Law News and Tips

The Case for a Trust

Fred Vilbig - Thursday, March 28, 2019

Fred L. Vilbig © 2019

     If you have young children, you probably don’t want them to have a lot of money dropped in their laps all at once. If they’re under 18, that means a court-supervised conservatorship. The court would have to approve investments and distributions. Courts typically will only allow insured investments that don’t keep up with inflation, such as money market funds. And all of the trust distributions must be approved by the court or the conservator can be personally liable. And you’ll have to hire an attorney to do anything.

     Even if your children are over 18, they may not be ready to handle large sums (and $10,000 can be huge to some people). The frontal lobe of the brain is the part of the brain that asks, “is this a good idea?” before you jump off a cliff or do something else thoughtlessly. In general, that part of the brain doesn’t fully form until you reach 25 years of age or so. That’s why teenagers and young adults make so many bad decisions.

     Another problem with a large inheritance is that he can actually ruin a child. If they receive a sizable sum outright to early, it can ruin their work ethic. I have seen that happen all too often.

     And then there is the child with special needs. If one of your children is receiving (or is likely to receive in the future) some governmental benefits, any inheritance can disqualify the beneficiary until all that money is gone.

     In all of these cases, distributions in trust for the benefit of the child makes perfect sense. Some clients worry that setting up a trust requires a trust company of some sort. However, an individual family member can serve as the trustee. Even when the kids reach an age where you think they’ll be responsible, you might want to leave the assets in trust, but let your child be his or her own trustee. As long as they are not the ones who created the trust, the trust assets will be protected if there’s a divorce or in the case of a lawsuit.

     And in the case of a child with special needs, in order not to cause them to lose their governmental benefits, restrictions need to be put onto the use of those assets to just supplement, but not replace, any government benefits. Under those circumstances, a properly drafted special needs trust is critical.

     In all of these cases, creating a trust for the benefit of a child makes perfect sense. If you want to learn more about trusts, feel free to order my book by clicking here or on Amazon. If you want to set up an appointment to see if a trust is right for your children, please call my office at (314) 241-3963. I look forward to hearing from you.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

 

 

 

529 Plans and Estate Planning

Fred Vilbig - Monday, March 04, 2019

Fred L. Vilbig © 2019

     529 Plans are sometimes referred to as “education IRAs.” And that’s a good way to look at them. Parents and grandparents can put money into a plan for the benefit of a child or grandchild, and the money grows tax-free. Even when the beneficiary takes the money out of the Plan, as long as he or she uses the money for education, all of the growth avoids taxes. If they use it for something else, then the growth is taxable as ordinary income.

     Before saying more, I need to make a disclosure. I don’t set up 529 Plans for clients. I had to ask a financial planning friend of mine, John Fischer, about the rules to set them up. And wouldn’t you know it? The rules vary from company to company and from state to state. I don’t want to get too complicated on this part, but here goes.

     When you are funding a 529 Plan, you are actually making a gift to the beneficiary. In 2019, gifts of up to $15,000 ($30,000 in the case of a married couple who splits the gift) are exempt from the federal gift tax. If you put more than that into a 529 Plan and the beneficiary is a family member, you can actually spread the gift out over 5 years, but you can’t exclude more than $10,000 per year in that case. Anything over that is technically “subject to” the gift tax. Unless the plan has a limit to it, you can give more, but it creates a gift tax issue.

     But there’s a funny thing about the gift tax: all it does is it eats into your federal estate tax exemption. No taxes are actually due until you have given away the maximum estate tax exemption which is currently $11,500,000. That’s a really big number. Only 0.1% of Americans who die in any year will owe any estate tax. For the rest of us, this is not a real issue. So practically speaking, for most people, there are no tax limits to what you can put into a 529 Plan. And don’t worry about filing a gift tax return. The penalty for failing to file is a percentage of the taxes due. No taxes due, then no penalty. But I digress.

     When I have a client come to me with a 529 Plan, we have to decide how to plan for it. So long as they are alive, they can always change the beneficiary. But if they die with money still in the plan, what happens to those assets? It turns out that you can name a successor owner of the account. And that successor can be your trust. That way if the beneficiary dies before everything is withdrawn, if you are not able to change the beneficiary due to your death or incapacity, the successor owner can make the change. Without planning properly, the Plan assets could end up in probate. And that’s what we want to avoid.

     So my advice is that if the plan permits it, name your revocable trust as the successor account owner. That way, if the primary beneficiary dies and you can’t or don’t change the Plan, so long as you’ve named your trust as the successor owner, the trustee can take care of those assets. The problem, though, is that I don’t know if all 529 Plans allow for a trust to be a successor owner. You’ll have to talk to your financial advisor about that.

     Having said all of that, it is important to note that helping a child or grandchild with college or graduate school or a vocational or trade school is always appreciated.

     Call if you have questions.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963