Trusts to avoid estate tax

[ChrisC]

I'm not so worried about estate taxes that might exist for my wife and me, as we have provisions in our estate planning documents to mitigate that risk if we're so fortunate that one of us has to deal with that stroke of good fortune-- we are planning on ditching some of our wealth while alive through gifting to charities and our heirs.

Nonetheless, we are leaving what remains, in trust to our children beneficiaries. For one thing, it's very likely that two of our three children will have their own estates likely to be significantly larger than our own estates so we want to give them some time and space to plan for themselves, and make their own adjustments to avoid their own estate tax problems. Two of them will also have state estate tax issues, if they continue to reside in their present places.

Another thing we are concerned about is potential divorces occurring with our children, spousal in-law issues, and blended family concerns with the spouses our children have married. Currently, we see a lot of potential issues even if our children never get divorced; we want to make sure our assets are earmarked for our children on a strategic and gradual release basis, through trusts that they would essentially control anyway. When they reach 43 years old, they can invade all trust principal and disband the trusts and place the wealth in their own hands with the lost of complete autonomy and independence from their spouses -- they can essentially co-mingle the trust funds into their own family funds. Children are currently 36, 38, and 41 so they will probably have this option as soon as the papers are in play!

We are not very concerned about creditor protection, but it's there too in trusts if necessary to shield our children from unsound business decisions they might make or if they get roped into some of the silly financial schemes proposed by some of their in-law relatives.

 

[Koolau]

Our estate plan creates a testamentary trust for our 50+YO son. It will hold very low seven figures plus he will receive a house with value approaching $1M. The reason for the trust is primarily to ensure proper management of the money as he is very financially naïve. It is also to protect the money as he is quite a gentle soul and would be vulnerable to hucksters that he might meet in "safe" places like his church. He knows about the trust and the reasons and he is grateful for it.

The trust will be funded with tIRA money, so will disburse based on the ten-year rule, then terminate.

Can you share with us what the trust company charges for the privilege of handling the assets? The kids grand parents left them a trust and the trust company churned their accounts and charged almost 4% of assets per year. No way to get them out of it. I would call them and they would promise to lower the rates and then never do it. I'm unimpressed with trust companies but have limited experience (all bad.) YMMV

 

[youbet]

Not true, *unless* it is an irrevocable trust. Irrevocable trusts remove the money from your control, it is no longer yours. And it has to be done properly, I'd assume there is also a 'claw back' period. A revocable ('living') trust does not do this at all (it can help avoid probate, but not estate taxes).

But it's complicated. Read up (NOLO is a good source) and seek a real pro if you want to move forward. Most of these plans have gotchas, TNSTAAFL.

-ERD50

Good points ERD50. And I bolded the most important part. Many folks have trouble dealing with the "no longer yours" part.

 

[OldShooter]

Can you share with us what the trust company charges for the privilege of handling the assets? The kids grand parents left them a trust and the trust company churned their accounts and charged almost 4% of assets per year. No way to get them out of it. I would call them and they would promise to lower the rates and then never do it. I'm unimpressed with trust companies but have limited experience (all bad.) YMMV

My recollection is that the fee will be 60 or 70 bps but you should check that. IIRC DW's megabank charges 150.

 

[luckydude]

Can you share with us what the trust company charges for the privilege of handling the assets? The kids grand parents left them a trust and the trust company churned their accounts and charged almost 4% of assets per year. No way to get them out of it. I would call them and they would promise to lower the rates and then never do it. I'm unimpressed with trust companies but have limited experience (all bad.) YMMV

See if the trust document has language to give the beneficiary the power to remove/replace the trustee. Also if a trust protector is named in the trust, that individual should be able to remove the current trustee.

Even if the language isn't there, get an attorney to draft a letter to notify the trust company that the beneficiary wants them removed as trustee, and threaten them with legal action if they are unwilling. More than likely they will simply resign because they don't want to deal with any legal action.

This problem is unfortunately quite common. Some states make it very easy to remove trustees even if the language isn't there in the trust document.

Good luck.

 

[Koolau]

See if the trust document has language to give the beneficiary the power to remove/replace the trustee. Also if a trust protector is named in the trust, that individual should be able to remove the current trustee.

Even if the language isn't there, get an attorney to draft a letter to notify the trust company that the beneficiary wants them removed as trustee, and threaten them with legal action if they are unwilling. More than likely they will simply resign because they don't want to deal with any legal action.

This problem is unfortunately quite common. Some states make it very easy to remove trustees even if the language isn't there in the trust document.

Good luck.

In our case, the trust was in a distant state and the amount was less than $50k/child so to save a few grand would have cost more in lawyer fees, I'm guessing - plus I trusted the trust company to do what it promised (guess I'm the fool.)

 

[Joylush]

I have the same concerns as the OP. If anyone has an estate attorney in Florida they are happy with, please message me with the name.

 

[Retired Expat]

Not in your position, but became aware of some of this back when the brackets were far lower.

Not true, *unless* it is an irrevocable trust. Irrevocable trusts remove the money from your control, it is no longer yours. And it has to be done properly, I'd assume there is also a 'claw back' period. A revocable ('living') trust does not do this at all (it can help avoid probate, but not estate taxes).

But it's complicated. Read up (NOLO is a good source) and seek a real pro if you want to move forward. Most of these plans have gotchas, TNSTAAFL.

-ERD50

The trust my father put his 2nd home was a huge deal for us. It kept the property out of the estate and so kept the overall value under my states exemption cliff. Of course it would have been better had we known there was a trust and titles changed when the trust came due but luckily it all worked out.

 

[livingalmostlarge]

Irrevocables can be useful. There is a claw back period and it counts against your lifetime gifting. We gifted our kids some in irrevocable trust which does make me a bit nervous but what can we do. We also had to name a trustee not ourselves so it was DH's cousin which bothers my mom a lot, but again no one on my side of the family is at all capable of financially prudence. They aren't spendthifts, but well naive/taken advantage of/etc describes it.

I would talk to a lawyer and planner because also the reason to gift say stock at a very low valuation with the potential to appreciately greatly and be out of your estate tax is a big deal.

 

[ncbill]

I've been looking for options for Washington state also. One thing I found- a Washington credit shelter trust (also known as a revocation trust), which allows a married couple to transfer one $2.2 million exemption to a surviving spouse, effectively doubling the exemption to $4.4 million for state taxes.

Sure, but the situation to which I responded involved a single individual with total assets approaching $10 million...versus a ~$2.2 million exemption.

So, again, transferring those assets from the individual to an irrevocable trust (& filing the gift tax form) solves the WA estate tax problem.

As far as I could determine, there is no gift tax and no 'claw back' period for WA...but the lawyer used for the trust would know for certain.

It will cost more versus a revocable living trust to setup & maintain but it will cost a whole lot less than paying WA estate tax.