Trust planning

[Arif]

After reading about Buffett and his plan to give away his billions I thought about the need for a trust for all our assets. One problem I realized is the large portion of our networth in real estate. While stocks are relatively passive investments and easier to manage, real estate (excluding REITs) is no where near passive. The work of ensuring rents are collected, nonperforming properties are sold and proceeds reinvested to provide income for our 3 year old is no walk in the park.

As I looked around at friends or people I respected that also posses high ethics to essentially operate our trust I was at a loss. But as I thought about it even more I decided to ask someone who fit the bill perfectly. She is in the real estate business and very successful with ethics that are higher than mine. She was honored by me asking her and she said she would have to think about it. So our plan is to have her manage the money and my mom will get custody of our son in the event we die prematurely.

I am curious how others have decided to select an executor of their trust, especially with young children involved.

Also if you've even given the idea any thought.

 

[brewer12345]

I don't have any financial whizzes among my closest friends, so I have left DW in charge and if both of us croak, it is my sister-in-law who at least understands present value calculations. Our portfolio is funky, but just about everything is exchange-traded, so liquidating some or al of it in a short period would be pretty easy. I have left simple instructions for what DW should do in the event of my demise.

Guardians of our kids are my sister and her husband, and alternates are one of my oldest friends and his wife (who will also be godparents to my little one).

Definately worth thinking about, Arif. BTW, in the event that the person you asked turns you down, couldn't you just pick someone who has a good head on their shoulders and can hire a management service for the day-to-day stuff?

 

[Arif]

Definately worth thinking about, Arif. BTW, in the event that the person you asked turns you down, couldn't you just pick someone who has a good head on their shoulders and can hire a management service for the day-to-day stuff?

We have property managers already in place. The difficult part comes when it is time to sell the properties that are no longer performing (i.e. neighborhood turns for the worse, other profitable opportunities arrise), refinancing, 1031 exchanges, when to switch management companies. All these decisions take a bit of real estate knowledge that no PM will undertake. I guess what I could do is upon our demise direct the trust to liquidate the real estate (stepped up basis)and put the proceeds in a portfolio of index funds (S&P, EM, Intl, etc.) and just do a 3-4% SWR until our son is 21 and then hand over the funds once he's old enough.
I hope to have all this ironed out with a trust in place by the end of the year.

 

[SteveR]

This is a tough one alright. I have had a trust for several years and when I remarried I rewrote mine and created one for my new wife. Finding someone you trust (no pun intended) and who has some clue about financial transactions is not easy. My family is really just my brother and my two single 20-something sons. Neither are exactly savy in all this stuff by at least my brother could find some one to help him. My kids are still too testosterone poisoned to trust with large sums of money. My fall back position is a local bank's trust department. We just don't have any one else we know/trust to handle the complexities of our finances.

My intermediate goal is to simplify our stuff so it is easier to deal with. We have far too many accounts right now but after we retire next year we will move our 401ks to Vanguard and will close out 6 other accounts as we consolidate. Crafting a letter of intent is a good idea too. I have one but it is not complete. Time to edit it.

 

[LOL!]

For us, our siblings will manage any money left for our underage kids. Our siblings possess the following qualifications:
1. They have kids or have raised kids that we like.
2. They are independently wealthy in their own right and do not need any money from us.
3. Our kids like them (aunts/uncles) and their kids as well (cousins).
4. We share similar values, whatever that may mean.

 

[doushioukanaa]

Vanguard offers trust services.  The best thing to do is set up a revocable trust, put everything including liquid investments and real estate into it, and name your principal beneficiary and Vanguard as co-trustees.  The other beneficiaries can be comfortable that there is a third party sort of monitoring things.  The principal beneficiary will need to do all the work for property management, etc.  Vanguard would only get involved in the case of a sale.  They would have an incentive to do this knowing that the proceeds would go into the trust which consists of accounts at vanguard. 

The only downside is you need to change everything into the name of the revocable trust.  That involves quit claim deeds for the real property, changing account names, etc. Of course, please consult an attorney as I am not one.

 

[Nords]

Vanguard offers trust services.  The best thing to do is set up a revocable trust, put everything including liquid investments and real estate into it, and name your principal beneficiary and Vanguard as co-trustees.  The other beneficiaries can be comfortable that there is a third party sort of monitoring things.
The only downside is you need to change everything into the name of the revocable trust.  That involves quit claim deeds for the real property, changing account names, etc.  Of course, please consult an attorney as I am not one.

We spent about two years reading up on trusts and going over the mechanics. No way would I involve a major fund company with a trust. I'd direct the principal beneficiary to hire an advisor if desired, but it's unrealistic to expect someone like Vanguard to get involved with trustee decisions-- even if major felonies are being committed. If we didn't think the beneficiaries could get along (siblings or relatives) then we'd break the trust into individual trusts.

We decided that, in our 40s & 50s, a revocable living trust doesn't make much sense. We don't have to worry about estate tax and we don't think the cost of the RLT would be less than the cost of probate. Then there's the hassle factor of setting up the RLT, making sure the assets are all properly transferred to it, and that assets continue to be added as necessary. I'm not looking to complicate our lives that much.

If spouse or I go, the other sets up a couple of marital trusts with the trustee assistance of BIL the CPA. (His involvement is expected to keep the IRS from accusing the trustee of self-dealing.) If we both go on the same roller coaster, our kid moves in with the same family (uncle & aunt) and her assets are in trust to age 21. I think we can trust him to get her financial education up to the responsibility.

We've been much more concerned about having strong durable POAs & healthcare directives. RLTs can help there, too, but they aren't the only way to accomplish the task.

 

[Momtwo]

We spent about two years reading up on trusts and going over the mechanics.  No way would I involve a major fund company with a trust.  I'd direct the principal beneficiary to hire an advisor if desired, but it's unrealistic to expect someone like Vanguard to get involved with trustee decisions-- even if major felonies are being committed.  If we didn't think the beneficiaries could get along (siblings or relatives) then we'd break the trust into individual trusts.

I wholeheartedly agree with Nords on this. I would not get a fund company involved. YIKES!

Our revocable trust goes to the survivor and then to our children with our oldest handling it. He is in his early 30's and is more than capable of handling everything properly. If there are any questions, he can contact our lawyer or hire his own.

Momtwo

 

[doushioukanaa]

it's unrealistic to expect someone like Vanguard to get involved with trustee decisions-- even if major felonies are being committed. 

Why is it unrealistic?  That is what trust companies are in the business of doing. 

It's not about felonies or the beneficiaries getting along.  The issue is openness and transparency.  By having a third party, there is some recourse if a trustee or successor trustee with a conflict of interest follows an impulse to act independently.  Let's say I leave everything of mine in a trust for the benefit of my husband during his lifetime but to be divided for his family and mine after he dies. 

Now let's say he remarries and becomes incompetent.  I don't want the assets hijacked by his niece, whom I haven't even met yet because she is unborn, and then have her go against my instructions and/or cut my family out of visibility and decision making.  Of course, if we're talking about small amounts, it doesn't make sense to bother, but in cases where substantial assets are involved, this sort of arrangement could make sense.

The bigtime trust companies like US Trust cost way too much though...their rate of 2-2.5% eats up too much of the SWR, so that is why I consider Vanguard.  They are more reasonable. 

I guess if you are old, married with children, and unlikely to remarry after the death of a spouse, this is a much simpler thing.  But for younger couples without kids and/or a marriage which is legally recognized by the state and federal government, there are some complexities.

 

[Nords]

Why is it unrealistic?  That is what trust companies are in the business of doing. 

This is analogous to the active/passive portfolio management debate or whether one should buy loaded mutual funds.

Trustees are legally required to be open, transparent, and free of conflicts whether they're big guys like Vanguard or "ordinary people" like us. The difference is that Vanguard gets paid to be a trustee in the hopes that they'll do the right thing without losing our trust in their bureaucracy. We may have legal recourse in the case of negligence or malfeasance, but we certainly wouldn't get a refund if the performance sucks.

It's not that I don't like Vanguard, it's that I'd never pay any trust company. I've seen way too many beneficiaries forced to spend humongous amounts of money to get rid of incompetent or combative trust companies. I'd expect the trust's job to be done by a trustee-- probably a family member-- who would seek advice (and pay for it) as needed instead of paying a retainer. I'd want a trustee who's doing it for the family or the beneficiary, not for the money.

 

[SteveR]

I am a trustee for my late wife's trust.  I cannot imagine turning this over to a faceless institution to handle.  Our current trusts have a local bank as the fourth level trustee...after family members.  I think if all the other family members are no longer around to administer the trust then who would be left to really care how it is administered?

One on trusts you all should know…once the owner dies the trust is locked for new items to be added to it and the provisions of the trust then become active.  If you have not titled assets properly it is too late at death to do so.  The trust turns from a revocable trust to an irrevocable trust...even the name changes to reflect this.  Taxes are required from the trust on an annual basis and the rate is higher than normal income taxes.  The requirements within the trust are active at the owner’s death and the trustee is required to follow the rules of the trust until relieved or until the trust provisions have been fully executed.  

In my case, my late wife’s trust assets can be used by me as part of the marital trust until my death; at which time, they would then go to the named beneficiaries.  Being the trustee, I can change beneficiaries but not the assets within the trust.  If I don’t need the assets (which is very likely) the assets will be distributed to the beneficiaries when I wish to do so.  Otherwise, they will sit and continue to grow and pay taxes on the annual gains.  

I believe that where family members are available and willing to do so, they should be trustees.  They can always hire professional help as someone already stated to assist them; just like I do (lawyer and CPA).  Special family issues can be taken care of within the family and within the trust by understanding family members.  An institution would be far less likely to do this.

 

[doushioukanaa]

I cannot imagine turning this over to a faceless institution to handle.  

I am not advocating that.  I am talking about having Vanguard as a co-trustee, a third party to make sure the instructions are followed even if the original or successor trustee doesn't want to follow the instructions. 

Also, you are the trustee, and you have a clue about investing, SWR's etc. What if the principal beneficiary serving as trustee does not?

If you have a falling out with your wife's family, what mechanism is there to ensure they are not capriciously written out of the estate?  What mechanism does your wife's family have to protect their interests if you become incompetent and the successor trustee starts writing big checks to themselves and/or their family?  Would the existence of a third party co-trustee help in either of those instances?  And in the absence of that, what else could be done? Heck, if I can figure out a good way to do this without paying a trustee fee, I'll jump at it.

 

[Nords]

I am not advocating that.  I am talking about having Vanguard as a co-trustee, a third party to make sure the instructions are followed even if the original or successor trustee doesn't want to follow the instructions. 

Well, in a situation like that you'll get what you pay for.

I doubt that a disgruntled beneficiary could inspire Vanguard to overrule a trustee. Even legal threats would be ignored/mediated or Vanguard would drop out. There's just no reason for them to step in and defend anything unless they're going to lose money or get a lot of bad publicity.

Also, you are the trustee, and you have a clue about investing, SWR's etc. What if the principal beneficiary serving as trustee does not?

In our case (parents of a teenager) that's an education issue. I'd rather pay Vanguard to educate than to be a watchdog. Our BIL the CPA has what it takes to both be a trustee and to educate until our kid takes over at majority. After that we'll have to (*shudder*) trust her mature judgment...

If a person has no capacity or ability to handle being a trustee/beneficiary then the provisions of a spendthrift trust might throttle back on the problems. But I think those are just as fraught with control problems as any other trust.

If you have a falling out with your wife's family, what mechanism is there to ensure they are not capriciously written out of the estate? What mechanism does your wife's family have to protect their interests if you become incompetent and the successor trustee starts writing big checks to themselves and/or their family? Would the existence of a third party co-trustee help in either of those instances? And in the absence of that, what else could be done? Heck, if I can figure out a good way to do this without paying a trustee fee, I'll jump at it.

I look at a trust mainly as a method of avoiding inheritance taxes. The other uses don't apply to our family situation.

If I'm trustee/beneficiary of my deceased spouse's marital trust, then I can legally pretty much dip into the trust at will as specified. Sure, it'll be in compliance with the trust document, but the other beneficiaries carry the burden of proving that I'm not acting in a fiduciary or even prudent manner if I dip into the principal. If I can defend each trustee action with a provision of the trust then not even the courts will step in, let alone Vanguard.

If I'm incompetent then I hope we've all chosen a good alternate trustee. Again I'd rather keep it in the family than pay big bucks to a toothless watchdog corporation. As long as the trustee is following the provisions of the trust then it's extremely hard to have them removed on philosophical differences.

I think a third-party co-trustee just makes everything harder and more expensive. A series of successor trustees keeps it simpler and avoids gridlock when the co-trustees don't get along. Or give the beneficiary the rights to fire the trustee and hire Vanguard if they think that's best. I just don't think that having a large, faceless, profit-motivated corporation with delusions of competence, especially considering their screwups with IRA beneficiary documents, is going to give me a warm fuzzy feeling.

If you think the beneficiaries are going to get screwed by the trustees, then the best solution I can think of is splitting assets into smaller trusts and having each smaller trust run by someone you, er, trust. Perhaps the beneficiary is the best person for those circumstances. There can be tax implications with a beneficiary acting as trustee, so perhaps a CPA or financial advisor could have a role in setting up the trust and dividing the assets, then bow out and let the designated trustees take over their own trusts.

 

[doushioukanaa]

The main thing about the third party is not that they will ever have to do anything, but their mere existence will deter any funny business. 

I have witnessed situations where somebody with financial POA just writes checks to their family from the assets of an incompetent rich widower Uncle.  The Aunt's family was in the dark about what the heck is going on, despite asking and wanting to know.  If there were a co-trustee of a revocable trust which held the assets, they wouldn't have to do battle with the other family to figure out what is going on.  They could just call Vanguard. 

Is the Vanguard fee of .75% on the first million plus .35% on the second million plus .2% on subsequent amounts excessive for turnkey fund management plus full transparency for some cases?  I honestly don't think so. But to your point about competence, one needs to do some due diligence on it.

I doubt that a disgruntled beneficiary could inspire Vanguard to overrule a trustee.  Even legal threats would be ignored/mediated or Vanguard would drop out.  There's just no reason for them to step in and defend anything unless they're going to lose money or get a lot of bad publicity.

This is the crux of the issue, and I would be interested to know what you are basing this on.  Vanguard has custody of the funds.  They could deny payment of a check that is out of compliance with the trust document instructions, and in fact they have a fiduciary obligation to do so.  That is what the trust is paying them to do.

You have given me a lot to think about.  Any other thoughts and ideas would be appreciated.

 

[Arif]

Thanks for all the feedback, I'm still chewing on it.

In my case, my late wife’s trust assets can be used by me as part of the marital trust until my death; at which time, they would then go to the named beneficiaries. Being the trustee, I can change beneficiaries but not the assets within the trust. If I don’t need the assets (which is very likely) the assets will be distributed to the beneficiaries when I wish to do so. Otherwise, they will sit and continue to grow and pay taxes on the annual gains.

Steve, can you explain why you can't change the assets in your late wife's trust but you can change the beneficiaries? Seems like it would be the opposite.