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helping the next generation with FIRE...
Old 06-30-2007, 02:55 PM   #1
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helping the next generation with FIRE...

Hello all, I am a long time lurker on this forum, but a newbie poster. I wondered out loud if I should post this to "Young Dreamers", but since this area has more relevance to investment strategy I thought I'd try it here.

I have a question / proposal for how a parent can best bequeath a substantial nestegg to their young children. I am well aware of all the traditional methods with wills, 529s, 401ks, putting kids on house title, etc.

The traditional mechanisms of leaving money to a child all suffer from one of several problems:

* ongoing payment of taxes at parent's marginal rates even for assets gifted to child (e.g. taxation of child's "unearned" income)
* ineligibility for child's financial aid
* possible payment of estate taxes upon death of the parent(s)
* legal liability risks that either parent or child may incur later in life which harms other's interest, e.g. torts, nursing home expenses, and many more.
* creation of intergenerational conflict (if I give it away now I cannot retire on it, use it for parent's end of life expenses)
* etc. etc. etc.

My proposal would be to create a trust fund which names the child(ren) as beneficiaries and have the trust own a variable annuity contract, again with the child(ren) as beneficiaries. The parents and other family could each contribute periodic amounts (up to gift tax limits) to this variable annuity contract.

Each child now owns an asset with modest value now, but which can compound tax free for literally decades until THEIR retirement. The trust vehicle would perhaps best be structured as irrevocable to avoid having the child spend it wildly in immaturity, or being forced to liquidate it due to a young divorce, tort, college financial aid requirements, etc.

Generally I am not a fan of VA's, but I think this might be an exception to the general dislike I have of their high fees, mortality expenses, surrender charges, etc.

The key risks of this strategy are perhaps two fold - we have no idea what the regulatory / tax regime will look like in 50...60...more years. VA's may or may not exist or be attractive to new investors. But I'm thinking there's a good chance that existing ones would be grandfathered in as things change. The insurance industry is very influential in American politics. The other big risk is of course asset class selection for the "LONG" haul, but I feel with such a long term horizon this is less of a problem. And, this risk exists outside of my concept too.

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Old 06-30-2007, 03:06 PM   #2
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Check the law on trusts first. Recently, while doing research on trusts re: estate planning (in Canada) I discovered that a trust must be realized within 25 years of the death of the donor.
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Old 06-30-2007, 06:01 PM   #3
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OK good point, I hadn't thought that perhaps trusts would be artificially limited in duration by some factor other than the trust agreement document.

Even so I don't think this invalidates my strategy. Even if the limit were 25 years after the death of the last grantor this puts our hypothetical child into at least their mid 20s, as a minimum, with a sizeable tax deferred variable annuity and no obligation to withdraw from it ever, at least under present law.

The nullification of the trust document itself only serves to permit the child(ren) access earlier than would otherwise be the case, which could indeed be a problem if the child(ren) aren't mature enough to handle this, but this factor doesn't seem to nullify the major tax or investment advantages to the strategy.

Thanks for the thoughts, any more?
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