Today we’re continuing the overview of our recent trip to a retirement workshop.
If you missed the first part of this series, I suggest you read it before this post so you’re up to speed.
Last time we covered sections 1 and 2, so let’s get rolling today with section 3…
Section 3 — Retirement Distribution Planning
This section started with a reiteration of points already made…tax rates were going up, you may need as much income in retirement as while working, your tax bracket could be higher, and so on.
Now they presented their solution to these problems.
The recommendation was to get to the proper allocation in the three types of retirement accounts (according to the course/teacher):
- Taxable — Savings accounts, money markets, CDs, mutual funds, stocks, etc.
- Tax-Deferred — 401k, IRA, 403b, etc.
- Tax-Advantaged (which the presenter kept calling Tax Free) — Roth IRA, Roth 401k, some cash value life insurance policies.
After a lot of methodology, they summarized their recommended allocation for each of these as follows:
- Taxable — 6 months of basic income needs. This is your emergency fund. Not sure why they just can’t say “6 months of expenses”. Later they say “6 months of income”, which is worse IMO (it assumes income = expenses).
- Tax-Deferred — Keep your balances low enough that your Required Minimum Distributions (RMDs) are equal to or less than your standard deduction (to minimize taxes). His rule of thumb for a married couple at age 72 is that this should be around $500k.
- Tax-Advantaged — Everything else.
So if you had $3 million, it would look as follows (my example, he didn’t share this):
- Taxable — $30k (assuming you spend $5k per month)
- Tax-Deferred — $500k
- Tax-Advantaged — $2,470k
Now let’s consider the audience he’s talking to — people who are mostly in their 50s or early 60s.
The 401k was established in 1978 and from there took some time to be adopted by companies on a widespread basis.
The Roth 401k (and Roth IRA) was established in 2001. It took some time to spread as well. In fact, when I retired in 2016, none of the companies I worked for had offered a Roth option. All had regular 401ks though.
Even today there’s a gap between 401k and Roth 401k offerings. Here’s a quote from CNBC highlighting this fact:
Seven in 10 employers now offer a Roth option within their 401(k) that lets workers put in after-tax dollars, which can then grow and be withdrawn tax-free in retirement. But only 18 percent of workers contributed after-tax dollars to their 401(k) in 2016, per the Plan Sponsors Council of America.
So needless to say, most Americans have most of their money in tax-deferred 401ks. (I looked but couldn’t find definitive numbers for the total amounts in 401ks versus Roth 401ks.)
The audience for this workshop has and even more disproportionate amount in tax-deferred options because that’s all they’ve known for most (or all) of their working lives.
And the presenter is telling them that anything over $500k in a 401k is going to cost them money. That’s probably most of them (if they’re lucky). Intuit says, “According to the Federal Reserve, the average net worth for Americans between the ages of 55 and 64 is $1,167,400, while the median is at $187,300.”
Now they have one of two problems. Those with $187k don’t have enough money. Those with $1.2 million likely have too much in tax-deferred accounts.
I wonder who could help these people with either issue? 😉
We have the vast majority of our money in tax-deferred options (the rest is in taxable accounts). The reason: At first, using a 401k was the only option. Then once Roths showed up, we always made too much to qualify for a Roth (even this year, in retirement, we earned too much). And as for conversion from our IRAs to a Roth, do I really want to convert now and pay even higher taxes? And yet I might have massive taxes in the future. There seems to be no great answer.
I know, tough problem to have. I’m sure you feel sorry for me.
But seriously, anyone else in this position? If so, what are you doing (if anything)?
Before we leave this section, let me cover a couple random items that came up:
- He introduced the concept of RMDs and noted that they “may have unintended consequences as it relates to your overall tax burden in retirement as well as affect Social Security taxation.”
- He talked a bit about inflation (really just mentioned it) and this set off a couple people on how inflation is “way higher than 2% or 3%.” After a lot of chatter about how this costs so much more and that costs so much more than in the past, I made the point that everyone really has their own personal inflation rate based on what they buy. This either made lots of sense or confused the individuals bemoaning inflation because they shut up.
At this point, the class took a 10 minute break.
Section 4 — Estate Planning
When we came back to the classroom, the presenter was Justin Fish, an estate planning attorney from Colorado Springs.
This turned out to be the most interesting and valuable part of the workshop for a couple reasons.
First, we recently finished our estate plan and I wanted to see what he thought of it.
Second, after what he said, I’ll probably arrange a follow-up meeting with him to re-look at what we did.
Here are the highlights of Justin’s presentation:
- He shared the documents everyone should have in addition to a will: financial power of attorney, living will, health care power of attorney, and HIPAA notification document.
- He contrasted the pros and cons of a will versus a living trust (also called a revocable trust or grantor trust). The underlying themes were: a will is better than nothing, but for most people, a trust is the best option. Guess which one he makes the most from? I know, call me Mr. Cynical.
- He recommends a review of your estate planning documents at least every 3-4 years (sooner if things change) since some banks and other institutions won’t accept powers of attorney if they are too old.
- He said that in his 20 years of practice or so that “inherited money is not viewed the same as money a person has worked for.” It’s seen as free, extra, etc. As such, his experience is that “inherited money usually lasts for 18 months and then it’s gone.”
- A will has to go through probate. In Colorado probate has to be open for a minimum of six months, but the averages he sees are more like nine months.
- Probate runs about $2,500 to $7,500 in Colorado.
- Probate is public and there are people who look for probate notices to prey on beneficiaries of higher-level estates.
- A trust is “an account that owns all your assets.” You transfer everything to a trust which is overseen by a trustee (you).
- A trust operates under your Social Security number.
- You can appoint successor trustees in case you become incapacitated. With a will, generally a judge or physician has to agree to label you as incapacitated for someone else to take over, and there are sticking points with each of these (courts are full and both judges and doctors may be loathe to label someone as incompetent.) With a trust you can name a “disability panel” (spouse, kids, friends) who can make that determination (which is much easier).
- There’s no probate with a trust (if you own property in multiple states, as we do, you have to have probate open in multiple states).
- If you die with a trust then there’s a successor trustee named who takes over and allocates assets according to the trust’s specifications.
- Assets in a trust are protected from divorce and creditors.
- He recommends that you do NOT name one of your kids as the successor trustee. He rarely sees that work out well if there are other kids. It just gets wacky even if the siblings generally get along well. So he recommends an institution as your trustee because they don’t care who gets mad at them (they do what you’ve specified no matter what). These cost roughly 1% to 1.2% of assets annually.
From there we got into questions and answers and several things stood out:
- He not only sets up your trust, but as part of his fee he transfers all your assets into the trust. This is the main reason I didn’t do a trust when we recently did our estate plan — I knew I would not take the time and energy to transfer all our assets to the trust. This is because doing so would make completing income taxes look like a walk in the park. I can’t imagine anything I think would be a more complicated, time-consuming, and frustrating process than doing that. BTW, Justin has found that MAYBE one in ten people who have trusts set up and opt do the transfers themselves actually take the step to transfer assets. This is why he does it for his clients.
- A lady asked for the costs of doing a trust. He didn’t give exact numbers but said it “was around $4k”. This includes setting up the trust, all the supporting documents, changing over the assets you have into ownership by the trust, and any follow ups or updates (as long as they aren’t a complete re-do of the trust).
- Managing life with a trust is not much different than managing as you do now. I had always thought it introduced hassles into daily financial life, but according to him, it does not. Is this accurate? Anyone out there with a trust who can verify this?
He offered a free follow-up visit as well, and I think we’ll take him up on it. The one factor I haven’t been able to find in an attorney is someone who does all the transfers, but since he does, I think setting up a meeting with him would be worthwhile.
Of course I’ll keep you updated on details if and when that happens.
Section 5 — Maximizing Social Security
The next section was titled “Maximizing Social Security” but would more accurately be titled “How to Minimize Taxes on Social Security Earnings”.
The presenter didn’t talk about how to claim Social Security (SS) for maximum benefits (which I would have loved to hear) but how to set up your finances so your Social Security isn’t taxed.
Here are the highlights:
- SS may get taxed depending on the level of your “provisional income”.
- Things that count as provisional income are all earned income, distributions from retirement plans, RMDs, and on and on. The Motley Fool defines provisional income as “a recipient’s gross income, tax-free interest, and 50% of Social Security benefits.”
- If you’re a married couple, you currently pay on 0% of your SS earnings if you earn $32k in income or less. This goes all the way up to paying on 85% of SS earnings (at your current marginal income tax rate) if you earn over $44k per year. Here’s a chart with the specifics.
- Take a wild guess at what’s NOT counted in provisional income? You got it — distributions from Roth IRAs, Roth 401ks, and some forms of cash value life insurance. As such, the teacher suggested we refer back to the optimal distribution of assets into taxable, tax-deferred, and tax-advantaged accounts that he shared earlier if we wanted to minimize taxes on SS earnings.
- If you want more details on how to calculate taxes on SS income, here’s a fairly good resource.
Overall, it seems to me that there’s more money at stake by working on maximizing SS benefit claims versus focusing to reduce taxes, but perhaps I’m wrong.
At this point, if I get any SS I’ll consider it a plus as I don’t need it.
And I don’t think there’s a realistic way I can or want to set up my finances so that none of our income is taxable. I’m assuming I’ll pay tax on 85% of what I receive.
This was the end of the first class. As we drove home we chatted about what was shared and if we learned anything new (not much for me and my wife said it was a bit fast for her).
Anyway, we had a week to digest it all and were prepared to go back for class #2 on Tuesday, March 10.
Any thoughts on these sections? Agree or disagree with what’s being said?
For details of the last class as well as a wrap up of the entire workshop, read part 3 of this series.
m says
I’m in a similar position to you on the Roth IRA: very little in it, with large sums in 401k/IRA.
I have read with interest many posts related to backdoor contributions, but the reality is that we make too much for it to make any sense to me (first world problem). While we have the option of a Roth 401k at work, it similarly feels like we are in such high brackets that it does not make tax sense.
Traci May says
Look again at backdoor “conversions”, not contributions — I was in the same position, could not contribute to Roth IRA because our income was too high, but I did have an After-Tax balance in my 401k (check your “Sources” of contributions) that I was able to do a backdoor conversion (I think it’s formally called a “Roth In-plan Conversion”) regardless of my income, and since it was already after-tax, I didn’t have to pay any taxes on it (if you want to convert pre-tax contributions, you will need to pay taxes on the converted amount in the current year you convert). So that is the workaround – if you are willing to pay taxes on the contributions (i.e. contribute as “After-Tax”), you can convert that contribution every year to your Roth 401k account, and there is no income limit!
*Note: in a Roth IRA, you can withdraw contributions any time without penalty or taxes since they were already taxed, but in a Roth 401k you cannot access any of the money until 59 1/2. Hope that helps – it was a nice surprise finding for me!
Ace says
I also see the same situation with regard to the Roth accounts. But I liked the concept (and hope to be in a higher tax bracket when I retire) so I jumped into the Roth with both feet when my employer started offering that option in the 401(k) in 2015. I had 20 years of saving behind me by then, so the untaxed funds will still dominate. I can’t see the benefit of converting now.
I cynically predict that politicians will honor the concept that Roth withdrawals are not taxed, but they’ll change other rules like the Toth funds’ applicability to Social Security taxes, computing your marginal tax rate, etc. Those ******’s are insatiable with your money.
Regarding the trust – I would agree that it’s transparent to your daily life once it’s set up. One thing to note – the name of your trust will probably be longer than will fit in the space allotted for your car title and other documents: “The Mister ESI Money and Missus ESI Money Revocable Living Trust” takes up a lot of characters. Maybe that lawyer has an idea to help there.
Bernd Doss says
Informative and insightful. I am. Currently investigating the issues associated with establishing a trust. What concerns me the most is the level of control the trustee has over the trust assets. Should the sale of assets occur the proceeds are held by the trustee, who may or may not disburse any assets to the heirs if the trustee deems that disbursements are not in the best interests of the trust. Specificity is a great portion of the many things you need in developing your trust. Obviously there are many issues, IMO, to resolve before initially making the decision to make a trust.
BSue says
At the encouragement of her three daughters, my mother set up a revocable trust when she was in her early 80s. Her husband had died a couple of years earlier. Since I live in the same town and the other two daughters live very far away (one in Europe), I was named as the co-trustee and another daughter is the back-up trustee. Two of her daughters and my mother worked carefully to make sure everything was transferred into the trust.
A major part of my mother’s interest in a trust was to avoid probate costs and exposure of her true wealth. Most folks thought she was a relatively poor retired schoolteacher.
Another advantage to the trust has been that as the remaining trustee after my mother’s death, I am not being forced to have a fire sale on her real estate holdings in order to close the estate. I can sell a portion when the right buyer with the right offer.
The transition has gone smoothly with only one glitch. My mother’s teacher’s retirement system has refused to pay the partial month retirement due since my mother did not die conveniently at the end of a month. Their excuse is that my mother had not specified the trust as the beneficiary of her pension and I don’t have any documentation from the Probate Court (probate we were avoiding) proving the trust is valid. I am sure they get away with this a lot because part of a month of a teacher’s retirement check is too small an amount to sue to get. And never in the decades that I worked with my mother’s affairs did the retirement system ever encourage recipients to check their beneficiary designations.
One of the best things about the trust was my ability to gradually take care of affairs as my mother’s abilities declined. This soft transition is a great way for independent parents to save face and accept help. And they can feel the sense of accomplishment that they set it up while they still had all their marbles (or faculties, if you prefer).
Trusts are a great tool for widows or widowers who need to depend on someone to eventually help with their affairs.
I totally don’t agree that an institution should be named as the trustee unless there is absolutely no family member or close friend available. The ongoing fees and inability for someone to hold them accountable for good management of the trust are big negatives. Their fees will likely dwarf what probate would have cost with just a will. Those trusts are often written so that the institution can just about never be fired.
MI14 says
Thank you for the detailed information – we are in the same situation with our mother, however, she already “gave” all her real estate to her children via a transfer to LLCs with the children as members, so we only have bank/investment accounts left. We were considering transferring them out of the trust’s name (to simplify the estate resolution for the executrix), but with the recent market chaos, we are concerned that she would have to liquidate the accounts at a significant loss.
My question to you is – if they remain in the trust, can the successor trustee (NOT co-trustee, my mother is already the co-trustee with my deceased father) keep the assets as is and only distribute once the accounts recover? Or better to make the brokerage accounts joint accounts, which then the joint owner can just hang on to them until the right time to sell? We want to simplify the estate as much as possible, but not force the executrix’ hand to sell assets at a loss (I don’t know if the trust must also be liquidated at the original trustees’ deaths, or if it can live on under the successor trustee)…thanks for your insights.
BSue says
Big caveat: I am not an estate attorney or an accountant, but here’s how it’s going for me as a Co-Trustee and now primary Trustee. My mother’s trust allowed the trust to continue 21 years after the death of the last of the three daughters/beneficiaries. When we split a brokerage account, my accountant said the investment assets could transfer in-kind which did not require a buy/sell which would trigger losses. Only the cash transfers triggered K-1 forms and potentially taxable items for the three trust beneficiaries. Best advice is talk to your accountant and estate lawyer about the trust.
MI14 says
OK – I’ll check the details in the trust. Understood your position :-), just wondering how it was going for you – thanks!
David says
Good info. I’ve enjoyed this series, as so far I’ve declined ALL the free meal invites that show up in the mail weekly.
The trust topic is interesting as I’m trying to decide if it makes sense for us. Am I understanding correctly that I’d pay an institutional trustee 1 to 1.2% of assets annually? That seems I’d be giving back all the fees I’ve “avoided” paying over the years by doing my own planning using index funds.
ESI says
Yep, that’s what it means…it’s a big bite IMO.
Robert says
I thought you could create a trust and then add the trust as the beneficiary on your 401k, IRA, investment/bank accounts, etc. That way, the institutional trustee (if you appointed one) does not take control until you die. You wouldn’t pay any trustee fees until after death.
I’m struggling with trusts myself due to a second marriage and how to handle our assets if I die first. I want to primarily take of my second wife, but I also don’t want want my assets to only go to her side of the family after she dies. I’ve been told there’s no easy fix for this unless I appoint an Institutional Trustee and then she would be required to ask for assests every time she needs them.
Middle Aged Investor says
My parents had a trust and made me the trustee before they both passed. Needless to say the administration of it is a lot of work. I am still waffling on whether or not I want to set one up for our family’s assets. My current view point on this is that, as long as accounts are titled correctly in concert with the appropriate availability and administration of the other necessary legal documents…..will, power of attorney, living will etc. then the need for a trust may be mostly negated depending on your personal situation.
Paulz says
I’m in a similar position to you on the Roth IRA: very little in it, with very large sums in 401k/IRA.
I am doing some Roth conversion for my IRA and will continue to do so through 2025. I figured my RMD amount and the amount would be staggering. Since I am temporarily in the 24% bracket (down from the 28%) through 2025 I figure now is a good time to make as much change as I can. I’m only converting $20k a year, so should have $100k completed by the time the taxes revert to the original 28% (or will they go dramatically higher?).
I am utilizing my Roth 401k for work again because of the temporary low tax rates. I’ll go back to traditional 401k at the end of 20205.
On a side note, we all know taxes are going to go up. It’s already a law that this happens in 2026. The only unknown is if the rates go back to where they were or if they go higher. I personally believe there is no way they don’t go higher. Our national debt levels are skyrocketing and there is already talk about a “phase 4” bailout, so where is all this money coming from?
MI 122 says
We setup a trust in 2017. Cost was about $3500. However, the only thing our lawyer helped with was re-titling our home. Everything else I had to do. I’m sure you are aware, but there is also specific guidance about what should be put in the trust vs. just having named individuals as beneficiaries. If I recall, we were also guided to not place vehicles in the trust, as it was not worth the effort (i.e. depreciating asset).
Regarding the institutional trustee, I would steer clear of that option now. We named one of our kids as the trustee. I also confirmed that if the trustee feels like they cannot handle the job when the time comes, they can always go to an institution. In that case, you’d avoid paying 1% every year, and only pay once at the very end.
All in all, I’m happy with our trust and I feel better protected with it, especially from a liability perspective. That’s my 2 cents…
SParadiso says
Estate Plans and Trusts:
My husband and I did trusts as part of our estate plan. Our assets include our home, rental properties, investments, a vacation house jointly owned with my sibling, etc. Not a simple estate, but we don’t own a business. My husband and I have separate trusts, because my husband has kids from a previous marriage. One of his children has mental illness issues, which added another complexity to his trust, as his trust will fund a special trust for his mentally ill (now adult) child.
We are each the trustee of the our own trusts, while we are alive. When we pass, the trustee is our spouse, then our siblings. We are not using institutional trustees.
For privacy reasons, I advise naming your trust something innocuous, specifically not using your name. The trust name is public. Use initials for example, like, The ESI Trust.
Don’t bother setting up trusts if you won’t follow through with moving your assets into the trust. And moving the assets is not hard, you just have to do it. Fidelity/Vanguard/etc deal with this all the time, they make it easy, and they have experts who can assist you. Of course, the more types of assets/accounts you own, the more retitling/etc you need to do.
Our lawyer moved our real estate (home, rental properties, vacation house) into the trusts, and she charged a flat fee for each deed (I want to say it was ~$150/deed for her work, plus a fee to the registry of deeds).
Our lawyer gave us each a comprehensive statement of our assets with instructions on what to do with them with respect to the trust, including exact wording for renaming assets. Some assets move (ownership renamed) to the trust, some assets don’t change, some assets stay in our name but the trust becomes a beneficiary (IRAs), etc. The asset type, your marital status, and prevailing law determines how an asset is handled. Our cars, for example, are not in the trusts (they are not valuable, and it’s too much hassle). Our after-tax investment accounts are in the trusts, and she gave us the exact wording to rename the accounts. Her instructions included how to handle bank accounts, investment accounts (fidelity/vanguard/etc), 401ks, IRAs, 529s, life insurance, and things like changing your homeowners insurance to account for the trust.
We did our estate plan about four years ago, and we completed the instructions over the following month. Since then, we have noticed no differences or difficulties with accounts that are owned by our trusts. The one annoyance is with TurboTax and some financial institutions, like computershare. I can’t get the trust’s statements to download into TurboTax, because it asks for the last name of the owner, and I haven’t figured out how to answer this for a trust. Otherwise, we haven’t noticed any other difficulties or issues with the trust-owned assets.
Lawyers:
It took us a few years to find a good estate planning lawyer. We found that many lawyers did not have experience with the mental illness aspect, or, they wanted to sell us investment advice and/or products. We also found many to be fearmongers.
Our lawyer only handles estate planning. She was excellent, she was much more knowledgeable than the other lawyers we spoke too, and she knew the subtle issues and trade-offs like why you’d want separate people for the trustee and the children’s guardian — or the same person.
I suggest that before you hire a lawyer, ask what kinds of instructions they’ll provide. The instructions our lawyer gave us were very comprehensive and invaluable.
LE says
Would you mind sharing your lawyers’s details?
RE@54 says
I have had a trust since 2005. The attorney did all the transfers for us at the time. House deeds, bank accounts, brokerage, etc. Since you and your wife are trustees, you operate as you would normally. If you open a new account, you may need to send the first page and the last page of the trust. The first page shows you as the trustee and the signed copy. The attorney may give you 5 copies for you if you open new accounts. Some banks may not do Trust Accounts. There might be a learning curve the first couple of months, but it is seamless, if the attorney is good.
We have modified our trust a couple of times with no extra cost. Maybe change the percentage of what someone was going to receive or charity. If you want to remove someone or add someone, that might require a redo of the whole trust. But, you don’t have to notify all the other accounts since it will be the same trust name, just different date the trust was redone.
We have updated our trust 3-4 times and have completely redone the trust twice. This is a hazard of starting the trust when I was only 34. So many life changes with family and situations. As you get older, less so. When we did redo the trust, we had to pay.
Remember, it may be $4K, but look at it as a percentage of your net worth for peace of mind. If your net worth is $3M, it would be 0.1%.
If you are member of AARP or other organizations, some may have some discounted attorneys that may do it cheaper. Make sure they do all the transfers though.
You can email me. I have more suggestions and thoughts. I assume you see the email that when we post comments. If not, let me know.
ESI says
Thanks. I’ll send you a note…
Jeff says
I would echo RE@54’s comments — we established a trust in 2005 when we realized (after attending a seminar on my military base) that even though we weren’t high net worth, the value of all our life insurance and other assets did mean our then-18 year old daughter would get >$1M if wife & I both passed. We just had a will at the time. That didn’t seem prudent and recipe for disaster.
We’ve made several minor updates over the years, and completely redone it once (when we moved from AK to CO recently). Overall it’s not been too difficult, but has added some complexity on major transactions (real estate, etc). Both attorneys we’ve used helped substantially with transfers and re-titling efforts — filled out the forms (or told us how to fill out for ones we could do online), notarized / witnessed signatures, etc.
One feature that both our original attorney in AK and current one in CO (NoCo) offered was an annual maintenance plan. We pay <$1000 annually and that covers minor updates, consults, titling / beneficiary help, etc throughout the year. Most importantly, if something happens to wife & I, our attorney steps in and helps my daughter (now 33) with everything as the successor trustee for no additional legal fees. We only have 1 child, so didn't have to factor in the expense of paying an organization to be the successor trustee and keep the peace between siblings.
ESI says
Welcome to Colorado!!!!
MI14 says
We also set up a trust in 2018 – paid about $2K, plus legal costs for transferring assets (ultimately I ended up doing myself – the deed transfers drafted by the lawyer were SO complex I couldn’t even understand them). But one thing you may want to consider is putting your rental real estate into LLCs instead – we’re doing that with our rental properties, and only put our primary and vacation homes into the trust.
I also agree with children as trustees rather than institutions, although not for any scientific reason, just to make it easier for them to administer (they can hire someone when the time comes if they choose) – plus I don’t want to pay those annual fees.
One hint – you should still have a will, even if you have a trust, to handle the “residual estate” (assets you acquired after the trust was created, and anything “forgotten” or not transferred to the trust). It can be simple and does help avoid probate for the bulk of the estate, but still a necessary step (i.e. guardianship of minor children).
The planners also recommended to us not to put our cars into the trust, and as far as transparency, there may be some extra steps involved in day-to-day management (since you basically sign everything as “X, trustee for the X Trust”, which I think is why you don’t bother with vehicles). Or, for example, if your bank account is in a trust, the bank can require a complete copy of the trust. Then, each time you update the trust, you need to provide copies to whichever institutions requested it (banks, brokerages, etc).
MI 122 says
Our attorney called the will for the residual estate a “Pour Over Will”. That was also included in what we paid for, along with healthercare directive, healthcare POA and all the other things mentioned above.
BK says
With a pour over will, is it even necessary to title assets in the name of the trust?
BSue says
The pour over will is really a safety net for the “oops, we forgot about that”. Depending on the size of the asset that was overlooked, you might have to go through probate anyway. Check with an estate lawyer in your state to find out how it is used.
Paper Tiger (aka MI-27) says
We did our family revocable trust back in 2011 and we need to update it. Both Fidelity and Schwab (and others I’m sure) have a service that will review your trust for free and give you things to consider when you are updating your trust. I plan to have Fidelity do this review before going back to my estate attorney.
We originally were motivated to do a trust as a way to avoid probate. We were told to put everything in the trust. Over the years, I have learned more about this. From what I can tell, a trust is good for organizing individual wills, establishing individual powers of attorney, healthcare directives, who will care for young children and how much they get of your estate and when, if you both pass. The home is a good thing to have in a trust but everything else, as long as you have named beneficiaries in place, avoids probate without the need for a trust. You also should not put retirement accounts like 401Ks in a trust because when you pass, the trustee is instructed to settle the estate and pay the heirs so a surviving spouse or child would lose the ability to continue to defer those retirement accounts if they are part of the trust.
Right now the only thing in our trust is our home but I do have a few brokerage accounts that have the trust as a secondary beneficiary and I plan to take those off. I believe we paid $1500 to have our trust done but again, that was 9 years ago. Our situation is simpler because we only have one child who will inherit whatever we have after we are gone. I suppose if you have multiple heirs, putting more things in the trust to assure your assets are properly divided may be a reason to keep more things in the trust than we have.
BSue says
Not sure what state you live in, but where I live, your strategy would not work because any assets left outside the trust would have to be probated – even extra funeral plots.
MI-169 says
I am doing Roth IRA conversions to fill in the 24% income tax bracket. I calculate that between pension, Social Security and RMDs, I will be in what is now the 35% bracket at age 72. The probability of tax rates going up in 10 years has increased significantly due to recent events. Also Roth funds will be more valuable to my beneficiary due to the recent inherited IRA distribution rules changes.
I am not planning on having a trust. My daughter is a beneficiary on all financial accounts (IRAs, brokerage, banking) and I am in the process of executing a Revocable Transfer On Death (TOD) Deed for my house. This should be sufficient to avoid probate in California.
ESI says
This is what I’ll probably do — “top off” my tax bracket with conversions.
Apex says
Given how much you have in deferred accounts that is what I would recommend. It won’t ever get you significantly converted but it will chip away. If you get enough money and income sources outside of deferred accounts that you don’t need to distributions then come age 72, you can make all RMDs a charitable contribution and would never have to pay a dime of tax on RMDs. Given your high giving rates I expect that is where you will eventually come down on RMDs.
ESI says
Yep, I think this is a winning plan…
PhilG57 says
Charitable contributions from IRAs (QCD) are limited to $100K so one may not be able to use ALL the RMD for charity
Phillip says
I’m planning on a similar strategy. For now, we still have 2 W-2 incomes so I expect our income to drop once I stop working. At that point, I plan to “top off” at whatever bracket makes sense, but at a lower tax bracket than what we’re in now.
Wapiti says
I am looking at a conversion of existing IRA assets ( Physical stock shares) to my existing Roth IRA. Transferring / converting ( Not cashing out) the shares.
It does not conflict with the annual $7,000 max contribution limit for a Roth
My research show that the market value of the assets on the day of transfer is that amount / cost basis. On this particular share allocation, I am down 50% ( Due to the current market decline.)
So if I transfer @ $10,000 shares cost basis , then the strategy is with market upturn, the value in the Roth would increase in a tax free basis.
What I don’t know is how the tax is applied on the conversion. If separate bill or done next year on my 2020 tax return. Also if these specific shares need to be held in the Roth for minimum 5 years.
A project in process. Am not a CPA.
Any expert feedback ?
ESI says
I think you’ll pay the tax when you file your taxes for 2020, but I’d ask my CPA to be sure…
Apex says
ESI is correct. The conversion would increase your 2020 taxable income by $10,000.
Phillip says
My advisor said whether you set up a living trust or not, you should factor in what state you live in and the probate laws of that state. California in particular has a lengthy and expensive probate process so the folks I know (e.g. my mom and her friends) all set up living trusts as they live in CA. We live in WA and things aren’t as “difficult” here and we have not set up trusts.
Separately, always assign specific beneficiaries with the institution that holds your assets for all accounts that allow this (e.g. brokerage accounts, etc). Don’t assume the will is good enough. These assets pass to beneficiaries much more quickly and easily in any state. If need be, file custom beneficiary instructions at each institution prepared by your attorney, if need be to accommodate special circumstances (we had to do this to specify a special needs trust as a beneficiary).
Joe says
My parents each retired after turning 65. Like many of the other comments, they never had Roth options and will have RMDs $100k+. They asked for my opinion on how much to take out before RMDs, and my recommendation was based on Medicare premiums. I recommended a MAGI of $173k before RMDs and $217k after that to avoid increased premiums as much as possible.
Ms. Tandem says
This may be a typo on your part, but a Will has nothing to do with incapacity while you are alive. A Will only becomes effective upon death and the probate process confirms the authenticity of the Will. Durable Powers of Attorney are documents which allow you to appoint someone to manage healthcare and/or financial affairs upon your incapacity.
Whether a Revocable Trust is preferable to only having a Will is partially driven by your state of residency and its laws surrounding probate (in some states probate is a relatively simple process).
ESI says
In that section I mean that if you have a will, there’s no clear way to establish you are incapacitated (since a will does not address that). You have to get a judge or a doctor to say you can’t manage your own affairs and neither are inclined to do that.
BSue says
Guardian ships and conservatorships are sometimes necessary, but my family avoided that by having my mother’s trust already in place so I could care of everything from financial to healthcare decisions without going to court. I feel sorry for families who do not have trusts in place and need to go for either of those options with so many of the probate courts closed.
Physician on FIRE says
“Assets in a trust are protected from divorce and creditors.”
There’s no way this is true. I have read many times that a living revocable trust offers no real asset protection. That’s what irrevocable trusts are for (and those have plenty of costs and complexity associated with them).
Best,
-PoF
Apex says
This is correct PoF. The only way to protect assets from being taken is to no longer own them. The only way to do that is an irrevocable trust. Irrevocable is a scary word. It means exactly what it says. No changing your mind. It’s a simple matter of chain of control. If you can get control of the assets so can a creditor. Since you can revoke the trust the court can force you to do so, thus irrevocable is the only option for asset protection.
I personally find asset protection vastly over-rated, but lawyers love talking about it because it generates a lot of fees. I am not interested in giving up ownership for asset protection. I prefer good liability insurance to either trusts or LLCs and their easily pierced corporate veil.
ESI says
There’s an asterisk by everything in these presentations… 😉
CB says
My parents had a irrevocable living trust set up. When my father passed away, my mother and I learned much more about trust benefits, especially about avoiding probate. I was my mother’s executor and when she passed, I handled the items in the trust and a few non trust items(car and 1 bank account) for my brother and myself. My mother included me on most meetings with her lawyer, bankers and investment firms so when she left, the process was simple. Everyone knew me already and knew that I understood her wishes and the trust. Trusts can be difficult when trustees don’t understand what the original couple wanted with the trust. They are complex with taxes when the first person dies, but a CPA can help.
I requested from my husband that we create trusts for our assets. We don’t have children but family on both of our sides. I also wanted a second trust to be created from my parents inheritance where all the funds go to my brother or his children when my husband and I die. I didn’t want my husband’s family to receive my parents money and a trust was the perfect way to ensure that plan. Our joint funds have another trust and that would be split between all family members. It is important to hire an estate attorney who can listen to your goals and create trust documents. I created a flow chart of trusts and discussed that with my brother who would be the executor if my husband and I both die. No financial numbers were shared, just want the goals are of the trust. The cost of setting up the trust is worth it.
Apex says
CB,
You mentioned the benefits of a trust but I didn’t see any listed above. What were those benefits that a trust provided that could not be provided elsewhere.
I really only know of three.
1. Avoid probate which has 4 downsides.
a. Costs money (probably less than the cost of setting up and maintaining a trust for decades)
b. Takes time, perhaps 6 months to a year. Is a quick disposition of assets important? No one knows when you were going to die anyway so why do they need to be able to take your assets and fire sale them right now anyway?
c. Can be a bit of a hassle. (Setting up, maintaining and updating a trust can be a bit of a hassle).
d. Probate is public and people can find out what you were worth. I can’t imagine anyone cares and if they do, I don’t care that they can go look it up.
2. It provides the ability to port the estate tax exemption from one spouse to the other to double the estate tax exemption when one dies before the other. This is no longer important for federal estate tax since they added portability directly into the law now. Federal Estate tax dwarfs any state estate tax so this already solved 75% of the problem. My state (MN) doesn’t have portability so in some states it does have value in that respect.
3. Irrevocable trust provides asset protection. I have no interest in trading ownership control for asset protection.
You mentioned a trust for your parents money to go to your brother. How does a trust accomplish that goal in a way that a WILL could not (other than avoiding probate)?
Trusts are such an often talked about topic, especially among lawyers (just like crazy and complex nested LLC structures are to hide/protect assets) but I am leery of any real benefit from them except in unique situations that outweighs the cost and hassle. I am still trying to determine what kind of benefits would make a trust worth it so I am always trying to find the hidden benefits of a trust. I am open to seeing that I am missing the boat on the value of a trust, but thus far I am still looking.
I would be interested in hearing any opinions people have on why a trust is needed other than the three I listed above (None of which I find compelling, except maybe the A/B trust for state estate tax portability exemption although I am still hopeful most states will eventually provide portability like the federal govt did a few years back). So many people have them and talk about how important they are, but I can never seem to get good reasons other than avoid probate, asset protection or some other nebulous answer that lawyers like to spit out. I feel like people have been convinced they have value by the legal community but can’t really tell me how. I am very interested in someone who truly can tell me how.
MI14 says
There are still some gray areas for me brought up in these posts (even after I have created a trust), that I would like some clarification on. But here is one scenario that I think would be beneficial – let me know if you disagree –
A significant amount in a trust-named brokerage account. This has dropped significantly in the last month. If the last trustee died in the near future, I would expect that the successor trustee can wait to liquidate the assets until an optimum time, whereas an estate executor must liquidate all assets to distribute as part of the execution of the will/estate. Do you agree?
And side question – you ask what can a trust do that cannot be done with a will, but if you create a trust that covers everything (with a simple accompanying pour-over-will for the few forgotten assets), what’s the difference which you create? I see a benefit overall not just to avoid probate (and especially in those states with complicated and expensive probate processes), but to make it simpler to execute (don’t even need to go to the courts in the first place). So basically I think it can be done with either, but to me they are the same amount of cost and hassle to create, but the trust is faster and simpler to execute (and easier to pass thru assets directly to others without liquidation). I imagine it all depends on how well the document is crafted…
CB says
Hi,
When you are an estate executor, you do not need to liquidate assets to distribute the accounts. Much depends on the assets, land can be difficult. Selling a home, second property can take time and the executor should share with others a timeline. Stocks, bond and mutual funds can be transferred in kind to the heirs. That way the heirs can decide to sell if they need cash immediately or hold until prices increase. Even with a trust, having a CPA is important since the IRS is quite interested in the value of the estate. I agree with you that the trust makes the estate process simpler during a difficult time.
CB says
Hi Apex,
every person has different feelings about probate. My parents did not want any of their friends and acquaintances to know of their personal wealth. My father was concerned that someone would attempt to take advantage of my mother when he passed away. She was quite sharp and she wasn’t interested in a second marriage, but he wanted to assist her and protect her when he was no longer there. When my parents created their trust in 1992, the estate tax exemption was a benefit since the shelter trust created at his death was less than $1Million at the time. This provided a totally tax free inheritance to my brother and I, since my mother did not use those assets. Now a days, the estate tax exemption is very high and not a factor in our trusts.
A will can be contested by anyone whether they are part of the will’s distributions or they expected to be. When someone contests a will and lawyers get involved, then none of the will can be distributed as it was desired at a person’s death. Unfortunately, family members can change when money is available. I needed the trust for my parents money since I was concerned that one of my husband’s brothers would contest the will and demand that both sides have access to the entire estate. My parent’s money was in an individual titled account before the trust was created to protect the money for my brother, but once again a contested will can take time and money to fight. I didn’t want that to occur to my brother and his children. My husband was in full agreement since he noticed how his family acted when his mother passed away and there wasn’t a huge inheritance. Sometimes just POWER/CONTROL takes over when someone dies. It is sad but real. The 2 trusts helped me feel more comfortable with our assets since we don’t have children and have to count on others to assist later.
Each family dynamic is different. Wills or trusts should be considered to follow the objectives or the original owners of the assets. Some estate lawyers offer a free consultation and I would suggest that you visit with 1 or 2 just to get ideas. If I didn’t have my individual property, then a trust would not have been needed for us.
Apex says
Thanks for a good reply CB. I appreciate it. I do think I have come to understand over the years that my family is unique. I do know that money can cause problems and I suppose one can never know for sure how people will react. I can’t even think of a person in my extended family who would try to contest anything. I regularly tell my wife that we are not normal when I observe the chaos in so many peoples lives around us. Still worth thinking about I guess to see if the benefits I don’t think I need are worth it. It still seems to come down to the benefits I listed which I currently don’t think I need. Maybe I will change my mind about that over time.
ESI says
For me, the advantages are:
1. Eliminates probate in MULTIPLE states. Since I own property in a state different than I live in, my heirs would have to do probate both here and there.
2. Public knowledge with a will. As I said in the post, the lawyer said that their are scammers who look for large estates and prey on them. Does this happen? Who knows? But why risk it? Heaven knows I’ve “protected” my kids from things less likely to happen than this.
3. Ask anyone who’s ever done probate and at least half of them will give you a horror story.
4. I like the incapacity options with a trust. You can have someone take over assets faster if need be (which could be good or bad — that’s why you appoint a committee, not one person).
In the end I think it comes down to what my original lawyer asked me:
Do you want to deal with the hassle or do you want your heirs to deal with it?
If you want to, get a trust and handle everything for them.
If you want them to deal with it, get a will and they can slog through probate.
I guess that’s another advantage, at least for us. At this point, I’m much better equipped to deal with estate planning issues than my heirs (and I may be for the rest of my life).
As always, YMMV.
Apex says
Thanks for the thoughts ESI.
I also tend to factor known hassle/issues vs unknown hassle/issues.
Creating a trust creates current and ongoing known hassles and issues.
Avoiding probate might alleviate some hassles/issues for the heirs in the future.
I tend to favor known vs unknown. I guess you could say this is partially the argument you have sort of implied about not paying tax now to avoid a potential increase in taxes in the future since the future is unknown.
I also hear people complain about probate or wanting to avoid it but have never personally heard anyone I know tell a horror story with details about probate. I have lots of relatives who have passed. I am not certain they didn’t have trusts but I doubt it and never heard any of them talk about it. I never heard any horror stories about probate, just some stories about stuff being tied up for “months” in probate court but that sounded more like an annoyance than anything worth worrying about. My parents inherited some assets from their parents. Some of it was land. I didn’t hear any horror stories about that.
So again I come down on the idea that people anecdotally say its bad but I haven’t seen anything yet that scares me.
I know there are plenty of places on the internet that do talk about how bad probate is. They also don’t scare me.
Here are two that make the argument that it’s not really that big of a deal.
https://www.thebalance.com/why-do-i-hear-bad-things-about-probate-3504864
I am not trying to convince you or anyone. I am trying to convince myself I guess. Which I still am not convinced either way. Maybe the answer will always be muddy. I prefer clarity and can’t seem to find it on this issue, but I do know that I do not want to create extra hassles right now unless they are definitely worth it. Perhaps as I get older they will definitely become worth it.
Apex says
I appear to have posted the same link twice.
https://www.thinkadvisor.com/2013/09/13/6-reasons-why-probate-isnt-that-bad/?slreturn=20200305134001
JayCeezy says
Awesome 3-part series, and awesome reader comments.
Wanted to add my 2 cents…first, a distinction.
Revocable trusts let the living grantor change instructions, remove assets or terminate the trust. Assets must be retitled in the name of the trust. Beneficiaries avoid probate court and guardianship or conservatorship proceedings; they also allow documents to be kept private.
Irrevocable trusts cannot be changed; assets placed inside them cannot be removed by anyone for any reason. When a grantor holding a Revocable Trust dies, the Trust then becomes Irrevocable.
My wife and I (no kids) have a reason for a Revocable Trust I haven’t seen, here. We do not want to be targeted by unscrupulous people. Our Trust name is not the usual “____ Family Trust” name, and we cannot be identified by assets held in brokerages, or County Property Tax Rolls. Although there is not a hard-and-fast rule protecting assets held in Trust from lawsuits, there is a professional understanding with lawyers that they will not pursue assets/damages greater than the coverage of a Homeowner’s Liability insurance policy, or assets held in a Trust. IRAs, 401(k)s, etc. have another layer of legal protection from lawsuits, and should not be held in Trusts.
So, we are somewhat invisible to those who scan Whitepages, Homeowner Directories, and Assessor records for potential targets for lawsuit. After a few years, renamed assets will drop off of Credit Reporting records, as well. That could be an entire blog post, by itself.
The cost was $2,400, and we obtained the services of a Professional Fiduciary at the rate of $100/hr, as needed (so far, not needed). The sttorney firm moved all property and brokerage accounts, renaming them. A good value for us. We have taken the ‘human proclivity for drama’ out of the issue, so our inheritors will just get a check. But, good for those of you who have a friend (like our host ESI) or relative who is willing to act as Trustee.
getagrip says
You mentioned something about wanting to know how to maximize social security. I found a site I liked that can help with that at https://opensocialsecurity.com/ . You can run a scenario and then play a bit with the numbers to compare. It maximizes based on total dollars you are estimated to get but it also puts out a nice chart so you can fiddle with and clearly see how they arrived at the numbers. It’s not fancy but gives you a nice idea if of what to expect.
Charlie says
Thank you for this entire series, as well as all your articles — finding it fascinating and putting your commentary and insight to use. I just had a question over will vs. trust. In my current situation, I’m 56, male, single and outside of cash accounts and retirement, both of which have beneficiaries attached to each respectively, my only other asset is a used car (no real estate). I completed a will (through a kit) a few years ago with a notary and witnesses. Is this sufficient? Lately, there’s been a few articles praising the trust over the will with respect to avoiding probate costs and the ease of transfer. But in my case, would probate be even necessary, if I’ve listed beneficiaries for all my money?
ESI says
This is a great question for a lawyer…