I Now Have a Revocable Trust and Have Questions

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carolinaman
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I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Wed Jul 11, 2018 1:11 pm

I asked the forum about the merits of a trust for our estate recently and received some good advice. Thank you Bogleheads.

viewtopic.php?f=2&t=249772#p3933991

We had an estate attorney update our wills and add DPOAs, HCPOA & Advance Health Directives. I asked about a trust and she said her trust knowledge was limited but she could do a basic Revocable Trust because this simplifies probate and is better accepted than DPOA if we become incompetent. It seemed reasonable and we agreed to that. She also re-deeded our home to the trust. The whole estate package was $1,125 (the trust was only $250).

We were pleased with her work on the whole package. Only afterwards did I realize the limitations of the trust. She had explained the trust was revocable and would become an irrevocable trust after our deaths which was fine. The trust stipulated one of our children would become trustee after out deaths. I understood there was no creditor protection for us but assumed once it became an irrevocable trust, there would be creditor protection for our heirs (our children). She explained that once the trust becomes an irrevocable one, all of the assets should be distributed in a reasonable time (less than one year).

She said that in order to get creditor protection and keep the funds in the trust for a longer time frame, a spendthrift trust would be needed. She said that was beyond her expertise and she could recommend a trust attorney for that.

As I understand it from my limited research, in order to afford creditor protection, an irrevocable trust would have to be administered by an independent trustee. Also, the trust would have to stipulate how the funds would be distributed. That sounds costly and we would like our heirs to have the ability to specify how and when they receive money from the trust. Could a spendthrift trust provide flexibility for distribution to our heirs?

Our estate right now consists of $600K taxable (includes our home) and $950K IRAs. We have our IRAs POD to our children, so that is already protected from creditors as I understand it.

I am questioning the practicality of creating the spendthrift trust at this time given the cost and level of assets protected.
Do you think a spendthrift trust is a viable approach for us?
Does it make sense to at least have a conversation with a trust attorney to determine feasibility of the spendthrift trust?

Thanks in advance for your always valuable feedback.

bsteiner
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Re: I Now Have a Revocable Trust and Have Questions

Post by bsteiner » Wed Jul 11, 2018 2:24 pm

I think the additional few thousand dollars to get a more robust estate plan is worth it in the context of a $1.5 million estate, especially at your age.

With more than one child, there's a reasonable chance that at least one child will get divorced, outlive his/her spouse and remarry, have a taxable estate, have a creditor problem, or want Medicaid.

Whether inherited IRAs that pass outright rather than in trust are protected against the beneficiary's creditors varies from state to state.
carolinaman wrote:
Wed Jul 11, 2018 1:11 pm
...
As I understand it from my limited research, in order to afford creditor protection, an irrevocable trust would have to be administered by an independent trustee. Also, the trust would have to stipulate how the funds would be distributed. ...
Neither of these is correct.
carolinaman wrote:
Wed Jul 11, 2018 1:11 pm
... we would like our heirs to have the ability to specify how and when they receive money from the trust. Could a spendthrift trust provide flexibility for distribution to our heirs?
...
Yes as to flexibility. The child can have the power to remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or a subordinate employee). That would give the child effective control over his/her trust.
carolinaman wrote:
Wed Jul 11, 2018 1:11 pm
...
Does it make sense to at least have a conversation with a trust attorney to determine feasibility of the spendthrift trust?
...
No. You should either hire a competent trusts and estates attorney to do it for you, or keep what you have. Consulting with someone won't accomplish anything.

afan
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Re: I Now Have a Revocable Trust and Have Questions

Post by afan » Wed Jul 11, 2018 2:42 pm

Absurd as it sounds to disagree with bsteiner on the subject of estate planning, here goes.

An attorney who tells you they don't know much about trusts and then gives you a trust that requires distributing all assets in a year is not an estate planning expert. That makes me nervous about what the rest of your documents say. For a qualified estate planning attorney your needs would be routine. They would have explained the issues of a trust for your retirement accounts, the advantages of having your heirs receive their inheritance in trust rather than outright and discussed the real requirements for asset protection. Since none of this happened I would not have much confidence in your current plan.

For those reasons I don't think keeping what you have would be a good idea. I suggest you find a real estate expert and get a proper plan.
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neilpilot
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Re: I Now Have a Revocable Trust and Have Questions

Post by neilpilot » Wed Jul 11, 2018 3:12 pm

afan wrote:
Wed Jul 11, 2018 2:42 pm

For those reasons I don't think keeping what you have would be a good idea. I suggest you find a real estate expert and get a proper plan.
I wouldn't trust my real estate attorney with drafting a revocable trust.

Gill
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Re: I Now Have a Revocable Trust and Have Questions

Post by Gill » Wed Jul 11, 2018 3:18 pm

Your attorney admitted her knowledge of trusts was limited, and that is one thing she was correct about. Essentially what she appears to have done is use the trust as a substitute for a DPOA and then have the trust terminate immediately after death rather than having more sophisticated dispositive provisions. I'm not sure what was gained by putting the residence in the trust.
Gill

Lastrun
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Re: I Now Have a Revocable Trust and Have Questions

Post by Lastrun » Wed Jul 11, 2018 3:53 pm

Gill wrote:
Wed Jul 11, 2018 3:18 pm
I'm not sure what was gained by putting the residence in the trust.
Gill
This is the most scary part, to me, of the OP's post. It may not be what was gained, but what was lost. The post does not inspire confidence in counsel.

1. Did the transfer impact your title insurance coverage on the property?
2. Did the transfer impact your liability insurance coverage on the property?
3. Did the transfer impact your liability protection under state law as spousal joint owners with rights of survivorship? A quick look at my ACTEC cheat sheet says likely no in NC, but I would want to be sure.
4. Are there any HOA or other type restrictions on transfer that were not complied with in the transfer of the property to the trust?
5. Was the property in any type of special real property tax regime (land use, elderly or disabled or veteran relief) that could be impacted by the transfer to the trust?

It is likely none of these will be of concern and while probate cost avoidance is an admirable thing, when you transfer real property to a trust you no longer have legal title to the property in your personal names, and this creates wide ranging impacts that should be considered.

carolinaman
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Re: I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Wed Jul 11, 2018 3:54 pm

Gill wrote:
Wed Jul 11, 2018 3:18 pm
Your attorney admitted her knowledge of trusts was limited, and that is one thing she was correct about. Essentially what she appears to have done is use the trust as a substitute for a DPOA and then have the trust terminate immediately after death rather than having more sophisticated dispositive provisions. I'm not sure what was gained by putting the residence in the trust.
Gill
Thanks Gill. I also learned after the fact that having home in name of trust and homeowners and umbrella policies in name of grantor/insuree can be problematic. Attorney did not tell me about this. I contacted my insurance company and had them add trust to my policies. They were vague as to whether not having trust on the policy would cause a problem but said they do add trusts when asked. I read on the web that some people had legitimate claims for property damage denied because the property was deeded to the trust and it was not on the insurance policy.

carolinaman
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Re: I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Wed Jul 11, 2018 3:59 pm

bsteiner wrote:
Wed Jul 11, 2018 2:24 pm
I think the additional few thousand dollars to get a more robust estate plan is worth it in the context of a $1.5 million estate, especially at your age.
Thanks Bruce. Based on your comments and others, I would like to have a fully competent estate attorney do a plan for us. Based upon my experience with this attorney, I am not sure how confident I will be in any attorney recommendation she provides. Do you know any estate attorneys in Charlotte area?

carolinaman
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Re: I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Wed Jul 11, 2018 4:13 pm

Lastrun wrote:
Wed Jul 11, 2018 3:53 pm
Gill wrote:
Wed Jul 11, 2018 3:18 pm
I'm not sure what was gained by putting the residence in the trust.
Gill
This is the most scary part, to me, of the OP's post. It may not be what was gained, but what was lost. The post does not inspire confidence in counsel.

1. Did the transfer impact your title insurance coverage on the property? I do not know but will check on this
2. Did the transfer impact your liability insurance coverage on the property? No, I added trust to policies
3. Did the transfer impact your liability protection under state law as spousal joint owners with rights of survivorship? A quick look at my ACTEC cheat sheet says likely no in NC, but I would want to be sure. I do not know but will ask whenever I hire a competent trust attorney.
4. Are there any HOA or other type restrictions on transfer that were not complied with in the transfer of the property to the trust? No HOA
5. Was the property in any type of special real property tax regime (land use, elderly or disabled or veteran relief) that could be impacted by the transfer to the trust? No

It is likely none of these will be of concern and while probate cost avoidance is an admirable thing, when you transfer real property to a trust you no longer have legal title to the property in your personal names, and this creates wide ranging impacts that should be considered.
Lastrun,
Thanks for raising these questions.

Your point about the transfer of real property to trust is very good. I discovered the insurance liability issue but did not know enough to consider the others.

letsgobobby
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Re: I Now Have a Revocable Trust and Have Questions

Post by letsgobobby » Wed Jul 11, 2018 4:29 pm

Go get a good experienced trust and estate attorney now. Pay what it costs. We used someone who was quickly out of his league with our estate and ended up wasting several years and thousands of dollars. Our new estate plan took three meetings and it's done. Exactly what we wanted. Would have been better off getting the expert from the beginning.

bsteiner
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Re: I Now Have a Revocable Trust and Have Questions

Post by bsteiner » Wed Jul 11, 2018 6:49 pm

afan wrote:
Wed Jul 11, 2018 2:42 pm
Absurd as it sounds to disagree with bsteiner on the subject of estate planning, here goes....
We don't disagree on this -- we just said it differently.

In addition to keeping what they have (which sounds like it's a simple Will in the form of a revocable trust) or having a more elaborate estate plan, there's a third choice. They could revoke the revocable trust, revoke their new Wills, and sign new copies of their previous Wills. That would bring them back to where they were before they created it. Depending on what their previous Wills say, that might be better than keeping what they have.

My concern about the revocable trust is that he referred to it in the singular. We see joint revocable trusts in community property states, mainly California (since it's the largest of the community property states, and the one where revocable trusts are commonly used), but we generally don't see them in common law states (states that aren't community property states). Unless they moved from a community property state and have community property, perhaps they bought a California form.

They have to decide whether a more elaborate estate plan is worth it to them. I think it's worth it for a couple in their 70s with $1.5 million, especially since they want to protect his children's inheritances. But my guess is that most people in that situation would say it's not worth it to them.
carolinaman wrote:
Wed Jul 11, 2018 3:59 pm
...
Thanks Bruce. Based on your comments and others, I would like to have a fully competent estate attorney do a plan for us. Based upon my experience with this attorney, I am not sure how confident I will be in any attorney recommendation she provides. Do you know any estate attorneys in Charlotte area?
Yes. I'll send you the information. If you're interested (either in working with that person, or anyone else comparable), you may have to make it clear that you're interested notwithstanding the size of your estate, and notwithstanding that it will probably cost several times what you paid this time.

carolinaman
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Re: I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Fri Jul 13, 2018 9:37 am

bsteiner wrote:
Wed Jul 11, 2018 6:49 pm

They have to decide whether a more elaborate estate plan is worth it to them. I think it's worth it for a couple in their 70s with $1.5 million, especially since they want to protect his children's inheritances. But my guess is that most people in that situation would say it's not worth it to them.
Thanks Bruce for the trust attorney contact. Her credentials are impressive.

Our concern regarding creditor protection is only with one child, our son. We are very comfortable in our daughter getting her inheritance directly without the need of a trust. However, our son has a small remodeling business which is a more risky business and he has no health insurance. He does have liability and worker's comp for his business which mitigates that risk. He is in good health but at age 49, there is always the risk of serious health problems and huge medical bills. One option would be to cover his health care risk by us paying for a high deductible policy.

I interpret your above statement to say that our case for a trust is marginal at $1.5M. However, we may only need to do half of that, $750k, for a trust. How much would that change the case for a trust?

I apologize for not making our creditor protection concerns more clear in the beginning.

John
Last edited by carolinaman on Fri Jul 13, 2018 4:19 pm, edited 1 time in total.

bsteiner
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Re: I Now Have a Revocable Trust and Have Questions

Post by bsteiner » Fri Jul 13, 2018 10:09 am

carolinaman wrote:
Fri Jul 13, 2018 9:37 am
...
Our concern regarding credit protection is only with one child, our son. We are very comfortable in our daughter getting her inheritance directly without the need of a trust. ...

I interpret your above statement to say that our case for a trust is marginal at $1.5M. However, we may only need to do half of that, $750k, for a trust. How much would that change the case for a trust?
...
I meant that, give the current level of the estate tax exclusion amount, many people worth $1.5 million might not want to pay for a lawyer who routinely creates lifetime trusts for children and who's familiar with discretionary trusts for IRA benefits, and might prefer something more basic at a lower cost (somewhere in between what you paid and what I described might cost).

The work (and hence the cost) is the same whether you're creating a trust for one child or for both children.

I think $750,000 is enough to warrant administering a trust for your daughter (that she would control) in case she does well and has a taxable estate, gets divorced, outlives her spouse and remarries, runs someone over, wants Medicaid, etc. But if you think the risk of any of these things isn't great enough to warrant the additional income tax costs of providing for her in trust, and the cost of annual income tax returns for the trust, then you could provide for her outright.

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FIREchief
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Re: I Now Have a Revocable Trust and Have Questions

Post by FIREchief » Fri Jul 13, 2018 1:08 pm

carolinaman wrote:
Fri Jul 13, 2018 9:37 am
Our concern regarding credit protection is only with one child, our son. We are very comfortable in our daughter getting her inheritance directly without the need of a trust. However, our son has a small remodeling business which is a more risky business and he has no health insurance.
I assume you meant "creditor protection," is this correct?

Regarding your daughter. Living life is risky, no matter who you are. Anybody can be sued for anything at any time. A properly established trust is one of the only ways there is to make assets "lawsuit proof." Even Umbrella insurance has its limits.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

carolinaman
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Re: I Now Have a Revocable Trust and Have Questions

Post by carolinaman » Fri Jul 13, 2018 4:17 pm

FIREchief wrote:
Fri Jul 13, 2018 1:08 pm
carolinaman wrote:
Fri Jul 13, 2018 9:37 am
Our concern regarding credit protection is only with one child, our son. We are very comfortable in our daughter getting her inheritance directly without the need of a trust. However, our son has a small remodeling business which is a more risky business and he has no health insurance.
I assume you meant "creditor protection," is this correct?

Regarding your daughter. Living life is risky, no matter who you are. Anybody can be sued for anything at any time. A properly established trust is one of the only ways there is to make assets "lawsuit proof." Even Umbrella insurance has its limits.
Yes, I meant creditor protection. My error. Thanks for your reply.

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