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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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