Setting up a trust

[prudent_one]

Yeah, if you want to use Vanguard you will need to use the language they require.

I'm sure they would issue monthly checks if that is what you want - but you'd have to ask if they compute the amount based on your desired formula.

[meierlde]

Quote:

Originally Posted by MooreBonds Just to follow-up to my earlier comment about trust tax rates...make sure you are aware of the penalty for keeping income inside the trust and not distributing it to the beneficiaries: Federal tax rate for estates and trusts: 15% $0-$2,500 25% $2,500-$5,800 28% $5,800 - $8,900 33% $8,900 - $12,150 39.6% $12,150 and higher Those are insanely high rates for just a small amount of income!

Note that if you distribute the income to the beneficiaries, it goes on a schedule k-1 and is taxed at the recipients tax rate. So the rates are really on retained income in a trust, not on distributions to the beneficiary. Might make sense to say that all current income be distributed for tax rate purposes. Further up to 12,150 the 15% rate on cap gains and qualified dividends is maintained, above this it is 20%. So the trustee should be instructed to invest in tax free munis and dividend paying equities.

[prudent_one]

Quote:

Originally Posted by meierlde Note that if you distribute the income to the beneficiaries, it goes on a schedule k-1 and is taxed at the recipients tax rate. So the rates are really on retained income in a trust, not on distributions to the beneficiary. Might make sense to say that all current income be distributed for tax rate purposes.

Agree with this - income should be distributed to avoid very high taxes if retained in the trust.

[utrecht]

When you say income should be distributed to beneficiaries and not kept within the trust to avoid high taxes, what income are you talking about? Dividends?

[meierlde]

Quote:

Originally Posted by utrecht When you say income should be distributed to beneficiaries and not kept within the trust to avoid high taxes, what income are you talking about? Dividends?

Assuming the trust has income that lands on the 1041, then this income is distributed to the beneficiaries, and is then deducted from the income used in figuring the tax to the trust. It can be whatever income a trust may have, dividends, interest, rental returns, capital gains, royalties etc.

[gcgang]

Quote:

Originally Posted by prudent_one FWIW, the trust I am a trustee of is handled by a local "wealth management" firm... The firm charges 0.8% on $2m for doing almost nothing besides having two in-person meetings a year with me and the beneficiaries to review glossy performance reports and ramble on about what they expect the markets to do. %.

Lol. I can relate to the "ramble on". They probably send you nice Xmas and birthday cards, too.


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[prudent_one]

Quote:

Originally Posted by gcgang Lol. I can relate to the "ramble on". They probably send you nice Xmas and birthday cards, too.

The beneficiaries may get them but I don't. The guy knew from the start he wasn't going to get control of my own personal funds after the first meeting with the grantor and the beneficiaries. All the beneficiaries have their money with him also (he cut them a "sweet deal" - they only pay the same 0.8% even though according to the standard rates, they should be paying 1.5%).

At the first meeting the guy went through most of his pitch designed to impress the grantor and beneficiaries - all of whom are salt-of-the-earth types with no investing experience - with his wizard-like knowledge of the markets and investing. I stopped him to ask "Would you be acting as a fiduciary or in an advisory role?"

That clearly caught him off-guard and he came back with "What do YOU do for a living, prudent_one?" It was snide and I could tell he wanted to take it back. So after that little exchange he never made one attempt to get me to sign up with him.

[Cat-tirement]

Similar to the OP, we are also in the process of setting up wills and a trust. However, in our case we don't have any children to provide for. Instead, in the event of both of our deaths, we are considering approaches to spreading out our assets (a large portion of which are tax deferred) among our siblings. Some of them have histories of bad money management, so we are looking for methods other than lump sum distributions. One thought was to have our trust buy something like a SPIA for each recipient. (I'm not sure what the tax implications of that would be.) Based on what others have said here, I may look into using Vanguard as our successor trustee, and have them make the periodic payments. In any case, with the recipients being siblings rather than our kids, does that make any difference as far as applicable or preferred options?

[mpeirce]

> One thought was to have our trust buy something like a SPIA for each recipient.

People are industrious. If they have an income stream, there are people out there who will buy it for a lump sum. I'm not sure how you'd protect from that. Heck, even a few state governments have done this to get at the tobacco settlements.

Tobacco-settlement bonds | The Economist

My view is that you can't control people from beyond. Maybe you can dole it out in a few lump sums over a few years, but if someone really wants to squander money, they will.

[utrecht]

I called Vanguard and the guy on the phone was incredibly knowledgeable and I've decided to use them as the trustee. The fees, just like the expense ratios on Vanguard funds are lower than the industry norms. Having said that, on a dollar basis, its still pretty expensive but for this situation I think its worth it.

They will contact the other companies where I have money invested, have it transferred to Vanguard, invest the money in an age appropriate mix of index and other Vanguard funds, take care of all taxes and distribute the money any way my will mandates. In my case I'm thinking of having them send my son a check for 1/12th of 3.0% of the balance every month.

[rodi]

This tax information about trusts is very interesting.

That said - I still have serious issues about my sons getting huge windfalls at an age they might not be able to handle it. I've seen it happen where someone gets a large inheritance at age 18 or 20, and blows it all - often with permanent damage to self (drugs, etc.). I think I'd rather have my kids take the tax hit.

We'll be reassessing if we manage to survive till their launched in life. Basically, we'll look at changing things in 10-15 years if nothing catastrophic happens to either of us.

I also should note - the IRAs/401ks have spouse as primary beneficiary... the trust is secondary - so that only kicks in if we BOTH die.

[MooreBonds]

Quote:

Originally Posted by utrecht I called Vanguard and the guy on the phone was incredibly knowledgeable and I've decided to use them as the trustee. The fees, just like the expense ratios on Vanguard funds are lower than the industry norms. Having said that, on a dollar basis, its still pretty expensive but for this situation I think its worth it. They will contact the other companies where I have money invested, have it transferred to Vanguard, invest the money in an age appropriate mix of index and other Vanguard funds, take care of all taxes and distribute the money any way my will mandates. In my case I'm thinking of having them send my son a check for 1/12th of 3.0% of the balance every month.

There are no "wrong" ways to do what you wish....but just a suggestion: because you could very well have a 10%-12%+ distributions in one year between dividends and net realized capital gains distributions, I'd hate to see 40% of that go to Federal/State gov'ts instead of your son and taxed at his (presumably) lower tax rate. Is there a way for Vanguard to have an end-of-year distribution that makes the net earnings retained in the trust zero each year, so all of the realized dividends/interest/cap gains is taxed at your son's rate, and not the crazy high trust rate?

Quote:

Originally Posted by rodi This tax information about trusts is very interesting. That said - I still have serious issues about my sons getting huge windfalls at an age they might not be able to handle it. I've seen it happen where someone gets a large inheritance at age 18 or 20, and blows it all - often with permanent damage to self (drugs, etc.). I think I'd rather have my kids take the tax hit. We'll be reassessing if we manage to survive till their launched in life. Basically, we'll look at changing things in 10-15 years if nothing catastrophic happens to either of us. I also should note - the IRAs/401ks have spouse as primary beneficiary... the trust is secondary - so that only kicks in if we BOTH die.

Rodi, based on the post by utrecht 2 posts ago, it sounds like Vanguard is able to manage a trust in a fairly efficient manner, according to your wishes. You might consider contacting them to see if you could arrange a "just in case" plan that they would then do and manage distributions to your children, while also avoiding a high trust income tax rate.

[rodi]

Quote:

Originally Posted by MooreBonds Rodi, based on the post by utrecht 2 posts ago, it sounds like Vanguard is able to manage a trust in a fairly efficient manner, according to your wishes. You might consider contacting them to see if you could arrange a "just in case" plan that they would then do and manage distributions to your children, while also avoiding a high trust income tax rate.

How does using Vanguard prevent the tax issues with a trust? I still have the issue of tax deferred accounts that have named beneficiaries. In order to NOT have the money go 100% to my kids, at an early age - it goes to a trust. Whether it is my sister or vanguard managing, I can set forth wishes that it be managed in a tax efficient basis to minimize cap gains, interest, and dividends. (income.)

The trust is serving the purpose, in this case, of preventing my kids from getting a windfall before they have the maturity to handle it. We'll change it when they reach that maturity. Knock on virtual wood that my husband and I don't die before that happens. But if it does - the trade off is taxes versus windfalls to kids.

[utrecht]

I dont remember having ever had anywhere near a 10-12% distribution between dividends and capital gain distributions. Can you give a real life example?

[Gill]

Quote:

Originally Posted by MooreBonds If you sell all assets within 9 months, then pick that date as the valuation date.

This is incorrect. Assets are valued as of the date of death unless you meet the requirements to select the alternate valuation date which is six months after death, unless an asset is sold or otherwise disposed of before that date.
Bruce