.....The background for this post, regarding estate planning.
A small gathering of in-laws (20), ranging in age from 60-78 years, some with spouse as well as adult children as beneficiaries. One third of the group lives in Michigan, the remainder live in other states.
A portion of overall discussion moved to, for a short period of time; wills, beneficiaries, deeds, directives, trusts and related.
I was a listener with this discussion and heard what I believe were misunderstandings, confusion or incomplete interpretations of various legal documents among those in the conversations.
--- Base assumptions for purposes of my question:
1. Single and/or married parents constructing an inheritance path
2. Spouse and adult child or children beneficiary(s) who have an excellent relationship (no pissing contests)
3. Total assets at $1 million, which includes one primary residence of parent/parents, 2 autos, bank/c.u. accts., investment accounts which consist of one taxable acct. and IRA's (traditional and Roth). The parents both have pensions, but these monies do not transfer; other than to one another and not to other beneficiaries.
4. All real property is paid in full...home and autos.
5. The only ongoing payments consist of normal areas, as: home/auto insurance, property tax, cable, phone, utility and related.
Federal estate tax will not be a consideration, as the estate is $1 million; in addition, Michigan has neither an estate or inheritance tax.
A. The Will: a written instrument by which you provide for the disposition of your property after your death. One decides about which/what goes to whom or where, yes?
B. Deed forms: Deeds of various types are likely used for ownership and/or transfer of real estate.
C. Beneficiary(s): Well, those one chooses as such, eh?
D. Directives: I place these for the sake of estate planning; although not directly part of wealth transfer or distribution; but can cause a personal and/or financial burden upon others. Power of Attorney generally include at least a medical and financial directive.
So, using a will for defining distribution of property; 2.) properly designating beneficiaries for all financial accounts IRA, 401k type, annuity(s), insurance policy(s), adding name(s) to checking/savings accounts, etc.; 3.) adding name(s) to a deed to transfer property upon death. All good, yes?
One may perform all of the above, to the best of my knowledge, using a trust, too. Overall, I find a few benefits of using a trust:
1. a trust is not a public document in the court system. Obviously, this may protect most transactions within the trust from public eyes.
2. a trust can be used to set a time frame/restrict for release of monetary features to beneficiary(s).
The above is quite simplistically written, and I have likely overlooked some critical information. Please give me an electronic poke in the arse about this.
The base question with the above, is whether a trust is an absolute necessity; or may not the same function be provided using a will and accompanying documents, as listed above.
NOTE: the legal status of written documents in the areas discussed may vary from state to state.
ADD: Per Ted's comment, yes; none of this implies not consulting an appropriate legal source. But, prior knowledge is invaluable; not unlike with investing.
Thank you for your input.
Regards,
Catch
Comments
Regards,
Ted
Kiplinger, Why You Don't Need a Living Trust
https://www.kiplinger.com/article/saving/T021-C000-S002-why-you-do-not-need-a-living-trust.html
I'm sure you know that anything that passes through POD/TOD, JTWROS, etc. already isn't public and isn't subject to probate or disclosure.
These properties aren't controlled by the will, so one needs to be careful in writing the will to take them into account. Suppose one gives IRA #1 to heir #1 (as the named beneficiary) and IRA #2 to heir #2. If one IRA has done much better than the other, the property split might not come out as intended. The will can be written to take this into account, but that requires keeping all assets in mind, not just the ones passing through the will.
You noted: " beneficiary if something happened to him and so on. The key reason as I understand it was to keep the trust assets separate from his so if he ever got divorced his wife wouldn't be entitled to anything that he hadn't withdrawn previously."
>>>Yes, this is a form of restrictions, limitations or protections that may be set within a trust. The kicker to all of this type may be a trust factor within an existing good marriage; and is his wife aware of this trust? Yup, probably too many times all of this gets smelly. Also, I know a few folks who have established a trust to perform ongoing funding to areas of their interests..... music education for kids and a historical society.
@msf .................I'm not a big fan of trusts either. But, I understand their use for complex family/business situations and to control cash flows to family members, too. When I've been curious about aspects of an estate plan with a friend or family member who will discuss this; generally, they have been hazy about how everything is tied together. I understand this too; as their full faith and trust is towards those trained in areas of estate planning and that hopefully the individual has acted in their best interest, legally and otherwise.
Being curious with this area of our lives, I had hoped for posts about methods being used by others here, that are considered of value to protect family assets through inheritance.
We individual investors here and at similar sites are a thin percentage slice of the total population. We make the time and effort to learn about investing to the best of our skills. This thin slice of the population should also be inclined, IMO, to strive to protect our hard won monetary gains to the full benefit of those we choose to be beneficiary of this effort.
If I can not be curious about the best functional choices for estate planning, I should begin to discard my investing curiosity, too.
I know and understand my limitations with areas of investing. The same applies to estate planning, but this does not limit me to as much understanding of the area as I can comprehend.
For investing and estate planning, without a basis of understanding; one can not expect a proper answer without a proper question, based in knowledge.
A complete review of the plan at this house is on our personal schedule.
Thank you, @LLJB and @msf for your thoughts with this subject.
Hopefully, there may be other input/experiences. At the least, perhaps this post will be of value to someone else here and classified as "for educational purposes only".
Regards,
Catch
What I tried to do was not post what I'm doing, but rather respond to the question originally asked: "The base question with the above, is whether a trust is an absolute necessity; or may not the same function be provided using a will and accompanying documents, as listed above."
I cited approvingly a Kiplinger article that specifically addressed most of the OP, but did not address the finer control that a trustee can exercise. While your background facts didn't indicate any need (or absence of need) for that control, I did discuss this concern separately.
Here are other ways to deal with the control issue that don't involve any kind of trust:
A UTMA can be created at death, as the beneficiary of an account (e.g. TOD) or by the will. Obviously this doesn't work for adult beneficiaries and it also gives less control than a trust (e.g. it automatically terminates when the beneficiary turns a certain age determined by the state). But it is a "document" that can be used in lieu of a trust for controlling some distributions of property.
https://talislawfirm.com/making-a-gift-to-a-minor-the-uniform-transfers-to-minors-act-may-be-the-way-to-go/
If the beneficiaries are charities, one can bequeath property to a donor advised fund. This gives the person one designates control over where that money goes, similar to the control that a trustee would exercise over a trust one could create for charitable purposes. As with the UTMA, one doesn't even need to create the DAF until death. Here's Fidelity's boilerplate verbiage for that purpose:
https://www.fidelitycharitable.org/docs/Bequests.pdf
Do you really want to read about real life examples?
I know of an older pair of adults who live in TIC property. The way they are handling the situation in their wills is to leave the other a life estate so that the survivor isn't evicted when the property is partitioned and sold.
I asked my financial institution how it will handle a particular account of mine at death. (Because of the form of title, it will not allow me to name beneficiaries.) I made it clear that I was not asking what the law was, but rather what actions they would take. I appreciated the honest answer I received: It didn't know, the situation was unusual, and that I'd be better off changing the form of the title.
Situations like these don't strike me as what you're looking for. You presented a vanilla situation, did not indicate any special need for control, no tax issues. For example, you didn't say that the real property was out of state.
KISS. (for educational purposes only, not advice
The key is keeping the property separate; you don't need a trust wrapper with its fees and administrative overhead to do that. Property that is inherited, even during marriage, is separate property. Just don't comingle it.
https://www.legalzoom.com/knowledge/last-will/glossary/separate-property-wills
Thank you for your follow up information. I intended to note real estate is in Michigan, and no other state. So, no conflicts with other state legal for this.
I did read the informative Kiplinger link you provided.
A personal summary remains that I don't find a need for a trust for most folks with the variety of other legal documents available to cover aspects of inheritance.
Respectfully,
Catch
My parents established a living trust and transferred all of their assets into it (pain!!). My Mom passed away first. Half of those assets then went into "Trust B" (all in a brokerage account), held for the kids; my Dad was the Trustee and I was Successor Trustee. At that time, Dad dissolved his half of the trust and returned to normal management of his assets (house, stocks, car, etc.).
Sounds simple so far, except for the fact that the trust had to file a tax return every year.
After Mom's death, Trust B also had to file a return every year (in addition to Dad's return).
When he died (ten years later, in 2016, at age 98), I became Trustee and distributed the assets (to me and my siblings; no squabbling). I was also Executor of his estate and distributed those assets.
When it came time to file taxes, we discovered the downside of the trust -- the basis for those stocks in Trust B:
Mom's half received the step-up basis at her death. But then the basis was essentially frozen (Dad was a buy-and-hold investor, so not much was sold inside the trust). After years of growth, there were considerable capital gains which were taxed (especially in comparison to Dad's separate assets, which stepped up at his death).
I argued with Dad's tax accountant (who reached out to tax experts) but he wouldn't let me step up the Trust B basis.
One of the highly promoted reason for establishing a living trust is to avoid probate. I'm sure this could be an issue, but in our state (Georgia) and under our circumstances, probate was a trivial piece of cake.
Perhaps probate is tougher in Michigan (I'd advise finding out).
Other types of trust may be called for (Special Needs, e.g.)
Unless, there are very specific reasons for a living trust, I'd advise against it.
David
Thank you for your personal accounting with this. I have not attempted to compare Georgia and Michigan as to probate variances; but I suspect the probate side is very similar. For the most part, probate has uniform standards with state modifications.
Your narrative will be of benefit to many.
Regards,
Catch
The clue is the use of the term "Trust B". What was constructed here was an A/B bypass trust. This is a tax maneuver designed to reduce estate taxes. The B trust is irrevocable. That's what makes it useful in reducing estate taxes. The trusts most people think of are revocable.
From a tax perspective, revocable trusts are essentially just another part of your personal assets. So when you die, they get a step up in basis and are considered part of your estate for estate tax purposes. In contrast, an irrevocable trust is a separate entity for tax purposes. It doesn't die, it doesn't get a step up. It is not counted as part of your estate.
As of July 1, 2014, Georgia has no estate tax. So the only question in that state is whether an A/B bypass trust serves any purpose at the federal level.
Generally, the purpose of bypass trusts is to split property so that each spouse can take full advantage of the estate tax exemption (currently $11.18M per person). Consider this example:
A couple has $12M in assets. With no tax planning, the surviving spouse retains the full $12M. (There's a spousal exemption so it doesn't matter how much passed from deceased to survivor.)
Under old federal rules, when the surviving spouse died, the estate was taxed to the extent it held more than the individual's exemption amount. But starting in 2011, the surviving spouse could add in the deceased spouse's exemption, so that none of the $12M would be subject to federal estate tax.
At the federal level, this "estate tax portability" simplifies things and obviates the need for bypass trusts. Nor do Georgians need to consider using bypass trusts to deal with state estate taxes, since they have none. Thus, the narrative, while of historical interest, isn't really of help to many Georgians.
Nor is it of particular help to many people overall. With estate tax limits now at $11M (or $5.5M in the future if the increase isn't made permanent), this is only of interest to wealthy couples.
State estate taxes might make this more interesting to some. No state, AFAIK, has estate tax portability (this may have changed recently). Further, a few have relatively low estate tax exemption amounts. For example, Massachusetts' is a "mere" $1M. Those people might be still be considering bypass trusts.
Michigan has no estate tax, and FWIW, it still has an inheritance tax, but that applies only to inheritors of assets of a person who died before Sept. 30, 1993 [sic].
execution-matters/
When I wrote, "Your narrative will be of benefit to many."; I was implying that David's write would be of value for avoiding the path that was taken in his write.
Separately, I recall NJ's current estate tax kicks in at $675,000. The treasury there is pulling in a good amount of cash every day.
Also, the admonition "Unless, there are very specific reasons for a living trust, I'd advise against it", was based on his experience with an irrevocable trust - a critical detail that was omitted.
Readers should not be mislead into thinking that their "living trusts" don't get a step up in basis. It's not the "living" (inter vivos) aspect that makes a difference, but the irrevocable part.
Quick question: who here, when reading "living trust", thinks of an irrevocable trust where the money funding it must be reported as a gift, like any other gift over $15K?
Separately, there's no estate tax in NJ. In exchange for Christie's approval to raise the gas tax (which had not been raised since 1988) to repair NJ's decrepit roads, the legislature had to agree to eliminate the estate tax.
Thank you for the "new" update on NJ.
Hopefully, then; folks reading any of this will do a great of homework to determine what is appropriate and/or necessary for inheritance avenues for their circumstance.
Perhaps my Dad could have distributed those Trust B assets to the kids whenever he chose, but he managed them as an extension of his. He never indicated to me that the trust was established to reduce estate taxes -- he wasn't in that neighborhood; I think a lawyer just sold it to them.
If Mom's half had just become Dad's at her death, the capital gains at his death would not have been a factor.
As several of you have said --- it's best to do your homework and really know what you're getting into. Today, we have easy access to a lot of information.
David
Like many on this board, my parents were of the Greatest Generation. They grew up in the Depression, raised a family, lived full lives. My grandmother, who immigrated from Scotland at age 8, was a firm believer in education (and in temperance and women's suffrage, according to Dad). Dad (and his older brother) went to Syracuse because the NY School of Forestry was tuition-free. He met Mom while selling sandwiches in the women's dorms. I remember his stories about hitchhiking home with a dime in his pocket.
Dad was drafted into the Army in the early 1940's. I asked him once if he had a choice of which service. He chose the Army because they had a Forestry Unit; but he never got into it. Instead, he was in a Communications Unit in Iceland.
They raised and educated four kids, with Mom a "stay-at-home" mother.
Of course, they were very careful with their money. Dad started investing early on. He came to favor dividend-paying stocks, one mutual fund (the AARP G&I one) and never any bonds. He bought Kellogg stock in the Kellogg DRIP program because he liked cornflakes. His broker always thought he was "too aggressive for his age".
I pretty much do the same.
He grew a garden, chopped his own firewood, walked five miles a day after his heart bypass and into his nineties, had a grape orchard, made lots of wine, was a big-business conservative, kept careful records in notebooks, bought bourbon by the case and loved life. Even an hour before he passed in hospice, I believed he'd walk out of there.
and they are still missed
David
Because they spent their formative years during Great Depression, many people of that generation tend to be frugal, preparing for what could happen again. I wonder how much the Great Recession affected people now in their twenties.
FWIW, here are a couple of columns about what happened to AARP funds - the original Scudder ones including the one your father bought, and the later reboot with SSgA:
https://www.cbsnews.com/news/aarp-mutual-funds-is-aarp-looking-out-for-you/
https://www.financial-planning.com/news/aarp-closing-down-funds