Living Trust and disbursement to kids after death

[BeanCounter62]

I am working with an estate attorney to set up a living trust.

I am single and have 3 kids (16, 21 and 25). My current net worth is about $3M. The trust will have about $2M ($1.5M in real estate including rental properties) plus $1M outside the trust in tIRA / 401k.

I am considering the typical staggered distribution at age 25, 30,and 35 from the trust. The kids will have access to the retirement accounts right away.

But I do not understand how the new (after my death) trust for distribution actually typically works ... YES, I know I can define much of this within the trust. But I need to understand the basics first before deciding how much detail to include.

Is the typical/default that 3 separate trusts would be created (and valued) as the trustee takes over after my death.

How typical is a "pot trust" where it all stays co-mingled until the youngest reaches a certain age.

How does real estate factor in? Typically sold off? (I have rental property)


Since my kids are all 5 years apart, I thought maybe they should get their distributions on MY birthday instead of theirs - so they each get the same as the others ... still in the year when they turn 25/30/35. (We share a birthday month anyway .... and 3 weeks apart in birthdays could mean different distributions to different kids based on the change in the stock market).

My lawyer thinks I'm over complicating it.
I think equal distributions to all of them on one day is actually easier not harder.... but that's assuming it's coming from one pot of money than if they have separate pots that maybe had a few different withdrawals or maybe even different investments).

ANYONE gone through this? How do these trusts for the kids created from the Living Trust work?

(Thanks in Advance! I know I have a lot to learn).

 

[OldShooter]

Listen to your attorney. Points:

A "typical staggered trust" is by itself a bad idea because you cannot predict the future. What if a child gets a debilitating or fatal disease and would benefit from 24x7 care that he/she cannot afford? I think you would want the trustee to step in, but the trustee cannot.

A better approach is to supplement with a "HEMS" instruction, permitting the trustee to provide discretionary funds for health, education, maintenance and support. This goofy language is actually well understood in the trust business and can be modified as desired by the grantor to be more specific or more limited. If your attorney has not mentioned this, he/she is not a specialist and you need a new attorney.

What about spouses, grandkids, divorces, remarriages, etc? Who gets the dough if a child dies before he/she receives everything? These kind of considerations are much more important than fussing about distribution dates IMO.

$3M is not a big deal as trusts go. You may find a trustee who is willing to hold real estate but extra fees will almost certainly apply. Also, given the relatively small amount you may find a trustee who will take a $3M trust but will decline or charge extra for 3x$1M trusts.

 

[BeanCounter62]

I agree with the "HEMS" feature - but how is that tracked. Are payments out of that specific kid's portion or out of a general pot? The potential future disability would lean towards a big pot. Yet with a 10 year span for my kids - should the oldest have to wait until her little brother grows up to get her inheritance? (So much to ponder).

My trustee is a life long friend. My estate is definitely not large enough for professional management. I picked someone who has the smarts, the means and the resources to figure it out.

Firecalc puts me between $78,000 and $12M at the end of my life! I'm figuring I should start spending down some of my net worth - my kids certainly don't need it all.

 

[OldShooter]

I agree with the "HEMS" feature - but how is that tracked. Are payments out of that specific kid's portion or out of a general pot? The potential future disability would lean towards a big pot. Yet with a 10 year span for my kids - should the oldest have to wait until her little brother grows up to get her inheritance? (So much to ponder).

Well, the strength of a trust is also its weakness. Everything is up to the grantor. There is no "should" -- just whatever you decide. It's your money.

Your expert trusts & estates attorney will have been through all this many times and will have suggestions, horror stories, and example language for you. This is not amateur hour law; it is highly specialized and specific to your state as well. A $6,000 legal bill is 20 basis points on a $3M estate. Is 20 basis points really a big deal in order to get things right?

My trustee is a life long friend. My estate is definitely not large enough for professional management. I picked someone who has the smarts, the means and the resources to figure it out.

Well, thing #1 is that you have to expect that your beneficiaries will end up hating your friend because he will not always do or give them what they want. That is the major downside with a "friends & family' trustee. It may make sense to make your attorney co-trustee and hope that he can serve as "bad cop" when necessary.

Ideally, your trustee/friend should attend all the meetings with your attorney and should review draft language carefully with special attention to areas that might cause problems with the beneficiaries. Your intent cannot be communicated completely on a piece of paper.

 

[socca]

My lawyer thinks I'm over complicating it.

One approach is to start with the simplest estate plan, and then incrementally make it more complex as needed. The executor of your estate, the successor trustee of your revocable trust, and your kids - if they are well-informed - will thank you profusely for keeping things simple.

So, what's simplest? Upon your death wrap everything up with no lingering irrevocable trusts that need to be administered by trustee(s) and monitored by your kids. What's the problem with this? Perhaps you are worried that you are (potentially) gifting too much too early in the life of each of your kids. A simple solution to this: gift a set amount to each kid and gift the rest to charity. Your kids might hate me for recommending a partial disinheritance; on the other hand, I am also proposing a strategy that will greatly simplify their financial lives after your death. In my experience, estate planning lawyers do a very poor job of explaining this trade-off: the greater the complexity, the more they get paid.

As you get older (and your kids get older), you might decide that there is less risk of a "large" inheritance ruining the lives of your kids, and thus increase the amount of their inheritances and decrease the amount going to charity.

I'm writing this as someone who has been managing trustee for two irrevocable trusts for many years. They are a PITA to administer - tread carefully!

An additional wrinkle in your situation is that you are (potentially) gifting what (I assume) is a successfully operating business (rental real estate). Dealing with all of the potential issues here is above my pay grade.

Good luck!

 

[Dash man]

Remember if a trust retains earnings, the trust has to file a tax return and rates are high. Distributions should be made annually.
The only “fair” distribution for three kids is to create a separate trust for each of them. Investments go up and down and timing may hurt one kid over another if you define ages to determine distributions.
Your attorney should not be the trustee. He/she should have the power to fire the trustee should things not be managed properly. They can also hire a replacement, likely professional management for a fee.
Decide on contingency beneficiaries in case one of your children pass away. Grandchildren, spouse? What if there is a divorce with kids?
What if someone challenges the trust? We put in a clause that anyone who challenged our wishes are automatically denied any benefits.
What if one of your kids want one of your houses and others do not?
Lots to think about.

 

[HarveyS]

Agree, lots to think about. I'd recommend that the real estate be sold and the proceeds put in trust. Friends inherited a multi-unit building. They love the cash flow, hate dealing with the siblings on what rent should be, when to renovate, what color to paint wall, etc. Everything is up for debate and disagreement. I would not want to put my kids in that situation. Also agree with a third party (preferably a professional) trustee. I have seen families torn apart by having a sibling be the trustee. Money can make people crazy.

 

[donheff]

We are planning to re-evaluate ours. They are complicated and confusing. And the IRS tax rules governing trusts as beneficiaries of IRAs raise the confusion an order of magnitude. The pending change in the tax law to 10 year RMDs on inherited IRAs may make it simpler although it will undoubtedly confuse things initially.

 

[PatrickA5]

We are planning to re-evaluate ours. They are complicated and confusing. And the IRS tax rules governing trusts as beneficiaries of IRAs raise the confusion an order of magnitude. The pending change in the tax law to 10 year RMDs on inherited IRAs may make it simpler although it will undoubtedly confuse things initially.

We looked into getting a trust, but a good 75% of our net worth is in retirement accounts with beneficiaries. Didn't seem worth it to set up a trust for the remainder. Right now, we have everything titled in a way to not even have to go through probate. We'll relook if things change.

 

[OldShooter]

... I'd recommend that the real estate be sold and the proceeds put in trust. ...

Be careful with this. The step up basis at death is an important planning factor where there are appreciated assets. Making this work out is an important part of estate planning.

That said, the RE should be under professional management before your trustee/friend has to deal with it and (probably) sell it. No rush; just do it by the day before you die. Also, you may want to vet and select a selling real estate company just to tee that up for your friend.

We are planning to re-evaluate ours. .. .

An important implicit point here. Having an estate plan is like owning something that eats. Periodic tune-ups will be needed as the family ages and changes and as the gummint changes its rules.

We looked into getting a trust, but a good 75% of our net worth is in retirement accounts with beneficiaries. Didn't seem worth it to set up a trust for the remainder. ...

100% of our investment assets are in IRAs at this point, all of this will go into the trusts. Not to re-ignite the "control from the grave" debate but none of our beneficiaries are equipped to deal with the fairly large sums being dumped on them. A "father figure" trustee is needed to make sure the money is invested well and not simply spent.

Other: Your trustee/friend is significantly younger, right? Younger than your youngest child? Your attorney is significantly younger, too. Right?

 

[BeanCounter62]

You all are giving me many things to add to my list to talk to the lawyer about!

Thank you!

This lawyer provides a free annual review of the trust. (As she says, that way people will review the trust every 5 years or so). Getting my money's worth from that will force me to at least briefly consider how things are going each year or so.

My trustee is my age, someone my kids know but not very well so no relationship to ruin if she has to play bad cop for them. And I'm only 57, so theoretically none of this will kick in for awhile. (But planning just in case!) By age 76 for me, my kids will all be 35+ and no more testamentary trust issues.

My rentals are already managed by a Property Management company - so holding them for awhile shouldn't be a big challenge to the trustee. One reason for having the trust is so that the kids aren't figuring out all the real estate holdings and a big influx of investments all by themselves.

I had forgotten the nasty tax rate for trust income. Back to the drawing board on what to distribute and when. Maybe it's worth it to give them the interest each year so that it's not going to the government!