Imagine what it would be like if each one of your grandchildren earned a scholarship to pay their college costs. Wouldn't that be great? In a sense they can. Not only that, they could receive grants to help them purchase their first home, start a business and even provide additional retirement funds! Read on to find out how.
You don't have to rely on a government program or the generosity of a school to provide a college 'scholarship' for your children, great-grandchildren and even your great-great-grandchildren. You don't have to rely on special grants to help them buy a home or start a business. And their potential retirement doesn't have to depend on the largesse of increasingly stingy employers.
No. You can award those 'scholarships' and 'grants'. You can take steps now that may provide such funding for generations. Imagine, your great-grandchildren growing up knowing that if they work hard and get good grades that you will pay some or all of their college education! Talk about a legacy.
It's not as hard as you think. Recently, I received a question from a reader who wanted to set up a trust that would provide retirement assistance to future branches in his family tree.
There are several advantages to setting up a multi-generational trust. The money can pass from generation to generation without any estate tax. The money is protected from divorce, lawsuits and the claims of creditors. And you get to set the terms of how the money is administered and distributed. That means the trust can provide incentives related to things you find important.
For example, there can be educational assistance based on grades. There can be financial assistance for starting a business, for doing charitable work or for saving for retirement. The trust can own homes-even vacation homes. The possibilities are endless. You determine what they are and how they will function.
An irrevocable trust will typically be used in these situations. Once you set it up, the terms of the trust can't be changed. So it's important that you thoroughly think it through before signing it. Just because the terms can't be changed doesn't mean these trusts can't be flexible. You can build in flexibility.
For instance, the terms can state that the trustees are able to determine the conditions upon which educational funding will be provided based on the current tax, legal and economic environment. They can take into account the financial wherewithal of the individual and their parents. You don't have to say, 'If this, then that'. Instead you can set guidelines for the trustees to follow. Of course, you also specify how trustees are determined and under what circumstances they can be changed. Since the trust is irrevocable, the more flexibility you can leave the trustees, the better.
Once the trust document is prepared and signed, it's time to move money into it. Since the trust is seen as a separate legal entity, money and/or assets are gifted to it. Check with state laws to see if gifts above a certain amount are subject to tax. At the Federal level, you can gift $12,000 a year per person without tax consequences. There is also a $1 million Federal lifetime exemption, so $1 million if you're single, or $2 million if you're married, can be transferred into the trust all at once without incurring Federal Gift Tax.
There are many ways that trust money can be invested. It can own real estate, insurance, annuities, stocks, bonds and mutual funds. In fact, what it can own is only limited by what the person setting up the trust decides.
Many suggest annuity or other tax-deferred products so the trust doesn't have to pay taxes on the income each year. I don't agree. Using annuities only pushes the taxes down the road, causing them to snowball. They are still subject to tax when withdrawn and will be taxed at ordinary income tax rates.
Stocks, bonds and real estate can be managed in such a way that they generate dividends and capital gains. These are taxed at a much lower rate and provide greater control and flexibility. Life insurance on those setting up the trust and/or other family members can be used to continue to replenish the trust from one generation to the next.
Nationally-syndicated financial columnist and Certified Financial Planner•® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He'll answer your financial question - FREE at www.guardingyourwealth.com.
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