Irrevocable Trusts?

[Ombud]

May 27, 2013 8:26:37 GMT -5 swamp said:

May 26, 2013 23:08:41 GMT -5 Ombud said:

What if its under the small estate limit? We didn't probate anything. We just divided it up (under 50k)

if it's a small estate, a trust is overkill, unnecessary, and someone screwed you out legal fees. 

The house sold for 400k & was in trust. 2 bank accounts weren't but they totaled 32k + car (4k per Edmund.com) + misc household items inc 4 gold coins / misc other coins > another 4k. The pourover will helped us pay off her debts + distribute outside probate. It was never notorized but was accepted until we tried to deposit proceeds from the house. Attny who drafted trust in 2000 apparently never thought that far ahead. Thankfully Wells Fargo figured it out for us

[skubikky]

May 26, 2013 17:57:13 GMT -5 swamp said:

And you have to make sure every asset subsequently acquired is titled in the trust. 

The big thing I don't like is that Irrevocable trusts need a trustee other than the beneficiary, which means you do not control your own money. And if circumstances change, amending or discontinuing the trust may require court intervention. 

That's the thing.  You can create a trust which is basically a container.  You have to re-title items to be put into the trust.
I have a revocable trust mainly because I want those assets that do not have a beneficiary designation to pass directly to my beneficiaries and to stay out of the public probate process.   It doesn't change the tax liability in my understanding.

[Deleted]

And update on this- met for an hour with the lawyer yesterday.  I established after this post that he had been talking about a REVOKABLE trust.  (Well, over the phone, "a revokable" and "irrevokable" sound about the same.)  It sounds pretty reasonable- it goes into effect at my death or disability and I can make revisions as needed before then.  While the house will need to be deeded to the trust, everything else stays as is and I name the trust as my beneficiary.  We walked through a lot of scenarios (DH predeceases me, DH and DS both predecease me, potential grandchildren, etc.) and I realized how blessed I was that there's no family drama.  All the potential heirs and trustees get along well, everyone is standing on their own two feet financially, no concerns that DS and DDIL would take the inheritance, quit their jobs and buy a condo and a yacht in FL. 

Odds are I'll still be alive and kicking at 90 but I'll feel better having this all signed, sealed and delivered in case the unexpected happens.

[swamp]

Why don't you just make your son the POD beneficiary of your bank accounts/brokerage accounts/financial accounts?  You don't need a trust to do that........

[Deleted]

Jun 27, 2013 7:35:20 GMT -5 swamp said:

Why don't you just make your son the POD beneficiary of your bank accounts/brokerage accounts/financial accounts?  You don't need a trust to do that........

But the house will still need to go through probate..

[swamp]

Jun 27, 2013 8:05:08 GMT -5 @bonnap said:

Jun 27, 2013 7:35:20 GMT -5 swamp said:

Why don't you just make your son the POD beneficiary of your bank accounts/brokerage accounts/financial accounts?  You don't need a trust to do that........

But the house will still need to go through probate..

Transfer to son with Life Estate to herself and husband. 

[Deleted]

Jun 27, 2013 7:35:20 GMT -5 swamp said:

Why don't you just make your son the POD beneficiary of your bank accounts/brokerage accounts/financial accounts?  You don't need a trust to do that........

It's a little more complicated since I need to take care of DH.  99% of our assets are in my name and if I were to be hit by a multicolored bus tomorrow, I want to provide for him.  (And DS would agree.)  On DH's death the trust would go to DS.  DH is 74 and DS is 29, so it's likely that I'll outlive DH so the trust will never get into DH's name and the trust would go to DS on my death. 

The trust structure avoids estate taxes and probate (my current estate is around the size that would get taxed).  As he explained it, it's also protected from DS' creditors or from claims of the Ex in a nasty divorce.  I don't expect either; DS and his wife are responsible people and I expect DS, who works in insurance, is carrying proper coverages.  They're still practically honeymooners and she doesn't strike me as the greedy type.  Certainly if things change over the years I can make adjustments to everything.

[Deleted]

So the son would own the house now but Athena & husband would have a life estate in the house?

Meaning if Athena's planning to sell the house, as she is, she would need to have her son sell the house and buy another for her?

[swamp]

Jun 27, 2013 8:13:11 GMT -5 @athena53 said:

Jun 27, 2013 7:35:20 GMT -5 swamp said:

Why don't you just make your son the POD beneficiary of your bank accounts/brokerage accounts/financial accounts?  You don't need a trust to do that........

It's a little more complicated since I need to take care of DH.  99% of our assets are in my name and if I were to be hit by a multicolored bus tomorrow, I want to provide for him.  (And DS would agree.)  On DH's death the trust would go to DS.  DH is 74 and DS is 29, so it's likely that I'll outlive DH so the trust will never get into DH's name and the trust would go to DS on my death. 

The trust structure avoids estate taxes and probate (my current estate is around the size that would get taxed).  As he explained it, it's also protected from DS' creditors or from claims of the Ex in a nasty divorce.  I don't expect either; DS and his wife are responsible people and I expect DS, who works in insurance, is carrying proper coverages.  They're still practically honeymooners and she doesn't strike me as the greedy type.  Certainly if things change over the years I can make adjustments to everything.

OK, then in your case a trust makes sense.

Sometimes, trusts get oversold to people who don't need them. 

[swamp]

Jun 27, 2013 8:15:28 GMT -5 @bonnap said:

So the son would own the house now but Athena & husband would have a life estate in the house?

Meaning if Athena's planning to sell the house, as she is, she would need to have her son sell the house and buy another for her?

Athena and her son sign the deed if she wants to sell it.  Works great when everyone gets along and is financially sound.  Doesn't work so well when the kids are a financial trainwreck. 

If she has Life use, she can claim the proceeds on the 1099.   If she's on Medicaid, then things get hairy, but I think she's got enough money to self fund long term care.

[Deleted]

BTW Athena,

We had the attorney do a complete "restatement" of MIL's Trust. One feature you might like is that in order to accomodate's MIL's changing group of charities DH, the sole beneficiary, can decline a portion of his inheritance and give a portion to charity on behalf of the Trust. I was surprised to learn than unless the Trust specifically gives the successor Trustee authority to give to charity on behalf of the the Trust he can't.

It's important because MIL's Trust today is right on the cusp of being taxable from the State of OR depending on what will be the net proceeds from the sale of her house.

[Deleted]

Jun 27, 2013 8:21:23 GMT -5 swamp said:

Jun 27, 2013 8:15:28 GMT -5 @bonnap said:

So the son would own the house now but Athena & husband would have a life estate in the house?

Meaning if Athena's planning to sell the house, as she is, she would need to have her son sell the house and buy another for her?

Athena and her son sign the deed if she wants to sell it.  Works great when everyone gets along and is financially sound.  Doesn't work so well when the kids are a financial trainwreck. 

If she has Life use, she can claim the proceeds on the 1099.   If she's on Medicaid, then things get hairy, but I think she's got enough money to self fund long term care.

It would also be a tax issue too, wouldn't it? The son would also assume Athena's tax basis and she would have to fill out a gift tax return for giving him the house if the equity exceeded $15k?

I don't know Swamp. Everything I've ever read about estate planning says putting your kid on the title of the house is not a good idea. Even in MIL's and DH's case I don't think it would be a good idea to put DH on title of her house. I don't want him to have any liability associated with her Disneyland waterpark features!

[swamp]

Jun 27, 2013 8:30:12 GMT -5 @bonnap said:

Jun 27, 2013 8:21:23 GMT -5 swamp said:

Athena and her son sign the deed if she wants to sell it.  Works great when everyone gets along and is financially sound.  Doesn't work so well when the kids are a financial trainwreck. 

If she has Life use, she can claim the proceeds on the 1099.   If she's on Medicaid, then things get hairy, but I think she's got enough money to self fund long term care.

It would also be a tax issue too, wouldn't it? The son would also assume Athena's tax basis and she would have to fill out a gift tax return for giving him the house if the equity exceeded $15k?

I don't know Swamp. Everything I've ever read about estate planning says putting your kid on the title of the house is not a good idea. Even in MIL's and DH's case I don't think it would be a good idea to put DH on title of her house. I don't want him to have any liability associated with her Disneyland waterpark features!

A life estate is not considered a complete gift, so no gift tax return filed. However, I'm sure it's only a matter of time before that changes too. 

Whether you put the kid on the house depends on the parents assets and the kids responsibility level.  We did it with my parents, it worked for them.  Not so much for DH's parents.  They have a farm co-owned with a sibling, and will probably have to go on Medicaid. 

It's a crap shoot.    Which is why you need to talk to an attorney who knows something about this instead of trying to self-plan. 

[Deleted]

Jun 27, 2013 8:21:23 GMT -5 swamp said:

If she has Life use, she can claim the proceeds on the 1099.   If she's on Medicaid, then things get hairy, but I think she's got enough money to self fund long term care.

Right. I have no intention of trying to qualify for Medicaid when (or if) I need long-term care. So many people will be in that boat the government (i.e. the taxpayers) are going to have a heck of a time trying to warehouse them all.  I haven't bothered to buy LTC coverage, although a guy in my church sells it and would LOVE for me to buy it because given my age (60), my excellent health and the longevity in my family, I'm not likely to need it for another 25 or 30 years.

[Deleted]

Coming from a family of financial train wrecks, I know don't want to have ANYTHING to do with being on title to anyone's property.

And I would guess that in my father's case he and his girlfriend would have not been able to get their reverse mortgage with a child's name on the deed.

I agree with you to seek appropriate legal counsel. No DIY estate planning!

[skubikky]

Jun 27, 2013 8:19:27 GMT -5 swamp said:

Jun 27, 2013 8:13:11 GMT -5 @athena53 said:

It's a little more complicated since I need to take care of DH.  99% of our assets are in my name and if I were to be hit by a multicolored bus tomorrow, I want to provide for him.  (And DS would agree.)  On DH's death the trust would go to DS.  DH is 74 and DS is 29, so it's likely that I'll outlive DH so the trust will never get into DH's name and the trust would go to DS on my death. 

The trust structure avoids estate taxes and probate (my current estate is around the size that would get taxed).  As he explained it, it's also protected from DS' creditors or from claims of the Ex in a nasty divorce.  I don't expect either; DS and his wife are responsible people and I expect DS, who works in insurance, is carrying proper coverages.  They're still practically honeymooners and she doesn't strike me as the greedy type.  Certainly if things change over the years I can make adjustments to everything.

OK, then in your case a trust makes sense.

Sometimes, trusts get oversold to people who don't need them. 

Swamp,
I know how a trust avoids probate, but how does it avoid estate taxes(let's assume here in New York state for the sake of this discussion)?   Is it because it transfers to her spouse?  Why would someone assign all of the estate to a spouse?  Why not assign some of the assets directly to the son?  Once the husband dies, and the estate passes to the son, there still wouldn't be any taxes paid(assuming the size of the assets is still over that threshold)?

[swamp]

I'm pretty sure you can't get a reverse mortgage when your kid is on the deed with you.  You can get a regular mortgage, but the kid has to qualify too.

Which is why it works in certain situations, but not all. 

Reverse mortgages aren't big up here, so I don't run into that question very often.  I think I've seen 2 reverse mortgages in 13 years of doing this.   Both times, the house went into foreclosure after the person died because the amount owed was greater than the value of the house.

[Deleted]

Right. I have no intention of trying to qualify for Medicaid when (or if) I need long-term care. So many people will be in that boat the government (i.e. the taxpayers) are going to have a heck of a time trying to warehouse them all. I haven't bothered to buy LTC coverage, although a guy in my church sells it and would LOVE for me to buy it because given my age (60), my excellent health and the longevity in my family, I'm not likely to need it for another 25 or 30 years.

I know this is a little O-T Athena, but now's the age to explore it because premiums will jump up substantially after age 60.

It's been a wonderful tool for my MIL. I think she bought her "cadillac" policy when she was 62. She is determined to have at home care which she has used for the last 2+ years. She is 78. Altough she's not in the best health, her father lived to 102 so it's a real crap shoot for how long she would live. What's nice is that she's been able to get care throughout some of her surgeries such as knee replacement surgery.

It's worked well for her because she stops paying premiums once the coverage kicks in. Given what a good pension she has at $120k/yr it's been nice that premiums are being paid out of the pension payments which cease when she dies. Therefore the rest of her estate is preserved for her heirs.

It doesn't cost anything to explore the options.

[swamp]

Jun 27, 2013 8:57:32 GMT -5 skubikky said:

Jun 27, 2013 8:19:27 GMT -5 swamp said:

OK, then in your case a trust makes sense.

Sometimes, trusts get oversold to people who don't need them. 

Swamp,
I know how a trust avoids probate, but how does it avoid estate taxes(let's assume here in New York state for the sake of this discussion)?   Is it because it transfers to her spouse?  Why would someone assign all of the estate to a spouse?  Why not assign some of the assets directly to the son?  Once the husband dies, and the estate passes to the son, there still wouldn't be any taxes paid(assuming the size of the assets is still over that threshold)?

Transfer between spouses avoids tax.  That's what the whole Supreme Court case decided yesterday was about.

As far as I know, a revocable trust does not avoid taxation when the beneficiaries are not the spouse, unless it's a charitable trust. 

If both spouses die, then the assets go to the kids, it can be taxable unless there is some charitable remaindermen in the trust. 

However, I don't pretend to be an expert on taxable estates since I rarely see them, and when I do, I know enough about them to send them to somebody who handles them all the time. 

[Deleted]

Reverse mortgages aren't big up here, so I don't run into that question very often. I think I've seen 2 reverse mortgages in 13 years of doing this. Both times, the house went into foreclosure after the person died because the amount owed was greater than the value of the house.

Yeah, I'm certainly not expecting anything. Dad told me during the last visit that the mortgage balance is growing due to their draws. Although property prices are rebounding, I fully expect Dad's girlfriend to outlive him and live into her late 90s just like her mother so I expect the house to be sold and fund her care when she needs to go into assisted living. I'll be pleased if I don't have to pay anything for my father's care.

As I frequently post, my parents told me not to expect any inheritances. And so far I haven't been disappointed!

[skubikky]

Jun 27, 2013 9:03:18 GMT -5 swamp said:

Jun 27, 2013 8:57:32 GMT -5 skubikky said:

Swamp,
I know how a trust avoids probate, but how does it avoid estate taxes(let's assume here in New York state for the sake of this discussion)?   Is it because it transfers to her spouse?  Why would someone assign all of the estate to a spouse?  Why not assign some of the assets directly to the son?  Once the husband dies, and the estate passes to the son, there still wouldn't be any taxes paid(assuming the size of the assets is still over that threshold)?

Transfer between spouses avoids tax.  That's what the whole Supreme Court case decided yesterday was about.

As far as I know, a revocable trust does not avoid taxation when the beneficiaries are not the spouse, unless it's a charitable trust. 

If both spouses die, then the assets go to the kids, it can be taxable unless there is some charitable remaindermen in the trust. 

However, I don't pretend to be an expert on taxable estates since I rarely see them, and when I do, I know enough about them to send them to somebody who handles them all the time. 

Yes, this was my understanding.  Not sure that when Athena said that the trust avoided estate taxes, she was just referring to the transfer to her husband, not in the scenario where the assets transfer to her son.

Putting the house in a trust for the kids, as well as some other assets that can't have a beneficiary or POD designation seems to me the best in order to keep as many assets, if not all, out of the probate process.
Any estate taxes that will be triggered can be handled by the CPA that files the tax return for the estate.

[Deleted]

Jun 27, 2013 9:15:35 GMT -5 skubikky said:

Yes, this was my understanding.  Not sure that when Athena said that the trust avoided estate taxes, she was just referring to the transfer to her husband, not in the scenario where the assets transfer to her son.

Right- I suspected there would be tax consequences when the trust passes to my son. I suppose I ought to have a talk with my brother, a CPA who's a tax partner at a medium-size firm. He's always been generous with free advice.

[swamp]

Jun 27, 2013 9:42:51 GMT -5 @athena53 said:

Jun 27, 2013 9:15:35 GMT -5 skubikky said:

Yes, this was my understanding.  Not sure that when Athena said that the trust avoided estate taxes, she was just referring to the transfer to her husband, not in the scenario where the assets transfer to her son.

Right- I suspected there would be tax consequences when the trust passes to my son. I suppose I ought to have a talk with my brother, a CPA who's a tax partner at a medium-size firm. He's always been generous with free advice.

set up a charitable distribution that brings it under the taxable limit. 

But, since congress keeps screwing with the threshold amount, good luck guessing what that is. 

[murphath]

In California, probate can now take up to a year or more, so if you own real estate over $35,000, you should have a revocable trust.
All public agencies have taken a hit with the recent economic woes.  For the courts system, it was in the non-criminal area such as probate courts.

[Deleted]

Jun 27, 2013 9:43:59 GMT -5 swamp said:

Set up a charitable distribution that brings it under the taxable limit. 

But, since congress keeps screwing with the threshold amount, good luck guessing what that is. 

Yeah, that's why it's going to take periodic updates. I've actually got a couple of bequests set up now (min of a $$ amount or % of my estate), which I may revise as my finances and priorities change.

[midwestlily]

Both of my parents set up revocable living trusts.

In California, my mother put her house, her only asset, into a living trust.  Also put me on one of her bank accounts, but not the other (I think she opened it later).  She sold her house in 2004 and put the cash into one of the accounts.  I was going to help her figure out what to do with it (CDs, probably), but she died before we had a chance.  The account that she put the money into was not in the trust, nor did it have my name on it, so I had to hire a lawyer to file a Heggstad petition (I think that's what it was called), basically stating that she had not intentionally removed the asset from the trust.  In the end, I avoided going through probate, but it took more than a year and cost several thousand dollars.  

A couple years later, my father died in Nevada (they had been divorced for many years).  My stepmother got the house and the IRA, but his Schwab account came to us through the living trust.  She and I spent less than an hour at the Schwab office, dividing everything in half, including the margin debt (yes, he had some margin, I'm not sure why and it's too late to ask).  I was stunned by how easy the process was.

So I think a living trust can be wonderful, if it's handled properly.

I should add that I don't intend to bother with one.  I have no kids, basically no family left, no one I'm responsible for.  So if my friends and a few charities have to go through probate after I'm gone, that's okay.

[tskeeter]

Jun 27, 2013 8:09:55 GMT -5 swamp said:

Jun 27, 2013 8:05:08 GMT -5 @bonnap said:

But the house will still need to go through probate..

Transfer to son with Life Estate to herself and husband. 

Swamp, if the house is transferred to the son now, isn't his basis the orginal purchase cost of the house?  Because the house is considered a gift?  While if the transfer of the house takes place as part of settlement of an estate, the son's basis in the house would be it's value as of the death?  If the son were to sell the house after his parents death, wouldn't transfering the house now probably result in the son owing a lot more capital gains taxes on the house than if the house were tranferred after his parents death?  Or is there something special about the life estate that allows the use of stepped up basis to determine the gain when the house is sold? 

[swamp]

Swamp, if the house is transferred to the son now, isn't his basis the orginal purchase cost of the house? Because the house is considered a gift? While if the transfer of the house takes place as part of settlement of an estate, the son's basis in the house would be it's value as of the death? If the son were to sell the house after his parents death, wouldn't transfering the house now probably result in the son owing a lot more capital gains taxes on the house than if the house were tranferred after his parents death? Or is there something special about the life estate that allows the use of stepped up basis to determine the gain when the house is sold? 

Damn, that's a lot of questions!

Transfer now, original cost basis.
estate:  stepped up basis

Yes, the son would owe more.

Life estate used to protect from Medicaid liens. It doesn't anymore.  but it does allow a transfer prior to probate and allow the parents to keep their real estate tax exemptions.   My parents house is worth less than $100k so I really don't care about the capital gains. 

[tskeeter]

So if my friends and a few charities have to go through probate after I'm gone, that's okay.


lily, do you really dislike your friends that much?  First, probate can be a real PIA for the person who administers your estate.  Second, the legal costs associated with probate can be high (I think it cost over $50K to probate my uncle's will).  If you do not designate an executor, and the court appoints an attorney to act as the representative for your estate, your estate will pay the attorney's regular hourly rate, which could be well over a hundred dollars an hour.  I think the uncle who administered his brother's estate got $35 an hour. 

If you ignore planning your estate, it is entirely possible that the probate costs will consume your entire estate and your friends and your favorite charities will get nothing.   

[tskeeter]

Jun 27, 2013 13:51:06 GMT -5 swamp said:

Swamp, if the house is transferred to the son now, isn't his basis the orginal purchase cost of the house? Because the house is considered a gift? While if the transfer of the house takes place as part of settlement of an estate, the son's basis in the house would be it's value as of the death? If the son were to sell the house after his parents death, wouldn't transfering the house now probably result in the son owing a lot more capital gains taxes on the house than if the house were tranferred after his parents death? Or is there something special about the life estate that allows the use of stepped up basis to determine the gain when the house is sold? 

Damn, that's a lot of questions!

Transfer now, original cost basis.
estate:  stepped up basis

Yes, the son would owe more.

Life estate used to protect from Medicaid liens. It doesn't anymore.  but it does allow a transfer prior to probate and allow the parents to keep their real estate tax exemptions.   My parents house is worth less than $100k so I really don't care about the capital gains. 

Yeah, but why would you give Congress another $20K to spend if you didn't have to?  It's not like they have an oustanding reputation for being good stewards of the taxpayer's money.