Deleted-Irrevocable Trust - Pro's and Con's For Estate Planning

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Deleted-Irrevocable Trust - Pro's and Con's For Estate Planning

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removed inappropriate post contesting mod action. mighty72 (mod)
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by afan »

Taxes: the trust would pay income taxes on income not distributed to beneficiaries. The trust tax brackets are compressed and reach 37% at around $13,000. If you have substantial wealth, then this may not matter as you are already in that bracket. If your heir would be in the top bracket without distributions from the trust, then it does not matter. For a beneficiary who is well below the top bracket you can save taxes by distributing to them the amounts that would face higher taxes if kept in trust.

Gifts to an irrevocable trust now would take the money out of your estate. Having done this, you would need to be careful not to ruin this by serving as your own trustees and treating the assets as if you still owned them. You should not be giving away to a trust money that you would need to support yourselves in old age.

If you give money to your son it may be good to give it to an irrevocable trust with him as beneficiary. It would still be unavailable to support you, but it would keep the assets out of your son's estate and protect it from claims of his potential creditors.

Changes in tax law: this is a good example of why we don't speculate on such changes here on bogleheads. No one knows what those changes might be. No way to know how money given now would be treated under a new law because no one knows what the new law might say.

Depending on how much money you have, you may be candidates for SLATs. This would get the growth out of your estates but still give you and spouse the ability to spend the money on yourselves. There are a lot of details to go over with your lawyer.

If you can gift the estate tax exemption amount now and have ample funds remaining to live on for the rest of your lives, then the overall idea is simple. Set up trusts to use up your entire exemptions now. The appeal of SLATs, as I understand them, is that the money is not completely out of reach. Thus, these appeal to people who would not have ample money left over if they gave away the exemption amount.

For people who will have much more than they need after giving away the ~$23M, then just create an irrevocable trust for your son.

If your son is successor trustee then there must be limits on his power to make distributions, otherwise he loses asset protection and the IRS may claim that this was his money, subject to estate tax at his death.

Again, if the son will inherit a large amount of money outright, beyond the trust, then he may rarely if ever have need to make distributions from the trust. In that case, he may be safe as trustee with no distribution powers. If he needed a distribution, then he could appoint an independent trustee who could do that.

If you are giving away considerably more than the exemption amount, I don't know whether it is better to make one trust for the exempt amount and another trust for the rest. Unfortunately, not relevant to my situation.

It could be advantageous for your son if you gave the excess above the exemption to a trust rather than outright. Any amounts given above the exemption amount would be subject to gift taxes.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by senex »

Everything afan said. And:
ipdiddly wrote: Thu May 06, 2021 12:33 pm Separate trust tax returns?
Usually an irrev trust has its own tax ID and files its own return. But there are things like IDGTs that make the grantor responsible for income tax, and I don't know how that works (does trust still have a tax ID and file some kind of informational return, or not?). You can research IDGTs.
ipdiddly wrote: Thu May 06, 2021 12:33 pm Can DW be trustee of my trust and vice versa?
I think one of the key phrases to research is "reciprocal trust doctrine"
ipdiddly wrote: Thu May 06, 2021 12:33 pm Can son distribute all trust assets to himself after death (if permitted in trust document) and end the trusts? (I understand there may be reason to keep the trusts alive for grandchildren.)
Another key phrase to research is "power of appointment", general vs specific.
ipdiddly wrote: Thu May 06, 2021 12:33 pm Other issues to be considered?
Consider giving to charity. Man's life consists of more than the abundance of his possessions.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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Afan: Thank you for the very thorough and helpful comments.
afan wrote: Thu May 06, 2021 1:39 pm Taxes: the trust would pay income taxes on income not distributed to beneficiaries. The trust tax brackets are compressed and reach 37% at around $13,000. If you have substantial wealth, then this may not matter as you are already in that bracket. If your heir would be in the top bracket without distributions from the trust, then it does not matter. For a beneficiary who is well below the top bracket you can save taxes by distributing to them the amounts that would face higher taxes if kept in trust.
Interesting point and a nice option to provide an annual income stream (albeit taxable).
Gifts to an irrevocable trust now would take the money out of your estate. Having done this, you would need to be careful not to ruin this by serving as your own trustees and treating the assets as if you still owned them. You should not be giving away to a trust money that you would need to support yourselves in old age.
Agree. I would anticipate that between modest pension income, soc. sec., IRA RMD's, and Roth we would likely have more than enough absent some catastrophic event.
If you give money to your son it may be good to give it to an irrevocable trust with him as beneficiary. It would still be unavailable to support you, but it would keep the assets out of your son's estate and protect it from claims of his potential creditors.

Changes in tax law: this is a good example of why we don't speculate on such changes here on bogleheads. No one knows what those changes might be. No way to know how money given now would be treated under a new law because no one knows what the new law might say.
I agree. Unfortunately, estate planning requires some long term forecasting and consideration of future contingencies. Once the law changes, it may be too late.
Depending on how much money you have, you may be candidates for SLATs. This would get the growth out of your estates but still give you and spouse the ability to spend the money on yourselves. There are a lot of details to go over with your lawyer.

If you can gift the estate tax exemption amount now and have ample funds remaining to live on for the rest of your lives, then the overall idea is simple. Set up trusts to use up your entire exemptions now. The appeal of SLATs, as I understand them, is that the money is not completely out of reach. Thus, these appeal to people who would not have ample money left over if they gave away the exemption amount.
Many thanks for this tip. I had to look up SLATS. (https://www.fidelity.com/viewpoints/wea ... state-plan) Seems like an interesting approach. It looks like the Donor can pay the taxes on trust earnings, which might keep the tax rate a bit lower than the trust rate. Also, if the Donor pays the taxes, then the Donor's estate shrinks by the amount of taxes paid. I see we need to avoid the "reciprocal trust doctrine."
For people who will have much more than they need after giving away the ~$23M, then just create an irrevocable trust for your son.

If your son is successor trustee then there must be limits on his power to make distributions, otherwise he loses asset protection and the IRS may claim that this was his money, subject to estate tax at his death.

Again, if the son will inherit a large amount of money outright, beyond the trust, then he may rarely if ever have need to make distributions from the trust. In that case, he may be safe as trustee with no distribution powers. If he needed a distribution, then he could appoint an independent trustee who could do that.
OK, good to know.
If you are giving away considerably more than the exemption amount, I don't know whether it is better to make one trust for the exempt amount and another trust for the rest. Unfortunately, not relevant to my situation.

It could be advantageous for your son if you gave the excess above the exemption to a trust rather than outright. Any amounts given above the exemption amount would be subject to gift taxes.
We are well below current Federal exemption amounts, but several years of growth could eventually bump up to the limits, particularly if those limits change (e.g., current limits sunset in 2026). The bigger issue is the punitive MA estate rates that kick in at $1MM.

Thanks again for the helpful info.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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senex wrote: Thu May 06, 2021 2:11 pm Everything afan said. And:
ipdiddly wrote: Thu May 06, 2021 12:33 pm Separate trust tax returns?
Usually an irrev trust has its own tax ID and files its own return. But there are things like IDGTs that make the grantor responsible for income tax, and I don't know how that works (does trust still have a tax ID and file some kind of informational return, or not?). You can research IDGTs.
I had to look up IDGTs. They seem a bit complicated and will require further research. Thanks for the tip.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

Others have touched on a lot of the topics.

I'll add a few notes.

- Assets you've gifted and that are outside of your estate are no longer going to get step-up basis at death.
- SLATs can provide you with a lot of flexibility. Also with reasonable amount of control and access without compromising the estate-planning piece
- Lifetime exemption is presently $11.7MM per person or $23.4 per couple. It is more efficient to use up one person's entire exemption amount rather than half of both.

Scenario 1:

#1: Gifts $11.7MM
#2: Gifts Nothing

Estate exemption drops to $5MM person, as a couple you still have $5MM exemption left

Scenario 2:

#1: Gifts $5.8MM
#2: Gifts $5.8MM

Estate exemption drops to $5MM per person, as a couple you have $0 exemption left

That said, gifting from one spouse to another in a lop sided fashion does introduce potential issues upon death of one spouse or divorce.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

oh thought of one other thing to plan ahead on

When investing assets in an irrevocable trust, invest in as tax-efficient assets as possible. Minimize dividends. Because there are two possibilites

- Trust has to pay taxes on it at a high rate.
- It's a grantor trust and you will have to pay taxes on annual income that you aren't directly receiving.

Either way, you want it to generate as little tax as possible since it won't probably need to generate income for a while.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by albireo13 »

My elderly parents had an IR trust and ran into problems.
They had their assets, and house, in the trust. A few years ago they decided to move to a CCRC and needed the assets to finance
the move. However, the Trust owned the assets and they could not claim them during application for a CCRC.
They ended up dissolving the IR Trust but, it was a major PITA.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bogcir wrote: Thu May 06, 2021 4:45 pm Others have touched on a lot of the topics.

I'll add a few notes.

- Assets you've gifted and that are outside of your estate are no longer going to get step-up basis at death.
I get the no step up argument. It's a big part of most comments on this forum. Unfortunately, there is no guarantee that this "loophole" will be there when we need it as there is lots of noise about eliminating it.
- Lifetime exemption is presently $11.7MM per person or $23.4 per couple. It is more efficient to use up one person's entire exemption amount rather than half of both.

Scenario 1:

#1: Gifts $11.7MM
#2: Gifts Nothing

Estate exemption drops to $5MM person, as a couple you still have $5MM exemption left

That said, gifting from one spouse to another in a lop sided fashion does introduce potential issues upon death of one spouse or divorce.
Unfortunately, what happens if person #2 dies first? Person #1 has used up all the exemption.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bogcir wrote: Thu May 06, 2021 4:58 pm oh thought of one other thing to plan ahead on

When investing assets in an irrevocable trust, invest in as tax-efficient assets as possible. Minimize dividends. Because there are two possibilites

- Trust has to pay taxes on it at a high rate.
- It's a grantor trust and you will have to pay taxes on annual income that you aren't directly receiving.

Either way, you want it to generate as little tax as possible since it won't probably need to generate income for a while.
In a perfect world, this works. Problem is most assets are now highly appreciated and pay dividends. In order to invest in "more tax efficient" assets, we (or the trust) would need to sell the current assets and realize substantial LTCG. So not an easy strategy to accomplish.

If the assets are placed in the trust, perhaps the appreciated assets could be sold over time and the LTCG's paid out to beneficiaries so they are taxed at the beneficiaries' rate.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

ipdiddly wrote: Thu May 06, 2021 6:02 pm Unfortunately, what happens if person #2 dies first? Person #1 has used up all the exemption.
The estate tax exemption is portable between spouses. So suvivor will get credit for it.

https://www.thebalance.com/what-is-port ... on-3505672
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

ipdiddly wrote: Thu May 06, 2021 6:06 pm
bogcir wrote: Thu May 06, 2021 4:58 pm oh thought of one other thing to plan ahead on

When investing assets in an irrevocable trust, invest in as tax-efficient assets as possible. Minimize dividends. Because there are two possibilites

- Trust has to pay taxes on it at a high rate.
- It's a grantor trust and you will have to pay taxes on annual income that you aren't directly receiving.

Either way, you want it to generate as little tax as possible since it won't probably need to generate income for a while.
In a perfect world, this works. Problem is most assets are now highly appreciated and pay dividends. In order to invest in "more tax efficient" assets, we (or the trust) would need to sell the current assets and realize substantial LTCG. So not an easy strategy to accomplish.

If the assets are placed in the trust, perhaps the appreciated assets could be sold over time and the LTCG's paid out to beneficiaries so they are taxed at the beneficiaries' rate.
Depends of course what assets you have and are gifting. Obviously don’t generate capital gains if you don’t have to. If you are gifting an income producing asset then you can pick and choose where new investments go.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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ipdiddly wrote: Thu May 06, 2021 12:33 pm
What are the pro's and con's of an irrevocable trust?

1. Tax rates? Separate trust tax returns?
2. Can DW be trustee of my trust and vice versa?
3. Can son be successor trustee of both trusts?
4. Can trusts pay our medical and nursing home costs, if needed, and still be outside our estate?
5. Can son distribute all trust assets to himself after death (if permitted in trust document) and end the trusts? (I understand there may be reason to keep the trusts alive for grandchildren.)
6. Other issues to be considered?
Sounds like you're considering SLATs.

2. You would typically name the beneficiary as the trustee, appoint a co trustee, or name an independent trustee for a SLAT.

3. Yes.

4. Yes

5. If you say so in the trust document. Giving son flexibility is wise (unless son can't be trusted). Contrarily, mandating dispersals is not wise IMHO.

6. Lots of things, but I’ll touch briefly on the income issue first. You’d want to make the SLAT a grantor trusts so the income is taxed to the grantor. I believe this is a standard practice unless there are reasons for not taxing the grantor (I can’t think of any off the top of my head).

The major con to an irrevocable trust is loss of control. You have to lose a good amount of control for it to work. That's just part of the deal. I can't emphasize that enough. Whether you retain enough control to be worth it is an individual decision.

ipdiddly wrote: Thu May 06, 2021 6:06 pm
If the assets are placed in the trust, perhaps the appreciated assets could be sold over time and the LTCG's paid out to beneficiaries so they are taxed at the beneficiaries' rate.
The assets will also not receive a stepped up basis. So, that's a huge downside that not a lot of people realize. So you need to decide which tax tail is going to wag the trust dog.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by afan »

If you expect that the trust assets will be a handful of index funds, that the trust will retain or distribute income but NEVER sell the funds, then you may not care about stepped up basis. It would never apply.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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afan wrote: Thu May 06, 2021 6:28 pm If you expect that the trust assets will be a handful of index funds, that the trust will retain or distribute income but NEVER sell the funds, then you may not care about stepped up basis. It would never apply.
True. But unless we're creating dynasty trusts, I don't think it's reasonable to assume the assets will just stay in their current allocation forever either. Also the prudent investor rule might force/persuade a corporate trustee to switch AA; the family member trustee might decide otherwise, etc etc.

I think it's a small con, but worth noting.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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afan wrote: Thu May 06, 2021 6:28 pm If you expect that the trust assets will be a handful of index funds, that the trust will retain or distribute income but NEVER sell the funds, then you may not care about stepped up basis. It would never apply.
If the choice is losing step up vs paying estate tax, the answer is clear since realizing capital gains can be controlled, and traditionally at a lower tax rate.

If you don’t ultimately exceed the estate tax limit, then losing the step up is obviously worse.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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afan wrote: Thu May 06, 2021 6:28 pm If you expect that the trust assets will be a handful of index funds, that the trust will retain or distribute income but NEVER sell the funds, then you may not care about stepped up basis. It would never apply.
As I pointed out earlier, the assets are currently in highly appreciated stocks, mutual funds and etf's. We don't own any broad market index funds. In order to convert the assets to broad market index funds, we (or the trust) would need to sell current assets and incur significant LTCG's.

I understand it is desirable to take advantage of step-up basis, if available. We just don't know if it will be available in the future - 5 or 10 or 20 years hence - given the current noise about eliminating it and the 2026 sunset. Also, there is the question of whether you want your heirs to wait that long to benefit from the inheritance. I am a believer that a gift today is worth more than a gift 5 years from now.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bogcir wrote: Thu May 06, 2021 6:34 pm
afan wrote: Thu May 06, 2021 6:28 pm If you expect that the trust assets will be a handful of index funds, that the trust will retain or distribute income but NEVER sell the funds, then you may not care about stepped up basis. It would never apply.
If the choice is losing step up vs paying estate tax, the answer is clear since realizing capital gains can be controlled, and traditionally at a lower tax rate.

If you don’t ultimately exceed the estate tax limit, then losing the step up is obviously worse.
Agree. The problem here is not so much the Fed estate exclusion limits. Those limits are currently pretty high. We just don't know whether those high limits will be there in the future given current tax noise.

The significant problem is that the MA exclusion is $1MM so there is substantial estate tax exposure there. Undoubtedly, the best and most effective solution is to move. That would eliminate the MA estate tax problem and also eliminate the MA income tax problem. Given that BHers always talk about tax efficiency, it is clearly more tax efficient to move. But I don't see that happening.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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The Massachusetts issue is relatively unique, but not new. While there are a few ways around it according to recent case law striking down the states position, it’s still mostly intact. And most of the solutions aren’t easy or necessarily desirable.

Lifetime gifts of unneeded funds up to the limits are clearly one of the best ways to reduce the estate size. You can even give it in trust.

The future is unknown. Cap gains taxes could increase, be done away with, etc. The current exemption is set to sunset, so planning for that makes sense. I personally do not think you should let that tax tail wag the dog though. Keeping control over your assets is arguably more important. Assets that are unneeded and will never be missed can go into trust without missing them.

That said, couples have been using slats for decades.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by illumination »

I think a lot of people make the mistake you can't "dip in" and take money out of it or be your own trustee on an irrevocable trust . There are though some provisions where the grantor can substitute assets of equal value.

One thing I would stress is avoiding any sort of arrangement where you need a corporate trustee for an irrevocable trust, it usually ends up being managed in a way that goes against most of what is preached here with fees for both being the trustee and fees for managing the assets. I genuinely think managing the money in this way can cost the estate more than just getting hit with an estate tax. It also sounds like this is not an estate size that it would be worthwhile.

If you feel your son is responsible, maybe make him trustee of an irrevocable trust and you as the grantor pay the taxes every year (IDGT). If your heirs live out of state, there may be some options there to where you set up the trust.

There's also some other estate planning strategies outside of trusts like converting all your pre-tax retirement accounts to post-tax (Roth IRA) since the estate tax doesn't differentiate and just takes a total asset figure. It also shelters the money for the heirs an additional 10 years of tax free growth.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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Lee_WSP wrote: Fri May 07, 2021 10:05 am Keeping control over your assets is arguably more important. Assets that are unneeded and will never be missed can go into trust without missing them.

That said, couples have been using slats for decades.
Concerns about keeping control aspect of it can be significantly alleviated by properly structured SLATs.

Assuming you can properly avoid reciprocal trusts by varying several aspects. Ultimately, you could end up with two spousal trusts with roughly equivalent assets, that are out of both of your estates. Beyond measurable health/maintenance/support withdrawals, you typically also have a 5 by 5 power which allows the beneficiary to withdraw 5% of assets from a trust for any reason.

Seeing as how the highest safe withdrawal number is 4%, the ability to "only" withdraw 5% doesn't seem much of a limitation at all.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bogcir wrote: Fri May 07, 2021 12:20 pm
Lee_WSP wrote: Fri May 07, 2021 10:05 am Keeping control over your assets is arguably more important. Assets that are unneeded and will never be missed can go into trust without missing them.

That said, couples have been using slats for decades.
Concerns about keeping control aspect of it can be significantly alleviated by properly structured SLATs.

Assuming you can properly avoid reciprocal trusts by varying several aspects. Ultimately, you could end up with two spousal trusts with roughly equivalent assets, that are out of both of your estates. Beyond measurable health/maintenance/support withdrawals, you typically also have a 5 by 5 power which allows the beneficiary to withdraw 5% of assets from a trust for any reason.

Seeing as how the highest safe withdrawal number is 4%, the ability to "only" withdraw 5% doesn't seem much of a limitation at all.
Divorce and death are the biggest risks of SLATs. Death comes for us all, and divorce comes to half of couples.

I'd say those are rather hefty risks.

Unless your estate plan calls for splitting the assets between the next generation and surviving spouse, in which case the slat has virtually no risk of death. The risk of divorce is asymmetrical or no risk depending on the source of the assets.

edit:
Regardless, you do lose control. In addition to the restrictions necessary to keep it out of the spouse's estate, you go from jointly owning the assets not in trust to you each own exactly what is in each spouses trust and each spouse has no right or ability to touch it. A hard concept to grasp for those who haven't been divorced or practiced family law, but an important concept regardless.
Last edited by Lee_WSP on Fri May 07, 2021 2:08 pm, edited 1 time in total.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bogcir wrote: Fri May 07, 2021 12:20 pm
Concerns about keeping control aspect of it can be significantly alleviated by properly structured SLATs.

Assuming you can properly avoid reciprocal trusts by varying several aspects. Ultimately, you could end up with two spousal trusts with roughly equivalent assets, that are out of both of your estates. Beyond measurable health/maintenance/support withdrawals, you typically also have a 5 by 5 power which allows the beneficiary to withdraw 5% of assets from a trust for any reason.

Seeing as how the highest safe withdrawal number is 4%, the ability to "only" withdraw 5% doesn't seem much of a limitation at all.
I'm not clear on what a "5 by 5 power" is. And I don't think limiting the beneficiary to only withdrawing a maximum of 5% is a good idea. I would want my beneficiary to be able to withdraw much more than that. I would assume trust language can be drafted that permits significant withdrawals.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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Lee_WSP wrote: Fri May 07, 2021 12:25 pm
Divorce and death are the biggest risks of SLATs. Death comes for us all, and divorce comes to half of couples.

I'd say those are rather hefty risks.

Unless your estate plan calls for splitting the assets between the next generation and surviving spouse, in which case the slat has virtually no risk of death. The risk of divorce is asymmetrical or no risk depending on the source of the assets.

edit:
Regardless, you do lose control. You go from jointly owning the assets not in trust to you each own exactly what is in each spouses trust and each spouse has no right or ability to touch it. A hard concept to grasp for those who haven't been divorced or practiced family law, but an important concept regardless.
In our case, after 45 years of marriage, the risk of divorce is essentially nil. I'm not sure I understand the risk of death. Presumably each SLAT would be managed by the opposite spouse as trustee and would nominally provide for care and maintenance of the donor spouse. I say "nominally" because it may be unlikely those SLAT funds will ever be needed given the retained assets (pensions, soc sec, IRA's, Roth). If the trustee spouse dies, then that SLAT would be managed by a successor trustee (presumably son). So I don't see what the risk of death is?

The bigger issue is insuring we stay away from the "reciprocal trust doctrine."
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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ipdiddly wrote: Fri May 07, 2021 1:33 pm
Lee_WSP wrote: Fri May 07, 2021 12:25 pm
Divorce and death are the biggest risks of SLATs. Death comes for us all, and divorce comes to half of couples.

I'd say those are rather hefty risks.

Unless your estate plan calls for splitting the assets between the next generation and surviving spouse, in which case the slat has virtually no risk of death. The risk of divorce is asymmetrical or no risk depending on the source of the assets.

edit:
Regardless, you do lose control. You go from jointly owning the assets not in trust to you each own exactly what is in each spouses trust and each spouse has no right or ability to touch it. A hard concept to grasp for those who haven't been divorced or practiced family law, but an important concept regardless.
In our case, after 45 years of marriage, the risk of divorce is essentially nil. I'm not sure I understand the risk of death. Presumably each SLAT would be managed by the opposite spouse as trustee and would nominally provide for care and maintenance of the donor spouse. I say "nominally" because it may be unlikely those SLAT funds will ever be needed given the retained assets (pensions, soc sec, IRA's, Roth). If the trustee spouse dies, then that SLAT would be managed by a successor trustee (presumably son). So I don't see what the risk of death is?

The bigger issue is insuring we stay away from the "reciprocal trust doctrine."
The second to die will not have access to the first to die's trust. It will pass to the next beneficiary. Obviously, the next beneficiary cannot be the other spouse.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

ipdiddly wrote: Fri May 07, 2021 1:21 pm I'm not clear on what a "5 by 5 power" is. And I don't think limiting the beneficiary to only withdrawing a maximum of 5% is a good idea. I would want my beneficiary to be able to withdraw much more than that. I would assume trust language can be drafted that permits significant withdrawals.
(Disclaimer: I am not a lawyer)

You can set up distributions as you like. However, you might not want to allow arbitrary distributions. In this particular example when we are talking SLATs which are Spousal Lifetime trusts.

If you gift $10MM to your wife without any restrictions, then it becomes a part of your wife's estate, which means you didn't really accomplish much to avoid estate taxes.

If you gift $10MM into a trust with restrictions for health / maintenance / support -- that allows the trust to exist for her benefit, but not be included in her estate, as long as you follow those defined rules. It protects it from her estate and also shields it from lawsuits. But beyond that, the IRS allows her to have this 5 x 5 rule to allow arbitrary distributions of up to 5% without considering the entire amount being included in her estate.

https://crummeyestateplan.com/tag/5-or-5-power/
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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illumination wrote: Fri May 07, 2021 10:45 am
If you feel your son is responsible, maybe make him trustee of an irrevocable trust and you as the grantor pay the taxes every year (IDGT). If your heirs live out of state, there may be some options there to where you set up the trust.

There's also some other estate planning strategies outside of trusts like converting all your pre-tax retirement accounts to post-tax (Roth IRA) since the estate tax doesn't differentiate and just takes a total asset figure. It also shelters the money for the heirs an additional 10 years of tax free growth.
Another commenter also mentioned the IDGT, which I need to learn more about. I would need to determine whether it makes sense for us to pay the taxes on trust income or to have the trust distribute income to the beneficiary(ies) and have the beneficiary(ies) pay the taxes. Although retired, our income, and therefore the tax rate, is considerably higher and will likely continue to be high as RMD's start this year and will be substantial.

As to Roth conversions, it's a bit too late now because RMD's start this year. I had already done several large Roth conversions over the past few years and wish I had started earlier. Unfortunately (or fortunately I suppose), the t-IRA kept growing.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by illumination »

ipdiddly wrote: Fri May 07, 2021 1:46 pm
illumination wrote: Fri May 07, 2021 10:45 am
If you feel your son is responsible, maybe make him trustee of an irrevocable trust and you as the grantor pay the taxes every year (IDGT). If your heirs live out of state, there may be some options there to where you set up the trust.

There's also some other estate planning strategies outside of trusts like converting all your pre-tax retirement accounts to post-tax (Roth IRA) since the estate tax doesn't differentiate and just takes a total asset figure. It also shelters the money for the heirs an additional 10 years of tax free growth.
Another commenter also mentioned the IDGT, which I need to learn more about. I would need to determine whether it makes sense for us to pay the taxes on trust income or to have the trust distribute income to the beneficiary(ies) and have the beneficiary(ies) pay the taxes. Although retired, our income, and therefore the tax rate, is considerably higher and will likely continue to be high as RMD's start this year and will be substantial.

As to Roth conversions, it's a bit too late now because RMD's start this year. I had already done several large Roth conversions over the past few years and wish I had started earlier. Unfortunately (or fortunately I suppose), the t-IRA kept growing.

I don't know what your heirs tax rate is, but it's probably likely your capital gains rate and their capital gains rate are close to the same rate. Even if it's one bracket higher, you could make a case its smarter for you to pay it instead, as the spread is going to be far less than if you get whacked with both a state and federal estate tax. So let's say their capital gains rate is 15% and your's is 20%, an additional 5% for you to pay is better than 40-50% on those same dollars with a hypothetical estate tax. Plus all the rest that's being pulled out of your estate for their benefit that won't get hit. It's another form of gifting that doesn't "count". But if say your heirs are in a 0% tax bracket, the math would change.

Even with RMD's, it might make sense to do the Roth conversions on top of those as it would still be a better outcome if the number one goal is maximizing what your heirs net. But there's a lot of "what ifs".

The easiest thing you can start doing is max gifting as soon as possible. I would also structure all of this to protect the assets for who you want the funds to go to if say a divorce were to happen.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

illumination wrote: Fri May 07, 2021 2:02 pm
ipdiddly wrote: Fri May 07, 2021 1:46 pm
illumination wrote: Fri May 07, 2021 10:45 am
If you feel your son is responsible, maybe make him trustee of an irrevocable trust and you as the grantor pay the taxes every year (IDGT). If your heirs live out of state, there may be some options there to where you set up the trust.

There's also some other estate planning strategies outside of trusts like converting all your pre-tax retirement accounts to post-tax (Roth IRA) since the estate tax doesn't differentiate and just takes a total asset figure. It also shelters the money for the heirs an additional 10 years of tax free growth.
Another commenter also mentioned the IDGT, which I need to learn more about. I would need to determine whether it makes sense for us to pay the taxes on trust income or to have the trust distribute income to the beneficiary(ies) and have the beneficiary(ies) pay the taxes. Although retired, our income, and therefore the tax rate, is considerably higher and will likely continue to be high as RMD's start this year and will be substantial.

As to Roth conversions, it's a bit too late now because RMD's start this year. I had already done several large Roth conversions over the past few years and wish I had started earlier. Unfortunately (or fortunately I suppose), the t-IRA kept growing.

I don't know what your heirs tax rate is, but it's probably likely your capital gains rate and their capital gains rate are close to the same rate. Even if it's one bracket higher, you could make a case its smarter for you to pay it instead, as the spread is going to be far less than if you get whacked with both a state and federal estate tax. So let's say their capital gains rate is 15% and your's is 20%, an additional 5% for you to pay is better than 40-50% on those same dollars with a hypothetical estate tax. Plus all the rest that's being pulled out of your estate for their benefit that won't get hit. It's another form of gifting that doesn't "count". But if say your heirs are in a 0% tax bracket, the math would change.

Even with RMD's, it might make sense to do the Roth conversions on top of those as it would still be a better outcome if the number one goal is maximizing what your heirs net. But there's a lot of "what ifs".

The easiest thing you can start doing is max gifting as soon as possible. I would also structure all of this to protect the assets for who you want the funds to go to if say a divorce were to happen.
The other benefit of it being a grantor trust is you can shift more assets into the trust over time without using up more of your estate tax exemption.

If your grantor trust generates $50,000 in tax obligation this year, you paying it from your personal estate means you’ve effectively “gifted” $50k from your estate to the trust.

This becomes particularly powerful when you have an income producing asset in a trust.

Also there are ways to alter “turn off” the grantor trust aspect of it if the taxes become a burden, so it’s not a unchangeable decision.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

No one knows what the law will be in the future. However, if you can afford to do so, if you and your spouse can afford to give away $23.4 million, you'll take advantage of the current estate and gift tax exclusion amounts, and you'll get the future income and growth on it during your lifetime out of your estates.

The details of the trust(s) will depend on your objectives, and the size of your estate. You can work them out with your lawyer. At that level, you can easily get good counsel.

As to income taxes, if the trust(s) are grantor trusts, your paying the income taxes will shift additional wealth out of your estates, free of transfer taxes. If the trusts are separate taxpayers, you can set them up so they'll only pay Federal tax, thus avoiding state income tax on the trusts' income and gains.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bsteiner wrote: Fri May 07, 2021 2:40 pm No one knows what the law will be in the future. However, if you can afford to do so, if you and your spouse can afford to give away $23.4 million, you'll take advantage of the current estate and gift tax exclusion amounts, and you'll get the future income and growth on it during your lifetime out of your estates.

The details of the trust(s) will depend on your objectives, and the size of your estate. You can work them out with your lawyer. At that level, you can easily get good counsel.

As to income taxes, if the trust(s) are grantor trusts, your paying the income taxes will shift additional wealth out of your estates, free of transfer taxes. If the trusts are separate taxpayers, you can set them up so they'll only pay Federal tax, thus avoiding state income tax on the trusts' income and gains.
How is that done? Must the trust be held by a trustee in another state?
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Leesbro63 »

bsteiner wrote: Fri May 07, 2021 2:40 pm No one knows what the law will be in the future. However, if you can afford to do so, if you and your spouse can afford to give away $23.4 million, you'll take advantage of the current estate and gift tax exclusion amounts, and you'll get the future income and growth on it during your lifetime out of your estates.

The details of the trust(s) will depend on your objectives, and the size of your estate. You can work them out with your lawyer. At that level, you can easily get good counsel.

As to income taxes, if the trust(s) are grantor trusts, your paying the income taxes will shift additional wealth out of your estates, free of transfer taxes. If the trusts are separate taxpayers, you can set them up so they'll only pay Federal tax, thus avoiding state income tax on the trusts' income and gains.
I think it's useful to remember that in 1993 the Federal government made tax law changes retroactive to January 1st of that year. Some people who made moves after 1/1/93 but before the tax laws were changed thought they would be operating under the old tax rules. In the end their moves were for naught. I believe the Supreme Court eventually agreed that tax changes can be made retroactively (at least retroactive to the beginning the tax year in which the changes were enacted).
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

ipdiddly wrote: Fri May 07, 2021 3:52 pm
bsteiner wrote: Fri May 07, 2021 2:40 pm ...
As to income taxes, if the trust(s) are grantor trusts, your paying the income taxes will shift additional wealth out of your estates, free of transfer taxes. If the trusts are separate taxpayers, you can set them up so they'll only pay Federal tax, thus avoiding state income tax on the trusts' income and gains.
How is that done? Must the trust be held by a trustee in another state?
You would have to live in a state that won't tax a trust if there's no trustee in the state (and no real or tangible property in the state and no income from sources in the state).

You would also have to have the trustees be in a state or states that won't tax the trust based on the location of the trustees.

The trust would have to be administered in a state that won't tax the trust based on where the trust is administered.

Any lawyer designing a $23.4 million trust should be familiar with this.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by ipdiddly »

bogcir wrote: Fri May 07, 2021 1:38 pm
If you gift $10MM into a trust with restrictions for health / maintenance / support -- that allows the trust to exist for her benefit, but not be included in her estate, as long as you follow those defined rules. It protects it from her estate and also shields it from lawsuits. But beyond that, the IRS allows her to have this 5 x 5 rule to allow arbitrary distributions of up to 5% without considering the entire amount being included in her estate.

https://crummeyestateplan.com/tag/5-or-5-power/
Thanks for the link. I missed it the first time through.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by ipdiddly »

One additional question: Can you later amend an irrevocable trust?
My gut tells me no because, as grantor, you no longer control the property in the trust.
However, I am wondering what happens if, several years down the road, there is some major family or life change that might affect how you would like the trust to distribute the assets. For example, let's say you learn you have a heretofore unknown illegitimate child that you would now like to include as a beneficiary. Or perhaps something happens to a beneficiary - becomes a drug addict, goes to prison, joins a cult, etc.
The foregoing are just crazy examples, but I'm sure there are other life changes that might warrant an amendment. What are the options? Do you just provide the trustee with greater flexibility?
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

ipdiddly wrote: Sun May 09, 2021 8:52 am One additional question: Can you later amend an irrevocable trust?
My gut tells me no because, as grantor, you no longer control the property in the trust.
However, I am wondering what happens if, several years down the road, there is some major family or life change that might affect how you would like the trust to distribute the assets. For example, let's say you learn you have a heretofore unknown illegitimate child that you would now like to include as a beneficiary. Or perhaps something happens to a beneficiary - becomes a drug addict, goes to prison, joins a cult, etc.
The foregoing are just crazy examples, but I'm sure there are other life changes that might warrant an amendment. What are the options? Do you just provide the trustee with greater flexibility?
By statute in some states, and probably by common law in most or all of the remaining states, a grantor may amend a trust with the consent of the adversely affected beneficiaries. However, the consenting beneficiaries may be making gifts if they consent.

Your last question is generally the solution. No one knows what the future will bring. So a well-drafted trust will provide substantial flexibility. The trustees will have discretion as to distributions to or for the benefit of children who are drug addicts, in prison, or in cults, or aren't any of the above. The trustees could provide for medical treatment for the child with the drug problem. Powers of appointment are also usually included to add additional flexibility.

Except where a particular provision is necessary to obtain a desired tax result (such as the spouse being entitled to all of the income from a marital trust), whenever someone limits or mandates distributions, there's a good chance it will cause a problem down the road. Flexibility is almost always the best practice.

The trustees could also decant the trust (in other words, distribute the trust assets to a new trust for the benefit of one or more of the beneficiaries of the existing trust).

All of this should be routine for any law firm with a good trusts and estates practice.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Lee_WSP »

You could include a provision to allow the trustee with the consent of all or a class of beneficiaries to amend or decant the trust.

Being flexible with your terms instead of being rigid is how one typically deals with the scenarios you describe.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Leesbro63 »

bsteiner wrote: Sun May 09, 2021 9:37 am
ipdiddly wrote: Sun May 09, 2021 8:52 am One additional question: Can you later amend an irrevocable trust?
My gut tells me no because, as grantor, you no longer control the property in the trust.
However, I am wondering what happens if, several years down the road, there is some major family or life change that might affect how you would like the trust to distribute the assets. For example, let's say you learn you have a heretofore unknown illegitimate child that you would now like to include as a beneficiary. Or perhaps something happens to a beneficiary - becomes a drug addict, goes to prison, joins a cult, etc.
The foregoing are just crazy examples, but I'm sure there are other life changes that might warrant an amendment. What are the options? Do you just provide the trustee with greater flexibility?
By statute in some states, and probably by common law in most or all of the remaining states, a grantor may amend a trust with the consent of the adversely affected beneficiaries. However, the consenting beneficiaries may be making gifts if they consent.

Your last question is generally the solution. No one knows what the future will bring. So a well-drafted trust will provide substantial flexibility. The trustees will have discretion as to distributions to or for the benefit of children who are drug addicts, in prison, or in cults, or aren't any of the above. The trustees could provide for medical treatment for the child with the drug problem. Powers of appointment are also usually included to add additional flexibility.

Except where a particular provision is necessary to obtain a desired tax result (such as the spouse being entitled to all of the income from a marital trust), whenever someone limits or mandates distributions, there's a good chance it will cause a problem down the road. Flexibility is almost always the best practice.

The trustees could also decant the trust (in other words, distribute the trust assets to a new trust for the benefit of one or more of the beneficiaries of the existing trust).

All of this should be routine for any law firm with a good trusts and estates practice.
Bruce, your reply educated me! What if the grantor is deceased, but the trustee and beneficiary agree? For instance, say that grandpa’s trust for the grandkid doesn’t allow withdrawals until age 50. The trustee is the parent (grantor’s child, beneficiary’s parent) and he/she and the beneficiary agree that they want to dissolve the trust for a good reason. Maybe because the adult grandchild has done well on his/her own and administering the trust is a PITA. Can the trustee and beneficiary do this with no living grantor to also sign off? On the one hand, this seems to violate the concept of Trust. On the other hand, it seems to confirm the concept of a thinking, “trustworthy” Trustee.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

Leesbro63 wrote: Sun May 09, 2021 12:56 pm ...
Bruce, your reply educated me! What if the grantor is deceased, but the trustee and beneficiary agree? For instance, say that grandpa’s trust for the grandkid doesn’t allow withdrawals until age 50. The trustee is the parent (grantor’s child, beneficiary’s parent) and he/she and the beneficiary agree that they want to dissolve the trust for a good reason. Maybe because the adult grandchild has done well on his/her own and administering the trust is a PITA. Can the trustee and beneficiary do this with no living grantor to also sign off? On the one hand, this seems to violate the concept of Trust. On the other hand, it seems to confirm the concept of a thinking, “trustworthy” Trustee.
Possibly but probably not. The likelihood of success would probably depend on the state, and on the judge. The proceeding to find out could be expensive.

A good lawyer would strongly discourage a client from creating such an inflexible trust. No one knows what the future will bring.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Leesbro63 »

bsteiner wrote: Sun May 09, 2021 3:17 pm
Leesbro63 wrote: Sun May 09, 2021 12:56 pm ...
Bruce, your reply educated me! What if the grantor is deceased, but the trustee and beneficiary agree? For instance, say that grandpa’s trust for the grandkid doesn’t allow withdrawals until age 50. The trustee is the parent (grantor’s child, beneficiary’s parent) and he/she and the beneficiary agree that they want to dissolve the trust for a good reason. Maybe because the adult grandchild has done well on his/her own and administering the trust is a PITA. Can the trustee and beneficiary do this with no living grantor to also sign off? On the one hand, this seems to violate the concept of Trust. On the other hand, it seems to confirm the concept of a thinking, “trustworthy” Trustee.
Possibly but probably not. The likelihood of success would probably depend on the state, and on the judge. The proceeding to find out could be expensive.

A good lawyer would strongly discourage a client from creating such an inflexible trust. No one knows what the future will bring.
I just learned more! Thank you.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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Thanks to all for the very helpful comments. I am seriously thinking about going this route in order to shrink my estate while taking advantage of the current high gift/estate tax exclusion.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by afan »

For a marital trust, the spouse must be entitled to all of the income. Are they required to withdraw it? Or can they let it accumulate in the trust?
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Leesbro63 »

ipdiddly wrote: Mon May 10, 2021 4:06 pm Thanks to all for the very helpful comments. I am seriously thinking about going this route in order to shrink my estate while taking advantage of the current high gift/estate tax exclusion.
Don't forget that in 1993, tax changes were made retroactive to Jan 1st. We can't discuss future tax possibilities, but we can remember what's happened in the past and what the Supreme Court has said is legal. So any current gift and estate planning moves should consider what happened in 1993.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

afan wrote: Mon May 10, 2021 4:21 pm For a marital trust, the spouse must be entitled to all of the income. Are they required to withdraw it? Or can they let it accumulate in the trust?
The spouse doesn't have to take it. However, the trustees have to keep track of how much accumulated income there is, so they can distribute it if and when the spouse wants it.

The accounting becomes complicated if the trustees invest the accumulated income rather than keeping it in cash.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by afan »

bsteiner wrote: Mon May 10, 2021 4:58 pm
afan wrote: Mon May 10, 2021 4:21 pm For a marital trust, the spouse must be entitled to all of the income. Are they required to withdraw it? Or can they let it accumulate in the trust?
The spouse doesn't have to take it. However, the trustees have to keep track of how much accumulated income there is, so they can distribute it if and when the spouse wants it.

The accounting becomes complicated if the trustees invest the accumulated income rather than keeping it in cash.
It might be easy to find the accumulating income, kept in cash, would push the trust to a higher than desired allocation to cash.

As an alternative to keeping it in cash, would things like using a short or even intermediate term bond fund, CDs or individual munis and never putting anything into the from other trust resources work? Since those funds would generate more income, anything in that part of the portfolio would be prior years' accumulated income, or current year income. All would be available to the beneficiary. Depending on the beneficiary, one might be able to stay within the desired allocation by selling or not reinvesting in other bond or CD investments.

Or is the accounting more complicated than just segregating the current and past accumulated income?
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

Leesbro63 wrote: Mon May 10, 2021 4:31 pm
ipdiddly wrote: Mon May 10, 2021 4:06 pm Thanks to all for the very helpful comments. I am seriously thinking about going this route in order to shrink my estate while taking advantage of the current high gift/estate tax exclusion.
Don't forget that in 1993, tax changes were made retroactive to Jan 1st. We can't discuss future tax possibilities, but we can remember what's happened in the past and what the Supreme Court has said is legal. So any current gift and estate planning moves should consider what happened in 1993.
At risk of veering out of bounds, but I feel this is helpful…

One big concern amongst estate planning going into this year was that the estate tax exemption might change retroactively to Jan 2021. However, the White House is not officially pursuing a change in the estate tax exemption limit (based on published plan), so it seems unlikely that it will happen this year. Not impossible of course but I, personally, would feel reasonably comfortable taking advantage of the exemption this year.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

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bsteiner wrote: Mon May 10, 2021 4:58 pm
afan wrote: Mon May 10, 2021 4:21 pm For a marital trust, the spouse must be entitled to all of the income. Are they required to withdraw it? Or can they let it accumulate in the trust?
The spouse doesn't have to take it. However, the trustees have to keep track of how much accumulated income there is, so they can distribute it if and when the spouse wants it.

The accounting becomes complicated if the trustees invest the accumulated income rather than keeping it in cash.
Just for clarification: Previous discussion concerned SLAT. Is SLAT also called a marital trust or are you referring to something different? I may want the option of NOT being REQUIRED to take income, but merely preserve the option to take income if needed. Lots of trust terminology gets tossed around and I want to be sure I understand the similarities and differences.

If one is required to take income and does not, is that untaken income added back to the spouse's estate?
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bogcir »

ipdiddly wrote: Tue May 11, 2021 8:48 am Just for clarification: Previous discussion concerned SLAT. Is SLAT also called a marital trust or are you referring to something different? I may want the option of NOT being REQUIRED to take income, but merely preserve the option to take income if needed. Lots of trust terminology gets tossed around and I want to be sure I understand the similarities and differences.

If one is required to take income and does not, is that untaken income added back to the spouse's estate?
Whether it's a SLAT or not, I believe there is a lot of flexibility on drafting the trusts. Our SLAT does not require any distributions, for example, so that money stays outside of the estate. I'm sure you could set it up as you want.
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by Lee_WSP »

ipdiddly wrote: Tue May 11, 2021 8:48 am
bsteiner wrote: Mon May 10, 2021 4:58 pm
afan wrote: Mon May 10, 2021 4:21 pm For a marital trust, the spouse must be entitled to all of the income. Are they required to withdraw it? Or can they let it accumulate in the trust?
The spouse doesn't have to take it. However, the trustees have to keep track of how much accumulated income there is, so they can distribute it if and when the spouse wants it.

The accounting becomes complicated if the trustees invest the accumulated income rather than keeping it in cash.
Just for clarification: Previous discussion concerned SLAT. Is SLAT also called a marital trust or are you referring to something different? I may want the option of NOT being REQUIRED to take income, but merely preserve the option to take income if needed. Lots of trust terminology gets tossed around and I want to be sure I understand the similarities and differences.

If one is required to take income and does not, is that untaken income added back to the spouse's estate?
These terms are not technical terms and are more like trademarks or categories of clothing like "suit" or "sun dress". (I'm butchering this "definition", but I'm doing my best).

Moving on to the actual answer....

A marital trust typically refers to a trust created upon the death of the first to die spouse. It is usually a credit shelter or bypass (A/B) trust, but really they're more or less very similar in that they're all sprung into being by the first to die and they all split the marital assets in two for various purposes.

That said, with the advent of of estate tax exemption portability, the popularity (or at least the benefit of) credit shelter trusts has declined. Previously, such trusts were used to "shelter" (keep intact) the "credit" (estate tax credit); since the estate tax exemption had to be used up on death, it was credit shelter or lose it. Plus the exemption was a lot lower back then.

If the income is not removed from the trust, it is not added back to the spouse's estate since it is still kept in trust and did not pass to the surviving spouse.

You can draft the marital trust to not distribute income; impose a Crummey power (Supercharged credit shelter trust (by Mitchell M. Gans, Jonathan G. Blatt, and Diana S.C. Zeydel, Supercharged Credit Shelter Trust, 21 Prob. & Prop. 52 (2007)); or force distributions. But this more or less comes down to what the surviving spouse needs or wants.

Looking at it from the surviving spouse's perspective, what used to be a unified portfolio is now split into two with half going to the next set of beneficiaries and the survivor only receiving income or discretionary distributions. It's not exactly something most people are happy to jump on board with. Which is why drafters typically put in clauses that give the survivor additional control or effective control.

And then there are issues with blended marriages or children from prior partners/spouses. Etc, etc.

TLDR: Trusts should be drafted specifically for the grantors' needs and wants; they are not and should not be rigid constructions. Hence the need for a qualified professional.
bsteiner
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Re: Irrevocable Trust - Pro's and Con's For Estate Planning

Post by bsteiner »

Lee_WSP wrote: Tue May 11, 2021 1:37 pm ...
A marital trust typically refers to a trust created upon the death of the first to die spouse. It is usually a credit shelter or bypass (A/B) trust, ....
A marital trust qualifies for the marital deduction and is included in the spouse's estate. A credit shelter (bypass) (family) (nonmarital) trust is intended not to be included in the surviving spouse's estate.

Many years ago, some people called the marital trust "Trust A" and the nonmarital trust "Trust B," but those names are archaic.

Some people give the spouse all of the income from the credit shelter (bypass) (family) trust. That was common before 1982 when the marital deduction was generally limited to 50% of the estate, and some people wanted to give the spouse as much as possible rather than as little as was necessary to eliminate the estate tax. GIven the current level of the estate tax exclusion amount and portability, executors sometimes elect the marital deduction for those trusts. We recently filed an estate tax return for one such trust to do that where the decedent died in 2014 since the surviving spouse's estate (he died in 2020) wasn't taxable and doing so gave us a basis step-up for the trust's assets as of the surviving spouse's death.
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