Estate_ Reader Question_ A Trust For Grandchildren


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Estate_ Reader Question_ A Trust For Grandchildren

  1. 1. Estate: Reader Question: A Trust For GrandchildrenImagine what it would be like if each one of your grandchildren earned a scholarship to pay theircollege costs. Wouldnt that be great? In a sense they can. Not only that, they could receive grants tohelp them purchase their first home, start a business and even provide additional retirement funds!Read on to find out how.You dont have to rely on a government program or the generosity of a school to provide a collegescholarship for your children, great-grandchildren and even your great-great-grandchildren. Youdont have to rely on special grants to help them buy a home or start a business. And their potentialretirement doesnt 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 suchfunding for generations. Imagine, your great-grandchildren growing up knowing that if they work hardand get good grades that you will pay some or all of their college education! Talk about a legacy.Its not as hard as you think. Recently, I received a question from a reader who wanted to set up atrust 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 fromgeneration to generation without any estate tax. The money is protected from divorce, lawsuits andthe claims of creditors. And you get to set the terms of how the money is administered anddistributed. 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 financialassistance for starting a business, for doing charitable work or for saving for retirement. The trust canown homes--even vacation homes. The possibilities are endless. You determine what they are andhow they will function.An irrevocable trust will typically be used in these situations. Once you set it up, the terms of the trustcant be changed. So its important that you thoroughly think it through before signing it. Just becausethe terms cant be changed doesnt mean these trusts cant be flexible. You can build in flexibility.For instance, the terms can state that the trustees are able to determine the conditions upon whicheducational funding will be provided based on the current tax, legal and economic environment. Theycan take into account the financial wherewithal of the individual and their parents. You dont have tosay, If this, then that. Instead you can set guidelines for the trustees to follow. Of course, you alsospecify how trustees are determined and under what circumstances they can be changed. Since thetrust is irrevocable, the more flexibility you can leave the trustees, the better.Once the trust document is prepared and signed, its time to move money into it. Since the trust isseen as a separate legal entity, money and/or assets are gifted to it. Check with state laws to see ifgifts above a certain amount are subject to tax. At the Federal level, you can gift $12,000 a year perperson without tax consequences. There is also a $1 million Federal lifetime exemption, so $1 millionif youre single, or $2 million if youre married, can be transferred into the trust all at once withoutincurring Federal Gift Tax.There are many ways that trust money can be invested. It can own real estate, insurance, annuities,
  2. 2. stocks, bonds and mutual funds. In fact, what it can own is only limited by what the person setting upthe trust decides.Many suggest annuity or other tax-deferred products so the trust doesnt have to pay taxes on theincome each year. I dont agree. Using annuities only pushes the taxes down the road, causing themto snowball. They are still subject to tax when withdrawn and will be taxed at ordinary income taxrates.Stocks, bonds and real estate can be managed in such a way that they generate dividends andcapital gains. These are taxed at a much lower rate and provide greater control and flexibility. Lifeinsurance on those setting up the trust and/or other family members can be used to continue toreplenish the trust from one generation to the next.Burbank real estate