The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: Ants on July 12, 2017, 03:24:57 PM

Title: Setting up a trust
Post by: Ants on July 12, 2017, 03:24:57 PM
I wanted some advice on the best way to handle a certain situation. My father passed away and named his wife and myself as the co-executors of his estate. His wife is entitled to certain items but the largest parts are a number of rental houses and several hundred acres of farmland that will be divided equally between me and my brother and sister. My problem is that my Dad didnít trust my sister, who admittedly isnít very good with her finances, to handle a large amount of money. In his will he called for a trust to be set up for her with me as the executor. The will says the trust will pay her one-third of assets at her 40th birthday (3 yrs away) and the remaining at her 45th. We are all agreed that we will liquidate the houses and farm and that will probably produce about $500-$600k each.

My concern is that trusts are so expensive even in the short time period the expenses with most trusts especially in ones as small as this will run 2% or more. I realize that Vanguard has trusts but I couldnít start one until the land has been sold and then it would be at least 1%. I donít really need much in the way of financial advice. Iíd prefer to just put her in a 70/30 index fund split between VSTAX and VBTLX

My question is does anyone have experience setting up something like this that was fairly painless and reasonably cheap? Secondly, if she doesnít say anything, do I even need to do a trust or could I set her up a Vanguard account and avoid the trust all together. My Dad told me to do what I thought best and while I recognize she isnít the best saver I donít think she will blow it all in a crazy spending spree or do some wild investments. Thanks

Title: Re: Setting up a trust
Post by: bobechs on July 12, 2017, 03:54:42 PM
As a general proposition, if all heirs agree (and by agree I mean agree -not just not disagree to the point of going to war)  they can virtually rewrite the will and its bequests to suit themselves.  The specific forms, waivers and so on are well known to any attorney in the jurisdiction  who practices probate law.  It should not cost much and you should be explicit with the attorney that you are not looking for full service probate administration, with a fee set by a percentage of the estate, but rather want to pay for the billable hours to accomplish your goal of wrapping the estate up with the division you have stated. 

Be absolutely sure all the heirs are completely on board before launching this raft.

Title: Re: Setting up a trust
Post by: JohnWC on July 12, 2017, 04:15:54 PM
Definitely consult the services of a professional who deals with this sort of thing every day. An estate planning attorney or elder law attorney would be the first two types that come to mind. I know such a lawyer who is trustworthy and located in PA , not sure where you are - you're best off finding someone you can meet in person to discuss the ins and outs of the situation. You don't want to misstep and create family problems (that could maybe result in legal problems) just because you wanted to save a couple bucks your sister may or may not miss in the end.
Title: Re: Setting up a trust
Post by: Dee18 on July 12, 2017, 05:55:33 PM
I am not sure why you think the trust will be expensive.  It only cost me a few hundred dollars to set one up.  If you are going to manage the money, to whom is the 2% being paid? 
Title: Re: Setting up a trust
Post by: sol on July 12, 2017, 06:02:55 PM
I am not sure why you think the trust will be expensive.  It only cost me a few hundred dollars to set one up.  If you are going to manage the money, to whom is the 2% being paid?

Mine was more like $1000, but your general point still holds.

Setting up the trust isn't the expensive part.  Trusts are only expensive when you're paying the lawyer to administer it, to manage the books and write the monthly checks and to basically be the responsible party.  Since you're the responsible party, I think this is really easy.  The estate belongs to the trust, but you are the defacto manager of everything because you control the trust.  You make the payments to your sister.  The trust is just a legal entity that owns the estate property.
Title: Re: Setting up a trust
Post by: secondcor521 on July 12, 2017, 06:43:35 PM
These are the costs I know of with trusts:

1.  The legal costs of working with an attorney to write up the trust language, either in the will, or a trust document, or whatever.  This is probably $500-$2000 depending on where you live and how complicated the trust is, but since your Dad has already passed away it sounds like this shouldn't be an issue.

2.  Trust taxes.  Trusts are their own entity and have to file annual tax returns and pay income taxes just like individuals and corporations do.  Costs here are the trust income taxes themselves plus any tax preparation costs.

My parents have an A/B bypass or credit shelter trust.  The assets are at Vanguard in a trust account.  Vanguard doesn't charge any sort of fee for the account other than the standard expense ratios of the mutual funds in there.  Definitely not 1%.  The tax prep will be a few hundred dollars, but it is simple enough I could do it myself if my Dad didn't prefer to pay his personal CPA to do both is individual tax returns and the trust tax returns.

Trust income taxes are a thing you'll need to look into.  Basically trusts pay income taxes at graduated rates just like individuals, except the dollar amounts for the brackets are much smaller.  Distributed income is basically treated like a pass through, so it is taxed to the beneficiary at their rates.  What we're doing is distributing enough of the income from the trust to the beneficiaries each year so that taxes are minimized between the trust and the beneficiaries.  Look at form 1041 and the related instructions.

You'll need a tax ID number for the trust, which you can get from the IRS for free by filling out a form.

You can open a Vanguard trust account with the tax ID and the trust paperwork and a Vanguard form that is maybe 6 pages long or so.

I would follow the terms of the will exactly - as executor that's what you're supposed to do.  Yes, there is TEDRA, which is what I think bobechs is referring to - but to do that you'll have to pay another thousand or two to a lawyer to write up a TEDRA agreement, get it signed by everyone (your Mom and your siblings and you) and then file it with the probate court.  It will certainly cost you more to do TEDRA than to do a trust for a few years.
Title: Re: Setting up a trust
Post by: Ants on July 13, 2017, 02:55:59 PM
Thanks everyone for your help. I had it in my head that I had to use a bank or other institution to create and administer the trust. If I can create one for as cheap as mentioned then do the investing and taxes myself it would be ideal. I really didnít want to involve my dadís widow with changing of the will as the situation is civil but not exactly friendly not to mention the additional costs.