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Leaving substantial retirement accounts to minors, post SECURE

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  • Leaving substantial retirement accounts to minors, post SECURE

    It's been eight months since SECURE passed, killing the stretch IRA. For those with substantial retirement account assets (IRA, 401k, etc) and minor children, what is your estate plan? Do you plan to leave the assets in trust, or are you using some other device?

    Our prior estate plan left these assets in trust, which was required to pay out the RMD each year, with additional money distributed at trustee discretion.

    Assume I'm not interested in leaving them the money outright. My spouse is my first beneficiary but then she will face the same set of decisions as to beneficiary designation.

    I know I need to meet with my attorney, but at her hourly rates I'd like to have some idea of what my options are beforehand.

  • #2
    An alternative would be use use a charitable remainder trust. This gets a long duration payout, like the old stre stretch but the distributions are outright to the individuals, not in trust. Although it is a drag to lose the stretch, the reasons for the accumulation trust still apply.

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    • #3
      Yes, trust for the kids as the secondary beneficiary, especially for Roth with no taxes due. But Afan is right, a CRAT/CRUT could also be the secondary beneficiary. This might work better for the tax deferred accounts with income tax due. I recommend you download Beating the Death Tax by James Lange. 99 cents on Amazon and it directly answers your question.

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      • #4
        I am not an estate attorney and have no expertise in the area but I do have what is probably a similar estate plan with retirement assets passing via beneficiary designation. Primary beneficiary is my wife, with the contingent beneficiaries being trusts that dole out the RMD each year to the child beneficiary. This is typically a conduit trust since it doesn't retain any assets. This probably doesn't work well with the SECURE Act since there are no required RMDs essentially leaving an asset bolus to be distributed after 10 years. TBH, my kids are now in their 20's, starting their careers and seem to have absorbed many of the financial lessons we've tried to impart on them as they've grown up. My oldest is maxing out 401k contributions on a good, but not doctor-good, salary and my youngest is also planning to do so (will be starting first post-college job soon). So they are now the contingent beneficiaries, not the trusts. Trusting them to be financially responsible adults.

        If you want to maintain some posthumous control over how the assets are distributed, I think you'll need an accumulation trust instead. The retirement assets will still have to come out in 10 years, but they go into the trust and can be held there with the distributions to the beneficiaries based upon the rules of the trust. Definitely the realm of an estate attorney, not a DIY project.

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        • #5
          Every client we have with a trust as an IRA beneficiary uses the conduit trust approach. After consultation with estate planning attorneys, we are recommending that the trust be changed to an accumulation trust. There are at least two good reasons for this. First, in the absence of required RMDs until the last day of the tenth year, the accumulation trust will allow the trustee to manage distributions both to heir's needs and their tax situation in any given year. Second, when the IRA must distribute all assets at the end of the tenth year, the accumulation trust at least gives the option of continuing to protect the IRA assets (especially important for many physician inheritors).

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          • #6
            Originally posted by GasFIRE View Post
            I am not an estate attorney and have no expertise in the area but I do have what is probably a similar estate plan with retirement assets passing via beneficiary designation. Primary beneficiary is my wife, with the contingent beneficiaries being trusts that dole out the RMD each year to the child beneficiary. This is typically a conduit trust since it doesn't retain any assets. This probably doesn't work well with the SECURE Act since there are no required RMDs essentially leaving an asset bolus to be distributed after 10 years. TBH, my kids are now in their 20's, starting their careers and seem to have absorbed many of the financial lessons we've tried to impart on them as they've grown up. My oldest is maxing out 401k contributions on a good, but not doctor-good, salary and my youngest is also planning to do so (will be starting first post-college job soon). So they are now the contingent beneficiaries, not the trusts. Trusting them to be financially responsible adults.

            If you want to maintain some posthumous control over how the assets are distributed, I think you'll need an accumulation trust instead. The retirement assets will still have to come out in 10 years, but they go into the trust and can be held there with the distributions to the beneficiaries based upon the rules of the trust. Definitely the realm of an estate attorney, not a DIY project.
            Just to second you on the issue of transitioning from a trust beneficiary to having the kids as direct beneficiaries, we just grappled with this as well. Had a trust set up for years, decades really. Just shifted everything over to each kid inheriting directly and each one directly as a contingent beneficiary with no trusts. Youngest is 25 and responsible financially, so we don’t see much risk. I also talk to them reasonably often (they might say too often) about the perils of inheriting millions when young.

            I do sometimes think about the value of having trusts to protect family assets in the case of the kids marrying and divorcing, but I have not been able to decide how seriously I should take that risk versus the administrative issues of actually managing a trust. Along those lines, are you planning to use an institutional trustee, or family?

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            • #7
              We just met with our estate planning attorney last week. I have a sizable 401K and am in mid 50s. While I plan to do some Roth conversions from this 401K between age 65-71, it is likely that we will still have a significant tax deferred balance (I know, 1st world problem and happy to have it). Beneficiary on the tax deferred money is spouse then Trust.

              The SECURE act creates an issue where a substantial amount of money can leave the protection of the Trust in a short amount of time. Therefore we need to realize heirs will have an issue of asset protection vs income tax that is very significant for the tax deferred money. If the heir needs asset protection (ie profession at risk of liability lawsuit or in a shaky marriage) then leaving the proceeds of the tax deferred money in Trust is beneficial however with then pay income tax at highest rate (Trust rate 37% on money over $12,500 I believe). Alternatively, heir can receive proceeds directly and pay income tax at their own bracket (increased by the proceeds of course) but the lose the asset protection.

              Our attorney is setting this up such that the decision as to take proceeds directly or leave in Trust can be made down the line.

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              • #8
                Thank you all and Larry, I have purchased the book.

                The issue with minor children is yes, asset protection especially from unknown future spouses, but importantly also from themselves. Both because they may become adults with problems, but also because 18 is simply very young. I suppose the conduit trust (which we have now) could be modified so that all can be distributed at age 26, per SECURE, but there's always a chance they don't go to college and then the money most come out even sooner. Regardless, it's too young an age for the amount at stake even if they are "good kids". Feel the money would be a curse, not a blessing.

                Downside to the accumulation trust is much higher tax rates compared to their likely tax rate anytime in the next 10-20 years. Though I guess I need to sit down and estimate their income from our full estate were we both to pass before I can say that definitively.

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                • #9
                  I am planning from different angle. I am telling my parents (my father is a retired surgeon), to not put me as beneficiary of their considerable IRA (tax-deferred accounts). I plan to retire early (goal age 59.5 or earlier depending of how medicine turns out) and to withdraw from my personal 401k for Roth conversions. I don't need to inherit their IRA assets, and likely it would push me to higher marginal tax rate. Personally, I am aiming to maintain AGI < $250,000 at retirement to avoid 3.8% NIIT. I would rather my parents give their retirement assets to my children at their lower marginal tax rates. Whether to set up an accumulation trust, I'm not sure: I would like to hear more about this!

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                  • #10
                    Another way to approach control of the money for beneficiaries that may not be mature enough to handle a large inheritance is to provide increasing levels of control as the heir ages. One can have a separate trustee if the heir is below a certain age, then the heir becomes a co-trustee at a later age and a sole trustee at an even later age. For instance, one could establish that if the heir is less than 32 y/o, then your named trustee will be the only trustee. At age 32 the heir is added as a co-trustee and at age 40 the heir becomes the sole trustee. This would allow for checks and balances until the heir is more mature.

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                    • #11
                      During the young children years it's a lot more structured trust and worth the higher tax rates. However, as folk mentioned it's a different issue once passed the formative years and hopefully safely into the earning stages of their lives. We had just updated recent before SECURE where the payout is still relatively structured to college funds and down payments. It'll be updated again. O ce the grandkids come our way.

                      The one concern about new secure beneficiary, in the past we would move the dollars to the trust directly to protect assets to another trust then blood children. This is tricky with tax deferred accounts now with the clock ticking. If goes to surviving spouse and then spouse remarries....those biological children may not receive those funds if evil stepspouse steps in.....perhaps too much Disney in us, but a real consideration to look at

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                      • #12
                        Although the tax rates on a trust get up to the maximum quickly, you can give the trustee discretion as to whether to make distributions. Sending the income to the beneficiary will save income taxes if the amount distributed will be taxed at a lower rate on the beneficiary's return. Many beneficiaries will be above the zero tax rate. So some amount of trust income would be taxed at a lower rate inside the trust than if distributed.

                        If income taxes are the only consideration, one could distribute the amounts that minimize taxes. To the extent that asset protection matters, it may be worth paying the higher taxes.

                        If invested in a simple portfolio of a cap weighted index fund for stocks- dividends currently under 2%- and munis or a muni fund, the taxable income would be a small fraction, perhaps 1-2% of the total. Of course, tax rates are never 100%, so one would be talking about the difference between paying 37% and zero % on the 1-2% taxable income. This may not be the most important consideration.

                        this article
                        https://www.thetaxadviser.com/newsle...ed%20dividends.

                        Calculated the tax on a trust that had $51,575 in qualified dividends as $10,750. VTI recently had a yield of 1.72%. to have $51,575 in qualified dividends at that rate, one would need ~$3M in stock. If that represented 60% of the portfolio with the balance in munis, then the total portfolio would be ~$5M. If all the income were retained in the trust, then this would be ~ 0.2% of the total assets paid in fed tax.

                        Depending on the tax bracket of the beneficiary, one could save somewhere between $10,750 and zero in taxes. The figure would be zero if the beneficiary were also in the top tax bracket.

                        The tax penalty would be less if one tilted toward low dividend stocks or more munis. Remember that the distributions from the tax deferred account would be reduced by the taxes paid. One would need a lot more than $5M in tax deferred accounts to end up with that much in the accumulation trust after the 10 year period.
                        $10,750 is not a trivial amount. But it might be worth giving up some of it each year for the value of the asset protection.
                        Last edited by afan; 09-15-2020, 04:37 PM.

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                        • #13
                          Some of you guys just blow me away with your advanced knowledge of these issues. (For those who don’t know me, guys=unisex). With trusts, taxes matter. Asset protection (impo) matters even more. How many of you (lurkers included) have been in a situation or known someone who had their head on straight but found a mate completely unsuitable? That is (potentially) a disaster waiting to happen. While younger folks are known for making bad first marriages, I know of several who have not chosen well the 2nd or 3rd time around because they were lonely, insecure, fat, whatever. You can’t protect your heirs from everything.

                          So...management and investment implementation of the inheritance may have as much or more impact.

                          The choice of trustee and custodian, along with the language in the trust are very significant and (impo) often overlooked regarding long-term significance. I can comment only on the choice of ttee/cust b/c the language of the trust is complex and client-centric. What works for one is probably not what works for another.

                          Unless you know the ttee is deeply indoctrinated in WCI principles (just holding this up as an example, not a single standard, not the Universal Truth), you are rolling the dice beyond the grave when you name a family member ttee/custodian to manage the portfolio. For example, did you ever think whole life insurance was a great investment? Were you ever duped into thinking annuities were the best source of security and a safe, guaranteed stream of income? How about a bond portfolio + individual stocks (with high expenses) for kids in their 20s, 30s, 40s? Is that how you would invest for your SS and children? READ THE DRAFT DOCUMENT.

                          It is supremely important that you word your trust document to specify what is and isn’t acceptable. You need to choose ttees who understand your principles and who you believe will manage the portfolio consistent with what you would do (close, anyway, nothing is guaranteed, of course). You need to specify that the ttee hire a fee-only advisor for investment management - rather than a salesman disguised as an “advisor”. Or that they choose a custodian that will at least give some consideration to these principles.

                          The attorneys I’ve worked with don’t always appreciate this approach (not saying my experience is universal, just in my limited contacts). They prefer to allow the person in charge of the investment of the corpus (which should be in the mid-high 8 figures at 2nd death) “wide latitude” to make these decisions. I realize there are reasons to not “tie their hands” but I suspect much of that language was written years ago and there now exists a much lower “intelligence gap” for non-professional money managers. If the manager has an investment philosophy compatible with yours, that’s great. But don’t assume that naming a family member you trust will translate to choices you would approve. And the only way to provide this protection is to carefully think through the investment plan you would implement for your loved ones.

                          Would love to hear Hank’s thoughts, especially commentary on if I am going in the wrong direction. I can handle a rap on the knuckles.
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            A good estate attorney will get into a decent disagreement with a good financial advisor post SECURE IMHO because of the issue of tax efficiency directly fights against asset/wealth preservation.

                            Our first trust attorney was simply amazing. He walked us through so many scenarios for the young kids and what/if possibilities and as @jfox mentioned, the successor trustee (executor) is extremely important as we could only dictate so much in our instructions for the kids and reasons for the decisions -- very important for the young kids.

                            Now that they are into the college years, it's less an issue, but still very important. Our redo pre-SECURE was less prescriptive and more timed releases with distributions for certain life milestones. It'll get revised again with grandchildren.

                            In many of this forum's situations, believe people will be more interested in protection than tax efficiency. That is why we struggle with putting all IRA funds to opposite spouse directly instead of trust as the evil -stepspouse can usurp all the funds from the biological children just to stretch the IRA a few additional years.

                            God willing, the high tax rate of the the trusts will only be slightly more than the tax rate earnings of children.

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