Irrevocable Trust for "Small" Estate?


H

honda.lioness

A friend has about $1.6 million in assets. He is about 61-years-old. After his death and his wife's death, the friend has two nephews (both adults in their 20s and 30s) to whom he wants to leave the estate, one way or another. He is talking to his financial planner and an estate attorney. He is still struggling with the basics. Does arranging a generation-skipping irrevocable trust for his two nephews following his death and his wife's death make financial sense? The alternative seems to be direct bequests to the two nephews. I understand the estate tax currently exempts a little over $5 million in assets. Of course, the estate tax is subject to change. The friend and his wife will be living off the income from this (currently) $1.6 million and do not expect to be adding to it nor reinvesting dividends/interest. So the CAGR will be less than the stock market's. People's impressions are welcome. This is a real-life friend and not a hypothetical. I am also trying to get some education. Thank you in advance.
 
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D

dumbstruck

I understand the estate tax currently exempts a little over $5 million in assets.
Consider state taxes too... IIRC Florida used take for itself everything that the feds didn't exempt. I mean it would tax the whole estate at 45% or so, except for the portion which already paid the fed equivilent.

Florida isn't so tax friendly as advertised... I believe it's intangible tax can take 1.5% of a retiree's assets every year, which is a lot if you are living off a lump savings instead of pension.
 
P

Pico Rico

A friend has about $1.6 million in assets. He is about 61-years-old. After
his death and his wife's death, the friend has two nephews (both adults in
their 20s and 30s) to whom he wants to leave the estate, one way or
another. He is talking to his financial planner and an estate attorney. He
is still struggling with the basics. Does arranging a generation-skipping
irrevocable trust for his two nephews following his death and his wife's
death make financial sense? The alternative seems to be direct bequests to
the two nephews. I understand the estate tax currently exempts a little
over $5 million in assets. Of course, the estate tax is subject to change.
The friend and his wife will be living off the income from this (currently)
$1.6 million and do not expect to be adding to it nor reinvesting
dividends/interest. So the CAGR will be less than the stock market's.
People's impressions are welcome. This is a real-life friend and not a
hypothetical. I am also trying to get some education. Thank you in advance.
1. Leaving his estate to his nephews is not a "generation skipping" trust.
Leaving it to the nephews kids would be.

2. You are right that the estate tax may change, so I would be putting in
place a trust with my specific intentions. This would also avoid probate,
and hopefully any infighting.

3. I would include terms that allow the trustee discretion to allocate funds
to the medical/etc. needs of the nephews. By the time this comes to pass,
one might be, heaven forbid, in need of significant care and the other not.

4. Since I don't trust those money grubbing politicians one bit, and if he
is sure what he wishes to do, I would put in place a trust to take effect
upon the first to die, so as not to loose that person's estate tax
exemption. I realize it is now "portable", but do not trust it to remain
such.

5. I would tie up the funds until the kids get older (let them earn their
own keep while in their 20s and 30s), or to see if there are any special
needs that develop.
 
T

Tad Borek

A friend has about $1.6 million in assets. He is about 61-years-old.
After his death and his wife's death, the friend has two nephews
(both adults in their 20s and 30s) to whom he wants to leave the
estate, one way or another.Does
arranging a generation-skipping irrevocable trust for his two nephews
following his death and his wife's death make financial sense?

If he passes away first, should the wife have the right to change
beneficiaries on any of the assets? Or is the point to avoid that? And -
is there some desire to control the assets after death, e.g. delaying
the inheritance until at least some triggering age?

What kind of assets are they? E.g. any real estate, IRAs or life
insurance as part of the $1.6?

-Tad
 
H

honda.lioness

If he passes away first, should the wife have the right to change
beneficiaries on any of the assets? Or is the point to avoid that?
Good point. The husband wants to have the final say on the beneficiaries.
And -
is there some desire to control the assets after death, e.g. delaying
the inheritance until at least some triggering age?
If you are saying that such a desire to control argues for a trust, I understand.

The draft of the trust the friend is considering specifies 35 years old before a beneficiary can receive the dissolved trust's income and/or proceeds. That is, the nephews must be 35 before they get any income from the trust. For the nephews' issue (= the nephews' kids), the nephews must not only die but their issue (kids) must also be at least 35 before the trust dissolves.

Hopefully I am understanding your question correctly and not butchering too badly the legal lingua franca.
What kind of assets are they? E.g. any real estate, IRAs or life
insurance as part of the $1.6?
The assets are stocks and bonds in an account with only the husband's name on it. The husband recently inherited these stocks and bonds from a parent. My understanding is community property is not an issue for this part (the recently inherited stocks and bonds)of the estate.

Pico rico and dumbstruck, your comments help. Thank you!
 
T

Tad Borek

The husband wants to have the final say on the beneficiaries.

The draft of the trust the friend is considering specifies 35 years
old before a beneficiary can receive the dissolved trust's income
and/or proceeds. That is, the nephews must be 35 before they get any
income from the trust. For the nephews' issue (= the nephews' kids),
the nephews must not only die but their issue (kids) must also be at
least 35 before the trust dissolves.

The assets are stocks and bonds in an account with only the husband's
name on it. The husband recently inherited these stocks and bonds
from a parent. My understanding is community property is not an issue
for this part (the recently inherited stocks and bonds)of the
estate.
It seems estate tax isn't a driver as it's so far below the limit. If
the threshold changes downward, he can amend the trust. It's all about
use and distribution of the trust assets, especially because he's
relatively young - there may be 30+ years ahead.

Community vs separate property - the inheritance from his parents is
separate, unless converted. That has significance if his wife passes
away first. Community assets are fully stepped up in cost basis at the
death of either spouse - eg stocks, stock mutual funds, the house.
Keeping them separate gives up that potential tax benefit.

Strictly for passing the assets to the nephews, he could set up a
revocable trust for himself that becomes irrevocable when he passes
away. Then, it's either distributed to the nephews if they're old
enough, or managed by a successor trustee until that time comes. While
irrevocable & in existence it would file its own tax returns and, if
income isn't distributed, pay taxes.

Of course, that cuts out the wife, so the trust will probably provide
some level of support for her if she outlives him. How much depends on
his wishes and her finances (less of an issue if there's other money
too). This could be a sticky conversation though; every restaurant check
during their retirement could raise the question of whether to pay for
it using "their money" or "the nephew's trust."

Also given the many years ahead, long-term care, and care and planning
around dementia and Alzheimer's need to be considered. Should the trust
be available to use entirely for care? Could it be depleted by a
successor trustee through gifts to the nephews, in lieu of paying for
more expensive care? Is asset protection part of the goal of this trust?

-Tad
 
H

honda.lioness

It seems estate tax isn't a driver as it's so far below the limit. If
the threshold changes downward, he can amend the trust. It's all about
use and distribution of the trust assets, especially because he's
relatively young - there may be 30+ years ahead.

Community vs separate property - the inheritance from his parents is
separate, unless converted. That has significance if his wife passes
away first. Community assets are fully stepped up in cost basis at the
death of either spouse - eg stocks, stock mutual funds, the house.
Keeping them separate gives up that potential tax benefit.

Strictly for passing the assets to the nephews, he could set up a

revocable trust for himself that becomes irrevocable when he passes

away. Then, it's either distributed to the nephews if they're old
enough, or managed by a successor trustee until that time comes. While
irrevocable & in existence it would file its own tax returns and, if
income isn't distributed, pay taxes.

Of course, that cuts out the wife, so the trust will probably provide
some level of support for her if she outlives him. How much depends on
his wishes and her finances (less of an issue if there's other money
too). This could be a sticky conversation though; every restaurant check
during their retirement could raise the question of whether to pay for
it using "their money" or "the nephew's trust."

Also given the many years ahead, long-term care, and care and planning
around dementia and Alzheimer's need to be considered. Should the trust
be available to use entirely for care? Could it be depleted by a
successor trustee through gifts to the nephews, in lieu of paying for
more expensive care? Is asset protection part of the goal of this trust?

Thank you Tad. These seem good points. My bud is studying them all in preparation for the next meeting with his attorney.
 
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