Managed Trusts

[robertf57]

I personally am not a fan of trusts for adult children as a way of controlling from the grave. Too many unforeseen issues that might require a lump sum may arise and the fees for managing and the taxes on the trust are too high.

If you have someone who is a spendthrift so that you simply don't think they can handle the money themselves, then perhaps a SPIA might be a better choice? They will have an income for life and won't be able to spend a large sum at once, it will be protected from wives and lovers and the annuity does not pay taxes. Hopefully, when you die many years from now, the interest rates will be better!

[meierlde]

Quote:

Originally Posted by robertf57 I personally am not a fan of trusts for adult children as a way of controlling from the grave. Too many unforeseen issues that might require a lump sum may arise and the fees for managing and the taxes on the trust are too high. If you have someone who is a spendthrift so that you simply don't think they can handle the money themselves, then perhaps a SPIA might be a better choice? They will have an income for life and won't be able to spend a large sum at once, it will be protected from wives and lovers and the annuity does not pay taxes. Hopefully, when you die many years from now, the interest rates will be better!

The trust instrument could provide for the trustee to be able to pay principal out in case of medical bills and education, as well as disablity. This is stuff a good will attorney would know how to phrase. If you pay out all income then the trust tax rates don't apply, all be it that the recipient has to deal with a K-1, and may need to move to a 1040 from simpler forms. You just need to decide what kinds of circumstances payments from principal are allowed.

[Brat]

Pick a tax efficient mutual fund. Under current law the growth in the value of the underlying assets are not taxed.

[hesperus]

Quote:

Originally Posted by robertf57 I personally am not a fan of trusts for adult children as a way of controlling from the grave. Too many unforeseen issues that might require a lump sum may arise and the fees for managing and the taxes on the trust are too high.

As a beneficiary of a sizeable generation skipping trust, I couldn't agree more. My parents set these up many years ago for myself and my sibling. The thought was at the time that we would all have children, and these investments would eventually go to them. Well, my spouse and I did not have children, and will not (55 now). However, my sibling does, and now it's set up such that the GST setup in my name (that I am trustee of) are designated to go to my sibling's children when I die. In other words, over $1M will leave our family and go to theirs when I pass, all because we don't have children. What makes it even more difficult is that my sibling and I are not on good terms because of other trust dealings after the death of our parents. I was initially appointed sole trustee of all the trusts since I was better with money, but that created a growing resentment from my sibling. I finally decided to relinquish my trustee role on my sibling's GST trust and be done with dealing with them. And it has been a huge relief to do so. It was a responsibility that tied me to a difficult relationship that I wanted no part of. All I can say is that in my experience, these trusts can open up all sorts of issues after the grantors have passed. It would have been a lot less problemmatic to have the estate split without continuing trusts.

[sheehs1]

That is sad hesperus! I am sure your parents did not think about the fact that you may not have children. Yes there can be unforeseen consequences.

After having managed my mother's trust for 8 years for the benefit of my Dad with myself and other siblings being remainder beneficiaries, I came to a similar conclusion as yours.
Trust are not necessarily tax efficient nor with Prudent Man Statutes required of the Trustee are they invested as perhaps some of us would invest.

But the niggle concern I have is my daughter has no interest in learning about investing or handling money and I know she would simply turn it over to her husband to handle. She is very intimated by it saying often, "Mom I can't do what you do…it is confusing". Well…I probably thought that too when I was in my 20's.

The likelihood of my son-in-law using it to help his own parents in their later years is extremely high. I am always hearing that "they" don't have what I do.

Other than a trust I can not think of another way to ensure it is for "her". The other thing I struggle with is "if it makes their lives easier" what do I care? I'm gone at that point. But I do care.

[mpeirce]

Our plan is to simply turn over whatever is left to the our kids when we're both gone.

If they want do something that I think is stupid with the money, well, I won't be around to get upset about it.

We did our best raising them and now they are adults.

Of course, I'm hoping they don't get at this for another few decades, but you never know.

[robertf57]

Quote:

Originally Posted by sheehs1 That is sad hesperus! I am sure your parents did not think about the fact that you may not have children. Yes there can be unforeseen consequences. ... But the niggle concern I have is my daughter has no interest in learning about investing or handling money and I know she would simply turn it over to her husband to handle. She is very intimated by it saying often, "Mom I can't do what you do…it is confusing". Well…I probably thought that too when I was in my 20's. The likelihood of my son-in-law using it to help his own parents in their later years is extremely high. I am always hearing that "they" don't have what I do. Other than a trust I can not think of another way to ensure it is for "her". The other thing I struggle with is "if it makes their lives easier" what do I care? I'm gone at that point. But I do care.

Respectfully, I think this is a bit of magical thinking. If they are together, you can't really keep it for her. It will be used directly or by displacing other funds in their houshold to support the parents if they do so.

I just think trusts for adult children pose more problems than they solve. Just my opinion and worth every bit of what you paid for it

[Taxman59]

I have worked for a family that has trusts going back to the Great Depression (the trusts, not me!). The success or failure of the trusts is rooted in two things.
1 - A well thought out plan that has been discussed with the beneficiaries;
2 - A strong Trustee who understands the plan and communicates with the beneficiaries (both the current beneficiaries and the remaindermen).

We have trusts that must pay out income (and no principal), some can pay out income or can accumulate it for future years, but no principal; some must pay income and can pay out principal and some can pay out income and principal based on the Trustee's discretion. We have had horrific failures where one child (in their 40' and 50's) threw temper tantrums to get more money; divorce lawyers assumed that if there is one trust, there must be more trusts hidden so give your ex spouse the trust; and the list goes on. There are more success stories where the managed trust protected the beneficiaries from themselves, and they were better able to plan their lives knowing the trust was there, but not always easy to get to.

Some trust documents are nothing more that Dad (or Mom) controlling the kids from the grave, and those will lead to a serious failure, but if the trustee is given some flexibility to react to future, unforeseen circumstances, then the use of trusts is warranted.

Just my two cents.

[sheehs1]

Quote:

Originally Posted by robertf57 Respectfully, I think this is a bit of magical thinking. If they are together, you can't really keep it for her. It will be used directly or by displacing other funds in their houshold to support the parents if they do so. I just think trusts for adult children pose more problems than they solve. Just my opinion and worth every bit of what you paid for it

Not sure I agree with this Robertf57. I can keep "it" for her, in a trust... with instructions to only spin off the generated income and allowing principle payments at certain points along the way. Trusts do work. But they are not without their headaches and costs.

[pb4uski]

I think robert57 was only saying that once the funds are paid to the beneficiary that it is likely that they will be used in a way different from what the grantor expects, directly or indirectly, because of subtle pressure on the beneficiary from the beneficiaries husband and in-laws.

[sheehs1]

pb4uski and robert57….perhaps I replied too quickly or incompletely. I understand any "income" paid out will perhaps be for the benefit of both and that is ok with me.

The only thing I was trying to say is that a trust is the only vehicle I know of that would protect the initial principle of the trust for the beneficiaries, whoever they may be.

It isn't meant to "control from the grave" or anything. Rather it is recognizing that stuff in life happens and I have a daughter that "runs" from this. She is good with money in that it doesn't flow thru her fingers and she is ok with a checkbook. She would be vastly overwhelmed with an inheritance and she would turn it over to her husband. Already knowing this makes it difficult to leave it to her outright…at least for now it does.

[modhatter]

Quote:

Originally Posted by sheehs1 pb4uski and robert57….perhaps I replied too quickly or incompletely. I understand any "income" paid out will perhaps be for the benefit of both and that is ok with me. The only thing I was trying to say is that a trust is the only vehicle I know of that would protect the initial principle of the trust for the beneficiaries, whoever they may be. It isn't meant to "control from the grave" or anything. Rather it is recognizing that stuff in life happens and I have a daughter that "runs" from this. She is good with money in that it doesn't flow thru her fingers and she is ok with a checkbook. She would be vastly overwhelmed with an inheritance and she would turn it over to her husband. Already knowing this makes it difficult to leave it to her outright…at least for now it does.

I think the biggest protection a trust offers is from the beneficiaries spouse or any future gold digger that may get their hands on them, whether divorced or not. Secondly from law suits, and thirdly from a spend thrift beneficiary. In a case as you mention, I would specify that any money coming from the trust is to be placed in an account (such a sweep account) that is in the sole name or your daughter, so you don't have the co-mingling problem to worry about.

[iac1003]

In the case of my son who has a history of substance abuse I can't think of any other way to leave part of our estate to him except in a trust. And the trustee and secondary trustee are long time friends of mine who work in the mental health and substance abuse field.

I think this is the best we can do under the circumstances. If anyone has other ideas I am open to them.

Every situation is different.


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[sheehs1]

Quote:

Originally Posted by modhatter I think the biggest protection a trust offers is from the beneficiaries spouse or any future gold digger that may get their hands on them, whether divorced or not. Secondly from law suits, and thirdly from a spend thrift beneficiary. In a case as you mention, I would specify that any money coming from the trust is to be placed in an account (such a sweep account) that is in the sole name or your daughter, so you don't have the co-mingling problem to worry about.

Exactly modhatter!

I have really got to get going on this and rewrite/update my will and trust document. I think I did them back in 2003!

[jerome len]

I've set up trusts for my kids that last their lifetime but, hopefully, don't give them enough so that they aren't motivated to do well themselves. Our trusts are designed to pay out 3% a year throughout their lifetime and when they pass the trust will be divided between their kids or given to a named charity. And, since they could have an emergency, they can, one time, request 20% of the trust and get it in cash. Vanguard manages the trusts, I put cash, as close as I can up to the gift limit, each year. DW and I live modestly, started fairly poor in life, and our goal is to make our kids secure but not wealthy. The trusts will be large enough for payments on a modest home and put food on the table for them. ......that's it. I've had a good lawyer and CPA, worked with Vanguard and feel fairly good about my plan.

[ChiliPepr]

I do not have kids, but I do have a SO. When I pass, a percentage of my estate goes into a trust that can be used for educational expenses for my nieces and nephews. The rest goes to my SO.

Personally, I think any restrictions to an adult child is controlling from the grave. What if I said "The rest goes to a trust with income going to my SO, unless she marries again, then she gets nothing." There is no problem doing that, but you should be able to stand in front of your kids now and tell them. Say, "I do not trust your husband", "You are a drug addict", "You cannot handle your money". and I am going to only let you have it in pieces. I believe there is nothing worse than to hear what your parents thought after they are gone without the ability to hear their explanation.

I have a cousin that was written out of his parents will and did not know about it until after they passed. He has still not gotten over it (and he makes plenty of money and has no need of the money, but was crushed to know that for some reason he was written out.)

[Dash man]

Quote:

Originally Posted by jerome len I've set up trusts for my kids that last their lifetime but, hopefully, don't give them enough so that they aren't motivated to do well themselves. Our trusts are designed to pay out 3% a year throughout their lifetime and when they pass the trust will be divided between their kids or given to a named charity. And, since they could have an emergency, they can, one time, request 20% of the trust and get it in cash. Vanguard manages the trusts, I put cash, as close as I can up to the gift limit, each year. DW and I live modestly, started fairly poor in life, and our goal is to make our kids secure but not wealthy. The trusts will be large enough for payments on a modest home and put food on the table for them. ......that's it. I've had a good lawyer and CPA, worked with Vanguard and feel fairly good about my plan.

How does the one time 20% distribution work with more than one child? Is it 20% shared among all of them or apiece? What if they want the lump sum at different times?


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[Independent]

Quote:

Originally Posted by iac1003 In the case of my son who has a history of substance abuse I can't think of any other way to leave part of our estate to him except in a trust. And the trustee and secondary trustee are long time friends of mine who work in the mental health and substance abuse field. I think this is the best we can do under the circumstances. If anyone has other ideas I am open to them. Every situation is different.

Right. I've got three kids and one is a very tricky situation. I don't know how to do what's best for that one, and at the same time be reasonably "fair" between to the other two.

[iac1003]

Quote:

Originally Posted by ChiliPepr I do not have kids, but I do have a SO. When I pass, a percentage of my estate goes into a trust that can be used for educational expenses for my nieces and nephews. The rest goes to my SO. Personally, I think any restrictions to an adult child is controlling from the grave. What if I said "The rest goes to a trust with income going to my SO, unless she marries again, then she gets nothing." There is no problem doing that, but you should be able to stand in front of your kids now and tell them. Say, "I do not trust your husband", "You are a drug addict", "You cannot handle your money". and I am going to only let you have it in pieces. I believe there is nothing worse than to hear what your parents thought after they are gone without the ability to hear their explanation. I have a cousin that was written out of his parents will and did not know about it until after they passed. He has still not gotten over it (and he makes plenty of money and has no need of the money, but was crushed to know that for some reason he was written out.)

My son knows his money will be in a trust and who the trustees are. And he acknowledges his poor choices due to his addiction lead to his being unable to handle a large sum of money at this time. If he develops into the person he hopes (and so do I) he can be, then DH and I will rethink the issue of the trust. Until then I rest easy knowing I set up something that might provide for him not to be homeless - which he has been in the past - after I am gone. It tears you up inside as a parent. I am glad most people don't have to experience it.


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[Texan1636]

Quote:

Originally Posted by prudent_one Just to play devil's advocate for a second, if I am the son who can handle money, why am I being punished just because my brother can't handle his? I might want to start a business, pay my kids tuition, need to pay for massive medical bills, and I can't have it because of my brother's ineptitude? Let me have access to my share, and then explain to him why he's on a decades-long allowance. My point is only that it's a conversation everyone ought to be prepared for. I believe that if people are going to receive an inheritance, and they are of sound mind, let them have it (with the appropriate safeguards against a spouse getting it). And if they blow it, so be it.

There definitely are trade-offs here. If a child is very sensible about money and you just give him/her the assets outright, there's really not an effective way to make sure that their ex-spouse doesn't get a significant chunk of the assets in a divorce. Your hard-earned assets may end up supporting your ex-son-in-law or ex-daughter-in-law. That's a risk I don't want to take. Even if you set up a spendthrift trust but provide for mandatory distributions of income (or a portion of the income), courts in many states will view the right to mandatory distributions as an asset of the child and will ignore the spendthrift provision to enforce alimony or other spousal support obligations out of the mandatory trust distributions.

We have even gone beyond the spendthrift provision by providing for complete "discretion" of the trustee as to when and if to make distributions, with guidance that the trust is intended to not pay distributions in amounts that would result in depletion of the trust funds over our child's lifetime, absent exigent circumstances. As I understand it, so far courts haven't cracked into these kinds of trusts or their distributions for the benefit of ex-spouses because the child is seen as not having a property interest (due to the complete discretionary nature). The child gets protection against a trustee that is too miserly by putting a provision in the trust instrument giving the child the power to switch out the trustee to a new more reasonable trustee not controlled by the child.

I agree with some of the other posters that problems may arise if you attempt to tie up the assets beyond your child's life, as you don't know whether you will have surviving grandchildren or what your child would like to do for any such grandchldren. Our child's trust provides that our daughter has a "limited power of appointment" at her death, meaning that she can give the money to anyone she wants (in trust or outright) upon her death, EXCEPT for a creditor in satisfaction of a debt. (If we didn't include this limitation in the power she holds at death, then she would be treated having property at death that creditors could latch onto).