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  • Revocable Living Trust. Anyone heard of this?

    I recently met with an estate lawyer who states that I can use a revocable living trust (RLT) as a way to protect assets for my beneficiaries as well as to defer retirement assets distributions (IRA stretch out) for maximum tax-deferred growth. I did not think this was possible but he assures me that there are provisions that can be placed to do both in a RLT.
    Under this RLT (along with subtrusts), I would place the trust as beneficiary of all my assets (savings/checking, all retirement accounts, life insurance). Even though the trust is the beneficiary, upon my death, my retirement assets can be inherited by my wife, who can then assume the assets into her own IRA. Upon my wife's passing, the retirement assets will be split up between our children in their own trusts, where they will serve as both the trustee and beneficiary. Because the trust is a conduit trust with designated beneficiary, RMD's will be calculated based on each child's age and the income will be distributed yearly so taxes will be paid at the beneficiary rate. Distributed income will not be protected, only the principle. However the trust can choose to keep income within the trust but will have to pay trust tax rates which is much higher.

    Anyone have any experience, advice or comments about this?

  • #2
    Well, it sounds a lot like a trust built around cascading beneficiaries. If so, I have not done one but I understand the technique is not only possible but well established, if complicated. As in, easy for your beneficiaries to screw up and reasonably frequent legal reviews necessary to keep your trust up with current law. This is an expensive way to plan your estate, so you have to consider what you are getting out of it. Here is a good reference for you to review about this technique: Retire Secure by James Lange.

     

     

    *Edited to replace “contingent” with “cascading.”

    Comment


    • #3
      OP, if I understand you correctly, are you saying that you had originally thought that you could (should) NOT list a trust as an IRA bene because of how it would be distributed, but now you are learning that you CAN, as the trust can act as a conduit to its beneficiaries and RMDs would be based on THEIR life expectancy (vs 5yrs)?

      If so, then yes, this is what I have also gathered in my experience (was previously advised incorrectly on this) because my trust has NAMED beneficiaries.  I think the issue comes up more when the beneficiaries are not "real people", so to speak.

      I'm not sure what previous commenter is referring to "contingent beneficiaries", but that is not what I'm referring to above.  The trust is your primary bene, and the dependents are beneficiaries of the trust.

      Comment


      • #4
        That's how ours is set up. Our attorney assured us the same and is very experienced (and very expensive) so I hope she is right. The general concept has been vetted by well known estate planning experts.

        The only thing you wrote I cannot comment on is the part where your "wife inherits your retirement assets and then assumes the assets into her own IRA". It seems at the least the benefits of the trust (which becomes irrevocable at your death) will be lost when she combines the IRAs; at worst it won't be permitted since the trust is irrevocable. While there are special advantages granted a spousal beneficiary of a retirement account, the two of you might need to decide which is more important: those advantages or the trust protection.

        Hopefully a real lawyer will chime in.

        Comment


        • #5
          You don't need a trust for your retirement accounts to be passed along in that manner. That's how inherited IRAs work with or without the involvement of an expensive estate attorney.

          That's how RMDs are calculated for your children's beneficiary (inherited) IRAs, regardless of whether they're in a trust or not.

          You heirs may benefit from your other assets being placed in an RLT, but for your retirement and investment accounts, it's pretty trivial to name primary and contingent beneficiaries (log into your retirement accts and go to the 'beneficiaries' section)...and it won't even cost you the hourly rate of some overpriced 'estate attorney', who it looks like is selling you a complicated way of doing something to achieve the same results you can achieve for free for yourself. I'm sure he's not making anything else far more complicated than it needs to be to convince you of your desperate need for his services and pad his fees, right...

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          • #6

            https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

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            • #7
              @FIREshrink

              "Our attorney assured us the same and is very experienced (and very expensive) so I hope she is right." So, you paid someone $$$ to tell you what IRS publication 590 says? No need to 'hope' she's right, you can just read it yourself.

              I guess the 'very expensive' estate attorney wouldn't be able to bilk people like you as much if they didn't make things like inherited IRAs seems far more complicated than they need to be, but then you couldn't brag to your friends about how you used a 'very experience and very expensive' estate attorney to impress them with your conspicuous consumption, the same results you could have achieved for free by yourself. To each his own.

              Comment


              • #8
                As @ZZZ mentions, having a Trust as the beneficiary of a retirement account creates potentially unnecessary complexities (and administrative work). You can get the same stretch provisions for your retirement accounts by naming your kids outright as contingent beneficiaries.

                The times you may want to consider listing your Trust as the contingent beneficiary would be:

                1) You’re worried about your children inheriting the full account value at once

                2) You’re worried about the potential of your children going through a divorce or lawsuit at some point

                3) You have young children (under 18)

                Here is a good article that gets more in the details on naming your Trust as a beneficiary:

                https://www.kitces.com/blog/qualifying-a-see-through-trust-as-an-ira-designated-beneficiary-conduit-or-accumulation/
                Financial Planning for Physicians | [email protected]

                Comment


                • #9
                  An RLT is only a mechanism to avoid probate for the assets titled to it, not to protect assets. It becomes irrevocable at death. Agree with others that you are probably causing unnecessary complexities in your planning. There are times when using a trust as beneficiary of retirement plan assets is helpful, but they are rare. This is a very individual-specific area and difficult to give general advice, but I'd probably get a second opinion or have your CPA/financial planner review the documents/recommendations.

                  The article that Andrew Musbach linked is probably my favorite piece on this subject.
                  Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

                  Comment


                  • #10
                    I am not at all an expert in this area but as I understand it, you absolutely DON'T want a trust to be the beneficiary of a tax-deferred IRA, or even really a Roth either. If I remember, the reason is since a trust isn't a person, that might require ALL of the money in those accounts to be distributed within 5 years of death of the owner (so, not stretch). OR, if I'm not remembering correctly, the reason is since a trust isn't a person, the RMD %age for these accounts when it's a trust rather than a person is a lot higher, requiring the account to be drawn down faster than if the beneficiary was a person subject to their own RMDs based on their own age. I agree with Larry-you should read "Retire Secure: A Guide to Getting the most out of what you've got" by James Lange.

                    Cascading beneficiary (also known as using disclaimers) allows the following scenario, which seems like a good idea to me. Let's say Bob dies and he makes his wife, Martha the beneficiary to all of his retirement accounts. He allows the trust to be set up such that Martha is allow to disclaim (i.e. not take) the money because she feels she doesn't need it. She can claim it if she wants, but she also has the option to disclaim it (all or a portion of it...maybe she feels she only needs 50% of it). Bob says in the trust is Martha disclaims, then the next beneficiary(ies) to consider disclaiming are his two children, Joe and Mary. Joe can disclaim, and if he does, Bob set it up that then the portion that Joe disclaims can go to his children, etc. Mary can also disclaim, and if she does, then her portion can go to her children. This is cascading.

                     

                    BTW, looks like WCI has a post about this:

                    https://www.whitecoatinvestor.com/langes-cascading-beneficiary-plan/

                    Comment


                    • #11




                      @fireshrink

                      “Our attorney assured us the same and is very experienced (and very expensive) so I hope she is right.” So, you paid someone $$$ to tell you what IRS publication 590 says? No need to ‘hope’ she’s right, you can just read it yourself.

                      I guess the ‘very expensive’ estate attorney wouldn’t be able to bilk people like you as much if they didn’t make things like inherited IRAs seems far more complicated than they need to be, but then you couldn’t brag to your friends about how you used a ‘very experience and very expensive’ estate attorney to impress them with your conspicuous consumption, the same results you could have achieved for free by yourself. To each his own.
                      Click to expand...


                      Whoa, Nelly.

                      Comment


                      • #12
                        Appreciate all the comments.

                        The reason I was looking into this trust was to protect retirement assets in addition to the stretch out benefit.  Unfortunately inherited IRAs are not protected for the beneficiaries, thus they are subject to creditors and ex-spouses.  I would assume many on this thread may have significant amounts left in your retirement investments upon passing and thus protecting your retirement assets and stretching out the benefits of tax deferment may appeal to many of you.

                         

                        Contrary to some of the previous comments, I have read numerous sources that state RLTs can provide asset protection and they are not subject to the 5 year distribution rule, as RLTs can be set up with a designated beneficiary which allows for RMDs based on beneficiary's age.  Thus I have yet to see any reason not to do this trust, beside the additional cost of setting up the trust (which is only about 1,000 more than common RLT itself).  Is there anything else I am missing?!?!?  What kind of complexities am I causing by doing this instead of going with a traditional RLT and setting up my individual family members are beneficiaries?  I ask not to challenge anyone, but just to get the best understanding of this.

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                        • #13
                          ZZZ

                          Can you explain how you would "accomplish the same thing" with beneficiaries who are minors, and for whom you'd like to ensure assets are left in trust for 150 years, to protect those assets from creditors and spouses, given that inherited IRAs do not have the same legal protections as individual IRAs?

                          Thanks!

                          Comment


                          • #14
                            “When you set up a typical probate-avoidance revocable living trust, you name yourself as the trustee. That lets you keep complete control over the assets you transfer to the trust. You can put property in the trust, take it out, sell it, or give it away at any time, with no restrictions. As a practical matter, it’s still yours.

                            Another reason the law considers you the owner of trust property is that the trust is revocable—that is, you can revoke it at any time. If you did, the assets would once again be in your name.”

                            Most likely it will not shield you from creditors. Not sure but YOUR IRA would need to be converted to an inherited IRA by the beneficiary. The trust is now irrevocable. If the terms restricted the control of funds by the beneficiary, then the terms of the trust would prevail. RMD’s or changes? Kids, grand kids, special needs? If the beneficiary controls it, most likely the protection is lost.
                            Loss of control sacrificed for asset protection.
                            RMD’s available should be the same inside or outside.
                            Umbrella insurance might be more cost efficient if it’s a fear of liability. Bad debt is a whole different beast.

                            Comment


                            • #15


                              Whoa, Nelly.
                              Click to expand...


                              Lol, I bet I can guess how old you are - within 10 years.
                              Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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