living trust necessary? recomended?

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gutrageous
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living trust necessary? recomended?

Post by gutrageous »

Hello all,

I was having a water cooler conversation with a co worker today and the topic of estate planning came up. They mentioned they were in the process of moving everything to a living trust for estate planning purposes, privacy, and flexibility. I don't know all of the details of their personal situation but I know them reasonably well and our situations I would say are likely to be pretty similar. I'm curious if any one has any insight as to whether setting up a living trust would make sense for me. A few facts -

- Married
-Age 48/49
- 2 kids, 20 and 21
-Mid 7 figure NW when including life insurance, home equity, etc.
-No prior spouses or kids
-Would probably never exceed federal estate tax exemption limits as if I get close to that, I'm already FIRE!
- Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.

I do understand that having this trust set would avert probate and I guess that's good but not really sure that would be a big issue in our situation. Also, I realize you can set up more conditions, special language, requirements, etc. for the assets to go the kids or provide more specific instructions for a trustee. Other than that am I missing anything? Is this something that everyone in my situation has already done and I'm behind the curve? If so, help me understand why this is something I should really consider.

Thank you all!!
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FreddieFIRE
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Re: living trust necessary? recomended?

Post by FreddieFIRE »

gutrageous wrote: Thu Jun 30, 2022 5:31 pm - Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.
Why wouldn't you leave it in trust and allow them to serve as their own trustee?
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

What state?

FreddieFIRE wrote: Thu Jun 30, 2022 5:38 pm
gutrageous wrote: - Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.

Why wouldn't you leave it in trust and allow them to serve as their own trustee?
Most lawyers don’t know how to do that. Sad, but true.
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retired@50
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Re: living trust necessary? recomended?

Post by retired@50 »

gutrageous wrote: Thu Jun 30, 2022 5:31 pm ...
-Would probably never exceed federal estate tax exemption limits as if I get close to that, I'm already FIRE!
The estate tax exemption limit seems to be a moving target, so this could change as the years go by.
See links:
Wiki: https://www.bogleheads.org/wiki/Estate_ ... itance_tax
IRS: https://www.irs.gov/newsroom/estate-and-gift-tax-faqs

Investopedia article had a couple "Key Takeaways" that caught my eye.
- The federal estate tax exemption for 2022 is $12.06 million.
...
- The current exemption, doubled under the Tax Cuts and Jobs Act (TCJA), is set to expire in 2026.
Source: https://www.investopedia.com/estate-tax ... on-5114715

Since politicians can't seem to stop playing around with this number, you may or may not want to do anything about it.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
bsteiner
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Re: living trust necessary? recomended?

Post by bsteiner »

As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).

Revocable trusts make sense in some cases and in some states since probating a Will and dealing with the courts is difficult in some states such as California, or expensive in some states such as Delaware (where the court fee is 1.75% of the probate assets, not counting real estate). However, there's no need for them in most cases in most states. What state are you in?
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FreddieFIRE
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Re: living trust necessary? recomended?

Post by FreddieFIRE »

Lee_WSP wrote: Thu Jun 30, 2022 5:46 pm What state?

FreddieFIRE wrote: Thu Jun 30, 2022 5:38 pm
gutrageous wrote: - Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.

Why wouldn't you leave it in trust and allow them to serve as their own trustee?
Most lawyers don’t know how to do that. Sad, but true.
Yep. Maybe they should join the forum and get smarter?
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

FreddieFIRE wrote: Thu Jun 30, 2022 5:56 pm
Lee_WSP wrote: Thu Jun 30, 2022 5:46 pm What state?

FreddieFIRE wrote: Thu Jun 30, 2022 5:38 pm
gutrageous wrote: - Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.

Why wouldn't you leave it in trust and allow them to serve as their own trustee?
Most lawyers don’t know how to do that. Sad, but true.
Yep. Maybe they should join the forum and get smarter?
They have plenty of business and no desire to improve professionally in that capacity. They’re not incompetent, just not suited to craft a legacy building plan. But 98% of the population doesn’t need or want such a plan.
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FreddieFIRE
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Re: living trust necessary? recomended?

Post by FreddieFIRE »

Lee_WSP wrote: Thu Jun 30, 2022 6:00 pm
FreddieFIRE wrote: Thu Jun 30, 2022 5:56 pm
Lee_WSP wrote: Thu Jun 30, 2022 5:46 pm What state?

FreddieFIRE wrote: Thu Jun 30, 2022 5:38 pm
gutrageous wrote: - Currently have a will that puts everything into a testamentary trust with my mom as trustee until kids are 25, then everything goes to them, no restrictions and split 50/50.

Why wouldn't you leave it in trust and allow them to serve as their own trustee?
Most lawyers don’t know how to do that. Sad, but true.
Yep. Maybe they should join the forum and get smarter?
They have plenty of business and no desire to improve professionally in that capacity. They’re not incompetent, just not suited to craft a legacy building plan. But 98% of the population doesn’t need or want such a plan.
I have encountered several such lawyers (as a consumer). I agree with you. I saw some fantastic business plans in action. Assembly lines spitting out huge gold leaved binders with hundreds of pages of "estate plan" for about five grand a pop, each requiring about 30 minutes of computer inputs by a relatively low paid administrative person. Pretty impressive from a business perspective! Not so much from a "right thing" perspective. :annoyed
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retired@50
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Re: living trust necessary? recomended?

Post by retired@50 »

bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).

Revocable trusts make sense in some cases and in some states since probating a Will and dealing with the courts is difficult in some states such as California, or expensive in some states such as Delaware (where the court fee is 1.75% of the probate assets, not counting real estate). However, there's no need for them in most cases in most states. What state are you in?
So, if a child is a trustee of their own trust and they can't give themselves the assets within the trust, how can they spend it, for, say, a new house or something?
Are they limited to interest and dividends only?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: living trust necessary? recomended?

Post by bsteiner »

FreddieFIRE wrote: Thu Jun 30, 2022 6:07 pm ...
I have encountered several such lawyers (as a consumer). I agree with you. I saw some fantastic business plans in action. Assembly lines spitting out huge gold leaved binders with hundreds of pages of "estate plan" for about five grand a pop, each requiring about 30 minutes of computer inputs by a relatively low paid administrative person. Pretty impressive from a business perspective! Not so much from a "right thing" perspective.
The leather on the binders is usually fake.

We've seen a few of those. They usually result in a subtantial amount of unnecessary legal fees to fix them after the client dies.
retired@50 wrote: Thu Jun 30, 2022 6:19 pm
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).
...
So, if a child is a trustee of their own trust and they can't give themselves the assets within the trust, how can they spend it, for, say, a new house or something?
Are they limited to interest and dividends only?
They can ask their co-trustee for distributions. If the co-trustee says no, they can remove and replace the co-trustee.

Alternatively, the trust can buy the house and they can live in it.
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Re: living trust necessary? recomended?

Post by FreddieFIRE »

bsteiner wrote: Thu Jun 30, 2022 6:58 pm
FreddieFIRE wrote: Thu Jun 30, 2022 6:07 pm ...
I have encountered several such lawyers (as a consumer). I agree with you. I saw some fantastic business plans in action. Assembly lines spitting out huge gold leaved binders with hundreds of pages of "estate plan" for about five grand a pop, each requiring about 30 minutes of computer inputs by a relatively low paid administrative person. Pretty impressive from a business perspective! Not so much from a "right thing" perspective.
The leather on the binders is usually fake.

We've seen a few of those. They usually result in a subtantial amount of unnecessary legal fees to fix them after the client dies.
Yep. I once sat through a very entertaining sales pitch (not even a free dinner :annoyed ). The guy had a shill in the front row who asked how he could deliver such a huge package so cheaply? Somebody asked why they delivered such a huge package, and the guy asked "how do I know what you will or won't need?" ?! I guess "more is better."
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Topic Author
gutrageous
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Re: living trust necessary? recomended?

Post by gutrageous »

thank you all, as usual. If nothing else, keeping their inheritances out of their estate for tax purposes is probably worth it.
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

gutrageous wrote: Thu Jun 30, 2022 9:34 pm thank you all, as usual. If nothing else, keeping their inheritances out of their estate for tax purposes is probably worth it.
I think the divorce protection is worth more. That's what I tell people anyway.
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gutrageous
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Re: living trust necessary? recomended?

Post by gutrageous »

Lee_WSP wrote: Thu Jun 30, 2022 10:20 pm
gutrageous wrote: Thu Jun 30, 2022 9:34 pm thank you all, as usual. If nothing else, keeping their inheritances out of their estate for tax purposes is probably worth it.
I think the divorce protection is worth more. That's what I tell people anyway.
I don't disagree. This didn't really seem to something to consider when setting up a will when the kids were 1 & 2 but now it is much more relevant. Thank you all that replied. Given the relatively nominal cost and peace of mind, I think this makes some sense for me. As a bonus, I work at a midsize regional bank that has trust department and offers an "employee discount" whatever that means. Ha. Thanks again.
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Re: living trust necessary? recomended?

Post by S_Track »

bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
We are not allowed to speculate on future changes to the law, so current estate tax limits will drop to about $6m for an individual in a couple years and are indexed to inflation. Your children are in their twenties. Based on a "mid-7 figures" estate getting split between them, if this money is invested in equities, it is easy to see a situation where this exceeds the estate exemption as the law is currently written by the time your children die. Unless they spend it all.
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Re: living trust necessary? recomended?

Post by bsteiner »

S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
The estate tax exclusion amount is presently $12,060,000, and is scheduled to revert to $6,030,000 (in both cases indexed from 2022) in 2026.

If you leave $3 million to each of two young adults, that $3 million, plus the income and growth on it during their lifetime, will be added to their estates.

There’s no way to know what the size of their estates will be or what the law will be at the time of their deaths. However, there’s a reasonable chance that at least one of them will have a taxable estate.

There’s also a reasonable chance that at least one of them will get divorced. In about 3/4 of the states, gifts and inheritances are not subject to equitable distribution (division) upon divorce (assuming you can trace the assets), that’s not the case in Connecticut. In Connecticut, they are.
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Re: living trust necessary? recomended?

Post by S_Track »

bsteiner wrote: Sun Jul 17, 2022 7:50 am If you leave $3 million to each of two young adults, that $3 million, plus the income and growth on it during their lifetime, will be added to their estates.

There’s no way to know what the size of their estates will be or what the law will be at the time of their deaths. However, there’s a reasonable chance that at least one of them will have a taxable estate.
Just to make sure I understand, if a complete distribution is made while the children are in their 20s, there is a good chance their estate will grow in excess of the federal exemption. In such a case, their children (grandchildren) would be subject to the estate tax? If I have that correct, let's assume we leave the funds in the trust, but the value of the trust grows in excess of the federal exemption? Would that also produce a taxable estate for the grandchildren to inherit?
schachtw
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Re: living trust necessary? recomended?

Post by schachtw »

bsteiner wrote: Sun Jul 17, 2022 7:50 am
S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
The estate tax exclusion amount is presently $12,060,000, and is scheduled to revert to $6,030,000 (in both cases indexed from 2022) in 2026.

If you leave $3 million to each of two young adults, that $3 million, plus the income and growth on it during their lifetime, will be added to their estates.

There’s no way to know what the size of their estates will be or what the law will be at the time of their deaths. However, there’s a reasonable chance that at least one of them will have a taxable estate.

There’s also a reasonable chance that at least one of them will get divorced. In about 3/4 of the states, gifts and inheritances are not subject to equitable distribution (division) upon divorce (assuming you can trace the assets), that’s not the case in Connecticut. In Connecticut, they are.
BSteiner:

Are you the attorney quoted in the WSJ personal finance below? If so, informative article regarding portability for estate planning.


IRS Gives Wealthy Families More Time to Shelter Assets from Estate Tax
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Re: living trust necessary? recomended?

Post by bsteiner »

S_Track wrote: Sun Jul 17, 2022 8:28 am ...
Just to make sure I understand, if a complete distribution is made while the children are in their 20s, there is a good chance their estate will grow in excess of the federal exemption. In such a case, their children (grandchildren) would be subject to the estate tax? If I have that correct, let's assume we leave the funds in the trust, but the value of the trust grows in excess of the federal exemption? Would that also produce a taxable estate for the grandchildren to inherit?
The trust would not be included in the children's estates (nor in the grandchildren's estates).
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Re: living trust necessary? recomended?

Post by bsteiner »

schachtw wrote: Sun Jul 17, 2022 9:13 am ...
BSteiner:

Are you the attorney quoted in the WSJ personal finance below? If so, informative article regarding portability for estate planning.

IRS Gives Wealthy Families More Time to Shelter Assets from Estate Tax
Yes. Here it is: https://www.wsj.com/articles/irs-gives- ... yURL_share.

As the article explains, if an estate is required to file an estate tax return, the executors may only elect portability on a timely filed return (9 months from death, with a 6-month extension permitted). However, if the estate is not required to file an estate tax return, the IRS has discretion to extend the time to elect portability. In 2017, the IRS granted a blanket extension of time to elect portability without a ruling to 2 years from death for estates not required to file a return. However, the IRS was still receiving a large number of ruling requests from executors of estates in which more than 2 years had elapsed. Now, in Revenue Procedure 2022-32, the IRS granted a blanket extention of time to elect portability without a ruling to 5 years from death for estates not required to file a return. After 5 years have passed from the date of death, an executor of an estate not required to file an estate tax return would still have to apply for a ruling to elect portability.

Apparently only a small percentage of estates not required to file a return file returns to elect portability. However, in any case where there's any reasonable possibility that, absent portability, the surviving spouse might have a taxable estate, the executors of the estate of the deceased spouse should file a return to elect portability. They have to do much of the work anyway to determine the basis of the assets (other than cash, life insurance and retirement benefits), or if a detailed inventory is required, or if a state estate tax or inheritance tax return is required. They should keep in mind that while the estate tax exclusion amount is presently $12,060,000, it's scheduled to revert to $6,030,000 (in both cases indexed from 2022) in 2026.
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Re: living trust necessary? recomended?

Post by S_Track »

bsteiner wrote: Sun Jul 17, 2022 9:40 am
S_Track wrote: Sun Jul 17, 2022 8:28 am ...
Just to make sure I understand, if a complete distribution is made while the children are in their 20s, there is a good chance their estate will grow in excess of the federal exemption. In such a case, their children (grandchildren) would be subject to the estate tax? If I have that correct, let's assume we leave the funds in the trust, but the value of the trust grows in excess of the federal exemption? Would that also produce a taxable estate for the grandchildren to inherit?
The trust would not be included in the children's estates (nor in the grandchildren's estates).
If that is the case, why can't the child take a full distribution, and if the value grows significantly during their lifetime, set up their own trust as a grantor fund it and pass to their children? Thanks
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Re: living trust necessary? recomended?

Post by bsteiner »

S_Track wrote: Sun Jul 17, 2022 11:47 am
bsteiner wrote: Sun Jul 17, 2022 9:40 am
S_Track wrote: Sun Jul 17, 2022 8:28 am ...
Just to make sure I understand, if a complete distribution is made while the children are in their 20s, there is a good chance their estate will grow in excess of the federal exemption. In such a case, their children (grandchildren) would be subject to the estate tax? If I have that correct, let's assume we leave the funds in the trust, but the value of the trust grows in excess of the federal exemption? Would that also produce a taxable estate for the grandchildren to inherit?
The trust would not be included in the children's estates (nor in the grandchildren's estates).
If that is the case, why can't the child take a full distribution, and if the value grows significantly during their lifetime, set up their own trust as a grantor fund it and pass to their children? Thanks
In that case, it will either be a taxable gift by the child, or it will be included in the child's estate, or both. You can take the toothpaste out of the tube (the money out of the trust), but you can't put it back.

Make the children's trusts discretionary, without mandating or limiting distributions.
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Re: living trust necessary? recomended?

Post by S_Track »

bsteiner wrote: Sun Jul 17, 2022 12:15 pm In that case, it will either be a taxable gift by the child, or it will be included in the child's estate, or both. You can take the toothpaste out of the tube (the money out of the trust), but you can't put it back.

Make the children's trusts discretionary, without mandating or limiting distributions.
I appreciate you taking the time to answer my questions. If you can entertain one more, I promise I will go away. :)

When you say you can take the toothpaste out but not put it back in. I can understand that with the original trust but what about a new one? For example,

I create a revocable trust and set my son as the beneficiary.
I pass, and the will instructs the successor trustee to give my son full distribution at age 25. (Keep the example simple)
My son invests the money in his own brokerage account and over the years the fund grows, and my son pays taxes as required.
Now my son decides to create his own revocable trust and name his child as the beneficiary. He funds the trust with his brokerage account.
My son passes.

Why does his child have to pay an estate tax or gift tax? It seems to me he is doing exactly what I am doing.

thanks again!
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

S_Track wrote: Sun Jul 17, 2022 2:56 pm
bsteiner wrote: Sun Jul 17, 2022 12:15 pm In that case, it will either be a taxable gift by the child, or it will be included in the child's estate, or both. You can take the toothpaste out of the tube (the money out of the trust), but you can't put it back.

Make the children's trusts discretionary, without mandating or limiting distributions.
I appreciate you taking the time to answer my questions. If you can entertain one more, I promise I will go away. :)

When you say you can take the toothpaste out but not put it back in. I can understand that with the original trust but what about a new one? For example,

I create a revocable trust and set my son as the beneficiary.
I pass, and the will instructs the successor trustee to give my son full distribution at age 25. (Keep the example simple)
My son invests the money in his own brokerage account and over the years the fund grows, and my son pays taxes as required.
Now my son decides to create his own revocable trust and name his child as the beneficiary. He funds the trust with his brokerage account.
My son passes.

Why does his child have to pay an estate tax or gift tax? It seems to me he is doing exactly what I am doing.

thanks again!
The difference is that the "mid-7 figures" that you are passing on, whether through death or by gifting it to the trust, is not currently a taxable amount, but splitting that in half and investing it for 60 years (and the rollback of the threshold in 2025) could very easily lead to an amount that is taxable for both of them.

E.g., let's say you give your children 6 million dollars collectively, either by gift or inheritance, directly or via trust. That's currently under the limit. No estate tax. They each take the 3 million dollars and invest it. In fifty years, they each have $40 million dollars, and now they are subject to the estate tax when they give that money to their children, regardless of whether they create a trust or not.

Now, if you put the money in a trust while you are currently under the gift/estate tax limit, and that money grows by leaps and bounds, as long as it is in the trust, the beneficiary can be changed from child to your grandchild without it counting as a gift or inheritance.
increment
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Re: living trust necessary? recomended?

Post by increment »

S_Track wrote: Sun Jul 17, 2022 2:56 pm I create a revocable trust and set my son as the beneficiary.
I pass, and the will instructs the successor trustee to give my son full distribution at age 25. (Keep the example simple)
My son invests the money in his own brokerage account and over the years the fund grows, and my son pays taxes as required.
Now my son decides to create his own revocable trust and name his child as the beneficiary. He funds the trust with his brokerage account.
My son passes.

Why does his child have to pay an estate tax or gift tax? It seems to me he is doing exactly what I am doing.
Your revocable trust does not prevent your estate from being subject to estate tax. Likewise, your son's revocable trust can't prevent his estate from being subject to estate tax.

The scheme is intended to prevent your son's estate from paying estate tax, because the (inherited) assets are kept in the (irrevocable) trust, which does not die.
island
Posts: 1971
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Re: living trust necessary? recomended?

Post by island »

S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
S_Track Thanks for asking those questions! I've had the same thoughts, and don't really understand the "keep it out of the estate for tax purposes" that I often see on Bogleheads, but not explained so I'm following this with great interest.

If kept in the trust to be distributed for over time or years, in addition to adding more complexity, doesn't this set up incur other high fees for trust management, attorneys, CPAs/tax prep and filing, etc?

I also thought trusts are taxed at a much higher rate than individuals or is that a different type of trust? And if the trust is paying those taxes doesn't that really mean the beneficiaries are paying for it anyway?

How does one keep track of all of this over years, with a very competent CPA and estate attorney?

What level of wealth necessitates an ongoing trust if minor children, special needs and spendthrifts are NOT a concern?

As for divorce, couldn't a good prenup take care of that without an ongoing trust?

Can anyone suggest some websites or reading material to further education on this subject?

Gutrageous thanks for your post, great thread many of us can learn from and so appreciate the participation of the esteemed attorneys here. Thank you all.
Last edited by island on Sun Jul 17, 2022 4:57 pm, edited 1 time in total.
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

island wrote: Sun Jul 17, 2022 4:44 pm
S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
S_Track Thanks for starting this convo! I've had the same thoughts, and don't really understand the "keep it out of the estate for tax purposes" that I often see on Bogleheads, but not explained so I'm following this with great interest.

If kept in the trust to be distributed for over time or years, in addition to adding more complexity, doesn't this set up incur other high fees for trust management, attorneys, CPAs/tax prep and filing, etc?

I also thought trusts are taxed at a much higher rate than individuals or is that a different type of trust? And if the trust is paying those taxes doesn't that really mean the beneficiaries are paying for it anyway?

How does one keep track of all of this over years, with a very competent CPA and estate attorney?

What level of wealth necessitates an ongoing trust if minor children, special needs and spendthrifts are NOT a concern?

As for divorce, couldn't a good prenup take care of that without an ongoing trust?

Can anyone suggest some websites or reading material to further education on this subject?

Great thread, thanks all.
Let's say you spend ten thousand dollars on an attorney to draw up the trust, one percent of the assets per year to have a corporate trustee, and five hundred dollars for a CPA to do the tax return. Whether that's worth it for you for an estate worth a half-million dollars is up to you. If your estate is worth tens of millions of dollars, it probably is.

As far as trust tax rates, the brackets are extremely condensed, but only undistributed income from the trust is subject to those taxes. But you can distribute all of the income the trust earns every year and let the beneficiaries pay their own taxes at their own rates.
island
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Re: living trust necessary? recomended?

Post by island »

toddthebod wrote: Sun Jul 17, 2022 4:56 pm
island wrote: Sun Jul 17, 2022 4:44 pm
S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
S_Track Thanks for starting this convo! I've had the same thoughts, and don't really understand the "keep it out of the estate for tax purposes" that I often see on Bogleheads, but not explained so I'm following this with great interest.

If kept in the trust to be distributed for over time or years, in addition to adding more complexity, doesn't this set up incur other high fees for trust management, attorneys, CPAs/tax prep and filing, etc?

I also thought trusts are taxed at a much higher rate than individuals or is that a different type of trust? And if the trust is paying those taxes doesn't that really mean the beneficiaries are paying for it anyway?

How does one keep track of all of this over years, with a very competent CPA and estate attorney?

What level of wealth necessitates an ongoing trust if minor children, special needs and spendthrifts are NOT a concern?

As for divorce, couldn't a good prenup take care of that without an ongoing trust?

Can anyone suggest some websites or reading material to further education on this subject?

Great thread, thanks all.
You might spend several thousand dollars on an attorney to draw up the trust, a percentage of the assets to have a corporate trustee (as opposed to a family member), and a few hundred dollars for a CPA to do the tax return. Whether that's worth it for you for an estate worth a half-million dollars is up to you. If your estate is worth tens of millions of dollars, you most likely already have an estate attorney and a CPA.

As far as trust tax rates, the brackets are extremely condensed, but only undistributed income from the trust is subject to those taxes. But you can distribute all of the income the trust earns every year and let the beneficiaries pay their own taxes at their own rates.
Thank you for your reply.

Only undistributed is subject to the condensed tax rates? Wouldn't undistributed usually be the bulk if the purpose is to keep funds out of the estate and therefore incur high tax payment due?

We plan to have an attorney do our wills and trust anyway as a way to avoid probate in CA, because thought that's the only advantage in our case, but now not sure. Haven't pulled the trigger yet since spouse and I have no kids and are still trying to decide on complicated beneficiary situation when both of us pass, well complicated in our minds anyway. Or may leave most to charities and/or our alma maters. We're a bit paralyzed by those decisions.

As far as ongoing trustee and CPA fees I assumed that would be very expensive even on a 10 million estate, or maybe not worth it at only that level of wealth? I don't know.
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

island wrote: Sun Jul 17, 2022 5:18 pm
toddthebod wrote: Sun Jul 17, 2022 4:56 pm
island wrote: Sun Jul 17, 2022 4:44 pm
S_Track wrote: Sun Jul 17, 2022 6:46 am
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses.
I understand how a trust reduces exposure to creditors and spouses but what is the concern with a few million dollars passing to them in terms of estate taxes as long as they are below the federal exception? Stocks would also receive a step up in basis along with say the family home if they sold. Sure they would have pay taxes on future dividends or capital gains, but the trust would have to pay those taxes as well reducing their future inheritance. I must me missing something. Thanks
S_Track Thanks for starting this convo! I've had the same thoughts, and don't really understand the "keep it out of the estate for tax purposes" that I often see on Bogleheads, but not explained so I'm following this with great interest.

If kept in the trust to be distributed for over time or years, in addition to adding more complexity, doesn't this set up incur other high fees for trust management, attorneys, CPAs/tax prep and filing, etc?

I also thought trusts are taxed at a much higher rate than individuals or is that a different type of trust? And if the trust is paying those taxes doesn't that really mean the beneficiaries are paying for it anyway?

How does one keep track of all of this over years, with a very competent CPA and estate attorney?

What level of wealth necessitates an ongoing trust if minor children, special needs and spendthrifts are NOT a concern?

As for divorce, couldn't a good prenup take care of that without an ongoing trust?

Can anyone suggest some websites or reading material to further education on this subject?

Great thread, thanks all.
You might spend several thousand dollars on an attorney to draw up the trust, a percentage of the assets to have a corporate trustee (as opposed to a family member), and a few hundred dollars for a CPA to do the tax return. Whether that's worth it for you for an estate worth a half-million dollars is up to you. If your estate is worth tens of millions of dollars, you most likely already have an estate attorney and a CPA.

As far as trust tax rates, the brackets are extremely condensed, but only undistributed income from the trust is subject to those taxes. But you can distribute all of the income the trust earns every year and let the beneficiaries pay their own taxes at their own rates.
Thank you for your reply.

Only undistributed is subject to the condensed tax rates? Wouldn't undistributed usually be the bulk if the purpose is to keep funds out of the estate and therefore incur high tax payment due?

We plan to have an attorney do our wills and trust anyway as a way to avoid probate in CA, because thought that's the only advantage in our case, but now not sure. Haven't pulled the trigger yet since spouse and I have no kids and are still trying to decide on complicated beneficiary situation when both of us pass, well complicated in our minds anyway. Or may leave most to charities and/or our alma maters. We're a bit paralyzed by those decisions.

As far as ongoing trustee and CPA fees I assumed that would be very expensive even on a 10 million estate, or maybe not worth it at that level.
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
island
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Re: living trust necessary? recomended?

Post by island »

toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
Thank you!
toddthebod
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Joined: Wed May 18, 2022 12:42 pm

Re: living trust necessary? recomended?

Post by toddthebod »

island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
Thank you!
1. Not taxed, but I'm not sure what the point of the trust is in this situation.

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
island
Posts: 1971
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Re: living trust necessary? recomended?

Post by island »

toddthebod wrote: Sun Jul 17, 2022 7:29 pm
island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
1. Not taxed, but I'm not sure what the point of the trust is in this situation.
For spouse and I, reason would be to put taxable accounts and property incl home in a trust to avoid probate which is supposedly an onerous and expensive process in CA.

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Are those $500,000 distributions still not considered part of the beneficiary's estate? The $300,000 taxed at the beneficiary's ordinary or cap gain tax rate depending on what the asset is, just like their other non-inherited income?
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

island wrote: Sun Jul 17, 2022 9:14 pm
toddthebod wrote: Sun Jul 17, 2022 7:29 pm
island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
1. Not taxed, but I'm not sure what the point of the trust is in this situation.
For spouse and I, reason would be to put taxable accounts and property incl home in a trust to avoid probate which is supposedly an onerous and expensive process in CA.

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Are those $500,000 distributions still not considered part of the beneficiary's estate? The $300,000 taxed at the beneficiary's ordinary or cap gain tax rate depending on what the asset is, just like their other non-inherited income?
You can do transfer-on-death for both brokerage accounts and real estate in California to avoid probate. But regardless, yes, in the case where the trust exists simply to distribute your assets to your children immediately following your death, there would be no tax implications.

The distributions to the beneficiaries become part of the beneficiaries' estates, and it is taxed as if the beneficiary had earned them directly as you said. But picture a trust with a large investment in a low-cost index fund like VTI or VOO. Every year, it earns 2-3% returns in capital gains and dividend distributions. You could leave that money in the trust and reinvest it, but the taxes will be pretty bad: trusts reach the top bracket (37% ordinary income) at $13,451, and 20% long-term capital gains at $13.701. Alternatively, you could distribute that income out, let the beneficiaries pay taxes at their own rates, and just leave the principal to keep appreciating.
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

S_Track wrote: Sun Jul 17, 2022 2:56 pm
bsteiner wrote: Sun Jul 17, 2022 12:15 pm In that case, it will either be a taxable gift by the child, or it will be included in the child's estate, or both. You can take the toothpaste out of the tube (the money out of the trust), but you can't put it back.

Make the children's trusts discretionary, without mandating or limiting distributions.
I appreciate you taking the time to answer my questions. If you can entertain one more, I promise I will go away. :)

When you say you can take the toothpaste out but not put it back in. I can understand that with the original trust but what about a new one? For example,

I create a revocable trust and set my son as the beneficiary.
I pass, and the will instructs the successor trustee to give my son full distribution at age 25. (Keep the example simple)
My son invests the money in his own brokerage account and over the years the fund grows, and my son pays taxes as required.
Now my son decides to create his own revocable trust and name his child as the beneficiary. He funds the trust with his brokerage account.
My son passes.

Why does his child have to pay an estate tax or gift tax? It seems to me he is doing exactly what I am doing.

thanks again!
You aren’t putting it back into the tube, your child is uselessly using up his/her exemption because you were too cheap/lazy to put it in trust to begin with.

As for missed step up in basis, the trust can give a general power or a limited general power to the child so that the unused exemption is used up when they pass.

But far more importantly, it simply keeps your child from 1) doing something stupid and/or 2) being the victim of bad luck/circumstances.
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
Thank you!
Your scenarios are not at all comparable.

A one time inheritance of 500k simply goes outright to the beneficiaries.

A 500k a year distribution is taxed to the beneficiaries assuming it’s DNI or the terms of the trust/state law allow for the allocation to income.

The question/controversy seems to revolve around income kept within the trust itself and the compressed tax brackets.

Yes, the tax brackets are compressed. The way around that if the asset protection features are not needed is to simply distribute it to the beneficiary unless the beneficiary has absolutely no use for the funds and wants to keep them in trust.
island
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Re: living trust necessary? recomended?

Post by island »

toddthebod wrote: Sun Jul 17, 2022 11:01 pm
island wrote: Sun Jul 17, 2022 9:14 pm
toddthebod wrote: Sun Jul 17, 2022 7:29 pm
island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
1. Not taxed, but I'm not sure what the point of the trust is in this situation.
For spouse and I, reason would be to put taxable accounts and property incl home in a trust to avoid probate which is supposedly an onerous and expensive process in CA.

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Are those $500,000 distributions still not considered part of the beneficiary's estate? The $300,000 taxed at the beneficiary's ordinary or cap gain tax rate depending on what the asset is, just like their other non-inherited income?
You can do transfer-on-death for both brokerage accounts and real estate in California to avoid probate. But regardless, yes, in the case where the trust exists simply to distribute your assets to your children immediately following your death, there would be no tax implications.

The distributions to the beneficiaries become part of the beneficiaries' estates, and it is taxed as if the beneficiary had earned them directly as you said. But picture a trust with a large investment in a low-cost index fund like VTI or VOO. Every year, it earns 2-3% returns in capital gains and dividend distributions. You could leave that money in the trust and reinvest it, but the taxes will be pretty bad: trusts reach the top bracket (37% ordinary income) at $13,451, and 20% long-term capital gains at $13.701. Alternatively, you could distribute that income out, let the beneficiaries pay taxes at their own rates, and just leave the principal to keep appreciating.
Thank u for explaining.
island
Posts: 1971
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Re: living trust necessary? recomended?

Post by island »

Lee_WSP wrote: Sun Jul 17, 2022 11:21 pm
island wrote: Sun Jul 17, 2022 6:12 pm
toddthebod wrote: Sun Jul 17, 2022 5:33 pm
Only undistributed income is subject to the condensed tax rates.

Trustee fees go down the larger the trust is. You can find reputable corporate trustees that will charge 0.1% to 0.5% per year on large trusts, slightly more if they are operating as investment advisors as well.
Yes understood it's undistributed INCOME subject to the compressed tax rate, but I figured that could balloon over the years.

Can you please clarify how it works in the following 2 scenarios?

1. If beneficiary inherits the deceased $500K taxable brokerage account held in a revokable (now irrevocable trust) distributed as soon as possible after death, it's not taxed, correct? Assuming no gain in this example.

2. If deceased trust is set up to keep inheritance out of beneficiaries' estates and they get a distribution of $500K annually, is it taxed?

Assuming not in a state with estate or inheritance tax.
Thank you!
Your scenarios are not at all comparable.

A one time inheritance of 500k simply goes outright to the beneficiaries.

A 500k a year distribution is taxed to the beneficiaries assuming it’s DNI or the terms of the trust/state law allow for the allocation to income.

The question/controversy seems to revolve around income kept within the trust itself and the compressed tax brackets.

Yes, the tax brackets are compressed. The way around that if the asset protection features are not needed is to simply distribute it to the beneficiary unless the beneficiary has absolutely no use for the funds and wants to keep them in trust.
Hi Lee, Yes I understand not comparable, not my intent. Just trying to understand how it works, the differences, reasons for using one or the other, tax treatment, etc and it all comes together easier for me by asking What If’s.
Thank you for your reply!
S_Track
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Re: living trust necessary? recomended?

Post by S_Track »

toddthebod wrote: Sun Jul 17, 2022 3:44 pm

The difference is that the "mid-7 figures" that you are passing on, whether through death or by gifting it to the trust, is not currently a taxable amount, but splitting that in half and investing it for 60 years (and the rollback of the threshold in 2025) could very easily lead to an amount that is taxable for both of them.

E.g., let's say you give your children 6 million dollars collectively, either by gift or inheritance, directly or via trust. That's currently under the limit. No estate tax. They each take the 3 million dollars and invest it. In fifty years, they each have $40 million dollars, and now they are subject to the estate tax when they give that money to their children, regardless of whether they create a trust or not.

Now, if you put the money in a trust while you are currently under the gift/estate tax limit, and that money grows by leaps and bounds, as long as it is in the trust, the beneficiary can be changed from child to your grandchild without it counting as a gift or inheritance.
That is what I was missing, get the money in the trust before it hopefully grows by leaps and bounds. thanks for the example, it helps.

In my particular case the rlt trust will have 2 beneficiaries which complicates the issue. It seems we would want the rlt trust to spilt, one for each child when the grantor dies and then the children can at some point become trustees of their own trust.
S_Track
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Re: living trust necessary? recomended?

Post by S_Track »

toddthebod wrote: Sun Jul 17, 2022 7:29 pm

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Does that mean income always comes out of the trust first for tax purposes? For example, the $500K distribution could not target principle only? Thanks
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

S_Track wrote: Mon Jul 18, 2022 7:24 am
toddthebod wrote: Sun Jul 17, 2022 7:29 pm

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Does that mean income always comes out of the trust first for tax purposes? For example, the $500K distribution could not target principle only? Thanks
Correct. When you distribute from a trust, it is always income first.

Example: You put $200,000 of cash in a trust. You buy $100,000 of bonds and $100,000 of stock. The bond earns a coupon payment of $10,000. You have automatic reinvestment turned on, so now you have $110,000 of bonds. Some time later, you sell $10,000 of stock for the same price you bought it at, and distribute that $10,000 to the beneficiary. Even though this is clearly "different" money, the distribution is considered to have come from the trust's income.
island
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Re: living trust necessary? recomended?

Post by island »

toddthebod wrote: Mon Jul 18, 2022 8:49 am
S_Track wrote: Mon Jul 18, 2022 7:24 am
toddthebod wrote: Sun Jul 17, 2022 7:29 pm

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Does that mean income always comes out of the trust first for tax purposes? For example, the $500K distribution could not target principle only? Thanks
Correct. When you distribute from a trust, it is always income first.

Example: You put $200,000 of cash in a trust. You buy $100,000 of bonds and $100,000 of stock. The bond earns a coupon payment of $10,000. You have automatic reinvestment turned on, so now you have $110,000 of bonds. Some time later, you sell $10,000 of stock for the same price you bought it at, and distribute that $10,000 to the beneficiary. Even though this is clearly "different" money, the distribution is considered to have come from the trust's income.
So undistributed income is taxed at the higher compressed tax rate while in the trust and then that income is taxed at the individual's tax rate once distributed?
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

island wrote: Mon Jul 18, 2022 1:02 pm
toddthebod wrote: Mon Jul 18, 2022 8:49 am
S_Track wrote: Mon Jul 18, 2022 7:24 am
toddthebod wrote: Sun Jul 17, 2022 7:29 pm

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Does that mean income always comes out of the trust first for tax purposes? For example, the $500K distribution could not target principle only? Thanks
Correct. When you distribute from a trust, it is always income first.

Example: You put $200,000 of cash in a trust. You buy $100,000 of bonds and $100,000 of stock. The bond earns a coupon payment of $10,000. You have automatic reinvestment turned on, so now you have $110,000 of bonds. Some time later, you sell $10,000 of stock for the same price you bought it at, and distribute that $10,000 to the beneficiary. Even though this is clearly "different" money, the distribution is considered to have come from the trust's income.
So undistributed income is taxed at the higher compressed tax rate while in the trust and then that income is taxed at the individual's tax rate once distributed?
No. If it is distributed in the year it was earned, it is deducted on the trust's schedule K-1.
toddthebod
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Re: living trust necessary? recomended?

Post by toddthebod »

island wrote: Mon Jul 18, 2022 1:02 pm
toddthebod wrote: Mon Jul 18, 2022 8:49 am
S_Track wrote: Mon Jul 18, 2022 7:24 am
toddthebod wrote: Sun Jul 17, 2022 7:29 pm

2. It depends if the trust has income. If Dad puts $10m in cash in a trust and it pays out $500k for 20 years, no, it is not taxed. If Dad puts $10m in a trust, the trust buys Treasury bonds paying 3%, the trust will have $300,000 of income. If the trust then distributes $500,000 to you, you will owe taxes on the $300,000.
Does that mean income always comes out of the trust first for tax purposes? For example, the $500K distribution could not target principle only? Thanks
Correct. When you distribute from a trust, it is always income first.

Example: You put $200,000 of cash in a trust. You buy $100,000 of bonds and $100,000 of stock. The bond earns a coupon payment of $10,000. You have automatic reinvestment turned on, so now you have $110,000 of bonds. Some time later, you sell $10,000 of stock for the same price you bought it at, and distribute that $10,000 to the beneficiary. Even though this is clearly "different" money, the distribution is considered to have come from the trust's income.
So undistributed income is taxed at the higher compressed tax rate while in the trust and then that income is taxed at the individual's tax rate once distributed?
As Lee explained, it is not taxed at the trust level if it is distributed in the same year. Maybe this will help:

Trust earns income X during the year.
Trust distributes funds Y during the same year.
If X is greater than Y, trust pays taxes on X-Y, and beneficiary pays taxes on Y.
If Y is greater than X, trust pays no taxes, and beneficiary pays taxes on X.
island
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Re: living trust necessary? recomended?

Post by island »

Hi Todd, Yes that's very helpful, thank u!
K-1's are they generated automatically by broker where funds are held like a 1099-Div?
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Lee_WSP
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Re: living trust necessary? recomended?

Post by Lee_WSP »

island wrote: Mon Jul 18, 2022 2:29 pm Hi Todd, Yes that's very helpful, thank u!
K-1's are they generated automatically by broker where funds are held like a 1099-Div?
No. The trustee must do so when filing the trust taxes.

Thus, why it's not a great idea to name anyone to be the trustee of your child's irrevocable trust. They need ought to be competent.
island
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Re: living trust necessary? recomended?

Post by island »

Lee_WSP wrote: Mon Jul 18, 2022 2:36 pm
island wrote: Mon Jul 18, 2022 2:29 pm Hi Todd, Yes that's very helpful, thank u!
K-1's are they generated automatically by broker where funds are held like a 1099-Div?
No. The trustee must do so when filing the trust taxes.

Thus, why it's not a great idea to name anyone to be the trustee of your child's irrevocable trust. They need ought to be competent.
Bummer, that's what I was afraid of. Spouse's 2nd parent passed earlier this year and finding out also not a great idea to name a family member as trustee just because they live the closest especially if they know nothing. We fear paperwork errors and IRS filing issues in our future.

Thanks again for your response. This thread and the replies have been so helpful
Electrum
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Re: living trust necessary? recomended?

Post by Electrum »

bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).

Revocable trusts make sense in some cases and in some states since probating a Will and dealing with the courts is difficult in some states such as California, or expensive in some states such as Delaware (where the court fee is 1.75% of the probate assets, not counting real estate). However, there's no need for them in most cases in most states. What state are you in?
We are also dealing with this question - the best way to leave an inheritance.

I gather from Bruce's post, above, that an independent co-trustee is required to effect such protections. Is this because the trust would need to limit distributions to an ascertainable standard, and an independent co-trustee is needed to verify that distributions qualify as such?

Thanks for the help.
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Re: living trust necessary? recomended?

Post by Lee_WSP »

Electrum wrote: Sat Sep 17, 2022 2:11 pm
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).

Revocable trusts make sense in some cases and in some states since probating a Will and dealing with the courts is difficult in some states such as California, or expensive in some states such as Delaware (where the court fee is 1.75% of the probate assets, not counting real estate). However, there's no need for them in most cases in most states. What state are you in?
We are also dealing with this question - the best way to leave an inheritance.

I gather from Bruce's post, above, that an independent co-trustee is required to effect such protections. Is this because the trust would need to limit distributions to an ascertainable standard, and an independent co-trustee is needed to verify that distributions qualify as such?

Thanks for the help.
If the beneficiary has unfettered control over the distributions, the assets are both includible in the estate and available to creditors as a seize-able asset. In addition to that, the beneficiary has the ability to just splurge away with no repercussions.

If you give the beneficiary the ability to withdraw up to the hems standard, there are some protections and the corpus isn’t includible in the estate. However, creditor protections and beneficiary waste protections are diminished.

If you give the beneficiary the ability to withdraw with a co trustee only, you give them a sense of participation and maintain all the protections.

It’s a matter of preference rather than a strict requirement.
Electrum
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Re: living trust necessary? recomended?

Post by Electrum »

Lee_WSP wrote: Sat Sep 17, 2022 3:24 pm
Electrum wrote: Sat Sep 17, 2022 2:11 pm
bsteiner wrote: Thu Jun 30, 2022 5:55 pm As Freddie and Lee pointed out, the far more important issue is providing for your children in trust rather than outright. If you provide for them outright at age 25, you'll be throwing a few million dollars into each of their estates for estate tax purposes, and exposing it to their creditors and spouses. You could instead allow each child to gain control of his/her trust at age 25, while still keeping their inheritances out of their estates and protecting their inheritances from their creditors and spouses. For this purpose, control means that they may become a trustee, they may remove and replace their co-trustee (provided the replacement trustee isn't a close relative or subordinate employee), and they have the power to appoint (give or leave) the trust assets to anyone they want (other than themselves or their estates or creditors).

Revocable trusts make sense in some cases and in some states since probating a Will and dealing with the courts is difficult in some states such as California, or expensive in some states such as Delaware (where the court fee is 1.75% of the probate assets, not counting real estate). However, there's no need for them in most cases in most states. What state are you in?
We are also dealing with this question - the best way to leave an inheritance.

I gather from Bruce's post, above, that an independent co-trustee is required to effect such protections. Is this because the trust would need to limit distributions to an ascertainable standard, and an independent co-trustee is needed to verify that distributions qualify as such?

Thanks for the help.
If the beneficiary has unfettered control over the distributions, the assets are both includible in the estate and available to creditors as a seize-able asset. In addition to that, the beneficiary has the ability to just splurge away with no repercussions.

If you give the beneficiary the ability to withdraw up to the hems standard, there are some protections and the corpus isn’t includible in the estate. However, creditor protections and beneficiary waste protections are diminished.

If you give the beneficiary the ability to withdraw with a co trustee only, you give them a sense of participation and maintain all the protections.

It’s a matter of preference rather than a strict requirement.
Thank you Lee, that was very helpful.
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