10-16-2020, 12:19 PM
(This post was last modified: 10-16-2020, 12:27 PM by ken-do-nim.)
Congratulations, you've made it. You have a nest egg in excess of $5 million dollars invested in high dividend paying equities, perhaps earning overall 7%. $5,000,000 x .07 = $350,000 per year; allow $100,000 to reinvest to let the principal grow and account for inflation and you are still getting $250,000 a year. Martinis every day on the beach.
But now you're approaching 70 years old, and perhaps your health isn't the best. I believe something like 1 in 3 Americans end up in a nursing home. If you go to a nursing home, your fortune will be spent down to pay for your stay until there's nothing left. Your spouse gets to keep the house and a car; that's it. There are three mechanisms to avoid health care eliminating your lifelong earnings:
1. Long term care insurance.
2. Gift your savings to your descendants at least 5 years before you enter a nursing home.
3. Put your nest egg into an irrevocable trust at least 5 years before you enter a nursing home.
My parents and siblings have long term care insurance. It's the safe approach, but those premiums aren't cheap and I would vastly prefer to be investing that money rather than paying premiums.
You can give your money to your kids before you die, but (a) there's no assurance they "give you an allowance" and (b) there's still the gift tax to consider.
This thread is about exploring option 3, the irrevocable trust. Specifically, a trust that still allows you to live off the dividends like you've always been doing.
**********************
First off, I'm not a lawyer. My plan is to write this all up and bring it to a lawyer when I'm about 65-70 years old; whenever I cross that $5 million mark.
When you put your money into an irrevocable trust, it isn't coming back. But you can, I'm pretty sure, receive dividends out of it. So, step 1 is to define yourself as a beneficiary, up to and until you are sent to a nursing home or die. Likewise for your spouse, if you have one.
But you can leave money to your descendants too. Here's what I'm thinking for my future trust. The beneficiaries will be:
1. Myself & my spouse, until we go into a nursing home.
2. All living descendants who have graduated from college and aren't in a nursing home either. Probably an additional clause excluding someone who is institutionalized.
3. The trust's management firm, at a fixed 10% of the dividend payout.
Let's work through an example. Let's say the family consists of:
1. You and your spouse
2. Your 3 kids.
3. Your 6 grandkids, 3 of whom have graduated college.
Let's go back to assuming the trust has $5,000,000 in it, earning 7%. Perhaps the trust stipulates that 1% + the inflation rate is reinvested to increase the principal, and let's say inflation is 2%. So the trust pays out 7% - 1% - 2% = 4% of 5,000,000 is $200,000.
10% goes to the trust's management firm, leaving $180,000. That is then split 8 ways, for each share to be $22,500. So payouts would be:
1. $45,000 to you and your spouse
2. $22,500 to each of your kids and your adult grandchildren who are college graduates.
Why a management firm? While you're still of sound mind it isn't necessary, but at some point you won't be, and there's no guarantee any of your descendants are market savvy enough to manage the trust and maintain a nice payout percentage. But to encourage them to take interest in how the trust is invested, I think a once-a-year gathering of the trustees would be useful, where the management firm does a presentation of what the trust has invested in and your descendants can make changes by vote. (Knowing me, I'd also probably record goofy videos to be played at each annual meeting for the next 20 years after my death or so, to encourage my descendants to take an interest in investing and to work with each other to make the trust the best it can be.)
I like how this encourages future generations to get a college degree, because otherwise they are cut off from the trust.
Now let's say another grandchild graduates college. The $180,000 (if that's still the dividend payout after the firm's cut) is now split 9 ways, giving the new college graduate a nice boost to get started in life.
The next piece to figure out is how to provide an incentive for descendants to opt to leave something to the trust, so that the principal can continue to grow rather than get diluted as the family tree grows larger. Perhaps a requirement of being a trust recipient is that he/she takes out a Whole Life insurance policy payable to the Trust when he/she dies? The recipient would probably collect the life insurance policy's dividends while he/she is still alive, of course.
So ideally the trust would keep paying into perpetuity. But there needs to be a clause about paying a charity if the family line dies out.
Thoughts? Comments?
But now you're approaching 70 years old, and perhaps your health isn't the best. I believe something like 1 in 3 Americans end up in a nursing home. If you go to a nursing home, your fortune will be spent down to pay for your stay until there's nothing left. Your spouse gets to keep the house and a car; that's it. There are three mechanisms to avoid health care eliminating your lifelong earnings:
1. Long term care insurance.
2. Gift your savings to your descendants at least 5 years before you enter a nursing home.
3. Put your nest egg into an irrevocable trust at least 5 years before you enter a nursing home.
My parents and siblings have long term care insurance. It's the safe approach, but those premiums aren't cheap and I would vastly prefer to be investing that money rather than paying premiums.
You can give your money to your kids before you die, but (a) there's no assurance they "give you an allowance" and (b) there's still the gift tax to consider.
This thread is about exploring option 3, the irrevocable trust. Specifically, a trust that still allows you to live off the dividends like you've always been doing.
**********************
First off, I'm not a lawyer. My plan is to write this all up and bring it to a lawyer when I'm about 65-70 years old; whenever I cross that $5 million mark.
When you put your money into an irrevocable trust, it isn't coming back. But you can, I'm pretty sure, receive dividends out of it. So, step 1 is to define yourself as a beneficiary, up to and until you are sent to a nursing home or die. Likewise for your spouse, if you have one.
But you can leave money to your descendants too. Here's what I'm thinking for my future trust. The beneficiaries will be:
1. Myself & my spouse, until we go into a nursing home.
2. All living descendants who have graduated from college and aren't in a nursing home either. Probably an additional clause excluding someone who is institutionalized.
3. The trust's management firm, at a fixed 10% of the dividend payout.
Let's work through an example. Let's say the family consists of:
1. You and your spouse
2. Your 3 kids.
3. Your 6 grandkids, 3 of whom have graduated college.
Let's go back to assuming the trust has $5,000,000 in it, earning 7%. Perhaps the trust stipulates that 1% + the inflation rate is reinvested to increase the principal, and let's say inflation is 2%. So the trust pays out 7% - 1% - 2% = 4% of 5,000,000 is $200,000.
10% goes to the trust's management firm, leaving $180,000. That is then split 8 ways, for each share to be $22,500. So payouts would be:
1. $45,000 to you and your spouse
2. $22,500 to each of your kids and your adult grandchildren who are college graduates.
Why a management firm? While you're still of sound mind it isn't necessary, but at some point you won't be, and there's no guarantee any of your descendants are market savvy enough to manage the trust and maintain a nice payout percentage. But to encourage them to take interest in how the trust is invested, I think a once-a-year gathering of the trustees would be useful, where the management firm does a presentation of what the trust has invested in and your descendants can make changes by vote. (Knowing me, I'd also probably record goofy videos to be played at each annual meeting for the next 20 years after my death or so, to encourage my descendants to take an interest in investing and to work with each other to make the trust the best it can be.)
I like how this encourages future generations to get a college degree, because otherwise they are cut off from the trust.
Now let's say another grandchild graduates college. The $180,000 (if that's still the dividend payout after the firm's cut) is now split 9 ways, giving the new college graduate a nice boost to get started in life.
The next piece to figure out is how to provide an incentive for descendants to opt to leave something to the trust, so that the principal can continue to grow rather than get diluted as the family tree grows larger. Perhaps a requirement of being a trust recipient is that he/she takes out a Whole Life insurance policy payable to the Trust when he/she dies? The recipient would probably collect the life insurance policy's dividends while he/she is still alive, of course.
So ideally the trust would keep paying into perpetuity. But there needs to be a clause about paying a charity if the family line dies out.
Thoughts? Comments?