Trust questions

[pb4uski]

... Traditional IRAs go directly to our kids upon the 2nd of us passing.

My understanding is that if our traditional IRA were to go into the trust, it would be subject to trust income tax rates which are (likely) significantly higher than personal income tax rates.

Admittedly, I’m less clear on the pros/cons of the trust being the beneficiary of our Roth IRAs. It seems to have potential benefit related to asset protection. What are the downsides?

That might not be the case. If your spouse is the primary beneficiary and your kids are contingent beneficiaries and you die first, your spouse inherits your IRA and can change the beneficiaries to whoever they want.

If your IRA goes into a see-through or conduit trust with the spouse as beneficiary and your kids as contingent beneficiaries then you are assured that it will go to your kids and not the next spouse or their kids. It happens.

In a conduit trust, the spouse gets RMDs as soon as the trust receive them and can get additional withdrawals if in the trustee's opinion is needed for the spouse's health, education, maintenance, and support.

 

[JBTX]

We were advised the same. Our brokerage account and house into a revocable trust that becomes irrevocable upon the passing of the 2nd of us. Traditional IRAs go directly to our kids upon the 2nd of us passing.

My understanding is that if our traditional IRA were to go into the trust, it would be subject to trust income tax rates which are (likely) significantly higher than personal income tax rates.

Admittedly, I’m less clear on the pros/cons of the trust being the beneficiary of our Roth IRAs. It seems to have potential benefit related to asset protection. What are the downsides?

Inherited IRAs can go into trusts. It is a little more complicated and you need an experienced attorney on these matters. Most of our IRA money will be passed to our adult children in trust.

If the RMDs are kept inside of the trust, they will be taxed at higher trust tax rates. If they are distributed from the trust the same year they are taxed to the individual just like if the individual owned it directly. Most likely if you child was a responsible non spendthrift adult you would distribute the RMDs to the adult child. If they got involved in a messy divorce or got sued etc you may leave it in the trust for protection even though the tax rates are higher . To have the above optionality it would have to be an accumulation trust vs conduit trust which automatically spits out RMDs to the individual. Conduits are usually suboptimal for 10 year old beneficiaries of disabled/chronically ill beneficiaries. For surviving spouses a conduit can get a longer stretch so in some cases may make sense. For a minor child it’s kind of complicated.

If the adult children were stable, financially responsible and don’t appear to be in danger of messy divorce, lawsuit or bankruptcy I’d probably lean to leaving the IRA/401k outside of a trust, but it’s a judgement call. In our case we have a disabled adult son and a spendthrift adult daughter so all Ira money will be left in trust

 

[JBTX]

That might not be the case. If your spouse is the primary beneficiary and your kids are contingent beneficiaries and you die first, your spouse inherits your IRA and can change the beneficiaries to whoever they want.

If your IRA goes into a see-through or conduit trust with the spouse as beneficiary and your kids as contingent beneficiaries then you are assured that it will go to your kids and not the next spouse or their kids. It happens.

In a conduit trust, the spouse gets RMDs as soon as the trust receive them and can get additional withdrawals if in the trustee's opinion is needed for the spouse's health, education, maintenance, and support.

It’s my understanding that if a spouse inherits an IRA in a conduit trust it can still get an extended stretch. If it is in an accumulation trust it must leave the IRA in 10 years. I only recently learned this.

There is a special carve out for disabled and chronically ill EDBs such that can get an extended stretch in an accumulation trust. I think it is called an AMBT trust

 

[pb4uski]

It’s my understanding that if a spouse inherits an IRA in a conduit trust it can still get an extended stretch.

That's my understanding too... in a conduit trust that the RMDs are the same as if the spouse inherited the IRA directly and when that spouse dies that the beneficiaries get 10 years, so it is the same as if the spouse inherited it directly but the spouse can't change the beneficiaries to a subsequent spouse or that subsequent spouses kids.

 

[orbops]

I'm currently setting up a trust for my wife and I + I am the successor trustee for my father's trust.

Personally as the successor trustee, it is much easier to distribute the money if you have transfer on death to the beneficiary set up for every investment account. As the trustee, it was a pain in the ass to send in all the documentation that proves I am the trustee including multiple notarized documents.

Concerning if you pass before your wife passes, others are correct in saying that the surviving spouse can change anything in the revokable trust.

All retirement accounts become inherited IRAs or inherited Roth IRAs, and are subject to the 10 year rule.

For the 2nd child to get the money over 5 year periods, remember that the 10 year rule will still apply, so the daughter will have to keep track of every distribution, and manage the money even after the 10 years have passed if more than 2 distributions in the first 10 year period are needed.

Ultimately, you have to have faith in the trustee the daughter will follow your wishes as called out in your revokable trust. In my case, my stepmother was the original successor trustee, and she refused to give us a copy of the trust when my father passed. Once she passed, I became the successor trustee and discovered that my sister and I were entitled to a portion of the retirement savings my father as the beneficiaries - but the step mother embezzled all those funds, and we lost out on about $500K.

 

[Slim11]

If you set up transfer on death beneficiaries for all your accounts, why would you need a trust?

 

[orbops]

Just for the home property ,measly collectibles, power of attorney, health power of attorney, pet care, and charitable organizations.

 

[Slim11]

Can't you just do that outside the trust? My power of attorney, health directives, are seprate documents. Pet care is harder. Pysical things I just left a letter of direction to follow. No one knows what's what, so no fights. The home could just pass through the regular estate. It takes time to sell and empty it anyway.

 

[orbops]

On DW's side, it could get messy, so we wanted the trust and the trustee to be very clear.

BTW - as we are in the process of creating our trust, we found out that our original will made like 20 years ago was never submitted by the lawyer, so it was never legal.

 

[pb4uski]

orbops, no disrespect, but I think you are confused on many things.

To begin with, a trustee technically has no responsibility for accounts with beneficiary designations, though often the executor of the will and the trustee of the trust are the same person.

I was a co-trustee for my dad's revocable living trust and my mother's revocable living trust but also sherparded DM's IRA, which had beneficiary designations but technically they were two separate roles.

With revocable living trusts, typically the grantor, beneficiary and trustee are all the same, though sometimes there is more than one trustee. For example, my uncle and I are co-trustees of my uncle and aunt's revocable living trust.

When the grantor of a revocable living trust dies, the trust becomes irrevocable.

For my parents two trusts that I was a co-trustee of I had no difficulties distributing the assets. I didn't have to provide anything since I was already an authorized co-trustee. It might have been different in your case because you were a successor trustee rather than a co-trustee.

On the last part, what do you mean by never submitted by the lawyer? Submitted to who? In my experience, once a will is signed, witnessed and notarized, it is valid.

 

[orbops]

IAs a successor trustee going in blind to all financial accounts in the Trust, I had to provide lots of documentation, and spent hours on the phone with Fidelity, Vanguard, and Bank of America.

That's why I suggest putting retirement accounts under a beneficiary or transfer on death. As a successor trustee, I had to provide the documentation, and then was finally told that there were beneficiaries on the accounts. Before that, they refused to provide any information.

Concerning the will, the lawyer witnessed it, but never got it notarized.

One additional twist in my case is that apparently my stepmother owes the IRS $60K, and I've been waiting so far for 2 months to even get copies of her tax returns to better understand her financial situation since all the brokerages won't provide any tax records without a probate court order, which is something I'm trying to avoid.

 

[pb4uski]

IAs a successor trustee going in blind to all financial accounts in the Trust, I had to provide lots of documentation, and spent hours on the phone with Fidelity, Vanguard, and Bank of America.

That's why I suggest putting retirement accounts under a beneficiary or transfer on death. As a successor trustee, I had to provide the documentation, and then was finally told that there were beneficiaries on the accounts. Before that, they refused to provide any information.

Concerning the will, the lawyer witnessed it, but never got it notarized.

One additional twist in my case is that apparently my stepmother owes the IRS $60K, and I've been waiting so far for 2 months to even get copies of her tax returns to better understand her financial situation since all the brokerages won't provide any tax records without a probate court order, which is something I'm trying to avoid.

No document can be notarized unless the notary sees the signers sign it, so that was incredibly sloppy and inappropriate. But you are correct, a will that isn't notarized isn't valid.

I'm confused.... accounts in the name of a trust don't have beneficiaries. It seems that in your case the problem wasn't a trust or not but the grantor not sharing details with you. Were you aware that you were the successor trustee? Water over the dam but if someone told me I was a successor trustee and was unwilling to share a copy of the trust and the trust's assets I would tell them that I was unwilling to serve as successor trustee. My parent's trusts each had an exhibit that was a list of the trust assets... with amounts.

 

[gauss]

No document can be notarized unless the notary sees the signers sign it, so that was incredibly sloppy and inappropriate. But you are correct, a will that isn't notarized isn't valid.

Speaking from my perspective as an Executor:

I am not sure that this is true -- at least in my state. And I think we follow one of the model laws for the most part.

If the witnesses are available post-death to give testimony to the court that it is indeed their signature then that should help. If all of the witnesses are unavailable then the uphill climb becomes steeper.

Lack of notarization will prevent the will from being "self-proving", but it will not automatically make it invalid.

From my perspective as one who would like to plan my estate -- yes get your signature and your witness signatures notarized -- you can have it done on the Internet these days.

And for gosh sakes, make sure folks know where to find the original copy -- my favorite place is deposited for safekeeping with the county with a photocopy available in my residence and a letter attached stating the location of the original signed copy.

And a second thing -- if you wish to revoke a will, don't just destroy it -- leave a new will. Your executor will thank you.

-gauss

 

[Dash man]

I reviewed my IRA beneficiaries and they are set up like this:
- My wife is the primary beneficiary
- The trust is the contingent beneficiary

The purpose of the trust is twofold:
1. To control spending by the one child
- distributes the money gradually
- prevents a child from withdrawing everything immediately

2. Asset protection. Trusts can help protect inheritance from:
- divorce
- creditors
- lawsuits

Do you realize that the child’s trust assets will be taxed at the higher trust tax rates if income is not distributed in the year received?