How to handle money left to heirs...

[OldShooter]

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Originally Posted by 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.

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]

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Originally Posted by 45th Birthday 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]

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Originally Posted by bingybear 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]

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Originally Posted by 45th Birthday 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]

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Originally Posted by Jeffman52 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]

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Originally Posted by Jeffman52 ... 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.

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Originally Posted by bingybear 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]

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Originally Posted by OldShooter 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]

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Originally Posted by RenoJay +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.

[OldShooter]

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Originally Posted by pj.mask 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

In most trusts, at least the ones my wife's staff was involved with, the trustee is given a fair amount of discretion. This is important because circumstances change and needs for money can change too. If you Google "trust HEMS standard" you will get a lot of stuff to read.

She and the bank got sued several times (four IIRC) during her career, but IIRC it was mostly cases where the beneficiaries were trying to break the trust by claiming that the grantor was not competent to sign, undue influence by someone, etc. Or sometimes a beneficiary wanted money from the trust that violated the rules set down by the grantor. The bank won 100% of the cases and, as you point out, the trust paid the legal bills.

[rodi]

We have minor age children (high schoolers). We set it so that 1/3 of their inheritance is issued at age 25, another 3rd at age 30, and the balance at age 35... Prior to 25 the funds are used for college, and room/board. A trusted family member is in charge of both raising them (guardian) and doling out the money.

We may change it later... but neither of us wanted them getting a lump sum at a very young age... At ages 14 and 16.... we have time to redo the trust if nothing happens to us and they grow into responsible adults.... but for now, we've got a trust set up for our current situation.

[OldShooter]

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Originally Posted by rodi ... We may change it later. ...

Yup. That's the nature of estate plans. Things change, so every few years you have to write another check to the attorney.

Another small thing: Our attorney is quite a bit younger than we are, so odds are that she will still be around to help explain and manage the estate when the time comes.

[Car-Guy]

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Originally Posted by OldShooter Another small thing: Our attorney is quite a bit younger than we are, so odds are that she will still be around to help explain and manage the estate when the time comes.

Actually that can be a pretty big thing. Many in our family used the same estate planning attorney back in the 80's and 90's. He was still practicing when the DW's mom and dad passed away and the probate process was super easy. However, when my mom and dad passed on, the attorney had retired (actually he had passed away too) It was much more of a time consuming and PIA to deal with the probate process with different lawyers that didn't know us and who didn't write up the original wills. Not sure how to avoid that since even lawyers die and or retire at some point. But having gone thru the process with both the original lawyer and a new lawyer, it is no contest. (No pun intended)

[aja8888]

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Originally Posted by Blue Collar Guy 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.

It's all about one's perceived definition of "poor".

[Blue Collar Guy]

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Originally Posted by rodi We have minor age children (high schoolers). We set it so that 1/3 of their inheritance is issued at age 25, another 3rd at age 30, and the balance at age 35... Prior to 25 the funds are used for college, and room/board. A trusted family member is in charge of both raising them (guardian) and doling out the money. We may change it later... but neither of us wanted them getting a lump sum at a very young age... At ages 14 and 16.... we have time to redo the trust if nothing happens to us and they grow into responsible adults.... but for now, we've got a trust set up for our current situation.

In a case like this, how does the guardian invest the money until the distributions happen?

[rodi]

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Originally Posted by Blue Collar Guy In a case like this, how does the guardian invest the money until the distributions happen?

Good question. I've got a lazy portfolio - and written notes (intended for DH) on how to rebalance every year... But this relative uses Schwab's managed portfolio service... and so it would likely be dumped into that. The relative also handled elderly relatives' investments - and that's how it was done....

I'll be dead... so it will be up to the relative/guardian/trustee to manage it for the beneficiaries. Oh... and there are two back up guardian/trustee folks lined up also.

[RenoJay]

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Originally Posted by Blue Collar Guy 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.

I thought we were much more working-class than we were because my parents lived way below their means. But thanks for such a d-bag comment.

[Blue Collar Guy]

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Originally Posted by RenoJay I thought we were much more working-class than we were because my parents lived way below their means. But thanks for such a d-bag comment.

Your very welcome, anytime.

[rodi]

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Originally Posted by RenoJay I thought we were much more working-class than we were because my parents lived way below their means. But thanks for such a d-bag comment.

This was my upbringing also. I was convinced we were poor because money was carefully budgeted and there were few splurges. Hand me downs were the rule and fashionable clothes were self purchased with babysitting income. Later I learned my parents didn't like debt and we're aggressive savers.