Creating a trust that pays your descendants

[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?

[fenders53]

Another great post. What you present is interesting. I looked at annuities and thought they were a scam. I can't even imagine what they are like with interest rates at near zero now.

I am very pleased that you volunteered to be my free estate planner. Thanks for that.

Seriously though, I m not sure I will have enough assets to qualify for the attention of a trust manager without giving them a much larger than 10% cut. I took about four years off work at age 53 to do some adventure fishing in cool places and drag racing. No regrets as few even have that option. Anyway, I doubt my net worth will ever be more than about half your example and that includes some real estate. NilesMike knows real estate so I'll look forward to his advice as well.

Here is my approximate projection, and I'll share a bit more personal info than I usually would on an open forum.

When I re-retire in a few years I am going to have my primary residence I wish to sell. I also have my previous rental property I just sold on contract with large down payment. I should be completely free of it. No drama expected as I'd be happy to repo it. It will be all settled before I get very old.

I could live happy off my pensions I receive within a few years and leave my stock port completely alone and will it. I'll live even happier if I spend some of it. I intend to live a little large on the front end as I gave up so many luxuries to be in my financial situation in my old age.

I only have two heirs. My wife which I am highly likely to outlive but who knows? I have a daughter I'm not so sure is physically capable of giving me natural grandchildren. Maybe she will adopt like I did? I doubt she will ever have more than a two year degree but I can't be sure. She isn't great with finances. Capable of managing a DGI port, not the option income strat I currently run. Point is I have few heirs so a trust like you describe might not be optimal. A trust of some sort seems prudent though. I might protect my daughter from destitution in her retirement years. Divorces are just too common and I didn't do this to fund some guy I never even met yet.

If I end up a widower I would like to buy a property in the northland where I can fish. That's my longtime dream. My current plans are to put the next property in my daughter's name so I can get the five year gift done. I am NOT going to give all my life's wealth to a nursing home. I am nowhere near a nursing home today but life throws you curves. I wish to protect a large portion of my assets so she can enjoy it. As I said better yet leave at least some income she can't access until she is retirement age.

[ken-do-nim]

> Another great post.

Hey thanks. It's nice to be here as well. I was on another money forum, but it died out.

> I looked at annuities and thought they were a scam.

The only reason to look at annuities is if you truly don't want to manage a dividend portfolio at all. But the big problem with annuities is that the payouts end when you die. Your portfolio will live on.

> Anyway, I doubt my net worth will ever be more than about half your example

It seems like a long road to me as well, but when I plug the numbers into an investment calculator for 15 years out, it looks rosy. For me, things will really pick up when the child support payments end.

> I could live happy off my pensions I receive within a few years

Sweet!

> I have a daughter I'm not so sure is physically capable of giving me natural grandchildren.

I hope she chooses to adopt.

> I doubt she will ever have more than a two year degree but I can't be sure. She isn't great with finances.

My daughter is only 15 but I think she's in a similar boat.

> If I end up a widower I would like to buy a property in the northland where I can fish. That's my longtime dream.

That sounds fun. I'm a board gamer, so I hope my retirement is filled with conventions and game nights.

> My current plans are to put the next property in my daughter's name so I can get the five year gift done.

Hopefully that works out.

****

For those of you who don't have any heirs, you could still save your money from going to the nursing home by a similar technique as I described but leave the dividends to the charities you like.

[fenders53]

I try to keep this place a little more active. I love forums, but they have died out the past few decades. Unlike other forums, this place is not adversarial. Some of us joke around, but nobody is rooting for somebody here to fail. That's my perception anyway. Most of the regulars have a helpful skillset. Real estate, taxes, growth stock picking, option income strats, and DGI of course.

This thread is an important topic to plan for. I was over 50 before I gave it much attention. I wasn't pleased my FED GOV 401K was going to be converted to an annuity. The annuity is keyed to FED funds rate. Not too bad when it was 4%. Some of my peers are going to get a shock when they see what happened to their forecasted monthly checks at sub 1% rates. You are stuck with whatever it is when your time to retire arrives. I transferred mine to a normal 401K account. I am probably better off even if I only manage an average 1% return in my port. There was no way I was going to live ten years into retirement, and leave nothing to my heirs except final bills. I've already seen that happen to a few former co-workers and relatives.

[crimsonghost747]

This is indeed a very interesting topic. Thanks for starting it. I know this forum is indeed mostly based on how to create that retirement portfolio, much less about what happens to it when we end up 6 feet under.

I, hopefully, have some more decades before I even need to start thinking about this. But it's always good to get some new ideas. I currently don't have any kids, and currently not planning on any either, so this is indeed something that I do need to think about at some point. Something similar to this trust could be the answer indeed, assuming there is something left towards the end.

[NilesMike]

While I do wish to leave a legacy for my wife if I go first, leaving a ton of money for my kids is not a significant factor.

I am very lucky that my kids 34/31 are educated with very good jobs. My son makes 6 times my peak earnings already, so they can take care of themselves.

Additionally, I am not sure that leaving a lot of money to descendants is necessarily a good idea. IF I were to do it, there would be strings attached to the money. One example is that they could only access money equal to what they earned for the past year. IME, things are cherished much more when they are earned as opposed to given to them.

See some of the big lottery winners and what happens to them. It's often not very good.
Just food for thought.

[fenders53]

(10-19-2020, 04:51 AM)crimsonghost747 Wrote: This is indeed a very interesting topic. Thanks for starting it. I know this forum is indeed mostly based on how to create that retirement portfolio, much less about what happens to it when we end up 6 feet under.

I, hopefully, have some more decades before I even need to start thinking about this. But it's always good to get some new ideas. I currently don't have any kids, and currently not planning on any either, so this is indeed something that I do need to think about at some point. Something similar to this trust could be the answer indeed, assuming there is something left towards the end.

If you get in a tight spot looking for heirs, don't forget your old DGI forum friends lol.  

My daughter knows I have a substantial stock port, and when she gave me trouble as a teenager I threatened more than once to will my entire estate to "The Cat Foundation".  Told her I'd put a clause in there so she could go pet kitties anytime she wants lol.  She wised up eventually and started threatening early nursing homes for me, so I was forced into peace talks. 

Seriously though, I am almost certainly going to set up some of my money in a trust.  I truly don't think it is going to be as easy for her to save enough money for retirement.  Even if I only put $100K in an annuity 20 years in advance of her social security date, she would be one helluva lot better off.  I definitely plan to spend some of this money myself when the time is right.  There is nothing wrong with that.  I don't act like it sometimes, but life is much more than a money accumulating contest.

[fenders53]

(10-19-2020, 06:43 AM)NilesMike Wrote: While I do wish to leave a legacy for my wife if I go first, leaving a ton of money for my kids is not a significant factor.

I am very lucky that my kids 34/31 are educated with very good jobs. My son makes 6 times my peak earnings already, so they can take care of themselves.

Additionally, I am not sure that leaving a lot of money to descendants is necessarily a good idea. IF I were to do it, there would be strings attached to the money. One example is that they could only access money equal to what they earned for the past year. IME, things are cherished much more when they are earned as opposed to given to them.

See some of the big lottery winners and what happens to them. It's often not very good.
Just food for thought.

I completely agree Mike.  My situation is a little different.  My only child squandered high school.  I partially funded some college but after three semesters it wasn't productive enough.  That was three years ago, and she has worked fulltime since then, and mostly on her own.  Low level healthcare.  EMT, ER tech, ambulance driver.  Now she supervises a crew at a mental health facility.  None of it pays worth a damn and when restaurants are open she waits table a few nights a week.  She knows she made her bed but I am proud of her work ethic.  Barely able to pay her bills but refuses to live at my house for more than a few weeks between apartments.  She seems to understand she made life harder than it needed to be.  Now I just need to get started on teaching her how to manage a DGI port.  She doesn't have to get it perfect.  She just has to understand the importance and put in a little time.  We'll see how it goes.

[crimsonghost747]

(10-19-2020, 06:43 AM)NilesMike Wrote: Additionally, I am not sure that leaving a lot of money to descendants is necessarily a good idea. IF I were to do it, there would be strings attached to the money. One example is that they could only access money equal to what they earned for the past year.

Indeed.
One way would be to indeed only get the same amount as your salary is. 
Another way could be to simply have access to the dividends (so a pretty decent extra income but nothing major) until X years old. (and X being something where a person is a true adult, not 18 or 20.)

Another thing that I've noticed with these is that inheritance usually hits when you're 40-60 years old. Now for most that means that they have a decent job that pays their bills, there might be a mortgage but it won't be big, the car and other major things are probably more or less paid for. This is not when you really need the money. You need it when you're in your early 20s, working on an entry level job, living in a rented apartment, when you have your life ahead of you. 

Something also to consider.

[fenders53]

(10-19-2020, 08:45 AM)crimsonghost747 Wrote:

(10-19-2020, 06:43 AM)NilesMike Wrote: Additionally, I am not sure that leaving a lot of money to descendants is necessarily a good idea. IF I were to do it, there would be strings attached to the money. One example is that they could only access money equal to what they earned for the past year.

Indeed.
One way would be to indeed only get the same amount as your salary is. 
Another way could be to simply have access to the dividends (so a pretty decent extra income but nothing major) until X years old. (and X being something where a person is a true adult, not 18 or 20.)

Another thing that I've noticed with these is that inheritance usually hits when you're 40-60 years old. Now for most that means that they have a decent job that pays their bills, there might be a mortgage but it won't be big, the car and other major things are probably more or less paid for. This is not when you really need the money. You need it when you're in your early 20s, working on an entry level job, living in a rented apartment, when you have your life ahead of you. 

Something also to consider.

The past few posts from Mike and I have established is there is no cookie cutter best answer.  Mike's kids are doing well financially, but my kid is good to me and I still love her lol.   What you just posted has some merit though.  We generally don't inherit at the proper time but such is life.  Or we don't inherit anything at all.  My father left me a worn out shotgun lol.  Same guy worked hard during during his short life and made my life as good as he could.  He was a very loving father.  I had to figure out finances for myself.  

I am considering something similar to what you suggest.  She probably needs more help at age 30 than 60.  But if they squander it they will still be struggling at 60.  Most Americans these days are heavily indebted way past 40.  In any event it's not too difficult to spread the money out in a way that makes sense.

[crimsonghost747]

Ohh there definitely can't be a cookie cutter best answer since everyone is different and lives in a different situation. But indeed, my idea was to get everyone thinking of the possibilities. "We generally don't inherit at the proper time" is true, but "such is life" does not need to be true. And that was my point, you CAN affect when that transfer of wealth occurs.

One way would be to indeed "spend" it on them earlier on. All education etc is free here so no personal experience but I imagine graduating with zero debt would be a pretty good starting position in the states. Or maybe pay the first 1-2 years of their mortgage payments to help out at that time.
Or simply offer to "double their salary" for the first 2 years that they have a job. I think we all remember our first real job and the salary probably wasn't much.
Or, if you prefer holding onto everything until you pass away, maybe designate a part to go to your grandchildren instead since it's very likely that they are in a position to need it much more than your children do.

Just some random ideas that could indeed work in order to put that money where and when it is most needed, instead of it all arriving on someone's bank account when they are 60+ years old.

edit: I should add that here, as with most money things, diversifying is probably a prudent thing to do. It doesn't have to be "either this or that" but rather "both this and that"

[fenders53]

(10-19-2020, 10:04 AM)crimsonghost747 Wrote: Ohh there definitely can't be a cookie cutter best answer since everyone is different and lives in a different situation. But indeed, my idea was to get everyone thinking of the possibilities. "We generally don't inherit at the proper time" is true, but "such is life" does not need to be true. And that was my point, you CAN affect when that transfer of wealth occurs.

One way would be to indeed "spend" it on them earlier on. All education etc is free here so no personal experience but I imagine graduating with zero debt would be a pretty good starting position in the states. Or maybe pay the first 1-2 years of their mortgage payments to help out at that time.
Or simply offer to "double their salary" for the first 2 years that they have a job. I think we all remember our first real job and the salary probably wasn't much.
Or, if you prefer holding onto everything until you pass away, maybe designate a part to go to your grandchildren instead since it's very likely that they are in a position to need it much more than your children do.

Just some random ideas that could indeed work in order to put that money where and when it is most needed, instead of it all arriving on someone's bank account when they are 60+ years old.

edit: I should add that here, as with most money things, diversifying is probably a prudent thing to do. It doesn't have to be "either this or that" but rather "both this and that"

My daughter needs money right now, and I can't give it to her without sacrificing my early retirement I invested for all my life.  I help her some of course, and I have, but the fact I can't fix everything causes her to grow as an adult. There is always a spare bedroom in my house.  If she is too proud to do that and wants to make her own way then it's all good.  Your point is taken though.  There is no need to make her wait until she is 60 to received the entirety of any benefit I may have the ability to leave her.