Money, Children, Trusts, Oh My! - Parenting Tips Requested

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Topic Author
solar99999
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Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

I would like to set up a crummy trust (non-grantor, irrevocable, complex trust) with me and my spouse as trustees for my soon to arrive child to enable me and my relatives to make annual gifts into the trust below the annual exclusion amount each year but have some concerns. I am aware of the technical aspects of the trust, i.e. withdrawal rights, hanging power rules, gift tax etc, but I don’t know much of the “parenting” aspects as I do not have any grown children yet. I know there’s no guide out there for proper parenting but I’m sure by reading of other people’s experiences with children and money, I will gain me some useful insight.

1)What are some good milestones I can put in the trust document (i.e. graduate college with high GPA, accumulate xxx in retirement by 30 years old, get a good paying job) to prevent my children from losing their ambitions as they grow up?

2)What is a good, tax efficient way to invest funds in this trust? 100% into a non-dividend paying diversified company like Berkshire Hathaway and distribute shares later to child?

3)If I created one trust for all my children and decided to distribute more money to one child versus the other, what is the best way to communicate this to them without causing resentment? (i.e. Child 1 is older so his share of the trust had more time to grow or Child 2 didn’t take out as much money so his share grew, etc)

I know a lot of you probably haven’t created a separate trust but anyone who has thought about setting aside some money for their children at some point in their lives may have encountered similar questions.

Thanks in advance!
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets."
flyingbison
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by flyingbison »

solar99999 wrote:
1)What are some good milestones I can put in the trust document (i.e. graduate college with high GPA, accumulate xxx in retirement by 30 years old, get a good paying job) to prevent my children from losing their ambitions as they grow up?
You cannot prevent it, any more than you can cause it. All you can with stipulations in a trust is punish them for not living up to your expectations.
aristotelian
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by aristotelian »

1. I am not familiar with trusts so can't really help you. But I would start by asking why you are interested in such a thing. If you are concerned with ensuring that your child is productive and motivated, why not put the money in a 529 earmarked for college, or simply keep it in your name and gift it later? Or a minor account that you have joint ownership of?

2. I would not put it in a single stock, even a reputable company like Berkshire. Your best bet is an S&P500 or Total Stock Market Index fund. That is what Buffet advises personal investors, after all.

3. I have a similar issue with inherited IRAs that my kids received from a relative. There are small differences in distribution amounts, bond cost, etc., due to their age difference. I will tell them not to worry about what your brother has, just be grateful for what you have.
Topic Author
solar99999
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

flyingbison wrote:You cannot prevent it, any more than you can cause it. All you can with stipulations in a trust is punish them for not living up to your expectations.
Thank you very much I will take that advice to heart.
aristotelian wrote:1. I am not familiar with trusts so can't really help you. But I would start by asking why you are interested in such a thing. If you are concerned with ensuring that your child is productive and motivated, why not put the money in a 529 earmarked for college, or simply keep it in your name and gift it later? Or a minor account that you have joint ownership of?
I will use a 529 plan concurrently, and I don't want the funds in my name in case I get sued for something stupid like not shoveling snow quick enough before someone falls in front of my house. Wanted to avoid joint account with minor is so child does not get scammed and withdraws without my knowledge.
aristotelian wrote:2. I would not put it in a single stock, even a reputable company like Berkshire. Your best bet is an S&P500 or Total Stock Market Index fund. That is what Buffet advises personal investors, after all.
Hate the fact that trust tax brackets go up so fast but I guess for the sake of principal preservation, maybe I have no choice but to eat the annual tax cost on dividends.
aristotelian wrote:3. I have a similar issue with inherited IRAs that my kids received from a relative. There are small differences in distribution amounts, bond cost, etc., due to their age difference. I will tell them not to worry about what your brother has, just be grateful for what you have.
Thank you very much for your advice!
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets."
NYC_Guy
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by NYC_Guy »

Hi,

I'm a long-time lurker but first time poster. Your post was one of the first to which I thought I could meaningfully contribute. Since you are looking to use your annual gift tax exemption, I assume you are concerned about having an estate substantially in excess of $11 million or so in 2017 dollars. I am in a similar situation. If not, then stop worrying about using your annual gift tax exemption -- it will lead to less than ideal investment decisions.

First, a 529 contribution is a fine choice, but not necessarily the best use of your annual gift tax exemption as payment of educational expenses directly by you will not constitute gift. See IRC 24503(e). On the other hand, a 529 contribution is a gift. As a result, I have not used my annual exemptions to fund a 529.

Instead, I opted to create a form of an ILIT for my two kids, who are now in their twenties. I had my ILIT buy a $2 million whole life policy from a super-reputable mutual fund company and I max funded it (up to annual MEC limits) since inception (about 13 years total). I did this throughout their teenage /college years and have just recently shut it off funding. That used up the gift exemptions for my wife and I for our two kids for years. The ILIT is now so overfunded it will never lapse. And I am now using my annual exemptions to help in other ways (downpayment on house, etc...). This made sense for me for two reasons. First, I have the personal wealth attributes to make whole life worthwhile for me and my family. Second, it allowed me to tell my kids, after 18 when they had to start signing the Crummey notices, that the sole reason for the Crummey notice/contribution is that I was buying life insurance. They know they have protection in a big life insurance policy on me. But they don't think of it as some trust fund piggybank. Of course, this isn't true as a technical matter, I could surrender it at any time. But optics matter. As my kids start their own families, we will have more detailed conversations about what really exists. But I certainly didn't want to have that conversation with an 18 year old.

I have other parts of my portfolio that are earmarked for eventual transition to my kids. They'll either get it before my death and use up some of our unified credit (and take my basis). Or they'll get it on my death with a stepped-up basis. But I found the ILIT approach to work well for me as described above.

Hope this helps.
Grt2bOutdoors
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by Grt2bOutdoors »

solar99999 wrote:I would like to set up a crummy trust (non-grantor, irrevocable, complex trust) with me and my spouse as trustees for my soon to arrive child to enable me and my relatives to make annual gifts into the trust below the annual exclusion amount each year but have some concerns. I am aware of the technical aspects of the trust, i.e. withdrawal rights, hanging power rules, gift tax etc, but I don’t know much of the “parenting” aspects as I do not have any grown children yet. I know there’s no guide out there for proper parenting but I’m sure by reading of other people’s experiences with children and money, I will gain me some useful insight.

1)What are some good milestones I can put in the trust document (i.e. graduate college with high GPA, accumulate xxx in retirement by 30 years old, get a good paying job) to prevent my children from losing their ambitions as they grow up?
Too restrictive. Example - child lacks the natural ability (read between the lines here) to attend college or vocational training, markets don't cooperate even for best of investors fail to accumulate xxx in retirement account by age 30, define a good paying job? Better to speak with a qualified trust attorney first before your develop expectations that are insurmountable for nearly any person.
2)What is a good, tax efficient way to invest funds in this trust? 100% into a non-dividend paying diversified company like Berkshire Hathaway and distribute shares later to child?
Total Stock Market Index.

3)If I created one trust for all my children and decided to distribute more money to one child versus the other, what is the best way to communicate this to them without causing resentment? (i.e. Child 1 is older so his share of the trust had more time to grow or Child 2 didn’t take out as much money so his share grew, etc)Read Beyond the Grave from Condon - what happens when you undertake actions (irrevocable, mind you) and the fall out from such actions that could not forsee the reactions and consequences of such actions. Be very careful what you wish for.You just might get it.

I know a lot of you probably haven’t created a separate trust but anyone who has thought about setting aside some money for their children at some point in their lives may have encountered similar questions.
How much money are you talking about here? You could open an UTMA for each child, fund it with $10K and let compounding do its work. Then you as parent have 18+9 months to influence their behavior, you might fail or you might just succeed and more. That is what parenting is like.
Thanks in advance!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
solar99999
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

NYC_Guy wrote:Hi,

I'm a long-time lurker but first time poster. Your post was one of the first to which I thought I could meaningfully contribute. Since you are looking to use your annual gift tax exemption, I assume you are concerned about having an estate substantially in excess of $11 million or so in 2017 dollars. I am in a similar situation. If not, then stop worrying about using your annual gift tax exemption -- it will lead to less than ideal investment decisions.Not concerned about $11 million estate. Want to accrue annual gifts in order to be able to make a large disbursement for child, such as buying a home in the future, which I presume would be millions of dollars due to inflation.

First, a 529 contribution is a fine choice, but not necessarily the best use of your annual gift tax exemption as payment of educational expenses directly by you will not constitute gift. See IRC 24503(e). On the other hand, a 529 contribution is a gift. As a result, I have not used my annual exemptions to fund a 529.My plan is to deposit $30,000 over three years for tax deduction (I live in NY) and stop there. I'd rather under fund than over fund. I'll let the market do the rest. The remaining $54,000 (assuming annual gift exemptions are $14k pp) over the three years will go into trust

Instead, I opted to create a form of an ILIT for my two kids, who are now in their twenties. I had my ILIT buy a $2 million whole life policy from a super-reputable mutual fund company and I max funded it (up to annual MEC limits) since inception (about 13 years total). I did this throughout their teenage /college years and have just recently shut it off funding. That used up the gift exemptions for my wife and I for our two kids for years. The ILIT is now so overfunded it will never lapse. And I am now using my annual exemptions to help in other ways (downpayment on house, etc...). This made sense for me for two reasons. First, I have the personal wealth attributes to make whole life worthwhile for me and my family. Second, it allowed me to tell my kids, after 18 when they had to start signing the Crummey notices, that the sole reason for the Crummey notice/contribution is that I was buying life insurance. They know they have protection in a big life insurance policy on me. But they don't think of it as some trust fund piggybank. Of course, this isn't true as a technical matter, I could surrender it at any time. But optics matter. As my kids start their own families, we will have more detailed conversations about what really exists. But I certainly didn't want to have that conversation with an 18 year old.I've always tended to shun life insurance, probably because I have an optimistic imagination and believe that by the time I reach 77, medical and technological advances will push the average lifespan of human beings another 10 years (think: Cyborgs). Didn't like the idea of paying premiums calculated by actuaries using current year information that ensure the insurance companies make a profit? On the other hand, I do like the tax-deferral advantages of a whole life policy and using life insurance as way to conceal a piggy bank trust fund as you mention has made me re-think my opinion.

I have other parts of my portfolio that are earmarked for eventual transition to my kids. They'll either get it before my death and use up some of our unified credit (and take my basis). Or they'll get it on my death with a stepped-up basis. But I found the ILIT approach to work well for me as described above.

Hope this helps.
For a first time poster, that was a really helpful post! Thank you.
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets."
otinkyad
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by otinkyad »

We found all the bandied rules too constraining and despite our attorney's best efforts to get us to write some rules, we decided that we would rather pick successor trustees that we are willing to trust to make reasonable judgements on our behalf. We think of such rules as the ultimate in helicopter parenting.

You cannot avoid the possibility of resentment, even if you divide the proceeds evenly, or means test them, or prorate them by GPA, or inverse income, or astrological sign, or by a roll of the dice on disbursement day, or by any other arithmetic division possible. But your chances of triggering resentment (I pointedly avoid saying "causing resentment") seem to be minimized by equal shares.

"You cause as much sorrow dead, as you did when you were alive." —Sinead O'Connor.
malabargold
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by malabargold »

The right way isn't the easiest, as usual.

It's the years you put in of parenting, being an
active teacher, and an example, for your children that
will count most.

The right way to act will be ingrained in their psyche,
not merely codified in fallible tree pulp and ink.
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Tamarind
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by Tamarind »

solar99999 wrote:
aristotelian wrote:2. I would not put it in a single stock, even a reputable company like Berkshire. Your best bet is an S&P500 or Total Stock Market Index fund. That is what Buffet advises personal investors, after all.
Hate the fact that trust tax brackets go up so fast but I guess for the sake of principal preservation, maybe I have no choice but to eat the annual tax cost on dividends
Total Stock Market index funds, particularly those of the large reputable companies like Vanguard, are very tax efficient. While they will generate dividends and capital gains, they will make such distributions to shareholders as small as possible and as qualified as possible. We routinely recommend TSM funds to people for their own taxable accounts.
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KlingKlang
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by KlingKlang »

solar99999 wrote:I don't want the funds in my name in case I get sued for something stupid like not shoveling snow quick enough before someone falls in front of my house.
A minor quibble, but don't use a hammer when you need a screwdriver. Liability protection is best addressed through umbrella insurance.
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TomatoTomahto
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by TomatoTomahto »

I have 4 kids (age 34, 27, 21, 19). Even today, i couldn't create rules for disbursement that would reflect the kids' different natures (strengths and weaknesses) and our hopes for them, which are not monolithic either. Best to have age bands, and the right person managing trusts in your absence. Before their birth, lol! "Man plans and God laughs" is never more true than when planning for offspring's futures.

And, +1 to an umbrella policy. Don't let the liability tail wag the investment dog.
I get the FI part but not the RE part of FIRE.
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solar99999
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

Thank you everyone for your responses. I think I will do the following:

1) Scrap the crummey trust. Set up a separate brokerage account, contribute whatever amount I would have contributed into a crummey trust into that brokerage account and invest in the Vanguard Total Stock Market fund. I will pay the taxes personally. I'll be disciplined enough not to touch that account.

2) Conceal the existence of each brokerage account from my children and make decisions on how much to distribute per conversation with my spouse as time goes on. We won't set early expectations or goals, will have to play it by ear. Distributions will probably be limited to $28,000 (or whatever the joint annual gift exclusion is at the time) per year but maybe its better that way. Not sure how my children will be able to handle a windfall anyways.

3) Speak to an insurance broker and get educated on how to protect my assets in the event of an unfortunate event. If I find it appropriate, proceed with an ILIT.
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archbish99
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by archbish99 »

If you're not worried about having a large estate, why do you care about the annual exclusion anyway? You have $11M in lifetime gift exemption; if you're not expecting to need that at death, you can use it anytime you want. Forget the annual gift limits.
I'm not a financial advisor, I just play one on the Internet.
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solar99999
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

archbish99 wrote:If you're not worried about having a large estate, why do you care about the annual exclusion anyway? You have $11M in lifetime gift exemption; if you're not expecting to need that at death, you can use it anytime you want. Forget the annual gift limits.
Agreed, but I can never be so sure since my parents are worth about $7.5 million right now.

I am absolutely encouraging them to spend it all themselves as I don't need their money. I'm happy to live a frugal and lean lifestyle but they are too.
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets."
blockdoc
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by blockdoc »

We used an irrevocable trust for our child and I think it was the right thing for us to do. The main motivation was to protect the money from a possibly irresponsible young adult. In my immediate family, each sibling inherited a moderate amount of money as children, and one sibling dissipated the money in his 20s in a way that was injurious. We set up an irrevocable trust that will give 1/3 of the money to the child at age 30, 1/2 at 35, and the remainder at 40. The trustees have the right to give the moneys out earlier if that seems best (for college, house, etc.). We have used our annual giving limit as follows: 1/4 to 529 and 3/4 to the trust. Both now have a fair amount of money in them. We invested the money in tax efficient mutual funds.
This was a while ago, and I understand there are benefits to more modern trusts.
There are some secondary benefits of this arrangement. I have an umbrella insurance policy, but I still like the asset protection aspect of the trust and the 529. The trust also protects the money from an unwise early marriage that ends in divorce (or a lawsuit directed against the child). The trust, but not the 529, is useful for estate planning. Other relatives can give money to either the 529 or the trust.
I agree with previous posters that setting up firm goals for disbursement (i.e. finish college, get money) is a bad idea, for the reasons given (can build resentment, what if the child isn't college material, etc).

Congratulations on the impending big event!
Topic Author
solar99999
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Re: Money, Children, Trusts, Oh My! - Parenting Tips Requested

Post by solar99999 »

blockdoc wrote:We used an irrevocable trust for our child and I think it was the right thing for us to do. The main motivation was to protect the money from a possibly irresponsible young adult. In my immediate family, each sibling inherited a moderate amount of money as children, and one sibling dissipated the money in his 20s in a way that was injurious. We set up an irrevocable trust that will give 1/3 of the money to the child at age 30, 1/2 at 35, and the remainder at 40. The trustees have the right to give the moneys out earlier if that seems best (for college, house, etc.). We have used our annual giving limit as follows: 1/4 to 529 and 3/4 to the trust. Both now have a fair amount of money in them. We invested the money in tax efficient mutual funds.
This was a while ago, and I understand there are benefits to more modern trusts.
There are some secondary benefits of this arrangement. I have an umbrella insurance policy, but I still like the asset protection aspect of the trust and the 529. The trust also protects the money from an unwise early marriage that ends in divorce (or a lawsuit directed against the child). The trust, but not the 529, is useful for estate planning. Other relatives can give money to either the 529 or the trust.
I agree with previous posters that setting up firm goals for disbursement (i.e. finish college, get money) is a bad idea, for the reasons given (can build resentment, what if the child isn't college material, etc).

Congratulations on the impending big event!
Thank you!
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets."
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