlum, FIREchief and afan for the time and effort they dedicated here) my DW and I have chosen to go the trust route.

We have discussed the reasons why we plan to use trusts with our two adult (but as yet unmarried) daughters and both are "100% on board". In fact, they questioned why anyone with a sizable estate would do it any other way. I suppose I could show them this thread, but I won't. They understand they will have reasonable access to funds in the trust (ascertainable standard/HEMS).

The only real drawback in my eyes is cost. We have made the decision that the benefits outweigh the costs.

[WannabeAgAlum]

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

Thanks. You are correct, however if a person's situation requires a springing POA, the banks/brokerages don't offer those. Correct?

I don't know. I generally like using powers that are effective immediately. Agents named in those powers don't have to know about them right away.

Wannabe

[FIREchief]

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

Thanks. You are correct, however if a person's situation requires a springing POA, the banks/brokerages don't offer those. Correct?

I don't know. I generally like using powers that are effective immediately. Agents named in those powers don't have to know about them right away.

Wannabe

With my brokerage, I believe that my newly named POA would know the next time they logged into their on-line account. (this is a feature, not a glitch)

[WannabeAgAlum]

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

Thanks. You are correct, however if a person's situation requires a springing POA, the banks/brokerages don't offer those. Correct?

I don't know. I generally like using powers that are effective immediately. Agents named in those powers don't have to know about them right away.

Wannabe

With my brokerage, I believe that my newly named POA would know the next time they logged into their on-line account. (this is a feature, not a glitch)

Hmmmm. Maybe you print it out the old-fashioned way, sign it, don't submit it to brokerage yet. Give it to trusted advisor if one exists and is not a fraidy cat like me. Then let it be known who needs to be contacted should you blow a fuse. There is probably no perfect answer here.

Wannabe

[FIREchief]

FIREchief: If you really want to have things go quickly with your bank/broker, use their version of the power of attorney. If I am not mistaken, they typically limit the power to accounts only at that institution. Of course your other powers of attorney will need to account for that and your EP attorney should be aware of it too.

Wannabe

Thanks. You are correct, however if a person's situation requires a springing POA, the banks/brokerages don't offer those. Correct?

I don't know. I generally like using powers that are effective immediately. Agents named in those powers don't have to know about them right away.

Wannabe

With my brokerage, I believe that my newly named POA would know the next time they logged into their on-line account. (this is a feature, not a glitch)

Hmmmm. Maybe you print it out the old-fashioned way, sign it, don't submit it to brokerage yet. Give it to trusted advisor if one exists and is not a fraidy cat like me. Then let it be known who needs to be contacted should you blow a fuse. There is probably no perfect answer here.

Wannabe

That might be a great backup plan!

I am cautiously optimistic that my approach, as described above, will work just fine; but, until I lose my mind, nobody will really know.

[afan]

In the one case where I needed to use a POA and it did not work the person was old enough to have been forced to withdraw nearly all the money in the retirement plans.

For a younger person I agree this would be a problem. For our retirement plans we have signed up each other as POA using the process of the plan administrators.

As I said, we are fortunate in having two people beyond ourselves we completely trust to hold the POA. For those who are not in that position it could be a challenge knowing what to do.

I cannot see creating a DPOA document but not telling the attorney in fact about it as accomplishing anything. Neither would it do any good to tell them but not give them the document. In one case they cannot act because they don't know they are supposed to. In the other case, they know what you have told them but they cannot prove they have a POA because they cannot produce the document.

Just as we have made sure that each if us can act as trustee for the other's trust I would worry about a POA that only came into action when we were incapacitated. No way to test that it will work.

[Finridge]

Again, that works ok when I'm paying by the hour, less so with pricing geared toward a more transactional relationship.

But I'll bet that the experts you do pay by the hour really love having you as a client!

[Finridge]

For those of you who do plan to have distributions to adult children governed by a irrevocable trust, what approach are you taking:

- Put your Vanguard accounts into a living trust that becomes irrevocable on your death?

- Keep in your own name and list the trust as the "payable on death" beneficiary. (I'm not sure if Vanguard even allows this... once when I asked them about doing this years ago, they said it was not possible.)

- Put into an irrevocable account now, with the viewpoint of not only protecting the trust assets against future creditors of your children, but also protecting against creditors you develop later. (Like, say, a judgement recorded against you after you crash into that charter bus taking the local bingo club to the casino.) One big downside I'd see with this is that I suspect this would make it impossible to get a step-up in tax basis on death.

[afan]

Living trust. That handles the estate planning goals and has advantages discussed above while the grantor is still alive.

POD has problems that I would avoid.

Creating and funding an irrevocable trust now is fine for those who can afford it. This works best for those who are sure they will have no need for the money for the rest of their lives. If you put money into such a trust then draw on it for yourself you weaken the asset protection. Again, the legal issues are beyond me but the basic idea is that the protection is greatest when it is clearly no longer your money in substance as well as in form.

The best protection of these trusts require elaborate measures to make it clear that the grantor has no control over it. Need completely independent trustees. Expensive to set up and maintain. The best protection may come from offshore trusts. Even more expensive to set up and maintain. Probably only worth it for those who

Have a lot of money that they will never need
Have a high risk of lawsuits
Cannot use insurance to protect themselves

[pennywise]

My understanding where the trust is better than the will is the in between stage before you get to death. Will deals with what happens at death. What about being incapacitated? Who will take care of things. I have a sister who has nothing. I’m not worrying about her estate when she dies, but what happens to everything when she can’t talk, can’t think, who will pay for her bills, will she lose her house if she has nobody to pay her mortgage or property tax, basically the in between phase.

This. We (husband, his brother and brother's wife) are reaping the enormous benefits in peace of mind and ability to take care of my MIL because there is a trust in place. After a period of mental decline and 2 hip fractures, I insisted that she and her two sons meet with a competent attorney specializing in estate planning. Luckily she was still aware enough, and trusted her sons enough, to cooperate. Everything was set up at that point including placing her house and bank accounts in a trust as well as medical and legal POA and health care proxy docs. Less than 6 months later she had her 3rd hip fracture and because everything was in order we were able to get her relocated to assisted living, take care of her bills and rent out her house to defray her living costs.

I've got a colleague and friend who is living the other side of this scenario; mother is declining rapidly but has adamantly refused to set up trusts or other arrangements. Became ill during a trip out of the state in which she lives, is in the hospital now which wants to discharge her but family doesn't have any arrangements in place for a transition-she is unable to walk or handle ADL of any kind including feeding herself. Legally she is completely 'competent' so there's an emergency hearing today to determine if the family or state can now take over care decisions.

Trusts can indeed make a huge positive difference for families, caregivers and the elderly in ways that are impossible to predict.

And last thank you to the OP and everyone participating in this discussion; my husband and I need to get ourselves to that same estate planning attorney. We set up trusts, wills, etc a few years ago but never transferred titles etc. My son mentioned recently that 'if something happens to you and dad, we (sister and him) have no idea what to do'. So 2018 is the year to remedy that and hopefully ensure our kids can rest easier knowing things are arranged to avoid putting them through an ordeal.

[afan]

One step we missed when dealing with a situation like pennywise's MIL: insurance. Although we had moved almost all the assets into the trust, things like homeowners insurance were still in the name of the beneficiary, rather than the trust. This meant they would not deal with me as trustee, since I was not the insured. It is important to clean up these details as one takes over for a declining individual.

The second situation that pennywise describes would only be partly helped by a trust. On the narrow financial matters, a typical revocable living trust is revocable. The competent grantor could revoke the trust, replace the family members who are serving as trustees and frustrate any attempts to help. The trust is the grantor's to do with as she pleases.

The trust would do nothing at all for getting the competent but declining person into a nursing home. She would have to agree. Fortunately, I have never encountered a situation where someone who needed help refused it. It sounds like you need a guardianship that states the family members rather than the individual herself makes the decisions about where she will live, medical care, etc. My understanding of getting a guardianship was that the critical issue was whether the individual was capable of making her own decisions. If she is then no guardianship. If she really is competent, and opposes the guardianship then of course it should not happen.

A lawyer friend, not an expert in this area but knew a lot more about it than I do, told us that guardianships are cumbersome, since they involve the courts. If you really have someone who is a danger to themselves because they refuse the help they need, then there may be no choice. But, I was told, for the rest of their lives, unless they recover and no longer need the protection, you have extensive reporting requirements and oversight by the government. This is to protect the elderly from predatory guardians, but for those who are only trying to help it sounded like a lot of additional hassle and some expense.

[WannabeAgAlum]

For those of you who do plan to have distributions to adult children governed by a irrevocable trust, what approach are you taking:

- Put your Vanguard accounts into a living trust that becomes irrevocable on your death?

- Keep in your own name and list the trust as the "payable on death" beneficiary. (I'm not sure if Vanguard even allows this... once when I asked them about doing this years ago, they said it was not possible.)

- Put into an irrevocable account now, with the viewpoint of not only protecting the trust assets against future creditors of your children, but also protecting against creditors you develop later. (Like, say, a judgement recorded against you after you crash into that charter bus taking the local bingo club to the casino.) One big downside I'd see with this is that I suspect this would make it impossible to get a step-up in tax basis on death.

Options 1 and 2 should have the same result (assuming the accounts are not retirement accounts) following death. Option 1 is better if you want to plan for incapacity prior to death.

Option 3 is different of course because you're now planning for yourself. Many jurisdictions offer self-settled asset protection trusts of some sort (sometimes referred to as domestic asset protection trusts). They can serve many purposes. Some attorneys will tell you they're wonderful, and others are wary of them. They can be drafted so that you still get a step-up. (By the way, those who try to set these types of trust up for creditor protection probably wish their parents would leave their inheritance in trust for them.)

If you are married and trust your spouse, you could set up an irrevocable trust for him/her and descendants where you don't retain an interest in the trust. So you don't even have a beneficial interest. (With domestic asset protection trusts, you retain an interest.) Family can get distributions. Trust can also be drafted to be out of your and their estates for estate tax purposes. You can also make it a "grantor trust" for income tax purposes so that you are liable for the income taxes on the trust - this is like you making tax-free gifts to the trust in the amount of income tax paid each time you pay tax on trust property. These trusts can be very flexible for future estate planning as well. If you're worried about being stuck with the income tax bill, some jurisdictions allow an income tax reimbursement provision from the trust to you.

Wannabe

[samsmith]

For those of you who do plan to have distributions to adult children governed by a irrevocable trust, what approach are you taking:

- Put your Vanguard accounts into a living trust that becomes irrevocable on your death?

- Keep in your own name and list the trust as the "payable on death" beneficiary. (I'm not sure if Vanguard even allows this... once when I asked them about doing this years ago, they said it was not possible.)

I have a question about how these two options would work in practice. Specifically, in both options while you are alive and the account owner, you would have used your SSN for the account and you would pay any taxes on the account. However, at the time of your death:

• If you have a living trust, as noted above, it should become irrevocable at your death. So does the trust need its own TIN for anything that happens between date of death and the date that the brokerage is notified by the trustee of the death. I assume the notification of death would be accompanied by instructions to the brokerage to make distributions consistent with the terms of the living trust?

• If you have a "payable on death" account. I assume it should just sit there until the brokerage is notified of your death. So does this account need its own TIN for anything that happens between date of death and the date that the brokerage is notified? Once again, I assume the notification of death would be accompanied by instructions to the brokerage on how to make distributions to the payable on death beneficiary(s)?

[FIREchief]

I have a question about how these two options would work in practice. Specifically, in both options while you are alive and the account owner, you would have used your SSN for the account and you would pay any taxes on the account. However, at the time of your death:

• If you have a living trust, as noted above, it should become irrevocable at your death. So does the trust need its own TIN for anything that happens between date of death and the date that the brokerage is notified by the trustee of the death.

• If you have a "payable on death" account. I assume it should just sit there until the brokerage is notified of your death. So does this account need its own TIN for anything that happens between date of death and the date that the brokerage is notified?

My understanding is that an estate and a living trust, during it's administration phase, can share a common EIN and file a single 1041 to report taxable income for both. I would really like to receive confirmation of this from one of our experts.

It is further my understanding that if the now irrevocable trust splits into shares for numerous beneficiaries after the administration phase, then each beneficiary's sub trust will require its own EIN. Again, confirmation would be greatly appreciated!

[curmudgeon]

For those of you who do plan to have distributions to adult children governed by a irrevocable trust, what approach are you taking:

- Put your Vanguard accounts into a living trust that becomes irrevocable on your death?

- Keep in your own name and list the trust as the "payable on death" beneficiary. (I'm not sure if Vanguard even allows this... once when I asked them about doing this years ago, they said it was not possible.)

I have a question about how these two options would work in practice. Specifically, in both options while you are alive and the account owner, you would have used your SSN for the account and you would pay any taxes on the account. However, at the time of your death:

• If you have a living trust, as noted above, it should become irrevocable at your death. So does the trust need its own TIN for anything that happens between date of death and the date that the brokerage is notified by the trustee of the death. I assume the notification of death would be accompanied by instructions to the brokerage to make distributions consistent with the terms of the living trust?

• If you have a "payable on death" account. I assume it should just sit there until the brokerage is notified of your death. So does this account need its own TIN for anything that happens between date of death and the date that the brokerage is notified? Once again, I assume the notification of death would be accompanied by instructions to the brokerage on how to make distributions to the payable on death beneficiary(s)?

my simplistic view/experience:

Yes, living trust needs a TIN. It generally takes time to wind up a trust/estate, so taxable income/changes come under the TIN (and get reflected to beneficiaries with K1s).

POD doesn't need a TIN. The recipient will need to establish a "date of death valuation" for what they inherited to establish the new basis, and will be responsible for any taxes after that point.

[fourwheelcycle]

Yes, living trust needs a TIN. It generally takes time to wind up a trust/estate, so taxable income/changes come under the TIN (and get reflected to beneficiaries with K1s).

I did not know that. Our joint revocable trust does not have a separate TIN. Vanguard sends all trust 1099 DIVs to me, since my SS number is the assigned SS number for the trust, and I file a joint return for my wife and myself. When the second of us dies, my expectation is that our executor and successor trustee (same person) will just file a final tax return for the second of us to die, using that person's SS number (which will also be the trust's assigned SS number at that time). Unless our trust earns more than $600 after we die, during the same tax year we die, I did not think anyone would need to file a separate tax return for the trust, which means it would never need to have its own TIN.

[golfCaddy]

Personally, my biggest worry is what happens in the event of divorce. Seen way too much divorce in my extended family. It's just so common nowadays. So for this, among the other very compelling reasons offered up by others on this thread (special shout out to WannabeAgAlum, FIREchief and afan for the time and effort they dedicated here) my DW and I have chosen to go the trust route.

We have discussed the reasons why we plan to use trusts with our two adult (but as yet unmarried) daughters and both are "100% on board". In fact, they questioned why anyone with a sizable estate would do it any other way. I suppose I could show them this thread, but I won't. They understand they will have reasonable access to funds in the trust (ascertainable standard/HEMS).

The only real drawback in my eyes is cost. We have made the decision that the benefits outweigh the costs.

Assuming you're not rich enough to be in estate/inheritance tax territory, and assuming your kids wouldn't completely blow the money on excessive spending, by far the biggest risk that a trust would protect against would be divorce. In theory, a prenup could protect against that. However, a trust has the advantage of letting the parents be the bad guy instead of forcing the daughters(in your case) to ask their prospective husbands for a prenup. As for disadvantages, there's differing legal opinions on this. However, some lawyers believe appointing the beneficiary as a co-trustee could be used to invalidate the asset protection aspects of the trust, if it were challenged in court.

[Finridge]

... So for this, among the other very compelling reasons offered up by others on this thread (special shout out to WannabeAgAlum, FIREchief and afan for the time and effort they dedicated here) ...

I wanted to echo this. Thank you. This has been a very helpful thread. One my New Year's resolutions was to finally get around to putting good estate plans in place. And now it's very clear to me that a run-of-the-mill A-B trust just won't cut it.

[HIinvestor]

This thread is fascinating. 2 brothers have been the beneficiaries of their sister’s estate. Initially many of the assets were held in a trust until final distribution, about 30 months after death.

It was very useful to one brother to have access to the funds that were POD and life insurance, so it could make timely, substantial contributions to a retirement fund that was rolled over to a mega-Roth IRA for him. The other brother contributed to his 401k and other investments.

Many of us (on this thread and in society) are not very personally familiar with trusts — the trust that held sister’s assets involved a few tax returns and the executor kept track of the assets and was sure to spend it distrubute any income. Having the trust saved the heirs over $100,000 in statutory probate costs, so the heirs felt it was well worth the slight extra work.

Because this trust dissolved upon final distribution as it was intended, it did not protect the beneficiaries from debtors or other claims on the funds. Since the beneficiaries are both fiscally responsible SR citizens, the grantor was comfortable that they would use the legacy wisely.

[FIREchief]

However, some lawyers believe appointing the beneficiary as a co-trustee could be used to invalidate the asset protection aspects of the trust, if it were challenged in court.

I don't beleive this has anything to do with which lawyer you're talking to, but everything to do with which state that lawyer practices in. In my state, current state laws are very clear. A beneficiary can be their own trustee and there is abaolutely no risk to trust assets.

[curmudgeon]

Yes, living trust needs a TIN. It generally takes time to wind up a trust/estate, so taxable income/changes come under the TIN (and get reflected to beneficiaries with K1s).

I did not know that. Our joint revocable trust does not have a separate TIN. Vanguard sends all trust 1099 DIVs to me, since my SS number is the assigned SS number for the trust, and I file a joint return for my wife and myself. When the second of us dies, my expectation is that our executor and successor trustee (same person) will just file a final tax return for the second of us to die, using that person's SS number (which will also be the trust's assigned SS number at that time). Unless our trust earns more than $600 after we die, during the same tax year we die, I did not think anyone would need to file a separate tax return for the trust, which means it would never need to have its own TIN.

I am not an expert on this, so take with a large grain of salt. But I may not have been clear; what I meant was that the trust needs a TIN *after* the death of the final grantor. In the case that I dealt with, I wanted to distribute cash, rather than stock, and as it happened, over the course of a few months, there were substantial gains that needed to be reported.

[WannabeAgAlum]

For those of you who do plan to have distributions to adult children governed by a irrevocable trust, what approach are you taking:

- Put your Vanguard accounts into a living trust that becomes irrevocable on your death?

- Keep in your own name and list the trust as the "payable on death" beneficiary. (I'm not sure if Vanguard even allows this... once when I asked them about doing this years ago, they said it was not possible.)

I have a question about how these two options would work in practice. Specifically, in both options while you are alive and the account owner, you would have used your SSN for the account and you would pay any taxes on the account. However, at the time of your death:

• If you have a living trust, as noted above, it should become irrevocable at your death. So does the trust need its own TIN for anything that happens between date of death and the date that the brokerage is notified by the trustee of the death. I assume the notification of death would be accompanied by instructions to the brokerage to make distributions consistent with the terms of the living trust?

• If you have a "payable on death" account. I assume it should just sit there until the brokerage is notified of your death. So does this account need its own TIN for anything that happens between date of death and the date that the brokerage is notified? Once again, I assume the notification of death would be accompanied by instructions to the brokerage on how to make distributions to the payable on death beneficiary(s)?

my simplistic view/experience:

Yes, living trust needs a TIN. It generally takes time to wind up a trust/estate, so taxable income/changes come under the TIN (and get reflected to beneficiaries with K1s).

POD doesn't need a TIN. The recipient will need to establish a "date of death valuation" for what they inherited to establish the new basis, and will be responsible for any taxes after that point.

If I have set up a living trust (i.e., a trust that exists during my life), and if the trust is a "grantor" trust, whether revocable or irrevocable, then I can use my SSN for the trust. I also have the option of getting a separate TIN for the trust, but the income will be tied to my SSN and all income reported on my personal 1040, so it does not establish a separate taxpayer. So, yes, a living trust that is a grantor trust can get a separate TIN, but it doesn't have to. If my living trust is a non-grantor trust, it is its own taxpayer, and so must get a separate TIN. Revocable living trusts are always grantor trusts and so do not need separate TINs.

The income on my personal POD account will flow to me personally during my life. There is not an option to get a separate TIN on my personal account in this scenario.

All income earned up to the date of my death will go on my personal 1040; this is the same whether my brokerage account is held in my personal name and is POD or whether it is held in the name of my revocable living trust. Following the date of my death, it will go on the next owner's income tax return, whoever that is (more on this below). For the revocable living trust that just became irrevocable following my death, that means getting a new TIN. Often the successor trustee will hold the assets in a separate administrative trust that will exist for a few months to a few years; basically long enough to pay the bills and make the distributions to the next owners (typically either outright to kids or to separate trusts for kids). This trust is the owner right after me. The next owners, after the administration trust is done, will have their own TINs (SSN for people, and separate new TIN for each continuing trusts for kids). The income earned during the period when the administration trust owns the property will go on that trust's 1041. The income earned after the property is distributed to the next owner will go on that owner's tax return (1040 for people; 1041 for continuing trust). Keep in mind that sometimes getting a separate TIN for the administration trust is skipped and so it's as if the property goes straight to the named beneficiaries (kids or kids' trusts), in which case all post-death income gets reported on their tax returns. This is not necessarily a bad thing, and can simplify things in many cases. The income still gets reported. In any event, income distributed from the administrative trust to the next owner will generally be eligible for a deduction on the administrative trust's return, and will show up on the next owner's return.

For the personal POD account, the income following the date of death will typically go to the next owner - the beneficiary. If there's a month between my date of death and the date the POD beneficiary takes over the account, all the income in that month will typically show up on the beneficiary's income tax return. This makes sense since the income probably will be accumulating in the account and be paid to the beneficiary anyway. If for some reason the income is paid to me (i.e., my estate since I'm dead) during that month, then it will show up on my estate's income tax return but will be eligible for a deduction if it is subsequently paid to the POD beneficiary, which I believe it should be.

To close the loop, if I have a third account that is not POD and is owned by me personally, then the income following my death will be reported on my estate's income tax return. This is similar to the administration trust that gets created right after my death with the revocable living trust property in that it exists for a relatively short time to pay bills and make distributions to the next owners. As FIREchief pointed out, this income tax return can be combined with the administration trust of the revocable living trust's income tax return to help simplify things. This is called a 645 election and certain requirements need to be met. See IRS Form 8855. (Incidentally, what I have been calling the administration trust of the revocable living trust is referred to as a Qualified Revocable Trust on this form.)

It is late and I may have said something wrong here - please correct me if someone wants to poke holes in any of this. It can be a bit complex. But isn't it fun?

Wannabe

[pennywise]

Actionable into action: Made an appointment with an estate planning attorney next week to set up any/everything needed for our family's peace of mine related to our financial life and our kids' inheritance.

Thank you Bogleheads!

[afan]

However, some lawyers believe appointing the beneficiary as a co-trustee could be used to invalidate the asset protection aspects of the trust, if it were challenged in court.

I don't beleive this has anything to do with which lawyer you're talking to, but everything to do with which state that lawyer practices in. In my state, current state laws are very clear. A beneficiary can be their own trustee and there is abaolutely no risk to trust assets.

It depends on state law, what the trust permits the beneficiary/trustee to do and what that person actually does. There are cases in which a beneficiary acting as trustee treats the trust as personal property, ignores limitations on distributions, then gets sued. The trust document may have sufficiently constrained the trustee's rights to provide asset protection. If the trustee exceeds these limits then the asset protection can be lost.

I gather this comes up a lot when people create asset protection trusts for themselves. They pay a lot of money to get the form correct and had they followed the rules they might have been OK. But they then use the money as their own with a magical trust label that they hope will protect them from creditors. That does not work.

[FIREchief]

If I have set up a living trust.......

Thanks for that thorough explanation! I think you've reinforced my limited understanding of this, and it doesn't sound like I had any significant misunderstandings. I have read through some of the instructions for IRS 1041, and that's primarily where I learned about the election to combine the estate's tax return with the administrative trust's. While we do have good discussions about trusts from time to time, I haven't really seen these tax issues come up before. Like many things with the IRS, it all does start to make sense if you stare at it long enough.

[samsmith]

First let me thank WannabeAgAlum for a a terrific post with clear explanations> I still have somne questions on the TOD

For the personal POD account, the income following the date of death will typically go to the next owner - the beneficiary. If there's a month between my date of death and the date the POD beneficiary takes over the account, all the income in that month will typically show up on the beneficiary's income tax return. This makes sense since the income probably will be accumulating in the account and be paid to the beneficiary anyway. If for some reason the income is paid to me (i.e., my estate since I'm dead) during that month, then it will show up on my estate's income tax return but will be eligible for a deduction if it is subsequently paid to the POD beneficiary, which I believe it should be.

Clearly, the POD account's income will go to the original owner while he is alive, And the POD income will go to the named beneficiaries (kids or kids trusts) after the assets have been successfully transferred (I looked on Fidelity's website and it looks like Fidelity requires the beneficiary to have or set up a Fidelity account to initially get the POD accounts assets. I am sure the beneficiary can then do whatever they want with the assets). But I am still hung up on the mechanics of what happens in the period between death and brokerage notification. I can easily see this period as 1-2 months. And if the death occurs in December, the brokerage may have sent out 1099s with the original owners SSN by the time they find out about the death. It seems unlikely to me that the brokerage would backdate and reissue statements and 1099s? So the deceased would have income attributed to his/her SSN after death. I get the concept that the income in the period after death and before POD distribution should be on the estate tax return, but the brokerage never got the estate's TIN number. So how does the IRS do a match?