How to handle money left to heirs...

[splitwdw]

Have fun. Spend it all. Leave them $0.

You made me laugh, thanks!

 

[ERD50]

As someone who has firsthand experience - if you know you can't trust your kid - use a trust and set up a 3rd party to administer.

Real story: mid 20's male, somewhat ongoing recreational drug use. Left money in a trust by family member. Wanted money to blow - they eventually started a lawsuit and family member didn't want all of it to go to attorney fees so folded. Didn't know they already did 33% contingency fee. Got the money, bought nice top of the line SUV, motorcycle, etc. died a few months later on the new motorcycle. All he had left for his kid was the SUV. They had to sell it at a big loss to cover expenses.

Of course treat everyone equal but all these 'parenting from the grave people' don't have the experience to relate.

Daughter was about 9 months old.

I'm not following your story.

What kind of trust was this, who was the Trustee? Who started the lawsuit (was it the mid-20 YO, to get more money faster?)? Didn't the trust stipulate the payouts? Typically, a "Spendthrift Trust" spells all this out, there wouldn't be any wiggle room to sue over.

The 9 month old was the daughter of the mid-20 YO?

I think a properly written, simple Spendthrift Trust would have handled all this easily. As you mentioned, you can name a bank as the Trustee to avoid any pressure on family members to make "needed" expenditures beyond the income the trust generates.

-ERD50

 

[MRG]

By me. Because I lived through it, as a beneficiary and trustee of a multimillion dollar inheritance. The money may be protected from problems, but the beneficiaries aren't. It ain't pretty sometimes.

I watched a person's trust go poof. It should not have ever happened but!

It happens and it's ugly.

 

[Bamaman]

The age of the recipient of the trust is a great factor.

When you have a kid that is highly unreliable, a Special Needs Trust needs to be in place. The best thing is if they run up huge debts and get sued.or have to file bankruptcy, the trust cannot be touched.

You might have the trust pay some of their basic needs like utilities, taxes, car insurance, and maybe a car every 8 years. You can also call the shots to what is.reasonable. You don't allow withdrawals that allow them to sleep to noon, let their druggie friends steal from them, and allow them to be complete bums.

 

[Closet_Gamer]

Our kids are younger (and we're still young too!) so hopefully all this is irrelevant.

That said, we staged the money out over the years from 25 to 40 (before 25 it funds college but not much else). This isn't about control -- it is about not making them lazy (if someone handed me $1m when I was 25, I wouldn't have been an idiot with it, but it sure would have hampered my motivation).

We actually spent more time on the question of "how much is too much?" God willing, we'll be in a position where we'll have a nice, shiny nest egg entering retirement. If we get hit by a bus, we don't think our kids should be made rich for life. Lots of needy people out there and, to the above point, being handed enough money to live your entire life w/o work can really warp someone. So we created hard $$$ caps (adjusted for inflation) and then figured out where else the money should go.

 

[Blue Collar Guy]

.... If we get hit by a bus, we don't think our kids should be made rich for life.

If you get hit by a bus in my city, your heirs will be rich for 2 lifetimes

 

[Blue Collar Guy]

.... If we get hit by a bus, we don't think our kids should be made rich for life.

If you get hit by a bus in my city, your heirs will be rich for 2 lifetimes
https://www.gairgair.com/new-york-bus-accident-lawyer.html

 

[Jerry1]

Our situation is very similar. Unfortunately, the less responsible child is also the only one with children (our grand children). DW want's badly to set it up so that DGK's get college money. I tell DW then she better out live me. That's what RIP means. When I'm gone, I don't care what happens. Each daughter gets 50%. Hopefully we'll live long enough to help the DGK's with college, but if not, they'll have to find their way. Other's have succeeded with less than what they have right now.

 

[45th Birthday]

Trusts don't have to pay high taxes if you distribute all income. Keeping income in the trust gets painful quickly. It's not really what they are invested in, but keeping he earnings in the trust. Now when you distribute $ you create taxes for the recipient. However this rate will likely be much less than in the trust

Yes, but distributing the income would defeat the purpose of keeping money away from them until they made it on their own for awhile.

 

[ERD50]

Yes, but distributing the income would defeat the purpose of keeping money away from them until they made it on their own for awhile.

But the income is likely only ~ 3%. And I think most trust departments charge ~ 1%, half taken from principal, half from income, so ~ 2.5%? Big difference between that and the whole enchilada, or some large % at XX ages.

-ERD50

 

[45th Birthday]

But the income is likely only ~ 3%. And I think most trust departments charge ~ 1%, half taken from principal, half from income, so ~ 2.5%? Big difference between that and the whole enchilada, or some large % at XX ages.

-ERD50

In my case, the trust wouldn't be paying 1%. And, the income would be many times their current income. Would be life changing, job quitting, etc. amounts. That's why they won't be getting it.

 

[pj.mask]

I'm not following your story.

What kind of trust was this, who was the Trustee? Who started the lawsuit (was it the mid-20 YO, to get more money faster?)? Didn't the trust stipulate the payouts? Typically, a "Spendthrift Trust" spells all this out, there wouldn't be any wiggle room to sue over.

The 9 month old was the daughter of the mid-20 YO?

I think a properly written, simple Spendthrift Trust would have handled all this easily. As you mentioned, you can name a bank as the Trustee to avoid any pressure on family members to make "needed" expenditures beyond the income the trust generates.

-ERD50

Don't know kind of trust - but I believe it left funding at discretion of trustee to deal with countless uncertainties.

Beneficiary started lawsuit. Don't know if payouts were stipulated. Yes, daughter of beneficiary.

Point wasn't about the trust but the fact that without one and access to lots of money, some people make life ending bad decisions. That the trust worked fine for 2 years, 3 months after they got the cash.. dead.

 

[Car-Guy]

Does anyone know if I can set up something like the following:

After we pass, money goes into a Vanguard account. Automatically pay a certain $$ amount out to them 50/50 each month.

Check with Schwab. They were setting up a specialize trust section earlier this year to allow customers to setup customized trust accounts. (for a fee I'm sure) I'm not sure if it's up and running yet but my broker told me about it a few months ago when I was thinking of setting up a trust.

 

[OldShooter]

Just a comment: The plural of "anecdote" is not "data." On the whole, trusts work pretty well. When they don't it is often the fault of the grantor and his/her attorney. I would not avoid trusts just because a few people trot out horror stories.

This stuff does take specialist attorneys, though. If a lot of money, add a specialist CPA. More than once my wife (SVP Trusts & Estates) would come home railing about expensive and uncorrectable errors made by non-specialist attorneys and even a few by attorneys who held themselves out as specialists.

 

[pj.mask]

OldShooter - if my message came off as me being anti trust forgive me for not being clear. I think if you know you need one do it (and do it right) because the can be very real risks to giving people large sums of money when they are not emotionally mature enough for it.

 

[OldShooter]

OldShooter - if my message came off as me being anti trust forgive me for not being clear. I think if you know you need one do it (and do it right) because the can be very real risks to giving people large sums of money when they are not emotionally mature enough for it.

Oh, no worries. I wasn't thinking of you particularly.

I was just observing the fact that good and interesting stories crowd out the dull and uninteresting, so can lead one to erroneous conclusions.

It's the same reason that we see lots of crowing by people who have made some money with stock trading. The winners boast, the losers don't. So from the posts you'd think that stock trading is a winning strategy, but unbiased statistics (aka "data") say the opposite.

 

[bingybear]

Yes, but distributing the income would defeat the purpose of keeping money away from them until they made it on their own for awhile.

It really depends on how you set it up. If you set it up using a large IRA that is at the point of distribution at 8% or so, then you really have a problem. Large amounts of income that you either distribute or pay tax on.
However, if you fund with after tax $ and invest in low distribution investments or ones that have high distributions in the years you need, then it should be golden. So you fund with cash and buy VTI or similar, distributions about 2%. Say 1% goes to trust admin, investment admin and compliance and tax filing for the trust.
The second 1% could be left in the trust and taxed, or could be used in other ways. If you really want to avoid the tax on this 1% and don't want the kids getting anything yet.. donate it for something good or give it to help someone else. In the scheme of things you have a tax on 1% or less of the value of the trust.
Using after tax $ and paying the tax is minimal and distribution does not defeat the purpose as the trust grow mostly.

Putting a tax time bomb in a trust and not distributing can suck the assets into some tax coffer.

Like planning for retirement... we should be somewhat tax conscience with estate planning.

 

[Jeffman52]

My two cents.

Money is a curse to those that are not ready for it. Look at lottery winners, sports stars, etc etc, and see how many of them are now broke and bankrupt.

Set up a trust, but I'm not sure you let them know what the payout is or what the timing is. That way they continue to be motivated to get ahead on their own.

Someone else said it above, if I had gotten a windfall early in life, I would have been stupid and would be broke now. A fool and his money are some party!!!

 

[45th Birthday]

It really depends on how you set it up. If you set it up using a large IRA that is at the point of distribution at 8% or so, then you really have a problem. Large amounts of income that you either distribute or pay tax on.
However, if you fund with after tax $ and invest in low distribution investments or ones that have high distributions in the years you need, then it should be golden. So you fund with cash and buy VTI or similar, distributions about 2%. Say 1% goes to trust admin, investment admin and compliance and tax filing for the trust.
The second 1% could be left in the trust and taxed, or could be used in other ways. If you really want to avoid the tax on this 1% and don't want the kids getting anything yet.. donate it for something good or give it to help someone else. In the scheme of things you have a tax on 1% or less of the value of the trust.
Using after tax $ and paying the tax is minimal and distribution does not defeat the purpose as the trust grow mostly.

Putting a tax time bomb in a trust and not distributing can suck the assets into some tax coffer.

Like planning for retirement... we should be somewhat tax conscience with estate planning.

The vast majority of the money is after-tax. All IRA money and then some will be used for charitable gifts, which take a chunk off the top.

 

[bingybear]

The vast majority of the money is after-tax. All IRA money and then some will be used for charitable gifts, which take a chunk off the top.

Then for you why would the taxes or distribution a little be an issue if you have the investments set up correctly?

 

[RenoJay]

My two cents.
Set up a trust, but I'm not sure you let them know what the payout is or what the timing is. That way they continue to be motivated to get ahead on their own.

+1. When I was young, I was seriously convinced my family was poor. My parents never let on they were millionaires. In college, I fell in with a spend-as-you-earn crowd of young entrepreneurs. I bought a Porsche, sold it six months later at a huge loss. About a decade later, I started reading finance books, got my act together, and independently made a lot of money and became much more conservative and cautious with it, as did my sibling. Not so mysteriously, it was at that point that my parents chose to do the big reveal that we were in line for a nice inheritance. They were clearly waiting til they saw signs of maturity and self-sufficiency before dropping any news that could squash motivation.

 

[OldShooter]

... Set up a trust, but I'm not sure you let them know what the payout is or what the timing is. That way they continue to be motivated to get ahead on their own. ...

There is fairly standard language for this, instructions to the trustee from the grantor. My trust expert wife says it is called the "HEMS Standard." The trustee is given discretion to disburse as he/she sees fit, for "health, education, maintenance and support." So it is not necessary to have any fixed payouts unless the grantor so chooses.

Then for you why would the taxes or distribution a little be an issue if you have the investments set up correctly?

I don't remember details but when we did our estate plan with trusts for the kids there were some serious tax considerations related to money in IRAs vs money in Roths. IIRC the executor will have to cash the IRAs and pay the taxes before the money can go into the trusts. Had we given the IRAs directly to the kids the tax payments would be due as they drew money. We felt that the pain of this was worth being able to protect their inheritances via the trusts. But don't trust SGOTI on that -- a trusts & estates attorney will know.

 

[kcowan]

For us, it is 50% to charities and 25% to each of 2 kids. The 5 GCs will have already gotten $50k each for college (I hope!).

 

[pj.mask]

There is fairly standard language for this, instructions to the trustee from the grantor. My trust expert wife says it is called the "HEMS Standard." The trustee is given discretion to disburse as he/she sees fit, for "health, education, maintenance and support."

Doesn't this get back to allowing interpretation and possibly more difficult/costly to defend in court vs set payout schedule? The beneficiary can sue the trust and defense is paid for out of the trust

 

[Blue Collar Guy]

+1. When I was young, I was seriously convinced my family was poor. My parents never let on they were millionaires.

How do people keep these things a secret? Were you living in a trailer park? Were your parents wringing their hands when the electric bill came? Poor people feed their kids first, then grab the pan and a slice of white bread and wipe the pan clean and eat the bread. When college came and you filled out the financial aid forms did they forge their assets?

Then to add insult to injury you bought a Porsche and thought your parents were poor? I see you didnt think of their well being very much, I hope they enjoy their money and leave you zero.
That might be their next secret surprise.