Revocable Trust Questions

We have been discussing the pros/cons of revocable living Trust vs TOD and trying to come up with a compelling reason (in our case) to go with the Trust and I think I may have finally come up with one. I wanted to validate my understanding. Please let me know if my understanding below is correct?

If we create an Earle Retyre Family Trust then when we pass, daughter can simply keep all the assets in the Trust under the Earle Retyre Family Trust name (and can only pull money out if and when she needs it). So, the majority of the assets will not get comingled with her other accounts. The Earle Family Trust and its assets live on. Of course, legally, she can pull all assets out. But if we ask that she doesn't do that then this is an easy way to not comingle her assets. OTOH, I believe if we go the TOD route then, by definition, she has to move the funds in my current accounts to accounts in her name. Is that all true?

The advantages of not comingling could come into play in scenarios like (a) protection if she gets a divorce so her Ex does not get these assets and (b) when we pass she could set up a Spendthrift Trust for Son in her Will to set aside some money for him.
 
Great questions for your lawyer.

Also, be sure to ask your lawyer about the taxes on trust income. Non-distributed income will be taxed at trust rates - which are high. If your lawyer can't answer somewhat complex questions about taxes - find another. A couple of the lawyers I went to were pretty "fuzzy" on taxes.
 
We have been discussing the pros/cons of revocable living Trust vs TOD and trying to come up with a compelling reason (in our case) to go with the Trust and I think I may have finally come up with one. I wanted to validate my understanding. Please let me know if my understanding below is correct?

If we create an Earle Retyre Family Trust then when we pass, daughter can simply keep all the assets in the Trust under the Earle Retyre Family Trust name (and can only pull money out if and when she needs it). So, the majority of the assets will not get comingled with her other accounts. The Earle Family Trust and its assets live on. Of course, legally, she can pull all assets out. But if we ask that she doesn't do that then this is an easy way to not comingle her assets. OTOH, I believe if we go the TOD route then, by definition, she has to move the funds in my current accounts to accounts in her name. Is that all true?

The advantages of not comingling could come into play in scenarios like (a) protection if she gets a divorce so her Ex does not get these assets and (b) when we pass she could set up a Spendthrift Trust for Son in her Will to set aside some money for him.
The downside is that she'll have to do a trust tax return every year, have the trust issue her a K-1 each year and then report the K-1 on her tax return.

She can get the same benefit in protecting the money from her spouse in the event of divorce but just keeping it separate once she receives it from the trust, although the trust make that point clearer but at the cost of that pesky 1041.
 
Great questions for your lawyer.

Also, be sure to ask your lawyer about the taxes on trust income. Non-distributed income will be taxed at trust rates - which are high. If your lawyer can't answer somewhat complex questions about taxes - find another. A couple of the lawyers

The downside is that she'll have to do a trust tax return every year, have the trust issue her a K-1 each year and then report the K-1 on her tax return.

She can get the same benefit in protecting the money from her spouse in the event of divorce but just keeping it separate once she receives it from the trust, although the trust make that point clearer but at the cost of that pesky 1041.
Ok, this all good to learn. I didn’t know about the tax implications of a trust. So it would cause daughter hassle and higher tax rates. As you say, she can protect the money keeping it separate without a trust.

So, now I am back to thinking I will likely choose the TOD route. I cannot think of a compelling reason at this point to choose going with the trust.
 
The downside is that she'll have to do a trust tax return every year, have the trust issue her a K-1 each year and then report the K-1 on her tax return.

She can get the same benefit in protecting the money from her spouse in the event of divorce but just keeping it separate once she receives it from the trust, although the trust make that point clearer but at the cost of that pesky 1041.
This is one of the reasons I didn't do a trust (other than the main reason of most of our money is in IRAs).

One of my kids could probably handle the 1041. The other two - no way. They'd just ignore it. Their tax preparer (me) would be dead.
 
Ok, this all good to learn. I didn’t know about the tax implications of a trust. So it would cause daughter hassle and higher tax rates. As you say, she can protect the money keeping it separate without a trust.

So, now I am back to thinking I will likely choose the TOD route. I cannot think of a compelling reason at this point to choose going with the trust.
A hassle but not higher tax rates, I never said that.
 
Earle, you are past the point of educating yourself and into the swamp of thinking you are an expert. Get that lawyer on the phone and make an appointment. Then find some brie and some nice cabernet and chill.
 
You didn’t but Patrick seems to imply they are higher.
Trust tax rates are easy to look up online. Take a look.

The rates themselves may be similar to individual income tax rates, but they start at much lower income levels. For example, the 37% rate starts at a measly $15,200 of undistributed trust income.

As others have said, you really need to talk to an estate attorney. And preferably not one that is in the business of "selling" trusts.
 
Earle, you are past the point of educating yourself and into the swamp of thinking you are an expert. Get that lawyer on the phone and make an appointment. Then find some brie and some nice cabernet and chill.
That’s funny. Yes I plan to call and make an appointment this week. This thread has been extremely educational. I appreciate everyone’s inputs. I don’t, however, like Brie. 😊
 
Trust tax rates are easy to look up online. Take a look.

The rates themselves may be similar to individual income tax rates, but they start at much lower income levels. For example, the 37% rate starts at a measly $15,200 of undistributed trust income.

As others have said, you really need to talk to an estate attorney. And preferably not one that is in the business of "selling" trusts.
Yes, I see that online. I appreciate you bringing this to my attention.
 
We have been discussing the pros/cons of revocable living Trust vs TOD and trying to come up with a compelling reason (in our case) to go with the Trust and I think I may have finally come up with one. I wanted to validate my understanding. Please let me know if my understanding below is correct?

If we create an Earle Retyre Family Trust then when we pass, daughter can simply keep all the assets in the Trust under the Earle Retyre Family Trust name (and can only pull money out if and when she needs it). So, the majority of the assets will not get comingled with her other accounts. The Earle Family Trust and its assets live on. Of course, legally, she can pull all assets out. But if we ask that she doesn't do that then this is an easy way to not comingle her assets. OTOH, I believe if we go the TOD route then, by definition, she has to move the funds in my current accounts to accounts in her name. Is that all true?

The advantages of not comingling could come into play in scenarios like (a) protection if she gets a divorce so her Ex does not get these assets and (b) when we pass she could set up a Spendthrift Trust for Son in her Will to set aside some money for him.
Yes, I would say that is generally true. Obviously the exact language of the trust and state law come into play but, yes, holding assets so they are not comingled with a beneficiary's marital assets is very possible and a great benefit of a trust. Also, if your attorney knows how to use the right language, it can be set up to be protected from your child's creditors in extreme cases. Again, that is dependent on trust language and the relevant laws.
 
Yes, I see that online. I appreciate you bringing this to my attention.
tax rates paid are only higher if income/realized capital gains are retained in the trust.

when paid out to the beneficiaries (reported on a K-1) they pay any taxes due at their lower personal rates.

income/realized capital gains would normally be paid out annually to beneficiaries.

and for the above tax filing is easy...TurboTax Business works just fine for filing estate/trust tax returns (Form 1041) plus generating K-1s for the beneficiaries...I used it for years to do just that.
 
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The downside is that she'll have to do a trust tax return every year, have the trust issue her a K-1 each year and then report the K-1 on her tax return.

She can get the same benefit in protecting the money from her spouse in the event of divorce but just keeping it separate once she receives it from the trust, although the trust make that point clearer but at the cost of that pesky 1041.
I would say a 1041 is extremely simple and not an issue. The benefits far outweigh this extremely minor issue.

The continuing trust, for children, is superior to the "just keeping it separate" as it's easier for a beneficiary to say, "sorry honey, I can't comingle this money with our money. My parents set up in trust for me. It has to stay there. Sorry."
 
That was my thought also when I was looking at trusts. It gives the kids an "out". Of course, having an IRA (for example) with only their name on it will also keep things separate.

Problem is: you, me, pb4uski, (and others on this board) would probably find making sure a trust pays out it's income and doing the resultant 1041, K1s and 1040s fun. The vast majority of people won't have a clue. I took a long look at my kids and finally decided that the hassle and possible problems of not doing things right outweigh the possible (yet unlikely) event that I was contemplating a Trust could solve.
 
thanks all. So, no higher taxes as long as any interest or capital gains are pulled out of the trust and paid to daughter each year. But daughter would need to know how to do K1 and 1041 - albeit easy using TurboTax type tools. All good information to know. I am going to call tomorrow and set up appointment to discuss with lawyer. I am not going to go in with a solution. I am going to go in with my goals and see what she recommends. And then we will decide. Without you guy’s input we would not have been prepared for the meeting. So much appreciated!! This has been very educational.
 
It's easy to duck taxes at the trust level by just paying out the income, but if the trust is funded with an IRA, this effectively means that the trust's lifetime is 10 years or less since the IRA must be paid out within that period.

We are funding a special needs trust for one of the grands. This money will be needed for longer than 10 years, though, so we have specified that trust to be funded from a Roth. There will still be some trust-rate taxes due on the growth of any earnings it retains but the bulk of the money will not be taxable.

Re the OP's daughter I don't think it is wise to just leave her some money and tell her to keep it separate. There are too many ways for a husband or a departing husband to convince or force her to give him access to it. Depending on the amount, a professional trustee could handle all the paperwork. Not a cheap solution though.
 
Good luck!
That was my thought also when I was looking at trusts. It gives the kids an "out". Of course, having an IRA (for example) with only their name on it will also keep things separate.

Problem is: you, me, pb4uski, (and others on this board) would probably find making sure a trust pays out it's income and doing the resultant 1041, K1s and 1040s fun. The vast majority of people won't have a clue. I took a long look at my kids and finally decided that the hassle and possible problems of not doing things right outweigh the possible (yet unlikely) event that I was contemplating a Trust could solve.
Thanks, Patrick. I will try and report back what we finally decided. It is not only important to know the facts how this stuff works but also helpful to hear the thought process folks like you went through to make a decision! Thanks much.
 
Trust tax rates are easy to look up online. Take a look.

The rates themselves may be similar to individual income tax rates, but they start at much lower income levels. For example, the 37% rate starts at a measly $15,200 of undistributed trust income.

As others have said, you really need to talk to an estate attorney. And preferably not one that is in the business of "selling" trusts.
True, but at least in my experience with three living trusts the income passed through to the beneficiaries so trust taxes were never an issue. I think this is typical. YMMV.
 
That was my thought also when I was looking at trusts. It gives the kids an "out". Of course, having an IRA (for example) with only their name on it will also keep things separate.

Problem is: you, me, pb4uski, (and others on this board) would probably find making sure a trust pays out it's income and doing the resultant 1041, K1s and 1040s fun. The vast majority of people won't have a clue. I took a long look at my kids and finally decided that the hassle and possible problems of not doing things right outweigh the possible (yet unlikely) event that I was contemplating a Trust could solve.
To my knowledge the income tax issue is extremely minor. It's one they could probably analyze for the next 5 years on Bogelheads but in reality it's not that deep. A CPA would not ask for exact documentation of distributions. They just show the trust income going out to the beneficiary individually on their individual taxes. Essentially, as I understand, it's a distribution on tax forms. It should also match, or be close, to what is actually taken out but I don't think it's quite as detailed of a situation as some make it sound. Plus, in the worst case scenario some income would theoretically get taxed at the trust tax rate rather than the bene's highest marginal rate which, for many, is not a big delta. The benefits of a continuing trust far outweigh these minor issues from my perspective. YMMV.
 
The continuing trust, for children, is superior to the "just keeping it separate" as it's easier for a beneficiary to say, "sorry honey, I can't comingle this money with our money. My parents set up in trust for me. It has to stay there. Sorry."
Would a prenup suffice?
 
Dealing with Vanguard can be a hassle. Fidelity is much better. Been there, done that.
 
For the accounts with beneficiary designations they told me it would take 5 weeks for her assets to be distributed to the beneficiaries even after all the beneficiaries had established accounts to receive the assets and they acknowledged that they received the death certificate. I raised a stink and threatened to file a complaint with ERISA if it wasn't done in a few days. It ultimately was done in a few days.
Five weeks, that's crazy.

Our recent experience with FIL's estate was T. Rowe Price took 2 days (after filing), bank accounts were next day, Fidelity was about 10 days and Vanguard was an absolute nightmare.
My Mom used Fidelity and it was quick. My brother notified Fidelity on Monday. I contacted the rep to give them my information (e.g new accounts or existing accounts) and then 4 days later (Friday), the money showed up. Her estate was around $3M.
 
OP here. I said I would report back what we decided after meeting with the lawyer. So here goes ...

We are creating an Earle E Retyre Revocable Living Family Trust. If both spouses pass then the Trust says to create two new beneficiary trusts – one for my daughter, Pearl, and a Spendthrift Trust with a little sum of money for my son, Merl.

The Pearl E Retyre Trust will fall under Pearl’s social security number since she is the sole beneficiary of that trust so no K1 or 1041’s are required!! She will have total control of when and how to pull money out but any money (and its interest/gains) will stay within her Trust accounts and therefore not get comingled.

She will be the Trustee of the Merl E Retyre Spendthrift Trust and have control over that as well. Again, no K1 or 1041 is required since that will be under Merl’s social.

We are modifying my original Will to be a pour over Will with 100% going to Pearl. Lawyer will file paperwork so real estate properties we own will be TOD to the Family Trust. So, nothing will need to get probated. Therefore, we have full privacy, no costs/time associated with probate, and no K1/1041’s. Plus the added benefit of not having to hassle moving Vanguard funds to Fidelity since Vanguard does not support TOD on joint accounts. We no longer have to worry about TODs since we are doing the Trust.

She is doing all of this - Trusts, real estate deeds, pour over wills as well as updated Powers of Attorney for $3,900. Seems extremely reasonable to me.

I think this is a great solution. Thanks everyone for your inputs and education … I would not have been able to know what questions to ask if it were not for your inputs. It has been a fun learning experience.
 
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