Managed Trusts

[Dash man]

DW and I are considering modifying our estate plan by changing the distribution of assets to the two sons to a managed trust paying out 4% or so of the balance each year, split between the two. We are basically concerned one of them will blow the money if we give it to him in a lump sum, or that it might end up in the hands of their spouse if not handled properly and the marriages don't last. To do this we'd need a fiduciary to handle the trust in case it lasts for several generations. We are concerned a managed trust might eat away at the assets with fees that are too high. We're looking for anyone who has been through this to offer any suggestions and guidance, and on what to expect for fees.

 

[seraphim]

Something I've been curious about as well...


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[Gill]

Consider Vanguard National Trust Company as a corporate trustee. Their fees are the most reasonable in the business.
Bruce

 

[Brat]

If you can go that route then choose Vanguard's Managed Payout fund. Deal done.

Keep in mind the fact that trusts pay a higher tax rate but frankly, for spendthrift insurance, an approach worth considering.

 

[sheehs1]

Something I've been curious about as well...


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Same here!

 

[utrecht]

I'm currently in the process of setting up a trust using Vanguard as the trustee (or whatever the correct terminology is). It will only take affect if both my wife and I die together. We have a 15 year old son who is nowhere near ready to manage a sizable estate and we dont have any relatives that I would trust with a large amount of money.

There's a $2500 set up fee that is only charged once the Trust goes into effect. The fees are:

0.7% for the first million
0.35% for the second million
0.2% for higher amounts

 

[AnIntentionalRoad]

Good to know! I'm helping my DM set something like this up for DB.

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[meierlde]

DW and I are considering modifying our estate plan by changing the distribution of assets to the two sons to a managed trust paying out 4% or so of the balance each year, split between the two. We are basically concerned one of them will blow the money if we give it to him in a lump sum, or that it might end up in the hands of their spouse if not handled properly and the marriages don't last. To do this we'd need a fiduciary to handle the trust in case it lasts for several generations. We are concerned a managed trust might eat away at the assets with fees that are too high. We're looking for anyone who has been through this to offer any suggestions and guidance, and on what to expect for fees.

The question becomes how do you know what how the 3rd generation will handle money. Further it seems trusts do have a maximum lifetime of something like 80 years as there is a legal rule against many kinds of perputities. Why not have the trust last until the last child dies then divide the principal among the descendents of the sons. (Perhaps after they reach 25). Another idea is to provide that all income is split between the two sons and the trust includes clauses for invading principal if some events happen (this is what a good lawyer will write up).
Now I did find a web site that lists some trust fees they start out at 3000 for a 500k trust, and then typically .5% on a declining scale above the 500k. A link to the site.
Who’s Charging What for Trust Services? |

 

[Dash man]

The question becomes how do you know what how the 3rd generation will handle money. Further it seems trusts do have a maximum lifetime of something like 80 years as there is a legal rule against many kinds of perputities. Why not have the trust last until the last child dies then divide the principal among the descendents of the sons. (Perhaps after they reach 25). Another idea is to provide that all income is split between the two sons and the trust includes clauses for invading principal if some events happen (this is what a good lawyer will write up).
Now I did find a web site that lists some trust fees they start out at 3000 for a 500k trust, and then typically .5% on a declining scale above the 500k. A link to the site.
Who’s Charging What for Trust Services? |

If only we could know how kids and grandkids would handle money after we're gone. But you bring up good points worth considering. We absolutely would want them to be able to access some money at key points in their lives. Thank you for the link! I was also able to find Vanguard's fee schedule and wish i could find USAA's. I guess I'll have to give them a call.

 

[Dash man]

I'm currently in the process of setting up a trust using Vanguard as the trustee (or whatever the correct terminology is). It will only take affect if both my wife and I die together. We have a 15 year old son who is nowhere near ready to manage a sizable estate and we dont have any relatives that I would trust with a large amount of money.

There's a $2500 set up fee that is only charged once the Trust goes into effect. The fees are:

0.7% for the first million
0.35% for the second million
0.2% for higher amounts

They are definitely competitive. We'll have to consider using them.

 

[Dash man]

If you can go that route then choose Vanguard's Managed Payout fund. Deal done.

Keep in mind the fact that trusts pay a higher tax rate but frankly, for spendthrift insurance, an approach worth considering.

I see the tax rates are quite high. What they don't get in estate tax they want in the trust tax.

 

[prudent_one]

Trust tax rates are incredibly high, but only on income retained in the trust. I don't know that it makes sense to have more trust income go to taxes when it could be paid to the beneficiaries who would pay less tax.

 

[rodi]

The way we handled this issue is to have the estate paid out in chunks at different age milestones. (We have minor children). They get 1/3 at age 25...1/3 at age 30... And the balance at age 35. The hope is that they are mature enough at one of the earlier payouts but they don't get it all at once in case they need more growing up.

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[Dash man]

The way we handled this issue is to have the estate paid out in chunks at different age milestones. (We have minor children). They get 1/3 at age 25...1/3 at age 30... And the balance at age 35. The hope is that they are mature enough at one of the earlier payouts but they don't get it all at once in case they need more growing up.

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That was our initial plan...now at 32 we realize it's not going to work. That's why we're looking at an annual payment of some sort.

 

[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.

 

[Dash man]

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.

The original trust is set up that way, however, there have been circumstances that have made us consider changing it. No decisions have been finalized since we are just thinking things through before we pay a lawyer to help us redo the trust. If things change, we can always update the trust in the future.

 

[wolf]

Trust tax rates are incredibly high, but only on income retained in the trust. I don't know that it makes sense to have more trust income go to taxes when it could be paid to the beneficiaries who would pay less tax.

If I understand this correctly. If the income the Trust generates, is distributed to the beneficiaries, the income would be taxed at the
beneficiary's rate, normal income.

However, if income the Trust generates, is retained in the Trust, it is taxed at a higher rate. (I assume there is a tax rate for Trusts).

Also, when one says Trust income, is that regular income and capital gains.

Also, do States have similar Trust rules?

 

[travelover]

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?.....

If getting free money for doing nothing other than breathing is punishment, lay it one me.

 

[prudent_one]

If I understand this correctly. If the income the Trust generates, is distributed to the beneficiaries, the income would be taxed at the
beneficiary's rate, normal income.

However, if income the Trust generates, is retained in the Trust, it is taxed at a higher rate. (I assume there is a tax rate for Trusts).

Also, when one says Trust income, is that regular income and capital gains.

Also, do States have similar Trust rules?

I'm not a tax expert but this is how it was explained to me.

Trust income that is not distributed is taxable to the trust using tax brackets for trusts. Trust long-term capital gains are taxed at 15%.
The way trust tax brackets are structured, it's very painful to not distribute trust income.

It only takes trust income of about $2500 to get a trust into the 25% tax bracket, if it is retained in the trust. The tax brackets top out after just $12,000 of trust income -- taxed at around 40% PLUS the 3.8% medicare surtax. If it is distributed to the beneficiary/ies, it is taxed as regular income for them. Most people would have a tax rate less than roughly 44%.

 

[wolf]

I'm not a tax expert but this is how it was explained to me.

Trust income that is not distributed is taxable to the trust using tax brackets for trusts. Trust long-term capital gains are taxed at 15%.
The way trust tax brackets are structured, it's very painful to not distribute trust income.

It only takes trust income of about $2500 to get a trust into the 25% tax bracket, if it is retained in the trust. The tax brackets top out after just $12,000 of trust income -- taxed at around 40% PLUS the 3.8% medicare surtax. If it is distributed to the beneficiary/ies, it is taxed as regular income for them. Most people would have a tax rate less than roughly 44%.

Thanks. Heard stories about Trust tax rates. Just did not believe they were true. Does not seem fair.

 

[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]

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]

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.