Trust Funds 101

I’m looking at estate planning items and wondered about setting up a trust. Any AFers have experience here?

Two questions:

  1. Is your net worth less than $5 million? (Or $10m if you’re married.)

  2. If you die intestate, the state will dole out your assets in accordance with state law. In most states, it all goes to your spouse first, then to your kids second, then to other family members third. Are you okay with that?

If the answer to the above questions are both “Yes”, then you probably don’t need much estate planning.

There are several reasons for setting up a trust, but most of them have to do with dying and avoiding probate. If you want to be sure your assets are given to your beneficiaries exactly how you want and in a timely manner, you need to set up a trust.

I thought you were a single guy with no dependents?

^ Yup. But I have family and a sister who has kids. It has me thinking of arranging a family trust.

Won’t the state take ~50% for their commission/taxes?

And unlike most of you AFers, I have less than $5m in assets.

The costs of setting this up and maintaining probably don’t make much sense unless you have substantial wealth. I’m sure a simple will would do just fine at a fraction of the cost.

Not at all. Not sure about NYC, but given the number of lawyers in that city I’d imagine it’s not too much more expensive than mine was. All in, it was about $2,200 to set up. And, if there are costs to maintain it, I haven’t encountered any.

I live in Texas, where there’s no income tax, no estate tax, and no inheritance tax. So no, the state takes nothing.

I forgot that other states have death taxes.

That’s about the price point I’ve seen, though annual costs are ~$500.

I guess another question, what is the Will vs. Trust argument?

Another reason I gotta get to Texas. It’s like Utopia.

Basically you set up a will to say the Trust will run everything.

Why the hell would you need to pay an annual cost? Once it’s filed with the courts it’s a done deal. Either that or my Trust was invalidated years ago and I need to fire me half-assed lawyer.

Does the trust have income of >$100? If so, you’ve got to file a 1041, and most likely pay an accountant to do it. Since I’m an accountant who can do this for a fee, I strongly advise you to set up several of them.

All kidding aside, I generally agree with Geo. Just write a will and leave everything to your sister.

But you have to be careful that you take care of all your non-probate assets. EG - I knew a guy who wanted all his money when he died to go to charity, and he stipulated such in his will. But when he died, 90% of his $2m estate was in his IRA/401k, and the beneficiary was his nephew. Since the IRA/401k skips probate, the nephew immediately inherited the $1.8m, and the other $200k went to charity.

The lawyers made sure that the nephew knew two things. (1.) That the guy really wanted all the money to go to charity, even the part that was in his IRA, but (2.) That the money now belonged to the nephew and he was not legally bound to honor his uncle’s wishes.

The nephew didn’t think very long or very hard about it.

Annual meetings are stated as the reason for the annual cost. Not sure if this is required.

Again, I know nothing of this and finally want to get something in order for the transfer of my assets in the event I die.

(double post)

Ah, yeah, I decline those. If nothing material changes in your life, why bother reading over your will and trust docs?

^Tax law may change.

In 2001, the estate tax exemption was $675,000. In 2006-08, it was $2m. In 2010, it was repealed. In 2011, it was $5m, and should (in theory) stay that way forever, but indexed for inflation.

So what made sense in 2001 might not make sense anymore.

EG - In 2001, you might set up a life insurance trust for your million dollar policy, so it’s not in your estate, given that you have $675k in other assets. (Life insurance is exempt from income taxes, but not estate taxes.) But in 2014, you might not want to set up that same trust, because you’re still not going to meet the $5m threshold, even with the million dollars. So to set up the trust will simply be a waste of money. (Of course, it might also be a waste of money to unnecessrily revisit it every year. But just because nothing changed in your life doesn’t mean that you don’t need to rethink your estate plan.)

^ Rather than setting up a life insurance trust, could you not more simply name someone as the beneficiary other than your estate? You can in Canada. Not sure if the same down there. Just wondering how all this complexity adds value.

^Doesn’t matter who the beneficiary is. What matters is who pays. If you write a check out of your bank account, then you paid for it and you lose $350k of your million dollar policy.

However, if you put write a check to the trust, and the trust writes the check to the life insurance, then it’s out of your estate, simply because the trust paid for it. And you’re 350k richer. (Less the couple of grand to set up the trust, that is)

^ Really? That’s bizarre. Not the same as here at all. Let’s say I wanted to give you $100k on my death, and I’m a fellow American. Could I write you a cheque for the premium amount, you pay the premium, and then you get the $100k tax free? Seems like its silly to make it depend on who pays.