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Gifting Inheritance

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  • FIREshrink
    replied
    Originally posted by StarTrekDoc View Post
    ). If irrevocable - you're paying top dollar taxes for earnings.
    IANAL but that is only true to the extent earnings are retained. If distributed they can be taxed at the trustee's rates.

    Leave a comment:


  • afan
    replied
    Originally posted by StarTrekDoc View Post
    Grantor (person originating the assets) goes away in an irrevocable trust. It's a one way street. In a revocable, the grantor remains in control until xx time the trust dictates (typically upon grantor's death).

    The beneficiary typically has no control over the trust. The named trustee has that control and follows whatever the grantor's stipulations laid forth in the trust. This is how the beneficiary is protected from outside parties trying to lay claim/influence on drawing assets inappropriately.

    In this case, you can use EITHER a revocable or irrevocable trust with these funds.

    Given your attorney isn't keen on passing it directly to them and Anne's very good comments -- you may want to put into a revocable trust (yours or a completely separate one if you wish). If irrevocable - you're paying top dollar taxes for earnings.
    The taxes would depend on how the money is invested and whether the earnings are distributed to the beneficiary. At current dividend rates, you could have several hundred thousand dollars in a trualst and not reach the top tax bracket.
    Depending on the circumstances, the trust could distribute to the beneficiary enough of the dividends to get the lowest combined tax rate between holding money in trust and paying it out.

    If you would be happy with the kid having the cash themselves, then it just becomes a matter of tax optimization. Distributing the money makes it part of the beneficiary's estate.

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  • StarTrekDoc
    replied
    Grantor (person originating the assets) goes away in an irrevocable trust. It's a one way street. In a revocable, the grantor remains in control until xx time the trust dictates (typically upon grantor's death).

    The beneficiary typically has no control over the trust. The named trustee has that control and follows whatever the grantor's stipulations laid forth in the trust. This is how the beneficiary is protected from outside parties trying to lay claim/influence on drawing assets inappropriately.

    In this case, you can use EITHER a revocable or irrevocable trust with these funds.

    Given your attorney isn't keen on passing it directly to them and Anne's very good comments -- you may want to put into a revocable trust (yours or a completely separate one if you wish). If irrevocable - you're paying top dollar taxes for earnings.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by afan View Post
    From an estate tax POV, the best might be for your wife to disclaim, if the money would then go to the kids. Since there is no will, I would have an expert estates and trusts attorney go over the situation carefully.

    If disclaiming would not send the money to the kids, or it is too late to disclaim, then giving it to them in trust would be the next best. Remember that the estate tax exclusion amount is slated to drop dramatically in a few years. Many people who are below current thresholds will be above them soon. The sooner your wife makes the gifts, the sooner the money is out of her estate. It can the grow without incurring higher estate taxes in the future. You would want to make theses gifts in trust, not outright, to provide the protections others have brought up.

    From an income tax point of view, distributing investment returns to the trust beneficiaries will likely result in lower taxes. This of course depends on the kids' income tax rates. For a portfolio of VTI and a muni fund- VWIUX or VTEB-.at the level of assets you describe, the tax burden will be low in any case.
    We asked, but our lawyer said that disclaiming really didn't work in this case because of the intestate rules. Well, more properly she said it might be possible but it would take longer, cost us more money, and the judge still might not agree. We decided it was easier for my wife to inherit and gift the money.

    Leave a comment:


  • Tim
    replied
    The irrevocable trust has an option that the beneficiary can change the trustee. My neighbor the estate attorney confirmed in a brief chat yesterday that this approach is how he is handling ONE beneficiary. Another does not have that option. State law dependent. You can make a trust dance if you want. Flexibility has consequences.

    Leave a comment:


  • afan
    replied
    Originally posted by Larry Ragman View Post

    I think I understand, thanks. But my question was aimed at the purpose. If I were seeking to protect the kids as beneficiaries I would need to use an irrevocable vice revocable trust. Right?
    Yes. If your kids could revoke the trust, then they would get no protection. The beneficiary of a trust they can revoke is treated as the owner of the assets.

    Leave a comment:


  • afan
    replied
    From an estate tax POV, the best might be for your wife to disclaim, if the money would then go to the kids. Since there is no will, I would have an expert estates and trusts attorney go over the situation carefully.

    If disclaiming would not send the money to the kids, or it is too late to disclaim, then giving it to them in trust would be the next best. Remember that the estate tax exclusion amount is slated to drop dramatically in a few years. Many people who are below current thresholds will be above them soon. The sooner your wife makes the gifts, the sooner the money is out of her estate. It can the grow without incurring higher estate taxes in the future. You would want to make theses gifts in trust, not outright, to provide the protections others have brought up.

    From an income tax point of view, distributing investment returns to the trust beneficiaries will likely result in lower taxes. This of course depends on the kids' income tax rates. For a portfolio of VTI and a muni fund- VWIUX or VTEB-.at the level of assets you describe, the tax burden will be low in any case.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by pit.alumni View Post

    I had an irrevocable trust at one point. It was irrevocable by me but I had the power to choose the trustees. Assets could be removed by the trustees I chose. I am the trustee of a trust for one of my children. It protects the assets from their spouse who they are divorcing but as trustee I can still remove assets for their benefit. My understanding is irrevocable doesn’t mean permanent, just irrevocable by the beneficiary.
    I think I understand, thanks. But my question was aimed at the purpose. If I were seeking to protect the kids as beneficiaries I would need to use an irrevocable vice revocable trust. Right?

    Leave a comment:


  • pit.alumni
    replied
    Originally posted by Larry Ragman View Post

    There have been several suggestions long this line, so I’ll take the advice and check into it some more. But only irrevocable trusts offer asset protection, right?
    I had an irrevocable trust at one point. It was irrevocable by me but I had the power to choose the trustees. Assets could be removed by the trustees I chose. I am the trustee of a trust for one of my children. It protects the assets from their spouse who they are divorcing but as trustee I can still remove assets for their benefit. My understanding is irrevocable doesn’t mean permanent, just irrevocable by the beneficiary.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by FIREshrink View Post
    Trusts are very much about protection moreso than control. Sometimes you are protecting from the beneficiary, which smacks of control; but sometimes you are protecting from external forces, and then even the beneficiary may come to appreciate the protection.
    There have been several suggestions long this line, so I’ll take the advice and check into it some more. But only irrevocable trusts offer asset protection, right?

    Leave a comment:


  • Tim
    replied
    “Since you and Tim both suggest holding the money back I’ll have to think about it a bit.”

    As with anything, presentation counts.
    There is a difference between a gift of $300k cash for whatever and a gift for a purpose. I really don’t view that as “strings” or controlling. I would prefer an honest open communication.
    This is money for an investment account is pretty clear. My investment in my kids is for their own good, they need to make good decisions. I refuse to make the choice. I will always discuss options.
    I will never use the purse strings to control them.
    WBD and I have a significant difference.
    I would have popped for a $5k continuing credit card balance to keep it from blowing up to a $50k balance. My deal was you owe me $5k. Don’t screw up again. Happened again. Now you owe me $10k. That call from the kid is not easy. I really never asked what they spent it on. When you have a problem, tell me sooner than later.
    WBD chooses to have a child pay the price. But WBD had a different situation.
    From your situation, I would hope your kids would give you a call if they were buying a house. If you wanted to use it as a match for retirement savings. Whatever, the goal is for them not chip away on simply spending.
    I do my daughter’s taxes and give her directions and have access to her 3 institution retirement accounts and Roth and taxable. This year I made her sit with me and go over every form.
    It’s her life and her money. What she wants is to avoid big mistakes, not value judgements. Guiding without directing.
    I think gifting your kids and investment account can be handled by the kids. I do think they would be receptive to making you authorized on the account. Make them set it up, including their bank account investments and beneficiary. Part of the learning process.
    You know your kids better.


    Full disclosure: A spouse greatly changes the family dynamics.
    I have another kid, that shares nothing. Nada, zip, zero. It’s okay.

    Leave a comment:


  • FIREshrink
    replied
    Trusts are very much about protection moreso than control. Sometimes you are protecting from the beneficiary, which smacks of control; but sometimes you are protecting from external forces, and then even the beneficiary may come to appreciate the protection.

    Leave a comment:


  • pit.alumni
    replied
    Originally posted by Larry Ragman View Post
    The key issue with the trusts is that they are a way to exercise control, and in many ways I would like to do that, but it would run counter to our intent, which is to gift them a measure of financial independence.
    Trusts can have advantages outside of control and in some cases the beneficiary can also exert significant control. They can protect assets and in the case of a divorce can keep the money in the family. Not saying that this is appropriate in your case but a conversation with an estate attorney might be helpful.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by Tangler View Post

    Sorry for the loss.
    1. I like total index fund for 90% idea
    2. I don’t know enough about trusts, but that might be a good way of keeping them from wasting it if that is a temptation and it may also have some tax advantages (i would consult attorney & cpa)
    3. not sure
    The key issue with the trusts is that they are a way to exercise control, and in many ways I would like to do that, but it would run counter to our intent, which is to gift them a measure of financial independence.

    Leave a comment:


  • Larry Ragman
    replied
    Originally posted by White.Beard.Doc View Post
    I would be careful about gifting too much money at early adulthood. In particular since they are not yet married. I might hold onto the money and tell them something along the lines of being able to help with major life events. And I would help with those types of things assuming that the kids are on a good path, working, productive, having learned how to appropriately be a steward to financial resources, as in learning how to invest.

    Things I might consider supporting:
    Paying off student loans
    Purchasing a new car
    Starting an investment account together with them and challenging to learn enough about finances to invest wisely
    Paying for a wedding celebration
    Helping with a downpayment on a house

    At the same time, it is important to maintain healthy boundaries. Don't try to use the money for control, unless one of them is seriously off a reasonable life path. Let them be adults. One of the best gifts we can give to our kids is letting them learn how to manage their own life on their own terms with their own financial resources. Once they have done that in a practiced and solid fashion, then sharing the wealth is ok in my view.
    The life expenses are valid considerations, though not all apply in their particular situation (no student loans, no short term need for cars, weddings are on us more or less). The house down payment though, I really would be ok if they used some or all for that. Since you and Tim both suggest holding the money back I’ll have to think about it a bit. The way I interpret your input though, I would probably say this is a question of timing and perspective. I’ve been working with both of them on finances for a few years. But I genuinely see this as life changing money in terms of financial independence if they invest it, so I am still inclined to focus them on that.

    Leave a comment:

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