If/When Should I make a trust?

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JC565
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If/When Should I make a trust?

Post by JC565 » Tue May 07, 2019 4:09 pm

Im wondering when and how people make the decision to set up a trust. "who" should have a trust? "why" should you have a trust. Ive search and found lots of information on types of trusts and reasons for having them. But nothing at this basic "beginners level" Anyone care to take a swing?

JC

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TomatoTomahto
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Re: If/When Should I make a trust?

Post by TomatoTomahto » Tue May 07, 2019 4:19 pm

We began the process of setting one up (still in process) when:
We wanted to make gifts to children
AND, one or more of them is a spendthrift. We hope he grows out of it.
So, we gift to the trust.
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Re: If/When Should I make a trust?

Post by sailaway » Tue May 07, 2019 4:28 pm

Trusts just aren't beginner level. You have to know something of your state laws, your assets and your intentions in order to choose one.

Avoiding probate and probate costs is one common reason, in some states.

Putting strings on future generations inheritance is another common reason.

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Re: If/When Should I make a trust?

Post by TomatoTomahto » Tue May 07, 2019 4:31 pm

My slightly longer answer is that we want to get assets out of our taxable estate. In MA, the taxes on bequests are pretty rough, begin with an estate of $1M, and portability is complicated (for a simpleton like me). Even the currently very generous Federal lifetime exclusion is not guaranteed to last forever.

$30k x 20 years plus growth shelters quite a bit. My wife will probably live longer.

We have an estate planner figuring out how to set things up in MA and NH. IMO, this is not a DIY project, but reading will mean that the lawyer won’t have to explain everything. For example, she was pleased not to have to explain basis or stepped up basis.
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Re: If/When Should I make a trust?

Post by StealthRabbit » Tue May 07, 2019 4:36 pm

1) Know your state laws... especially inheritance !!! < $1m may be fine W/o Trust, Some states are matching federal level of $5.6m for inheritance tax.
2) Your personal needs (Custodians for kids, distribution of estate, allocation of assets / business interests and personal holdings, confidentiality needs (Trust is not public, Will is public))
3) Complexity of finances and family situation.
4) Your succession plan.

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Re: If/When Should I make a trust?

Post by bsteiner » Tue May 07, 2019 4:41 pm

JC565 wrote:
Tue May 07, 2019 4:09 pm
I'm wondering when and how people make the decision to set up a trust. "who" should have a trust? "why" should you have a trust. I've searched and found lots of information on types of trusts and reasons for having them. But nothing at this basic "beginners level" Anyone care to take a swing?
Almost all of our clients create trusts in their Wills. That keeps the beneficiaries' inheritances out of their estates, and protects the beneficiaries' inheritances against their creditors and spouses, and Medicaid.

Clients who have or expect to have estates large enough to pay estate tax often make gifts during their lifetime to reduce their estate tax. These gifts are usually in trust rather than outright, for the same reasons. These trusts are created while the clients are alive.

In some cases, it makes sense for someone to create a revocable trust. Reasons for that are as follows:

1. In some states, particularly California, probating a Will is said to be difficult. Professor David Horton examined every estate in one county in California and wrote an interesting article about it in the Georgetown Law Journal which I reviewed for Trusts & Estates: https://georgetownlawjournal.org/articl ... robate/pdf.

2. In some states, probating a Will is expensive. For example, in Delaware, the court filing fee is 1.75% of the value of the probate estate, not including real estate.

3. In New York, we have to notify the persons who would have taken absent a Will. Someone who doesn't know who his/her closest relatives are, or where they are, would create a revocable trust to avoid having to search for them and publish notices to unknown persons.

4. In Florida, a personal representative has to be a relative or a Florida resident. Someone whose preferred choice isn't a relative or a Florida resident might create a revocable trust to avoid that restriction.

5. Some states require trustees of a trust under a Will to file periodic court accountings. There are fewer such states now that many states have adopted the Uniform Trust Code, but there are still some states where this is still the case.

6. If the estate expects to receive a large amount of income during the administration period that will be subject to state income tax in the decedent's home state, it's sometimes possible to avoid the state income tax by using a revocable trust with out-of-state trustees. You would have to make sure not to elect to treat the trust as part of the estate for income tax purposes under Section 645.

7. If you want to have a bank act as agent under a power of attorney, the bank may be willing to act as trustee of a revocable trust but not as agent under a power of attorney.

8. Someone concerned about being the victim of elder financial abuse might create a revocable trust that he/she can only revoke or change with the consent of a trusted person or persons.

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Re: If/When Should I make a trust?

Post by celia » Tue May 07, 2019 4:49 pm

... when you want to avoid probate (and it's costs and time) and "everyone" knowing your assets
... when you want your share of assets to go to your kids/relatives instead of your spouse's future spouse's family
... when you want to specify particular gifts to particular people and the gifts don't have beneficiary forms
... when you want non-trust assets to be swept into your trust by default
... when a beneficiary might not be able to handle assets properly (due to age, health, bad habits, addiction, undue influence)

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JC565
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Re: If/When Should I make a trust?

Post by JC565 » Tue May 07, 2019 4:55 pm

Thanks for all your replies. It sounds like many of the things your saying are certainly reasons I would want to make a trust.

The next question is, dollar value. Is there a point to making a trust for a small amount of money? (meaning say 20-100k)

And can trust be used to keep investments in perpetuity? (with predetermined distributions based on performance of the underlying assets)

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celia
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Re: If/When Should I make a trust?

Post by celia » Tue May 07, 2019 5:07 pm

JC565 wrote:
Tue May 07, 2019 4:55 pm
Is there a point to making a trust for a small amount of money? (meaning say 20-100k)
Sure, especially if you have reasonable expectations that your income will increase. But it costs money to amend the trust over time, so maybe you want to wait until your life settles down a little bit.
And can trust be used to keep investments in perpetuity? (with predetermined distributions based on performance of the underlying assets)
What would be the purpose of that? We don't even know what life will be like in 100 years, let alone who a good trustee might be or what trustee companies would exist. We don't know if any heirs will be around or if money will still have value in the future. What countries or laws might exist?

Bitcoin, anyone?

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Re: If/When Should I make a trust?

Post by Broken Man 1999 » Tue May 07, 2019 5:31 pm

DW and I have set up our estate plan to include trusts primarily to protect legacy for children and grandchildren.

Any final legacy with be left in trust(s) for the two generations.

If my daughters wish to mingle any legacy with their spouses, that is their prerogative.

The grandchildren could be minors when we die, and I wanted to ensure they would get what I desire to leave them. Family dynamics can change quickly, and I just want things to go where I want them to go.

Broken Man 1999
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Re: If/When Should I make a trust?

Post by JGoneRiding » Wed May 08, 2019 9:36 am

JC565 wrote:
Tue May 07, 2019 4:55 pm
Thanks for all your replies. It sounds like many of the things your saying are certainly reasons I would want to make a trust.

The next question is, dollar value. Is there a point to making a trust for a small amount of money? (meaning say 20-100k)

And can trust be used to keep investments in perpetuity? (with predetermined distributions based on performance of the underlying assets)
There are family trusts set up for perpetuity type where principal isn't paid out. These are typically multi million (billion) dollar trusts where it can be assumed someone will always be willing to administer them. Then there is Harvard trust ....

The problem with a small trust is no one will want to administer it outside of family so it needs a lot of Lee way to close it down eventually. Also when you think I only have x for a trust are you including life insurance? Because if me and my husband both die tomorrow our son is fairly wealthy and that should be in trust but no guarantees about 60 yrs from now when we have spent it all!

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Re: If/When Should I make a trust?

Post by JC565 » Wed May 08, 2019 12:02 pm

JGoneRiding wrote:
Wed May 08, 2019 9:36 am
JC565 wrote:
Tue May 07, 2019 4:55 pm
Thanks for all your replies. It sounds like many of the things your saying are certainly reasons I would want to make a trust.

The next question is, dollar value. Is there a point to making a trust for a small amount of money? (meaning say 20-100k)

And can trust be used to keep investments in perpetuity? (with predetermined distributions based on performance of the underlying assets)
There are family trusts set up for perpetuity type where principal isn't paid out. These are typically multi million (billion) dollar trusts where it can be assumed someone will always be willing to administer them. Then there is Harvard trust ....

The problem with a small trust is no one will want to administer it outside of family so it needs a lot of Lee way to close it down eventually. Also when you think I only have x for a trust are you including life insurance? Because if me and my husband both die tomorrow our son is fairly wealthy and that should be in trust but no guarantees about 60 yrs from now when we have spent it all!
Makes Sense. If I had to put a realistic number on the assets, I would guess it would be somewhere between 4-10 million. Assuming I live another 30-40 years. Maybe I catch a lucky break somewhere and its a little more. I guess in the grand scheme of things that would be considered "small."

To elaborate on my goals, I simply want to give my family a steady "small" income stream and I don't want them to be able to deplete the fund in its entirety. in fact, I don't want them to be able to access more than 50% of the earnings, so that it continues to grow. Thats the number one 1 goal. In addition, I would prefer that if i pass early, that no payouts will begin until the kids turn 25. The number 2 goal is to be able to stop anyone from getting funds if they are into drugs, excessive gambling, or criminal activities.

beyond that, my questions would be, how long could I ensure its existence, how much control anyone would have over the underlying assets, etc. If it was up to me, I would put it all into a total market tracking fund like VTI, forever, and never let anyone touch anything but the dividends.

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Re: If/When Should I make a trust?

Post by TomatoTomahto » Wed May 08, 2019 12:06 pm

First, read Beyond the Grave.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: If/When Should I make a trust?

Post by Broken Man 1999 » Wed May 08, 2019 12:45 pm

TomatoTomahto wrote:
Wed May 08, 2019 12:06 pm
First, read Beyond the Grave.
Absolutely!

Lots of good info, and the book will give the reader some better understanding of when/why an estate planner might zig when they think they could zag. Reading before the first session will make the estate planner's meeting(s) more productive, IMHO.

I have to say some of the disasters discussed in the book would have put me over the top in favoring using a real live person instead of an online will/trust, had I been considering a DIY solution. There was no chance I would consider DIY. I was the trustee of my father's and sister's trusts, and his executor of his estate. He made my job as easy as it could be made, and I have sought to do the same for our estate. My siblings and I were treated identically, and the trusts and wills were shared prior to my father's death. All knew what to expect, and there was zero tension during the settlement activities.

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Re: If/When Should I make a trust?

Post by Sandtrap » Wed May 08, 2019 12:50 pm

1. Read "Beyond the Grave" by Condon.
(learned the importance of family dynamics, the human element, in estate planning)
2. Multiple personal experience and also observed in relatives, what happens to large estates with poor trusts. (nasty)
3. Bad legal counsel is nearly as bad as none at all. (experience)
4. A huge weight is lifted when one's estate planning is complete and everything is in order.
5. A trust must be modified over time as family dynamics and finances change.
6. A trust/will is only as good as you are intimately familiar with "what you want" and "what you don't want".
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Re: If/When Should I make a trust?

Post by Peter Foley » Wed May 08, 2019 1:00 pm

Many good reasons mentioned already.

In the course I took on estate planning the instructor emphasized that holding real estate in multiple states would be a good reason for establishing a trust. (Avoiding multiple probates.)

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Re: If/When Should I make a trust?

Post by Nowizard » Wed May 08, 2019 1:27 pm

For us, the primary reason to establish a revocable trust was to simply avoid probate when that time comes. We are the Trustees, and our children are the Successor Trustees. My mother had a Trust and limited assets, but it was a breeze to settle her estate for her. It would not have been much more involved if she had more assets since you have to close/transfer stock, banking, savings, mutual fund accounts anyway.
Tim

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Re: If/When Should I make a trust?

Post by RadAudit » Wed May 08, 2019 1:54 pm

We made a trust to increase the chance the money would go to and stay with the kids. As I understand, TOD would make it subject to inclusion in family assets if a divorce occurred.
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Re: If/When Should I make a trust?

Post by bsteiner » Wed May 08, 2019 2:10 pm

JC565 wrote:
Wed May 08, 2019 12:02 pm
... If I had to put a realistic number on the assets, I would guess it would be somewhere between 4-10 million. Assuming I live another 30-40 years. Maybe I catch a lucky break somewhere and its a little more. I guess in the grand scheme of things that would be considered "small."

To elaborate on my goals, I simply want to give my family a steady "small" income stream and I don't want them to be able to deplete the fund in its entirety. in fact, I don't want them to be able to access more than 50% of the earnings, so that it continues to grow. That's the number one 1 goal. In addition, I would prefer that if i pass early, that no payouts will begin until the kids turn 25. The number 2 goal is to be able to stop anyone from getting funds if they are into drugs, excessive gambling, or criminal activities.

beyond that, my questions would be, how long could I ensure its existence, how much control anyone would have over the underlying assets, etc. If it was up to me, I would put it all into a total market tracking fund like VTI, forever, and never let anyone touch anything but the dividends.
You can (in your Will) provide for your family in trust rather than outright, on pretty much whatever terms you want.

I generally favor flexibility since no one knows what the future will bring. But you can put in pretty much whatever restrictions you want. Or you can put in guidelines.

You should focus on the degree of control (if any) each child should have upon reaching a specified age, and until then who should control.
TomatoTomahto wrote:
Wed May 08, 2019 12:06 pm
First, read Beyond the Grave.
Be careful there. While that book is popular here, the author focuses on the end points (providing for children either outright or in trusts that aren't very flexible). Most of our clients opt for a middle ground, providing for their children in trust rather than outright but having the trusts be flexible and in most cases letting each child control his/her trust upon reaching a specified age.

The author doesn't say much about taxes, though with the current level of the estate tax exclusion amount very few people will pay estate tax. Of course, the estate tax exclusion amount is scheduled to revert to $5.7 million (indexed) in 2026, so more people will then pay estate tax.

The book is also geared to community property states, in particular California. Of course, about 30% of the population lives in community property states, and about 1/8 of the population lives in California. But the author assumes everyone is in California. Much of what he writes won't apply to people elsewhere.

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Re: If/When Should I make a trust?

Post by JC565 » Wed May 08, 2019 2:35 pm

This is all very good information. I appreciate all of your advice. Since I think what I want is pretty cut and dry, I see no reason not to go ahead and set up the trust and will, just in case.

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JC565
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Re: If/When Should I make a trust?

Post by JC565 » Wed May 08, 2019 2:39 pm

... a bit on the personal side. I was 12 years old when my father passed. He had never worked a real job and paid social security, and received disability. So when he died, I was left with nothing, and my mother had to raise me on her own. I refuse to let that happen again. (it already wont since I have been working since I was 15) I feel like the family deserves a "baseline" and its up to them to raise that baseline and standard or living after Im gone. I just want to make it mandatory LOL

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Re: If/When Should I make a trust?

Post by BigFoot48 » Thu May 09, 2019 11:38 am

The "Beyond the Grave" book is available on Amazon for Kindles for $1.99.
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Re: If/When Should I make a trust?

Post by retire2022 » Thu May 09, 2019 12:30 pm

JC565 wrote:
Wed May 08, 2019 2:39 pm
... a bit on the personal side. I was 12 years old when my father passed. He had never worked a real job and paid social security, and received disability. So when he died, I was left with nothing, and my mother had to raise me on her own. I refuse to let that happen again. (it already wont since I have been working since I was 15) I feel like the family deserves a "baseline" and its up to them to raise that baseline and standard or living after Im gone. I just want to make it mandatory LOL
JC

I hear you, my dad had me when he was 58 separated when I was 7, he died when I was 18.

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Re: If/When Should I make a trust?

Post by LSLover » Sun May 12, 2019 12:08 pm

bsteiner wrote:
Tue May 07, 2019 4:41 pm
JC565 wrote:
Tue May 07, 2019 4:09 pm
I'm wondering when and how people make the decision to set up a trust. "who" should have a trust? "why" should you have a trust. I've searched and found lots of information on types of trusts and reasons for having them. But nothing at this basic "beginners level" Anyone care to take a swing?
Almost all of our clients create trusts in their Wills. Is that a Testamentary Trust? If it is in a Will, does it have to go thru the probate then?

That keeps the beneficiaries' inheritances out of their estates, and protects the beneficiaries' inheritances against their creditors and spouses, and Medicaid.

Clients who have or expect to have estates large enough to pay estate tax often make gifts during their lifetime to reduce their estate tax. These gifts are usually in trust rather than outright, for the same reasons. These trusts are created while the clients are alive.

In some cases, it makes sense for someone to create a revocable trust. Reasons for that are as follows:

1. In some states, particularly California, probating a Will is said to be difficult. Professor David Horton examined every estate in one county in California and wrote an interesting article about it in the Georgetown Law Journal which I reviewed for Trusts & Estates: https://georgetownlawjournal.org/articl ... robate/pdf.

2. In some states, probating a Will is expensive. For example, in Delaware, the court filing fee is 1.75% of the value of the probate estate, not including real estate.

3. In New York, we have to notify the persons who would have taken absent a Will. Someone who doesn't know who his/her closest relatives are, or where they are, would create a revocable trust to avoid having to search for them and publish notices to unknown persons.

4. In Florida, a personal representative has to be a relative or a Florida resident. Someone whose preferred choice isn't a relative or a Florida resident might create a revocable trust to avoid that restriction.

5. Some states require trustees of a trust under a Will to file periodic court accountings. There are fewer such states now that many states have adopted the Uniform Trust Code, but there are still some states where this is still the case.

6. If the estate expects to receive a large amount of income during the administration period that will be subject to state income tax in the decedent's home state, it's sometimes possible to avoid the state income tax by using a revocable trust with out-of-state trustees. You would have to make sure not to elect to treat the trust as part of the estate for income tax purposes under Section 645.

7. If you want to have a bank act as agent under a power of attorney, the bank may be willing to act as trustee of a revocable trust but not as agent under a power of attorney.

8. Someone concerned about being the victim of elder financial abuse might create a revocable trust that he/she can only revoke or change with the consent of a trusted person or persons.
Please, see my question in red color above.

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Re: If/When Should I make a trust?

Post by afan » Sun May 12, 2019 12:35 pm

Yes, those would be testamentary trusts. Yes the will would have to go through probate.
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Re: If/When Should I make a trust?

Post by bsteiner » Sun May 12, 2019 1:01 pm

LSLover wrote:
Sun May 12, 2019 12:08 pm
bsteiner wrote:
Tue May 07, 2019 4:41 pm
JC565 wrote:
Tue May 07, 2019 4:09 pm
I'm wondering when and how people make the decision to set up a trust. "who" should have a trust? "why" should you have a trust. I've searched and found lots of information on types of trusts and reasons for having them. But nothing at this basic "beginners level" Anyone care to take a swing?
Almost all of our clients create trusts in their Wills. Is that a Testamentary Trust? If it is in a Will, does it have to go thru the probate then?
...
Please, see my question in red color above.
In most cases in most states (see my post above for the principal exceptions) probating a Will is a fairly simple administrative task and a small part of the work involved when someone dies.

Your executors or their lawyer will file your Will with the court together with a death certificate, some forms, and a check or credit card payment for the filing fee (up to $1.250 in New York depending on the size of the estate, about $400 in Florida, and usually a few hundred dollars depending on the number of pages in the Will in New Jersey). In New Jersey the court clerks will even fill out the forms. Except perhaps in California where there's more to do with the court, I don't know why so many people are concerned about it.

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Re: If/When Should I make a trust?

Post by afan » Sun May 12, 2019 2:03 pm

Are there circumstances under which it is better to go through probate than to have everything pass via a trust?

Say someone is dying and making final plans. If they had all their assets in a trust would it ever make sense for them to transfer some out of the trust in order to ensure they had a probate estate?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: If/When Should I make a trust?

Post by bsteiner » Sun May 12, 2019 2:35 pm

afan wrote:
Sun May 12, 2019 2:03 pm
Are there circumstances under which it is better to go through probate than to have everything pass via a trust?

Say someone is dying and making final plans. If they had all their assets in a trust would it ever make sense for them to transfer some out of the trust in order to ensure they had a probate estate?
It doesn't usually make much difference. Probating the Will is usually a small part of the work involved when someone dies.

There are more important things to look at when someone is expected to die soon. Does the Will (or in this case the revocable trust) say what it ought to say? If not, it is possible to fix it (do a new Will or amend the revocable trust)? Should the person make annual exclusion gifts? In a state with a state estate tax (other than New York where gifts within 3 years of death are included for state estate tax purposes), should the person make large gifts of high basis assets such as cash and bonds? Should the person convert any traditional IRAs to Roth IRAs?

The taxation of estates and the taxation of trusts have been generally harmonized over the years However, there are a few cases where revocable trusts may save or cost taxes.

Most if not all states tax an estate if the decedent was domiciled in that state. However, different states have different ways of determining when a trust is taxable in that state. So having a revocable trust and not making a Section 645 election to treat the trust as part of the estate may save or cost state income taxes. In most cases this isn't significant. But occasionally it is.

An estate may hold S corporation shares during the estate administration period without having to make a QSST or an ESBT election. A revocable trust may do so but only for a limited time period. If that's an issue, it would be better not to have the S corporation shares in a revocable trust.

When the estate tax rates were higher, and more estates were subject to estate tax, we would often have the children take executors' commissions (fees). They were deductible for estate tax purposes and includible for income tax purposes, so there was a tax arbitrage to the extent the estate tax rates were higher than the income tax rates. There was also a timing difference since the estate tax deduction was as of the due date of the estate tax, 9 months after death, whereas they income tax usually wasn't payable until later.

In some states, there's a shortened statute of limitations for creditors' claims. So probating the Will allows the estate to take advantage of that.

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