Your Money Matters More

Children are Expensive

 Children are expensive. That is a given: but the cost of higher education is growing at an unprecedented rate. A 529 Plan, a type of college savings fund, is a tax free way to accumulate money for college expenses. After the birth of a child, begin to put money away for college. The owner of the account can contribute for a named beneficiary. If for some reason the beneficiary chooses not to use it the owner can transfer it later to a different student. 

There are a wide selection of plans available. Each State has its own plan with some offering more than one, and an investor can choose from any of these. Each state provides its own residents additional incentives, but these tax incentives should be subordinate to the underlying returns of the investments of the plan. Always seek the advice of a Certified Financial Planner (CFP) when selecting a plan. 

Recent graduates have left college with a crushing debt load. An alternative to this is paying out of pocket. Making wise investments early allows compounding of returns to work for you. This is just one of the tools that your CFP has in their arsenal.  

Different Types of Trusts

When establishing your estate plan, trusts can serve as a way to put your intent into the estate plan even after your death. The trust is funded from the estate. In an estate, property passes by ownership first where jointly owned assets are passed to the joint owner, contracts with a named beneficiary are second (i.e. IRAs, Insurance Policies), and lastly only what is left over flows through your will. Many people establish elaborate trusts only to have them unfunded at their death because they have everything titled jointly with their spouse.

Testamentary Trusts 

The most common trust is a Testamentary Trust. This trust is drafted as a part of your will and is funded at the time of your death. This is the next step up from having only a simple will. While this is a perfectly acceptable form of trust, this lacks several of the advantages which Living Trusts provide.

 Living Trusts or Inter-Vivos Trusts

These are the next step in the sophistication of your estate plan. This form of trust can be funded during your lifetime or upon your death. A living trust can be the beneficiary to contractual assets. In addition, the will would divide your assets into two baskets; personal property and invest property.  This means that all of the personal property are disposed of through the will and the remainder are investment assets which are transferred into the trust.

 Irrevocable Insurance Trusts

These are drafted in addition to or in place of the two other trusts. This trust is named the owner and beneficiary of your insurance policies. Since they are irrevocable they are not included in your estate at your death.  A neat trick is to make it the owner of a term policy. That way if you later decide that you don’t want the trust, if you are insurable, then you simply don’t fund the policy and it defaults thus rendering your trust irrelevant.

 Items of Note

With any of these trusts the terms are open to your intent. Regarding distribution, you can distribute income and principle as you see fit.  You will probably want to make the terms of all your trusts similar if not identical. Children with special needs require specific care to be drafted within the trust so as not to disrupt their disability services.

 

This is an oversimplification of the trust law and you should consult your attorney before establishing your estate plan.

Case Study in Retirement Planning - Part 2

In Part 1, we established the Jack and Diane Davis family and their current net worth.  In this, Part 2, we will address gifting to their soon-to-be-born grandchild.  There are a variety of ways to accomplish this and not pay any gift tax.  And since they have more income than will be needed in their retirement they wish to make a gift to their grandchild.

 

Gifting Options

• One option they can use is their annual exclusion.  This amounts to $13,000 each, or a total of $26,000 for the couple.  Since they will be buying Christmas and birthday presents throughout the year, it's not advisable to use all of this credit.  They would probably want to use $25,500 at a maximum.  This can be done each year for each grandchild from this point forward.  This needs to be a "present value" gift.  In other words, this needs to be money they can spend, i.e. cash. 

• Another option is to use their one-time credit that ultimately totals $1 million for each spouse, and then it will be gone.  Right now it might seem excessive, but the child will have many years to receive gifts and this is better reserved for a future time, or when they can do some form of "leveraged gifting.” 

• “Leveraged gifting” means that something that is valued at than $1 today will only use $1 of the lifetime credit.  Since the value of things is calculated at the time of the gift, now would be an ideal time to do this, when the market has not fully recovered, and prices are depressed.  Leveraged gifting involves either giving a future interest in something, or something that has its value decreased by its container, i.e., a family limited partnership.  The reason a future value gift is not worth dollar-for-dollar is because it has delayed gratification to it.  A problem with these gifts is they may never be completed, and they have the ability to get sucked back into your estate.  These may take the form of a Grantor Retained Income Trust (GRIT).  In other words, the grantor retains the right to the income during his/her lifetime, or a specified number of years.  The longer the term, the greater the discount.  This is just one type of leveraged gifting. 

• Wrapping these gifts in a partnership which has a general partner and limited partnership interest is another form of discounting.  These are discounted because they have strings attached.  In other words, because of the restrictions placed on the beneficiary, the gifts can't just be spent or sold.  Real estate and business interests are often ideal assets for this type of entity.  It makes it easily dividable into units to distribute among the children.  For example, Jack could take the stocks in the furniture store and divide them among the children, giving a limited partnership to all the children, and the general partnership to only those children involved in the business.  Or he can retain the general partnership interests, thus retaining control of the partnership. 

These are only a few of the endless possibilities for gifting.  In fact, I have seen some individuals who have used these techniques to keep the family together at holidays by holding board meetings in exotic locations!  And this arrangement is advantageous for tax reasons too. 

I will expand on this subject in future articles.  For now, suffice it to say that Jack and Diane have a multitude of good options they can choose.