Should we create a testamentary trust for $6M estate?

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bsteiner
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

smackboy1 wrote: Wed May 13, 2020 3:19 pm ...
With this much $ it should be obvious but use experienced professionals i.e. lawyers, CPA, trustees, financial advisors. ... TBH the internet is not the best place to get anything more than the most general advice. Some of the information either misinformed or wrong.
...
I agree that the comments in this thread have varied considerably.

I also agree that $6.5 million is sufficient to warrant getting good professional advisors. However, for good professional advisors, it should be a routine matter.
smackboy1 wrote: Wed May 13, 2020 3:19 pm ...
I agree with the recommendation not to mandate distributions. It may make sense when the trust becomes small not cost effective e.g. $100K, and the idea is to spread out the $ and terminate the trust. The risk is that assets distributed to the beneficiary become available to their creditors, spouses, grifters,and even the beneficiary themselves if they develop an incapacity. There are some asset protection specialists that would argue that any ascertainable standard weakens a trust's asset protection. In those trusts the there is not even a HEMS (health, education, maintenance, support) standard. Trustee has full discretion. The fear is that a court rule that the trustee's ascertainable standard creates a property interest in the beneficiary and allow a beneficiary's creditor to reach trust assets.
That's the issue. Some but not all states have updated their statutes to say that an ascertainable standard doesn't make the trust available to creditors. But it might make it available for Medicaid. There's also the issue as to whether it gives the beneficiary an entitlement. I had a case where there was a standard, the beneficiary (the decedent's second wife) wanted $x a month, and the trustees (looking out for the children from the first marriage who would get the balance at the spouse's death) wanted to give her a lesser amount. We couldn't settle, and the judge held a hearing and at the end of the hearing decided on the amount the beneficiary would receive (which I think was about midway between what the two sided proposed).

There are other ways to give a beneficiary effective control where that's appropriate. The beneficiary may have the right to remove and replace his/her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee).
oldfort
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

FIREchief wrote: Wed May 13, 2020 3:49 pm No. His post was highly relevant, as it clearly supported our points that a beneficiary can serve as trustee without jeopardizing asset protections in the state where that court ruled. The fact that this example involved a marital trust was irrelevant to the point being made.
Now, you're changing your position. There's a difference between a beneficiary serving as co-trustee with an independent corporate trustee and a beneficiary serving as the sole trustee. In the facts of the case cited by afan, the beneficiary was never the sole trustee. There was always a corporate trustee.
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FIREchief
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief »

oldfort wrote: Wed May 13, 2020 3:57 pm
FIREchief wrote: Wed May 13, 2020 3:49 pm No. His post was highly relevant, as it clearly supported our points that a beneficiary can serve as sole trustee without jeopardizing asset protections in the state where that court ruled. The fact that this example involved a marital trust was irrelevant to the point being made.
Now, you're changing your position. There's a difference between a beneficiary serving as co-trustee with an independent corporate trustee and a beneficiary serving as the sole trustee. In the facts of the case cited by afan, the beneficiary was never the sole trustee. There was always a corporate trustee.
I clarified my post above. You may have missed this part:
Thus, the discretionary standard set forth in Article TENTH of the Barton Will limits the extent of Debtor's control over the Marital Trust, even if she were to become the sole trustee
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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TomatoTomahto
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Re: Should we create a testamentary trust for $6M estate?

Post by TomatoTomahto »

bsteiner wrote: Wed May 13, 2020 2:21 pm
nimo956 wrote: Wed May 13, 2020 1:18 pm
TomatoTomahto wrote: Tue May 12, 2020 2:55 pm This is probably the part of the program where I remind viewers that, however generous the Federal exclusion currently is, some states are much stingier. MA’s lifetime exclusion is $1M, and it’s a cliff exclusion with a tax rate that quickly climbs to 16%.
One wonders how such a law with a cliff exclusion could have been written, given that Boston/Cambridge probably has the highest concentration of top economists in the US.
...
The Massachusetts estate tax isn't a cliff, though the marginal rate between $1 million and about $1.1 million is about 40%. It then drops to 6.4%, and goes up to 16% on taxable estates above $10.1 million.
Maybe “cliff” isn’t the right term, but
In addition, unlike the federal estate tax which only taxes the excess over the threshold, if an estate exceeds $1 million the entire amount above $40,000 is taxed.
I get the FI part but not the RE part of FIRE.
bsteiner
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

TomatoTomahto wrote: Wed May 13, 2020 4:24 pm
bsteiner wrote: Wed May 13, 2020 2:21 pm
nimo956 wrote: Wed May 13, 2020 1:18 pm
TomatoTomahto wrote: Tue May 12, 2020 2:55 pm This is probably the part of the program where I remind viewers that, however generous the Federal exclusion currently is, some states are much stingier. MA’s lifetime exclusion is $1M, and it’s a cliff exclusion with a tax rate that quickly climbs to 16%.
One wonders how such a law with a cliff exclusion could have been written, given that Boston/Cambridge probably has the highest concentration of top economists in the US.
...
The Massachusetts estate tax isn't a cliff, though the marginal rate between $1 million and about $1.1 million is about 40%. It then drops to 6.4%, and goes up to 16% on taxable estates above $10.1 million.
Maybe “cliff” isn’t the right term, but
In addition, unlike the federal estate tax which only taxes the excess over the threshold, if an estate exceeds $1 million the entire amount above $40,000 is taxed.
That's not correct. The Massachusetts estate tax on a taxable estate of $1,001,000 is $410. The Massachusetts estate tax on a taxable estate of $1,000,100 is $41.
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TomatoTomahto
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Re: Should we create a testamentary trust for $6M estate?

Post by TomatoTomahto »

Bsteiner, I’m not disagreeing based on knowledge, but simply saying what I’ve read.
https://www.thebalance.com/overview-of-massachusetts-estate-tax-laws-3505320 wrote:The Massachusetts tax applies to the entire value of the estate, not just the portion that's above the $1 million exemption threshold. Any value over $40,000 is taxed. There are no exceptions, even if that value boils down to one single dollar.
I get the FI part but not the RE part of FIRE.
spth
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Re: Should we create a testamentary trust for $6M estate?

Post by spth »

FIREchief wrote: Wed May 13, 2020 12:51 am
spth wrote: Tue May 12, 2020 11:33 pm
2020content wrote: Mon May 11, 2020 2:12 pm We trust our daughter as we always have. Not everyone is capable of effective money management, making wise decisions about investing, and picking trustworthy advisors. We don't want to control from the grave, but we also don't want our daughter to misappropriate what could be a great gift for several generations.
But you do want to control from the grave. It’s the sole purpose of the testamentary trust you are considering. We have said trusts created in our will for our four young children to get them through college. We feel we have financial responsibility to them and to their caretakers until then. Beyond that it’s their money and the only control we have is through their memories of us.
I don't believe we've ever all agreed that "control from the grave" is an awful thing. I prefer to think of it as when a person is lying on their death bed they can take some comfort that they've provided well for their heirs (both immediately and, perhaps, for later in their lives). Is this a bad thing? :confused

Why do you just boil this down to "financial responsibility." Do you not care about your four children's well being beyond college? A lot of "stuff" happens in peoples lives far beyond that point. Is it an evil parent who wants to die with some assurances that their children will not be homeless in their fifties and beyond?
I place no moral value on the statement “control from the grave.” The OP stated that he or she did not want to do this. Based on that statement I tried to clarify that the main purpose of a testamentary trust is to exert control of assets once you are dead. At least that is why we have them placed in our will.
bayview
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Re: Should we create a testamentary trust for $6M estate?

Post by bayview »

senex wrote: Wed May 13, 2020 1:15 pm... Maybe we'll get lucky and obi-wan-bsteiner will drop in to clarify...
(emphasis mine)

lol

I do hope that Mr. Steiner saw this.

Even if he didn’t, he is forever rechristened/ renamed in my mind.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
Luckywon
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Re: Should we create a testamentary trust for $6M estate?

Post by Luckywon »

bayview wrote: Wed May 13, 2020 5:14 pm
senex wrote: Wed May 13, 2020 1:15 pm... Maybe we'll get lucky and obi-wan-bsteiner will drop in to clarify...
(emphasis mine)

lol

I do hope that Mr. Steiner saw this.

Even if he didn’t, he is forever rechristened/ renamed in my mind.
IMO "bsteiner" can properly be used as a verb and should be formalized in the English lexicon.

bsteiner
bee-sty-ner
To authoritatively inform, especially in the case of dispelling confusion.
"I had a lot of misconceptions about cholesterol but my doctor was kind enough to take time to bsteiner them today."
bayview
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Re: Should we create a testamentary trust for $6M estate?

Post by bayview »

Luckywon wrote: Wed May 13, 2020 5:47 pm
bayview wrote: Wed May 13, 2020 5:14 pm
senex wrote: Wed May 13, 2020 1:15 pm... Maybe we'll get lucky and obi-wan-bsteiner will drop in to clarify...
(emphasis mine)

lol

I do hope that Mr. Steiner saw this.

Even if he didn’t, he is forever rechristened/ renamed in my mind.
IMO "bsteiner" can properly be used as a verb and should be formalized in the English lexicon.

bsteiner
bee-sty-ner
To authoritatively inform, especially in the case of dispelling confusion.
"I had a lot of misconceptions about cholesterol but my doctor was kind enough to take time to bsteiner them today."
+1,000

Awesome.

As irritating as attorneys can be (my younger daughter is one, and she can be VERY irritating 🤪), I deeply appreciate their ability and willingness to parse their way(s) through the legal jungles and present the here’s-how-it-works to those of us who chose not to wade into those swamps.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
kevdude
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Re: Should we create a testamentary trust for $6M estate?

Post by kevdude »

smackboy1 wrote: Wed May 13, 2020 3:19 pm
2020content wrote: Mon May 11, 2020 6:49 amWe are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren. . .

-- total value of our estate estimated to be $6.5M

. . .

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?
Some thoughts for the OP:



- Testamentary trust just means a trust that is created by a will upon the grantor's death. It has no existence until then. It doesn't bypass probate and doesn't minimize grantor's estate taxes. A living trust is created while grantor is alive. Living trust could be revocable or irrevocable. IDK which is best for you. Laypeople sometimes think these are the only types of trusts, but there are actually a lot more than that for different purposes and some with odd names e.g. QTIP, GRUT, GRAT, GRIT, Intentionally Defective Grantor Trust, Accidentally Perfect Non-Grantor Trust. This is why you need a pro.

Bolding is mine. I'm confused. Earlier, bsteiner said the testamentary trust does minimize estate taxes (I would quote it but don't know how to do quotes from multiple posts - it's his first quote on this thread on page 1). We have a testamentary trust and that is my understanding, and one of the main reasons we set it up. In the event of my death, the assets go to the trust at a stepped up basis, with my wife is the trustee (the way we have it set up). Same in the event of her death, but with me as the trustee. Since the assets are transferred into the trust, there is no estate tax. At least that is how it was explained to us 10 years ago when it was set up. The majority of the assets are rental properties.

Assuming I die first, then my wife, it seems (based on previous comments in this thread) the remaining assets are again stepped up in basis, and then go to our children. If at the time the last one of us dies and they are over 25, they receive their equal shares in full. Or it goes to the new trustee/personal representative as Custodian until they turn 25, which isn't really that far away as our oldest is 17 and youngest is 15. :shock:

We live in Washington state, where the exemption is $2.2MM. We are below the Federal exemption at this time, but well over Washington's. If the testamentary trust does not shield us from the estate tax, we will have to revisit our documents, and obviously, our attorney/new attorney.
oldfort
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

kevdude wrote: Wed May 13, 2020 8:53 pm
smackboy1 wrote: Wed May 13, 2020 3:19 pm
2020content wrote: Mon May 11, 2020 6:49 amWe are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren. . .

-- total value of our estate estimated to be $6.5M

. . .

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?
Some thoughts for the OP:



- Testamentary trust just means a trust that is created by a will upon the grantor's death. It has no existence until then. It doesn't bypass probate and doesn't minimize grantor's estate taxes. A living trust is created while grantor is alive. Living trust could be revocable or irrevocable. IDK which is best for you. Laypeople sometimes think these are the only types of trusts, but there are actually a lot more than that for different purposes and some with odd names e.g. QTIP, GRUT, GRAT, GRIT, Intentionally Defective Grantor Trust, Accidentally Perfect Non-Grantor Trust. This is why you need a pro.

Bolding is mine. I'm confused. Earlier, bsteiner said the testamentary trust does minimize estate taxes (I would quote it but don't know how to do quotes from multiple posts - it's his first quote on this thread on page 1).
If you're referring to this: 3. The trust would be out of her estate for estate tax purposes , I think bsteiner is saying when your heirs die, their estates will have a lower estate tax because their inheritance is kept of their estate, not that it would minimize taxes on your estate.
kevdude
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Re: Should we create a testamentary trust for $6M estate?

Post by kevdude »

oldfort wrote: Wed May 13, 2020 9:12 pm
kevdude wrote: Wed May 13, 2020 8:53 pm
smackboy1 wrote: Wed May 13, 2020 3:19 pm
2020content wrote: Mon May 11, 2020 6:49 amWe are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren. . .

-- total value of our estate estimated to be $6.5M

. . .

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?
Some thoughts for the OP:



- Testamentary trust just means a trust that is created by a will upon the grantor's death. It has no existence until then. It doesn't bypass probate and doesn't minimize grantor's estate taxes. A living trust is created while grantor is alive. Living trust could be revocable or irrevocable. IDK which is best for you. Laypeople sometimes think these are the only types of trusts, but there are actually a lot more than that for different purposes and some with odd names e.g. QTIP, GRUT, GRAT, GRIT, Intentionally Defective Grantor Trust, Accidentally Perfect Non-Grantor Trust. This is why you need a pro.

Bolding is mine. I'm confused. Earlier, bsteiner said the testamentary trust does minimize estate taxes (I would quote it but don't know how to do quotes from multiple posts - it's his first quote on this thread on page 1).
If you're referring to this: 3. The trust would be out of her estate for estate tax purposes , I think bsteiner is saying when your heirs die, their estates will have a lower estate tax because their inheritance is kept of their estate, not that it would minimize taxes on your estate.
I'm actually referring to this:
1. Yes. That will keep her inheritance out of her estate for estate tax purposes (even if this were her only asset, she would have a taxable estate once the estate tax exclusion amount reverts to pre-2018 law in 2026). It will also protect her inheritance from her creditors and spouses. It will also accomplish your objective of having someone else manage it. (If you're in California you would probably do this in a revocable trust rather than in your Will, but the effect is the same.)

I'm assuming he is saying she will have a taxable estate because the current estate is over the 2018 level of $5.6MM. Since Washington's estate tax is $2.2MM, the state exemption won't totally help us, thus the testamentary trust. So, I guess my question is does this type of trust help avoid estate taxes upon our death?
oldfort
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

kevdude wrote: Wed May 13, 2020 9:30 pm I'm actually referring to this:
1. Yes. That will keep her inheritance out of her estate for estate tax purposes (even if this were her only asset, she would have a taxable estate once the estate tax exclusion amount reverts to pre-2018 law in 2026). It will also protect her inheritance from her creditors and spouses. It will also accomplish your objective of having someone else manage it. (If you're in California you would probably do this in a revocable trust rather than in your Will, but the effect is the same.)

I'm assuming he is saying she will have a taxable estate because the current estate is over the 2018 level of $5.6MM. Since Washington's estate tax is $2.2MM, the state exemption won't totally help us, thus the testamentary trust.
Exactly, when the OP's daughter dies, then the OP's daughter, the beneficiary, will have a smaller estate because her inheritance is not in her estate. This doesn't affect the taxes paid on the OP's estate, when the OP, the grantor, dies, although $6M is currently below the federal exemption. The grandchildren are the ones who benefit from this.
bsteiner
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

kevdude wrote: Wed May 13, 2020 8:53 pm ...
We have a testamentary trust and that is my understanding, and one of the main reasons we set it up. In the event of my death, the assets go to the trust at a stepped up basis, with my wife is the trustee (the way we have it set up). Same in the event of her death, but with me as the trustee. Since the assets are transferred into the trust, there is no estate tax. At least that is how it was explained to us 10 years ago when it was set up. The majority of the assets are rental properties.

Assuming I die first, then my wife, it seems (based on previous comments in this thread) the remaining assets are again stepped up in basis, and then go to our children. If at the time the last one of us dies and they are over 25, they receive their equal shares in full. Or it goes to the new trustee/personal representative as Custodian until they turn 25, which isn't really that far away as our oldest is 17 and youngest is 15. :shock:

We live in Washington state, where the exemption is $2.2MM. We are below the Federal exemption at this time, but well over Washington's. If the testamentary trust does not shield us from the estate tax, we will have to revisit our documents, and obviously, our attorney/new attorney.
If the first spouse to die leaves the Washington State exempt amount (presently $2,193,000) in a credit shelter trust for the surviving spouse, a couple gets to shelter that amount in each spouse's estate (for a total of twice that amount) from state estate tax. That's especially valuable in Washington State where the state estate tax rates go up to 20%.

You might also provide that, instead of mandating distribution to your children at 25 (or at the surviving spouse's death, if later), that each child gain control of his/her trust at that point. That will keep your children's inheritances out of their estates for estate tax purposes. That will be particularly important if your children remain in Washington and the Washington estate tax remains the way it is now.

The tradeoff is that the amount that's kept out of the surviving spouse's estate, or your children's estates, won't get another basis step-up at their deaths. However, if the trustees determine that the basis step-up is more valuable than keeping the assets out of their estates, they can always distribute the highly appreciated assets, or give them testamentary general powers of appointment so as to throw the assets into their estates. There are, of course, other tradeoffs to doing that, but it's nevertheless an option.
kevdude
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Re: Should we create a testamentary trust for $6M estate?

Post by kevdude »

bsteiner wrote: Wed May 13, 2020 9:50 pm
kevdude wrote: Wed May 13, 2020 8:53 pm ...
We have a testamentary trust and that is my understanding, and one of the main reasons we set it up. In the event of my death, the assets go to the trust at a stepped up basis, with my wife is the trustee (the way we have it set up). Same in the event of her death, but with me as the trustee. Since the assets are transferred into the trust, there is no estate tax. At least that is how it was explained to us 10 years ago when it was set up. The majority of the assets are rental properties.

Assuming I die first, then my wife, it seems (based on previous comments in this thread) the remaining assets are again stepped up in basis, and then go to our children. If at the time the last one of us dies and they are over 25, they receive their equal shares in full. Or it goes to the new trustee/personal representative as Custodian until they turn 25, which isn't really that far away as our oldest is 17 and youngest is 15. :shock:

We live in Washington state, where the exemption is $2.2MM. We are below the Federal exemption at this time, but well over Washington's. If the testamentary trust does not shield us from the estate tax, we will have to revisit our documents, and obviously, our attorney/new attorney.
If the first spouse to die leaves the Washington State exempt amount (presently $2,193,000) in a credit shelter trust for the surviving spouse, a couple gets to shelter that amount in each spouse's estate (for a total of twice that amount) from state estate tax. That's especially valuable in Washington State where the state estate tax rates go up to 20%.

You might also provide that, instead of mandating distribution to your children at 25 (or at the surviving spouse's death, if later), that each child gain control of his/her trust at that point. That will keep your children's inheritances out of their estates for estate tax purposes. That will be particularly important if your children remain in Washington and the Washington estate tax remains the way it is now.

The tradeoff is that the amount that's kept out of the surviving spouse's estate, or your children's estates, won't get another basis step-up at their deaths. However, if the trustees determine that the basis step-up is more valuable than keeping the assets out of their estates, they can always distribute the highly appreciated assets, or give them testamentary general powers of appointment so as to throw the assets into their estates. There are, of course, other tradeoffs to doing that, but it's nevertheless an option.
Thank you for your response. Our wills only state that the assets go into a trust upon the death of either of us, but not a specific type of trust. Is that something we need to address? A meeting with our attorney maybe in order.
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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

smackboy1 wrote: Wed May 13, 2020 3:19 pm
2020content wrote: Mon May 11, 2020 6:49 amWe are concerned that she is not really capable of managing the inheritance and we want to ensure there are moneys continue to grow for her, our grandchildren, and possibly greatgrandchildren. . .

-- total value of our estate estimated to be $6.5M

. . .

Questions:

-- Should we place the assets in a testamentary trust?
-- What are thoughts on having a large company manage the trust... Vanguard Family Legacy Services?
-- How does the trust avoid a large tax burden?
-- Any ideas advice on how to invest the moneys in the trust?
-- Any ideas or guidance on how to disperse the moneys?
-- Anything else we should consider?
Some thoughts for the OP:

- With this much $ it should be obvious but use experienced professionals i.e. lawyers, CPA, trustees, financial advisors. $65K is a mere 1% which can buy a lot of good advice which is specific to your particular situation. TBH the internet is not the best place to get anything more than the most general advice. Some of the information either misinformed or wrong.

- IMHO you should use the anecdotes and recommendations you've read here to question your professionals' recommendations in detail. Half the battle is finding an experienced trusts and estates lawyer. Sometimes it pays to find one that has a deeper understanding of asset protection and divorce law.

- Nobody knows what the future brings, and nobody knows what they don't know. Whatever the estate plan, ensure it is flexible and has checks and balances. There has to be mechanisms in case the situation changes e.g. tax laws change; beneficiaries relocate to a different country. There has to be governance structure to allow adding and removing a trustee, protector, financial advisor, maybe even a beneficiary.

- Testamentary trust just means a trust that is created by a will upon the grantor's death. It has no existence until then. It doesn't bypass probate and doesn't minimize grantor's estate taxes. A living trust is created while grantor is alive. Living trust could be revocable or irrevocable. IDK which is best for you. Laypeople sometimes think these are the only types of trusts, but there are actually a lot more than that for different purposes and some with odd names e.g. QTIP, GRUT, GRAT, GRIT, Intentionally Defective Grantor Trust, Accidentally Perfect Non-Grantor Trust. This is why you need a pro.

- I don't know much about Vanguard's trust or family legacy services. But I assume they are designed to support Vanguard the mutual fund company. Their services might be good for some situations. In my work I have made some inquiries of Vanguard National Trust and found them lacking in certain respects e.g. they won't invest in assets not available at Vanguard brokerage; it's pretty much restricted to publicly traded investments and they will not hold real estate or shares of private companies. VNT is located in PA and I believe PA law would apply when it comes to asset protection (PA is not particularly known as an asset protection state compared to DE, NV, SD, AK).

- I believe Vanguard Personal Advisor Services (PAS) will work with outside trustees. So having a SD directed trustee with trust assets custodied at Vanguard under the direction of PAS is possible. Of course there are other RIAs that will work with trusts and invest in a Boglehead way with low fees. You can find them discussed elsewhere on this forum.

- An irrevocable trust can save estate taxes because a trust cannot die. Subsequent to grantor's death the death of beneficiaries or even the trustee does not subject the trust principal to estate tax. Income tax is a different story. Generally, irrevocable trusts are taxed on income on an accelerated schedule compared to a person. A person doesn't pay the highest marginal tax rate until over $500K income. Trusts hit that rate at $12,750 income. To minimize trust taxes the trustee should work with a CPA and financial advisor to reduce ordinary income e.g. tax exempt bonds. Another strategy is to distribute the net income to beneficiaries so it is taxed at the personal tax schedule and not the accelerated trust schedule. There are other specialized trusts that shift the tax burden between the grantor, trust and beneficiaries, but that's not for this simplified discussion.

- I agree with the recommendation not to mandate distributions. It may make sense when the trust becomes small not cost effective e.g. $100K, and the idea is to spread out the $ and terminate the trust. The risk is that assets distributed to the beneficiary become available to their creditors, spouses, grifters,and even the beneficiary themselves if they develop an incapacity. There are some asset protection specialists that would argue that any ascertainable standard weakens a trust's asset protection. In those trusts the there is not even a HEMS (health, education, maintenance, support) standard. Trustee has full discretion. The fear is that a court rule that the trustee's ascertainable standard creates a property interest in the beneficiary and allow a beneficiary's creditor to reach trust assets.
This was extremely helpful, and perhaps the best advice I've received. Thank you!
bsteiner
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

kevdude wrote: Wed May 13, 2020 10:19 pm
bsteiner wrote: Wed May 13, 2020 9:50 pm
kevdude wrote: Wed May 13, 2020 8:53 pm ...
We have a testamentary trust and that is my understanding, and one of the main reasons we set it up. In the event of my death, the assets go to the trust at a stepped up basis, with my wife is the trustee (the way we have it set up). Same in the event of her death, but with me as the trustee. Since the assets are transferred into the trust, there is no estate tax. At least that is how it was explained to us 10 years ago when it was set up. The majority of the assets are rental properties.

Assuming I die first, then my wife, it seems (based on previous comments in this thread) the remaining assets are again stepped up in basis, and then go to our children. If at the time the last one of us dies and they are over 25, they receive their equal shares in full. Or it goes to the new trustee/personal representative as Custodian until they turn 25, which isn't really that far away as our oldest is 17 and youngest is 15. :shock:

We live in Washington state, where the exemption is $2.2MM. We are below the Federal exemption at this time, but well over Washington's. If the testamentary trust does not shield us from the estate tax, we will have to revisit our documents, and obviously, our attorney/new attorney.
If the first spouse to die leaves the Washington State exempt amount (presently $2,193,000) in a credit shelter trust for the surviving spouse, a couple gets to shelter that amount in each spouse's estate (for a total of twice that amount) from state estate tax. That's especially valuable in Washington State where the state estate tax rates go up to 20%.

You might also provide that, instead of mandating distribution to your children at 25 (or at the surviving spouse's death, if later), that each child gain control of his/her trust at that point. That will keep your children's inheritances out of their estates for estate tax purposes. That will be particularly important if your children remain in Washington and the Washington estate tax remains the way it is now.

The tradeoff is that the amount that's kept out of the surviving spouse's estate, or your children's estates, won't get another basis step-up at their deaths. However, if the trustees determine that the basis step-up is more valuable than keeping the assets out of their estates, they can always distribute the highly appreciated assets, or give them testamentary general powers of appointment so as to throw the assets into their estates. There are, of course, other tradeoffs to doing that, but it's nevertheless an option.
Thank you for your response. Our wills only state that the assets go into a trust upon the death of either of us, but not a specific type of trust. Is that something we need to address? A meeting with our attorney maybe in order.
The Federal estate tax law was in a state of flux 10 years ago. Under the 2001 Act, there was no estate tax in 2010, but the estate tax was scheduled to return in 2011 with a $1 million exclusion amount. In late 2010, Congress retroactively restored the estate tax with a $5 million exclusion amount, indexed for 2011 and 2012, only to revert to $1 million in 2013, and allowed estates of persons dying in 2010 to elect carryover basis in lieu of estate tax.

So from the information provided we don't know whether your Wills create trusts for the Federal estate tax exclusion amount (presently $11,580,000) or the Washington exempt amount (presently $2,193,000).

If you have the cover letter that you received with the drafts, that would probably contain a summary of your Wills. Or you may be able to tell what you have from the formula in your Wills what you have. Or you could post the text of the formula clause in your Will and many of use would be able to tell what you have.

But since it's been 10 years since your signed your Wills, and since you mandated distribution to your children at 25 (or the death of the surviving spouse, if later), it probably makes sense to review and update your planning, preferably with a lawyer who would recommend that your children gain control over their trusts at 25 (or the death of the surviving spouse, if later) rather than mandating distribution at that point. As part of that process, you could make sure that the formula for the trust for the surviving spouse is appropriate for your assets and your objectives.
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Re: Should we create a testamentary trust for $6M estate?

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Ironically, this case provides a good example of reasons not to use a family member as trustee. The origins of the creditor dispute in this case go back to:
Given that a jury had already concluded that Mr. Kiesewetter has unconscionably lied to and stolen from his family members,
Mrs. Kiesewetter colluded with or otherwise actively participated in the fraudulent transfer and did so with fraudulent intent.
It's not clear how effective the trust was ultimately from an economic perspective. She was forced into bankruptcy and some of the debts were non-dischargeable in bankruptcy. To the extent the trust worked, after bankruptcy and over 15 years of litigation, it's a grotesque reflection on the legal system where you can commit larceny and embezzlement and have your assets shielded.
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Re: Should we create a testamentary trust for $6M estate?

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smackboy1 wrote: Wed May 13, 2020 3:19 pm - I agree with the recommendation not to mandate distributions. It may make sense when the trust becomes small not cost effective e.g. $100K, and the idea is to spread out the $ and terminate the trust. The risk is that assets distributed to the beneficiary become available to their creditors, spouses, grifters,and even the beneficiary themselves if they develop an incapacity. There are some asset protection specialists that would argue that any ascertainable standard weakens a trust's asset protection. In those trusts the there is not even a HEMS (health, education, maintenance, support) standard. Trustee has full discretion. The fear is that a court rule that the trustee's ascertainable standard creates a property interest in the beneficiary and allow a beneficiary's creditor to reach trust assets.
I'd like to thank everybody on this thread (especially the professionals) for a very helpful and enlightening discussion. I've learned a lot and this discussion has changed my views a bit. And given that we intend to update our wills this year, this discussion is very timely.

I'm still stuck on the mandatory distribution issue. I can see why some circumstances require a "lifetime trust," but when the children are young (say, under 25) at the time the will is drafted, it seems to me that providing for a lifetime trust is planning for the worst case scenario--divorce, debt defaults, bankruptcy, mental issues, reckless spending, whatever. Would it not make more sense to assume not a worst or best case scenario, but a middle case scenario. And if circumstances requiring a lifetime trust arise later the will can always be changed.

My sons are 22 and 15 and based on what I see right now they will live well-adjusted, productive lives--tho not perfect lives. If my wife and I died today, my strong guess (and I acknowledge it's only a guess) is that mandatory distributions at 25, 30 and 35 would be the right thing to do for them. And my wife and I can always change our mind as long as one of us remains alive.

As a fall back I do like the idea of the trustee having authority to terminate the trust with stated standards in the trust--acknowledging that may weaken the asset protection--especially given there would be no asset protection with a mandatory distribution.

Does that make sense?
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

FIREchief wrote: Tue May 12, 2020 8:36 pm
oldfort wrote: Tue May 12, 2020 7:34 pm
FIREchief wrote: Tue May 12, 2020 7:18 pm If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer
Full control is the wrong reference. Are you familiar with the HEMS standard? In asset protection states a beneficiary can exercise effectively full control over the trust without “full discretion over distributions”. If limited by the HEMS standard, the assets are fully protected from creditors, but the trustee can freely distribute for health, education, maintenance and support; which can include a lot of “control” without risking asset protections. You of course are free to believe whatever you want.
In the case cited by afan, in the hypo where the beneficiary became the sole trustee, the trustee would not be allowed to freely distribute from the principal for health, education, maintenance, and support. As sole trustee, she would have been absolutely prohibited from making any principal distributions to herself, whether for HEMS or any other purpose. Having a sole beneficiary as the sole trustee, with the normal trustee powers of discretion of both trust principal and income, would raise serious problems with the doctrine of merger.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.
Thus, even as the sole trustee, Debtor would remain unable to compel distributions of principal
Last edited by oldfort on Thu May 14, 2020 12:39 pm, edited 1 time in total.
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Re: Should we create a testamentary trust for $6M estate?

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oldfort wrote: Thu May 14, 2020 12:29 pm
FIREchief wrote: Tue May 12, 2020 8:36 pm
oldfort wrote: Tue May 12, 2020 7:34 pm
FIREchief wrote: Tue May 12, 2020 7:18 pm If a state's laws currently provide full asset protection even though a beneficiary is currently serving as their own sole trustee, why would a person pay somebody else? Please keep in mind, many who post in these threads aren't just posting some random crap they read on the internet somewhere. 8-)
I'll take that bet. I doubt there is a single state, where the beneficiary can be the sole trustee with full control over distributions to himself and keep the full asset protection of the trust. :sharebeer
Full control is the wrong reference. Are you familiar with the HEMS standard? In asset protection states a beneficiary can exercise effectively full control over the trust without “full discretion over distributions”. If limited by the HEMS standard, the assets are fully protected from creditors, but the trustee can freely distribute for health, education, maintenance and support; which can include a lot of “control” without risking asset protections. You of course are free to believe whatever you want.
In the case cited by afan, in the hypo where the beneficiary became the sole trustee, the trustee would not be allowed to freely distribute from the principal for health, education, maintenance, and support. As sole trustee, she would have been absolutely prohibited from making any principal distributions to herself, whether for HEMS or any other purpose.
The Marital Trust prohibits Debtor from having control over principal distributions made to herself.
Yeah, I know. That's the nature of a marital trust. The surviving spouse typically benefits from the income, but future heirs are entitled to 100% of the principal. That's why I asked if you understood what a marital trust was. This has nothing to do with discretionary distributions or protection of assets from creditors.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

FIREchief wrote: Thu May 14, 2020 12:38 pm Yeah, I know. That's the nature of a marital trust. The surviving spouse typically benefits from the income, but future heirs are entitled to 100% of the principal. That's why I asked if you understood what a marital trust was. This has nothing to do with discretionary distributions or protection of assets from creditors.
You are the one who doesn't understand what a marital trust is. Future heirs are not entitled to 100% of the principal. From the case:
Distributions of principal can be made to Debtor at the discretion of the other co-trustees, which included a corporate trustee and Herbert Gerstein.
The degree of control the trustee-beneficiary can exercise has everything to do with "the doctrine of merger" and the protection of assets.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief »

cowdogman wrote: Thu May 14, 2020 11:21 am I'm still stuck on the mandatory distribution issue. I can see why some circumstances require a "lifetime trust," but when the children are young (say, under 25) at the time the will is drafted, it seems to me that providing for a lifetime trust is planning for the worst case scenario--divorce, debt defaults, bankruptcy, mental issues, reckless spending, whatever. Would it not make more sense to assume not a worst or best case scenario, but a middle case scenario. And if circumstances requiring a lifetime trust arise later the will can always be changed.
There's absolutely nothing wrong with planning for a worst case scenario. Worst cases tend to occur when you least expect them to. Allowing the trust to remain in effect, with the beneficiary having effective control, provides tremendous potential benefits to the beneficiary. The "cost," in the absence of a paid trustee, is simply the annual tax return and some minor administrative work. If the trust holds only financial assets, the tax return can be extremely simple. Whether or not the assets are held in trust, they will likely require the same amount of annual maintenance.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief »

oldfort wrote: Thu May 14, 2020 12:43 pm
FIREchief wrote: Thu May 14, 2020 12:38 pm Yeah, I know. That's the nature of a marital trust. The surviving spouse typically benefits from the income, but future heirs are entitled to 100% of the principal. That's why I asked if you understood what a marital trust was. This has nothing to do with discretionary distributions or protection of assets from creditors.
You are the one who doesn't understand what a marital trust is. Future heirs are not entitled to 100% of the principal. From the case:
Distributions of principal can be made to Debtor at the discretion of the other co-trustees, which included a corporate trustee and Herbert Gerstein.
I do understand. That's why I used the work "typically," because it all depends upon how a specific trust is drafted. In this case, it sounds like there were no allowances for the spouse, while serving as sole trustee, to distribute principle to herself. The fact that the trust allowed this at the discretion of the other co-trustees in no way impacts the asset protections of the assets that she would have effective control over were she serving as sole trustee. She would have effective control over the income of the trust, and the case ruled that even if she were serving as sole trustee she could not be forced to distribute those assets to creditors. That's the entire point here, and afan's example answered the question quite convincingly. I'm not sure why you are insisting upon muddying the waters focusing on the principal aspect of this trust. They are irrelevant to the case in point, since without agreement by the other co-trustees, she would never have any access to them.
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Re: Should we create a testamentary trust for $6M estate?

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FIREchief wrote: Thu May 14, 2020 12:46 pm There's absolutely nothing wrong with planning for a worst case scenario. Worst cases tend to occur when you least expect them to.
There is a difference between (1) realizing a worst care scenario is one possible outcome and incorporating that realization into the decision process and (2) making decisions based on the assumption the worst case scenario will occur.

I've read the thread and am aware of the various issues related to paid vs. unpaid trustees and costs.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief »

cowdogman wrote: Thu May 14, 2020 1:10 pm
FIREchief wrote: Thu May 14, 2020 12:46 pm There's absolutely nothing wrong with planning for a worst case scenario. Worst cases tend to occur when you least expect them to.
There is a difference between (1) realizing a worst care scenario is one possible outcome and incorporating that realization into the decision process and (2) making decisions based on the assumption the worst case scenario will occur.

I've read the thread and am aware of the various issues related to paid vs. unpaid trustees and costs.
This is where you lost me:
Would it not make more sense to assume not a worst or best case scenario, but a middle case scenario. And if circumstances requiring a lifetime trust arise later the will can always be changed.
Estate planning documents should never be drafted assuming that you'll have a chance to modify them prior to death. To your point, most don't plan to die tomorrow, but life (and death) happens. What if "circumstances" don't change until after you are gone?
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

FIREchief wrote: Thu May 14, 2020 1:24 pm
cowdogman wrote: Thu May 14, 2020 1:10 pm
FIREchief wrote: Thu May 14, 2020 12:46 pm There's absolutely nothing wrong with planning for a worst case scenario. Worst cases tend to occur when you least expect them to.
There is a difference between (1) realizing a worst care scenario is one possible outcome and incorporating that realization into the decision process and (2) making decisions based on the assumption the worst case scenario will occur.

I've read the thread and am aware of the various issues related to paid vs. unpaid trustees and costs.
This is where you lost me:
Would it not make more sense to assume not a worst or best case scenario, but a middle case scenario. And if circumstances requiring a lifetime trust arise later the will can always be changed.
Estate planning documents should never be drafted assuming that you'll have a chance to modify them prior to death. To your point, most don't plan to die tomorrow, but life (and death) happens. What if "circumstances" don't change until after you are gone?
My wife and I dying tomorrow would be another worst case scenario. Nobody (or maybe very few people) make decisions or plans based on the assumption a worst case scenario will occur. It's likely, I hope, one of us will make it for another 10-20 years

Yes, we may die without a chance to change the wills. That cuts both ways--like if we opt for a lifetime trust and then later decide for an immediate distribution at death, and then die before having a chance to make the change. The key is to be happy with the decision when made--realizing that we may not be able to change it (and also realizing that we likely will have a chance to change it).
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Re: Should we create a testamentary trust for $6M estate?

Post by kevdude »

bsteiner wrote: Thu May 14, 2020 9:28 am
kevdude wrote: Wed May 13, 2020 10:19 pm
bsteiner wrote: Wed May 13, 2020 9:50 pm
kevdude wrote: Wed May 13, 2020 8:53 pm ...
We have a testamentary trust and that is my understanding, and one of the main reasons we set it up. In the event of my death, the assets go to the trust at a stepped up basis, with my wife is the trustee (the way we have it set up). Same in the event of her death, but with me as the trustee. Since the assets are transferred into the trust, there is no estate tax. At least that is how it was explained to us 10 years ago when it was set up. The majority of the assets are rental properties.

Assuming I die first, then my wife, it seems (based on previous comments in this thread) the remaining assets are again stepped up in basis, and then go to our children. If at the time the last one of us dies and they are over 25, they receive their equal shares in full. Or it goes to the new trustee/personal representative as Custodian until they turn 25, which isn't really that far away as our oldest is 17 and youngest is 15. :shock:

We live in Washington state, where the exemption is $2.2MM. We are below the Federal exemption at this time, but well over Washington's. If the testamentary trust does not shield us from the estate tax, we will have to revisit our documents, and obviously, our attorney/new attorney.
If the first spouse to die leaves the Washington State exempt amount (presently $2,193,000) in a credit shelter trust for the surviving spouse, a couple gets to shelter that amount in each spouse's estate (for a total of twice that amount) from state estate tax. That's especially valuable in Washington State where the state estate tax rates go up to 20%.

You might also provide that, instead of mandating distribution to your children at 25 (or at the surviving spouse's death, if later), that each child gain control of his/her trust at that point. That will keep your children's inheritances out of their estates for estate tax purposes. That will be particularly important if your children remain in Washington and the Washington estate tax remains the way it is now.

The tradeoff is that the amount that's kept out of the surviving spouse's estate, or your children's estates, won't get another basis step-up at their deaths. However, if the trustees determine that the basis step-up is more valuable than keeping the assets out of their estates, they can always distribute the highly appreciated assets, or give them testamentary general powers of appointment so as to throw the assets into their estates. There are, of course, other tradeoffs to doing that, but it's nevertheless an option.
Thank you for your response. Our wills only state that the assets go into a trust upon the death of either of us, but not a specific type of trust. Is that something we need to address? A meeting with our attorney maybe in order.
The Federal estate tax law was in a state of flux 10 years ago. Under the 2001 Act, there was no estate tax in 2010, but the estate tax was scheduled to return in 2011 with a $1 million exclusion amount. In late 2010, Congress retroactively restored the estate tax with a $5 million exclusion amount, indexed for 2011 and 2012, only to revert to $1 million in 2013, and allowed estates of persons dying in 2010 to elect carryover basis in lieu of estate tax.

So from the information provided we don't know whether your Wills create trusts for the Federal estate tax exclusion amount (presently $11,580,000) or the Washington exempt amount (presently $2,193,000).

If you have the cover letter that you received with the drafts, that would probably contain a summary of your Wills. Or you may be able to tell what you have from the formula in your Wills what you have. Or you could post the text of the formula clause in your Will and many of use would be able to tell what you have.

But since it's been 10 years since your signed your Wills, and since you mandated distribution to your children at 25 (or the death of the surviving spouse, if later), it probably makes sense to review and update your planning, preferably with a lawyer who would recommend that your children gain control over their trusts at 25 (or the death of the surviving spouse, if later) rather than mandating distribution at that point. As part of that process, you could make sure that the formula for the trust for the surviving spouse is appropriate for your assets and your objectives.
Again, thank you very much for your response, along with everyone else that has contributed to this thread. It has been very informative, indeed.

I'll quote from the Will, which was created March, 2009:

DISPOSITION OF RESIDUE (this is after Disposition of Personal Property, which doesn't seem to apply to this discussion)
FOURTH (A) The residue of the property owned by me at my death, real and personal and wherever situate, I devise and bequeath to my wife, if she survives me; provided, that, if my wife survives me but disclaims the right to take any portion of or interest in my residuary estate, I give such disclaimed portion of or interest in my property in trust to my trustee hereinafter named to be disposed of as directed in Article FIFTH hereof.
(B) If my wife does not survive me, the residue of the property owned by me at my death, real and personal and wherever situate, shall be disposed of as directed in Article SIXTH hereof.

TRUST FOR WIFE
FIFTH: If my wife survives me and disclaims the right to take any portion of interest in my residuary estate under Article FOURTH, I give such disclaimed property to my trustee hereinafter named to hold in trust pursuant to the following terms and conditions:
(A) During the life of my wife, my trustee shall pay her all of the net income of this trust at least quarterly and also so much of the principal thereof as is needed for my wife's health, support, and maintenance at the level she was enjoying at my death, taking into consideration all other resources (including income) available to her.
(B) Upon the death of my wife, my trustee shall dispose of the then remaining trust (if any) as directed in Article SIXTH hereof.

PROVISIONS FOR CHILDREN AFTER DEATH OF HUSBAND AND WIFE
SIXTH: (A) All property directed to be disposed of under the provisions of the Article, at the times set forth in this Will for such disposition shall be divided into equal shares so that one such share shall be set apart for, and distributed to, each child of mine who is then living and so that one such share shall be set apart for, and distributed to, the living issue, per stripes, of each child of mine who is then deceased. Notwithstanding the forgoing, the share of any beneficiary what has not attained the age of twenty-five (25) shall not be distributed outright to her or him, rather the same shall be distributed to my personal representative hereinafter named to hold as Custodian for said beneficiary under the Washington Uniform Transfer to Minors Act.
PROVISIONS IN CASE OF DEATH OF HUSBAND, WIFE AND ALL ISSUE
(B) If at my death, or at any time thereafter, either before, during the existence of, or at the termination of the trust created hereunder, neither my wife nor any of my issue is then living, all property which would have otherwise been then distributable under my Will to or in trust for any of my issue had any of my issue been then living and then remaining undistributed shall be distributed as follow:
(1) FIFTY PERCENT (50%) to my heirs at law determined as though I had died at that time; and
(2) FIFTY PERCENT (50%) to my wife's heirs at law determined as though she had died at that time.

(I'M SKIPPING THE SPENDTHRIFT CLAUSE, SEVENTH)

PERSONAL REPRESENTATIVE AND TRUSTEE PROVISIONS AND POWERS
EIGHTH: (A) I name my wife personal representative of this will. If my personal representative resigns or otherwise fails or ceases to serve as such, I name _________ as alternate personal representative. I name my wife trustee of any trust created herein. If my trustee resigns or otherwise fails or ceases to serve as such, I name __________ alternate trustee. My fiduciaries (meaning both personal representative and trustee) above named need not give bond, in any jurisdiction. My estate shall by managed, settled, and administered by my above-named personal representative, or any personal representative of my estate, without the intervention of any court and with all powers granted herein and by law to a personal representative acting under nonintervention power, and I direct that such nonintervention powers be completely unrestricted. Such powers may be exercised without regard to whether or not the transaction being undertaken is necessary for the management, settlement, or administration of my estate.
(B) In addition to all distributions of property from my probate estate otherwise permitted by law, at any time during the probate administration of my estate at which, if a final distribution of my estate were made, property would be distributed to one or more trusts created under this instrument, I authorize (but do not require) my personal representative to make to or for the benefit of any beneficiary of any such trust any distribution or distributions of the income and principal of my probate estate which my trustee hereunder would have authority to make if such trust had already been funded.
(C) My fiduciaries shall have all the rights, powers and duties given by law on the date hereof, including, as to my personal representative, those set forth in R.C.W. 11.68.090, or any successor section thereto, and, as to all my fiduciaries, those set forth in R.C.W. 11.98.070, or successor sections thereto, except as modified and increased hereinafter provided:
(1) To make any distribution in cash or in specific property, real or personal, or an undivided interest therein or partly in cash and partly in property , in shares which may be composed differently; all assets distributed in kind shall be valued for purposes of distribution at their distribution date values; and
(2) No loan shall be made to my wife at any time at which she is serving as personal representative and/or trustee hereunder.


Whew! Im sorry for including so much information, but I didn't know when to stop, and then where to begin again. I also apologize to the OP for hijacking this thread.

As an FYI, the persons left blank in the personal representative and trustee section above is a cousin of my wife. Also, the properties that would be transferred into the trust are owned by separate LLC's that we are both 50% owners of and I'm pretty sure we are both managing members.

So, after going through all of this, and the cover letter, I'm still unsure as to whether this actually accomplished one of the priorities we had - to avoid
estate taxes. I'm sure we knew at the time, but it has been awhile. I think I'll schedule a meeting with our attorney to address this, along with many other issues that have arisen from this thread. In the meantime, your feedback is very much appreciated.

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Re: Should we create a testamentary trust for $6M estate?

Post by NotWhoYouThink »

cowdogman wrote: Thu May 14, 2020 1:10 pm
FIREchief wrote: Thu May 14, 2020 12:46 pm There's absolutely nothing wrong with planning for a worst case scenario. Worst cases tend to occur when you least expect them to.
There is a difference between (1) realizing a worst care scenario is one possible outcome and incorporating that realization into the decision process and (2) making decisions based on the assumption the worst case scenario will occur.

I've read the thread and am aware of the various issues related to paid vs. unpaid trustees and costs.
That's how we look at it. Full distribution at age 30 is what we have now. If something happens to make us think that's a bad idea we'll change it at that time. If something changes and we don't get a chance to adjust our estate plan, too bad.

We plan to live a long time, and hope they do also. We'll start giving them more as we and they get more secure about our situations. They are in the phase now that they want to demonstrate they are making it on their own, and don't really want help from us. Some day we'll just say "ok, you made it, congratulations to you (and to us since we'll take credit for raising you right). Here's some money because we can't figure out a way to spend it all before we die."

0.0% of my net worth is in trusts that would protect it from creditors or ex-spouses, and that fact has never cost me one minute of lost sleep. We do have IRAs and 401ks, so there is some protection.
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Re: Should we create a testamentary trust for $6M estate?

Post by bsteiner »

kevdude wrote: Thu May 14, 2020 2:09 pm ...
FOURTH (A) The residue of the property owned by me at my death, real and personal and wherever situate, I devise and bequeath to my wife, if she survives me; provided, that, if my wife survives me but disclaims the right to take any portion of or interest in my residuary estate, I give such disclaimed portion of or interest in my property in trust to my trustee hereinafter named to be disposed of as directed in Article FIFTH hereof.

(B) If my wife does not survive me, the residue of the property owned by me at my death, real and personal and wherever situate, shall be disposed of as directed in Article SIXTH hereof.

FIFTH: If my wife survives me and disclaims the right to take any portion of interest in my residuary estate under Article FOURTH, I give such disclaimed property to my trustee hereinafter named to hold in trust pursuant to the following terms and conditions:

(A) During the life of my wife, my trustee shall pay her all of the net income of this trust at least quarterly and also so much of the principal thereof as is needed for my wife's health, support, and maintenance at the level she was enjoying at my death, taking into consideration all other resources (including income) available to her.

(B) Upon the death of my wife, my trustee shall dispose of the then remaining trust (if any) as directed in Article SIXTH hereof.

SIXTH: (A) All property directed to be disposed of under the provisions of the Article, at the times set forth in this Will for such disposition shall be divided into equal shares so that one such share shall be set apart for, and distributed to, each child of mine who is then living and so that one such share shall be set apart for, and distributed to, the living issue, per stripes, of each child of mine who is then deceased. Notwithstanding the forgoing, the share of any beneficiary what has not attained the age of twenty-five (25) shall not be distributed outright to her or him, rather the same shall be distributed to my personal representative hereinafter named to hold as Custodian for said beneficiary under the Washington Uniform Transfer to Minors Act.
...
That's a disclaimer Will. You leave your estate to your wife, except to the extent (if any) that she disclaims (waives), the disclaimed portion goes to a trust for her benefit.

That's a commonly used approach where you don't know how much you want to shelter, or where you don't expect there to be any estate tax so you want to leave everything to your spouse, but you have the disclaimer trust as a backup.

Since you know you want to shelter the Washington exempt amount, you might create a credit shelter trust for that amount in the first instance. A mandatory credit shelter trust can be much more flexible than a disclaimer trust. Your wife may have a power of appointment over a mandatory credit shelter trust, but not over a disclaimer trust.

You might want to change the terms of the trust. You mandate that she receive all the income. That will make her estate (and therefore her Washington estate tax) larger. You could instead make the income (and the principal) discretionary. You could add your children as beneficiaries.

You provide for your children outright at the surviving spouse's death. As discussed above, you might want to provide for them in trust, with each child gaining control over his/her trust at age 25.
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Re: Should we create a testamentary trust for $6M estate?

Post by senex »

cowdogman wrote: Thu May 14, 2020 11:21 am My sons are 22 and 15 and based on what I see right now they will live well-adjusted, productive lives--tho not perfect lives. If my wife and I died today, my strong guess (and I acknowledge it's only a guess) is that mandatory distributions at 25, 30 and 35 would be the right thing to do for them. And my wife and I can always change our mind as long as one of us remains alive.
I agree this is a particularly informative thread.

Even with the asset protection, and the costs more-controllable-than-I-realized, I do have a nagging feeling that a lifetime trust may not be for me.

Not sure if it's the lack of access to principal (if own trustee), or interpersonal power struggles (if volunteer trustee), or cost (if paid trustee). Or if it's the complaints I've heard from trust users: humiliation, broken relationships, mismanagement, embezzelment. Or if it's the reports (such as the book I referenced upthread) saying 80% of that particular consultancy's clients called their trust a net negative in their life. Or if it's an irrational prejudice of my modest upbringing. (Granted, I am focused on competant, upright beneficiaries; special needs is a different story)

There is something character-building about taking full responsibility for oneself and one's gifts; and practicing placing your hope into something higher than an invincible pile of money; and approaching life willing to risk "one heap of all your winnings [...] and lose, start again at your beginnings, and never breathe a word about your loss." Charlie Munger once said that you should structure your life so you can handle a 50% loss without fussing too much about it. These things appeal to me at a deeper level than putting a fence around one's material excess. Who knows, if I had been sued or divorced I may feel the opposite. I don't necessarily recommend these thoughts; just sharing for the sake of people who may silently agree. I personally wish spendthrift trusts were illegal, so I wouldn't have to make difficult decisions about them (paradox of choice and all that).

I much appreciate the experts. Before bogleheads my decisions were made out of relative ignorance (a few books, and one attorney's opinions). Now I am weighing a more expansive view of costs and benefits, and pondering my hopes and values. Appreciate the people with heart of educators.
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Re: Should we create a testamentary trust for $6M estate?

Post by FoolStreet »

cowdogman wrote: Thu May 14, 2020 11:21 am
smackboy1 wrote: Wed May 13, 2020 3:19 pm - I agree with the recommendation not to mandate distributions. It may make sense when the trust becomes small not cost effective e.g. $100K, and the idea is to spread out the $ and terminate the trust. The risk is that assets distributed to the beneficiary become available to their creditors, spouses, grifters,and even the beneficiary themselves if they develop an incapacity. There are some asset protection specialists that would argue that any ascertainable standard weakens a trust's asset protection. In those trusts the there is not even a HEMS (health, education, maintenance, support) standard. Trustee has full discretion. The fear is that a court rule that the trustee's ascertainable standard creates a property interest in the beneficiary and allow a beneficiary's creditor to reach trust assets.
I'd like to thank everybody on this thread (especially the professionals) for a very helpful and enlightening discussion. I've learned a lot and this discussion has changed my views a bit. And given that we intend to update our wills this year, this discussion is very timely.

I'm still stuck on the mandatory distribution issue. I can see why some circumstances require a "lifetime trust," but when the children are young (say, under 25) at the time the will is drafted, it seems to me that providing for a lifetime trust is planning for the worst case scenario--divorce, debt defaults, bankruptcy, mental issues, reckless spending, whatever. Would it not make more sense to assume not a worst or best case scenario, but a middle case scenario. And if circumstances requiring a lifetime trust arise later the will can always be changed.

My sons are 22 and 15 and based on what I see right now they will live well-adjusted, productive lives--tho not perfect lives. If my wife and I died today, my strong guess (and I acknowledge it's only a guess) is that mandatory distributions at 25, 30 and 35 would be the right thing to do for them. And my wife and I can always change our mind as long as one of us remains alive.

As a fall back I do like the idea of the trustee having authority to terminate the trust with stated standards in the trust--acknowledging that may weaken the asset protection--especially given there would be no asset protection with a mandatory distribution.

Does that make sense?
I think bsteiner’s advice makes the most sense. You are giving the heir the option. If they want the cash, they can dissolve the trust. If they want the protections, they can keep the trust. If they want the middle ground, then they can choose alternate co-trustees. It’s all about the optionality.

The assumption is that the heir will take the time to understand their options, which is a fair assumption considering the responsibility they are given with the bequest, whether cash or in Trust.
Last edited by FoolStreet on Thu May 14, 2020 5:12 pm, edited 1 time in total.
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Re: Should we create a testamentary trust for $6M estate?

Post by kevdude »

bsteiner wrote: Thu May 14, 2020 3:32 pm
kevdude wrote: Thu May 14, 2020 2:09 pm ...
FOURTH (A) The residue of the property owned by me at my death, real and personal and wherever situate, I devise and bequeath to my wife, if she survives me; provided, that, if my wife survives me but disclaims the right to take any portion of or interest in my residuary estate, I give such disclaimed portion of or interest in my property in trust to my trustee hereinafter named to be disposed of as directed in Article FIFTH hereof.

(B) If my wife does not survive me, the residue of the property owned by me at my death, real and personal and wherever situate, shall be disposed of as directed in Article SIXTH hereof.

FIFTH: If my wife survives me and disclaims the right to take any portion of interest in my residuary estate under Article FOURTH, I give such disclaimed property to my trustee hereinafter named to hold in trust pursuant to the following terms and conditions:

(A) During the life of my wife, my trustee shall pay her all of the net income of this trust at least quarterly and also so much of the principal thereof as is needed for my wife's health, support, and maintenance at the level she was enjoying at my death, taking into consideration all other resources (including income) available to her.

(B) Upon the death of my wife, my trustee shall dispose of the then remaining trust (if any) as directed in Article SIXTH hereof.

SIXTH: (A) All property directed to be disposed of under the provisions of the Article, at the times set forth in this Will for such disposition shall be divided into equal shares so that one such share shall be set apart for, and distributed to, each child of mine who is then living and so that one such share shall be set apart for, and distributed to, the living issue, per stripes, of each child of mine who is then deceased. Notwithstanding the forgoing, the share of any beneficiary what has not attained the age of twenty-five (25) shall not be distributed outright to her or him, rather the same shall be distributed to my personal representative hereinafter named to hold as Custodian for said beneficiary under the Washington Uniform Transfer to Minors Act.
...
That's a disclaimer Will. You leave your estate to your wife, except to the extent (if any) that she disclaims (waives), the disclaimed portion goes to a trust for her benefit.

That's a commonly used approach where you don't know how much you want to shelter, or where you don't expect there to be any estate tax so you want to leave everything to your spouse, but you have the disclaimer trust as a backup.

Since you know you want to shelter the Washington exempt amount, you might create a credit shelter trust for that amount in the first instance. A mandatory credit shelter trust can be much more flexible than a disclaimer trust. Your wife may have a power of appointment over a mandatory credit shelter trust, but not over a disclaimer trust.

You might want to change the terms of the trust. You mandate that she receive all the income. That will make her estate (and therefore her Washington estate tax) larger. You could instead make the income (and the principal) discretionary. You could add your children as beneficiaries.

You provide for your children outright at the surviving spouse's death. As discussed above, you might want to provide for them in trust, with each child gaining control over his/her trust at age 25.
Thank you again for your input. We'll definitely discuss these issues (and more) with our attorney.
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Re: Should we create a testamentary trust for $6M estate?

Post by FIREchief »

senex wrote: Thu May 14, 2020 4:51 pm Not sure if it's the lack of access to principal (if own trustee)
Are you suggesting that a beneficiary serving as their own sole trustee does not have any access to trust principle? This would not be correct for a properly drafted trust.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

senex wrote: Thu May 14, 2020 4:51 pm Now I am weighing a more expansive view of costs and benefits, and pondering my hopes and values. Appreciate the people with heart of educators.
Nicely said.

When we meet with our estate attorney (who we've known for 20+ years) later this year I will listen to what he says with a newly opened mind on these issues. I haven't come to any hard conclusions or ruled anything out.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

FoolStreet wrote: Thu May 14, 2020 4:58 pm
I think bsteiner’s advice makes the most sense. You are giving the heir the option. If they want the cash, they can dissolve the trust. If they want the protections, they can keep the trust. If they want the middle ground, then they can choose alternate co-trustees. It’s all about the optionality.
Not sure that is what bsteiner was saying. I think what he said was that the trust document can give the trustee (not the beneficiary) the option to dissolve the trust if in the interests of the beneficiary and that the trust document could have standards which if met would require the trustee to dissolve the trust. bsteiner did not provide any specific language but I am guessing the standards would be related to the beneficiary demonstrating financial and social responsibility and stability. I'm probably not getting the above 100% correct, but that is how I understood, in general, the advice.

If the trust documents simply give the option to the beneficiary to dissolve the trust at any time, what purpose is the trust serving?
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Re: Should we create a testamentary trust for $6M estate?

Post by BillWalters »

The worry over divorce is overblown in my opinion. In most states inheritance is specifically off limit in divorce proceedings.

If people do choose to go with a corporate trustee, I think it’s important to sit sown with heirs and explain why. Because once they see it in action, answering to a faceless corporation with every incentive to milk fees, they’re not going to feel good about it.
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Re: Should we create a testamentary trust for $6M estate?

Post by Gill »

BillWalters wrote: Thu May 14, 2020 6:01 pm
If people do choose to go with a corporate trustee, I think it’s important to sit sown with heirs and explain why. Because once they see it in action, answering to a faceless corporation with every incentive to milk fees, they’re not going to feel good about it.
I’m sorry your experience differs so much from the many trust company clients who depend on these firms through generations. Are you also familiar with the many horror stories of individual trustees mismanaging and squandering trust assets to the detriment of those for whom the trusts were established? My former employer has been in business for over 200 years and it’s not from being “faceless” and charging excessive fees.
Gill
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Re: Should we create a testamentary trust for $6M estate?

Post by delamer »

BillWalters wrote: Thu May 14, 2020 6:01 pm The worry over divorce is overblown in my opinion. In most states inheritance is specifically off limit in divorce proceedings.

If people do choose to go with a corporate trustee, I think it’s important to sit sown with heirs and explain why. Because once they see it in action, answering to a faceless corporation with every incentive to milk fees, they’re not going to feel good about it.
An inheritance isn’t off limits if it is put into a joint account or otherwise co-mingled in a joint asset (like used as a downpayment for a house).

By putting it in a trust for the inheritor, that particular problem can be avoided/minimized. Spouses can exert a lot of pressure to put an inheritance in a joint account — many times with no ill intentions, but not always.
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Re: Should we create a testamentary trust for $6M estate?

Post by cowdogman »

BillWalters wrote: Thu May 14, 2020 6:01 pm
If people do choose to go with a corporate trustee, I think it’s important to sit sown with heirs and explain why. Because once they see it in action, answering to a faceless corporation with every incentive to milk fees, they’re not going to feel good about it.
My thoughts about using Vanguard are:

1. Our estate will be sizable (unless we find a way to spend it all) and the investments need to be handled by a professional. And I'm in general agreement with Vanguard's investment principles.

2. Anybody that we would think about using as an individual trustee is around our age and I would worry about them not living to my youngest son's 35th birthday--20 years from now.

Assuming you had the ability to change your trust, what would you do (other than dissolve it)? What provisions would you add/change?
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Re: Should we create a testamentary trust for $6M estate?

Post by FoolStreet »

cowdogman wrote: Thu May 14, 2020 5:57 pm
FoolStreet wrote: Thu May 14, 2020 4:58 pm
I think bsteiner’s advice makes the most sense. You are giving the heir the option. If they want the cash, they can dissolve the trust. If they want the protections, they can keep the trust. If they want the middle ground, then they can choose alternate co-trustees. It’s all about the optionality.
Not sure that is what bsteiner was saying. I think what he said was that the trust document can give the trustee (not the beneficiary) the option to dissolve the trust if in the interests of the beneficiary and that the trust document could have standards which if met would require the trustee to dissolve the trust. bsteiner did not provide any specific language but I am guessing the standards would be related to the beneficiary demonstrating financial and social responsibility and stability. I'm probably not getting the above 100% correct, but that is how I understood, in general, the advice.

If the trust documents simply give the option to the beneficiary to dissolve the trust at any time, what purpose is the trust serving?
I can’t speak for details the way bsteiner does, so I will give my interpretation. When one has younger children, you need to determine when to give the money. To address that issue, I think bsteiner suggests granting increasing levels of control of the trust. For example, at 25 they can replace a corporate trustee. At 30, they can add themselves as a co-trustee. At 35, they can dissolve the trust.

I may be trying to solve a different problem than you, so may have picked up on different things. For me, I am concerned with minor dependents. Others might have older dependents, in which case the stages might be collapsed, and maybe one would skip that 3rd stage?
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Re: Should we create a testamentary trust for $6M estate?

Post by afan »

Re divorce: One has no idea where their heirs may live decades from now. Treatment of inherited property in divorce is not one of the common criteria for choosing where to live.

One chooses a corporate trustee if they are needed to accomplish one's goals. If the beneficiaries can manage fine without one, then don't use a paid trustee. If the beneficiaries need the money management, estate tax advantages and asset protection of a trust, then use a trust. A trust need not have a paid trustee.

If the beneficiaries need money management, estate tax advantages and asset protection then a trust is the best way to get these.

Having sizeable assets does not, by itself, mean one needs a professional to manage the portfolio. Boglehead 3 fund portfolios scale up quite nicely.
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Re: Should we create a testamentary trust for $6M estate?

Post by afan »

If you want someone to manage your portfolio, you do not need a trust. There are thousands of invididuals and firms that will be happy to do that without a trust. Vanguard PAS, among many others.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

If you are as worried about your own potential creditors as much as you worry about your daughter's potential creditors, consider putting money in an irrevocable trust now. This can put your assets beyond the reach of your creditors.
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Re: Should we create a testamentary trust for $6M estate?

Post by oldfort »

FIREchief wrote: Thu May 14, 2020 5:37 pm
senex wrote: Thu May 14, 2020 4:51 pm Not sure if it's the lack of access to principal (if own trustee)
Are you suggesting that a beneficiary serving as their own sole trustee does not have any access to trust principle? This would not be correct for a properly drafted trust.
If you think this way, you almost certainly didn't bother to read Elliott v PNC bank in its entirety.
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Re: Should we create a testamentary trust for $6M estate?

Post by Seasonal »

oldfort wrote: Fri May 15, 2020 1:38 pm
FIREchief wrote: Thu May 14, 2020 5:37 pm
senex wrote: Thu May 14, 2020 4:51 pm Not sure if it's the lack of access to principal (if own trustee)
Are you suggesting that a beneficiary serving as their own sole trustee does not have any access to trust principle? This would not be correct for a properly drafted trust.
If you think this way, you almost certainly didn't bother to read Elliott v PNC bank in its entirety.
A beneficiary may serve as sole trustee and make whatever distributions the beneficiary wants, including distributing principle, if authorized by the trust terms. There may be consequences, such as lack of protection in bankruptcy, but that's a different question.
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2020content
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Re: Should we create a testamentary trust for $6M estate?

Post by 2020content »

Thank you, Bogleheads, for all the thoughtful posts on this subject. The discussion was interesting and helped me recognize I have much to investigate, learn, and consider.

Much appreciated!
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Post by Taylor Larimore »

2020content wrote: Sat May 16, 2020 6:31 am Thank you, Bogleheads, for all the thoughtful posts on this subject. The discussion was interesting and helped me recognize I have much to investigate, learn, and consider.

Much appreciated!
2020:

It is always appreciated when an Opening Poster (OP) like you gives thanks to Bogleheads who took the time and effort to reply.

Thank you and best wishes
Taylor
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Re: Should we create a testamentary trust for $6M estate?

Post by LadyGeek »

New member Satirepups has some questions which I've moved into a new thread. See: [Testamentary trust questions - cost basis, capital gains]
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