Is a trust too complicated?

April 10, 2023 1:09 PM

My elderly parent is talking to a lawyer about setting up a new will and trust. The lawyer suggests using an irrevocable trust with myself as both the trustee and the beneficiary, to start when my parent dies. My spouse thinks this would be too complicated to keep track of. Do you have any experience, positive or negative, with this?

The estate will likely be in the $2-$4 million range, so the advantage of doing this would not be in avoiding estate taxes because that amount doesn't trigger taxes in the US, but in protecting the money were I to be sued. The arrangement would be that I would give myself "health, education, maintenance, and support," which I've read can include charitable donations and other less obvious things as part of "support." I have no grandiose plans and am unlikely to change my frugal lifestyle. How annoying would it be to deal with this inheritance as a trust vs outside of a trust? What are the pitfalls?

posted by HodieMacBodhi to Work & Money (17 answers total)

the trust also protects your ownership of the inheritance in the case of you getting divorced, and it streamlines your inheritance of assets like houses and bank accounts which otherwise can be a hassle.
posted by fingersandtoes at 1:19 PM on April 10, 2023

(Can you talk to that lawyer with your parent? Are you all in the same place, or can you get them on the phone?)
posted by bluedaisy at 1:20 PM on April 10, 2023

Trusts also make the distribution of assets much easier than going through probate. I would absolutely talk with the lawyer to get an idea of what you would have to do before outright ruling this out.
posted by tafetta, darling! at 1:25 PM on April 10, 2023

You need to specify your location and the location of your parents to get specific answers. Generally speaking, revocable trusts are simpler than irrevocable.

The main advantage of a trust (revocable or irrevocable) is that it avoids the estate falling into probate, which is slow and complicated.
posted by caek at 1:28 PM on April 10, 2023

Transfer on death is simpler still depending on what assets there are and how many people will inherit. Easiest with a trust to set up a revocable trust that will be changed to irrevocable on death. IANAL - this is just what we dealt with. Trusts can be more complex than needed depending on the size of the estate.
posted by leslies at 1:33 PM on April 10, 2023

Easiest with a trust to set up a revocable trust that will be changed to irrevocable on death. IANAL - this is just what we dealt with.

Same here. Trust with me as successor trustee and my brother and I as sole beneficiaries. Two years later, the trust no longer exists and I haven't set foot in a courtroom. Unless your spouse has personal experience as the executor of a multimillion dollar estate that went through probate, I think you can safely disregard their opinion.
posted by LionIndex at 1:49 PM on April 10, 2023

I went through this with my parents recently. I'm the eldest child and will also be the executor of their will. Will you be the executor for the will, or is that someone else? I'd highly recommend that you talk with your parents and their lawyer about their thoughts; if you're not the executor, they should also be having this conversation so they understand. Ultimately my parents ended up deciding to form a revocable trust that converts to irrevocable upon death for the ease of execution, in addition to restructuring their will to provide for grandchildren explicitly. Your situation will be very state-dependent -- in California, my spouse and I have a living trust to ensure that assets avoid probate and that our children are cared for, but I understand that it's not nearly as necessary in other states.

This is somewhat unrelated to your question, but if you're concerned with protecting assets if sued, look into umbrella insurance policies. They are relatively inexpensive (I think ours is $300/y for $3M of coverage). When we bought our house in San Francisco, I didn't want to be in a situation where a rogue lawsuit could leave us back at square one. For sure look into this if you're anxious about such things.
posted by kdar at 1:51 PM on April 10, 2023

To clarify:

Yes, my parent and I have met with this lawyer several times. The trust would be under Arizona law and the lawyer says it will remain that way, whichever state I live in. I am also the executor.

I should have said that my parent's assets have been in a trust, but the main difference would be that in this new revised trust, the assets would remain under HEMS forever. I am middle aged and reliably boring.
posted by HodieMacBodhi at 1:59 PM on April 10, 2023

One experience: my grandfather set up on irrevocable trust (back when estate tax happened for < $1m) to go to us grandkids, with mom, his only daughter, getting some $ along the way. There's now not really enough money in the trust to justify paying trust fees and such, but we can't empty it out, because it's irrevocable. So now we're jumping through hoops with the trust just to help get $ for mom's care (something that is written in there, but lawyer hoops), and we'd all have preferred to have simply terminated the thing years ago. She and dad also have/had revocable trusts to skip probate, and in my limited experience when dad died, they've been much less of a pain. Sounds like there's more money involved for you, so maybe not applicable - but irrevocable is hard to change/modify/terminate.
posted by ldthomps at 2:19 PM on April 10, 2023

From personal experience with Arizona trusts: they're not too complicated. My wife and I had to fly out last year to meet with the estate lawyer to go over everything in a scheduled review, and since my wife's father and siblings had all died the upshot was that the one trust was dissolved and a new trust was formed with the same assets. The new trust establishes precedence and ownership after my mother-in-law passes, but until then she's the sole trustee. My wife will be the trustee as well as a beneficiary of the trust at some percentage, and the other heirs (most of whom are still minors) will have their percentage divided in a specific way we all agreed on in the meeting. I believe the old trust had been an irrevocable trust, but part of the reason we were there was to get stuff notarized relating to the dissolution of the old trust so the new one could be established. It's a thing, but it's a thing estate lawyers in AZ do all the time, and they'll guide you through it.

On the other hand my mom lives in Oklahoma and all her assets are supposed to have been assigned as transfer on death. Knowing what I know about my mom's organizational skills, I think I might feel a bit of relief if everything were in a trust. As it is, everything may be "filed" somewhere that may or may not make sense or even be in a filing cabinet, or it might be in the safe deposit box for which my sister and I had to sign paperwork spelling out what had to happen before we got access. When I saw the contents of the safe deposit box that day I didn't exactly have a lot of faith in my parents' management of the things they put there (title documents for cars they hadn't owned in decades, an outdated will, and so on).

I guess ask me this question again after my mother and mother-in-law have died, and I can tell you which one was easier to deal with after the fact. For now, I didn't find the trust stuff particularly difficult.
posted by fedward at 2:27 PM on April 10, 2023

A few questions to ask the lawyer based on things that came up when we drafted our own irrevocable trust:
- are you still protected from lawsuits if you are the trustee of your own trust?
- can you dissolve the trust if the remaining funds are below a certain level?
- can you create a new trust to replace this one with slightly different terms? how different? (you might be surprised how much wiggle room there is here)
- if you die first, will your wife have access to the trust earnings, if not the principal, to pay her expenses when she outlives you?
- can you adjust the ratio between future beneficiaries (typically your own children) if, for example one of them has special needs and can't support themselves you might want to give them a larger share
- think about what happens if there are step-children or step-grandchildren
- Read the spendthrift section very carefully to make sure it reflects the reality. The first draft we got from our lawyer acted as if people were EITHER in school OR working OR care-giving while I have personally been doing a part-time mix of these for most of my adult life. Also, make sure the language on dealing with addiction and recovery is realistic given the likehood of relapse.
posted by metahawk at 4:06 PM on April 10, 2023

My spouse thinks this would be too complicated to keep track of.

As opposed to going through probate? What makes your spouse think this?
posted by saladin at 4:13 PM on April 10, 2023

I think folks are misreading the question. A probate-avoidance trust already exists; this is about changing the trust to make it irrevocable.

I agree with a poster above: if the main goal is to protect the money from lawsuits, what are the upsides and downsides of this plan vs. just purchasing a big umbrella insurance policy? At the very least, I'd find another professional to talk to and get those questions answered. $4million is a lot of money, but it's not a lot of money, such that you start needing to get super esoteric with your planning.
posted by Blue Jello Elf at 5:34 PM on April 10, 2023

I agree that people seem to be misreading the question/issue. The parent’s money is in trust and will not go to probate. The question is - after the parents’ deaths - should the money stay in an irrevocable trust for the benefit of the OP during the entire lifetime of the OP, with the OP as the trustee? I’m not an expert on trusts, but this seems unusual to me. For example, I had some vanilla docs drawn up for my family - the structure is a revocable living trust, which turns irrevocable at the death of me/my spouse, but then the assets of the trust are required to be distributed to our kids over a period of years (fixed to their ages). I.e., the money does not stay inside the trust for the entire lifetime of the kids, which is what I understand is being proposed here.

If the only benefit is “protection from lawsuits,” that doesn’t seem like much of a benefit - as others have pointed out, there is umbrella coverage, and, also, are you at a high risk of lawsuits? If I were you, I would want to understand more about the tax consequences of this structure - such as how distributions will be taxed, I would want to understand if/how I could get the money in a big emergency, and I would want to know what happens to the trust when I pass away. If you are not getting answers to those types of questions, I would talk to someone else for advice.
posted by Mid at 7:16 PM on April 10, 2023

I would also want to understand if the attorney suggesting this plan stands to earn trust management fees (or commissions on them) unto infinity.
posted by Blue Jello Elf at 8:00 PM on April 10, 2023

Thinking about this a little more - and this isn’t a foolproof heuristic, but if this structure is so great then why doesn’t everyone with $2-4M put all the money in an irrev trust with themselves as beneficiary and trustee? It seems a little “one simple trick” to me. But this is fairly uniformed skepticism on my part.
posted by Mid at 5:09 AM on April 11, 2023

I'm hesitant to weigh in here because there may be issues of state law that I'm unfamiliar with in Arizona. Some general observations include that putting the money in an irrevocable trust (it is apparently not in one today) offers some protection from the estate being drained by expensive end of life nursing care and allowing your parents to use medicaid to cover that (with some caveats) and that a HEMS trust is often used when one is concerned that the recipients might otherwise use the money for frivolous expenses. As such it does have more limitations on the disposition of those assets, although they are not unduly burdensome in my view. There are advantages to irrevocable trusts when it comes to lawsuits, because money in an ordinary trust is considered an asset of the parents and can be reached by creditors and lawsuits easily. They will also shield your parents from tax on asset appreciation. Some of the answers provided above do not reflect a very good understanding of the concepts involved. A better strategy for you might be to simply hire another trusts and estates attorney to review the documents and answer your questions. The main disadvantage of this sort of trust is that it somewhere between very complicated and impossible to change depending on what it is you want to change.

Nothing you have said makes me suspect that the original attorney has made any mistakes or that they don't understand what they are proposing.
posted by Lame_username at 1:03 PM on April 11, 2023