We live in California. We are told having a living trust in California will avoid probate and a lot of problems.
We have 2 sons. One is just 18 years and the other 14.
Our goal is to have our sons get the money over a period of say 10 to
15 years so he does not blow it at a young age.
Can any one please let us know how we can structure this "economically".
We called Schwab etc., the said that they would be trustees for the 15 years and take 1% to 4% of net assets every year...that means in 15 years they will take 60% of the net assets!
Is there a way to create accounts that will allow our sons to be able to draw a limited amount each year - say x number of dollars each year only ?
or is there any other suggestion from any one that will allow us to accomplish our goals ?
You might consider a will in which the executor will liquidate the assets and purchase a lifetime annuity for each child. That way the distribution will provide them with a lifetime stipend that they can't piddle away in the first few years. Perhaps in a trust, the trustee could do the same thing.
Andy in Eureka, Texas
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OP has 2 children and wants to control distribution of estate assets from the grave. OP is also shocked that Schwab want 1% to 4% of net assets every year to administer a restricted payout. OP asks for an "economical solution."
First, my pet peeve - Everybody wants to go to Heaven, nobody wants to die. Everyone wants help, but no one wants to pay!
Schwab's fee is reasonable considering what you're asking them to do. You also have to factor in something for a return on the investment. If the investment is earning at least 4% a year (which can be done fairly easily) then Schwab gets paid from earnings and only the corpus is getting distributed. If the investment can do better than 4% then it should stay ahead of the curve.
It is a skewed perception to think that Schwab, or anyone else, is going to get 60% of an investment for managing it - you have simply ignored any return and that isn't fair to whomever might manage this for you.
You might consider a restricted payout, available with many annuities. This limits the amount of money they'd get over a period specified by you before you die. BUT this won't be free either - the annuity company will charge a fee.
Another option would be a trust - BUT then you'll need a trustee and the trustee may need a financial advisor. This could easily cost 4% a year - again, not free.
You could ask a relative to oversee things, but I strongly discourage this. Putting one relative in charge of another is a S***storm waiting to happen. Family dynamics come into play that can damage relationships beyond repair.
You also didn't mention the amount of money involved. If you're talking about $100K split between two children your options are going to be different than if you're talking about $100M.
Some other things to consider:
Probate is nothing to fear. Frankly I encourage probate, it puts creditors on notice that they only have a fixed amount of time to file a claim against your assets.
Probate also costs about the same, or less, for the average size estate. When you factor in the costs of having a good trust document drafted and periodically reviewed, and add in the costs associated with retitling assets in the name of the trust, and consider that almost everyone winds up in probate anyway because something got overlooked, you'll find that except for a few specific situations - people with out of state real property and the wealthy (who can afford to pay for representation), trusts are generally most costly than probate. AND even with a trust you'll still need a trustee to oversee a restricted payout. So in the long run the trust could eat up more of your money.
Trusts almost never avoid estate tax issues, so even if you avoid probate you may still have an estate tax issue.
Another option you might consider is replacing the assets you intend to leave to your kids with a high dollar insurance policy - for two reasons:
1 - insurance passes outside of probate (and usually outside of estate taxes);
2 - most insurance companies can easily (and cheaply) accommodate a restricted payout.
You may find that buy using your investments to purchase life insurance you can leave a larger legacy AND avoid probate and estate taxes cheaply and more easily.
But once again, it won't be FREE - you'll to meet with a planner who can help you structure things in the way most beneficial to YOU. That means they will need to spend some time getting to know you before they can make any recommendations about what you should do - whether you ultimately buy anything from them or not.
If all you want is advice (and I'll not get into the pros/cons of fee only services versus commissioned sales) then you can expect to pay a fee for the advice.
If you don't want to pay a fee, you can expect to pay some sort of sales commission.
I presume that 4% of assets would be paid year after year no matter what the investment return might be. If stock market returns were like they have been recently, that could deplete the capital rapidly. In the first case, the trustee would be receiving $4000 in the first year, if there were no investment returns at all. In the second case, the trustee would be receiving 4 million the first year. I find it hard to believe that the investment advice and paperwork involved would be worth that much. A fee-only financial planner together with an accountant might be a better choice.
It is certainly possible to structure a will so that the beneficiary will receive the money in installments or in several lump sums spread over a period of years, instead of all at once. What is important is to find an executor, perhaps another family member, who will handle those provisions without charging an exorbitant fee.
A living trust can be a good idea in some cases, but 1% to 4% of net assets is a large price to pay just to "avoid probate," and, also, in my opinion, too much for investment advice. In the case of a living trust, too, it is wise to have a family member as trustee, or someone who will handle it for a reasonable fee. At any rate, by the time both spouses die, the kids could be old enough and responsible enough to receive it all at once. If not, a fee-only financial planner together with an accountant should be sufficient to insure that things go smoothly when family members are no longer available.
What structure would you use for this? It seems to me that you probably still need a trust to make it work. If the policy is owned by the parents, the value is part of the estate. If the policy is owned by the kids, there's no restriction on what they can do with it (other than the parents saying they'll stop funding it if the kids blow it). To have the control that these folks want and the estate tax protection, it seems like you are suggesting an ILIT - which still requires a trustee, again preferably a third-party one, though the trustee's duties may be a lot more simple - pay the insurance premium annually, and if the insurance is set up with a structured payout later on, pass along those payments. That should be a lot cheaper than active ongoing management of a trust, but it's still a bit of trust management.
That's certainly the truth. And anything which *seems* to be free, one should probably be very suspicious of. Nobody can afford to give this level of service and advice for free - they need to be paid somehow and if you don't know where the money's coming from you can count on the fact that it's still coming from you and probably more than you think.
Find a young attorney and consult with them. In my experience talking with an attorney is an exercise. Make them answer your questions in outline form within the space of an hour. If they haven't the mental capacity to do so, then find another. Estate planning attorneys get paid because the area is complicated by legislation and the search for loopholes in tax laws (which are few and far between and only marginally reduce taxes owed). Setting up a will typically doesn't cost more than a few thousand (or even a few hundred), but attorneys get paid for settling estates, advising the executor who typically knows little about estate laws. There is nothing to prevent you from getting a second opinion on a completed will.
The percentage active management fee declines with the amounts involved. If you bought 20 year T-bonds there would be no need for active management, no chance for poor investment selection, and a good banker or your estate attorney could be appointed as administrator or trustee with simple instructions to disburse a set amount or a set percentage annually. Make sure you have account statements, settlement and other specified fees in writing, and the statements, contract and billing copies, delivered to the hands of your heirs or trustee.
If you are planning on dying soon, have a talk with your kids about money management. They could still blow their annual disbursements the day they get them. I would suggest, considering your sons' ages, allocating an amount towards a down payment on a house.
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