Twelve years ago, I found myself in an uncomfortable position. I had unlimited liability related to a nine-figure (USD) corporate insolvency.
It was a reminder => assets are best protected before they need protection.
After the dust settled, I went to work, adjusting the legal structure of my life.
Below are ideas for you to discuss with tax and legal experts in your local jurisdiction. Always keep in mind that you are not trying to avoid tax, you are seeking to avoid ruin.
Once you’ve spoken with the trust & tax advisors, invert the situation and spend time with an expert litigation attorney. Find out what they are looking for when they decide to go after someone’s balance sheet and future earnings.
Financially, there are two things I want to deliver to my kids:
- Debt free education to the best of their ability (5-20 years time horizon); and
- US$ 250,000 (15-25 years time horizon, 2022 purchasing power) per kid
The debt-free education is what I really care about. Get that done, and model wise choices, they won’t need any financial support from my generation.
Aiming for a capital bequest forces me to be conservative with my own choices, greatly reducing the likelihood my generation becomes a financial burden on the one that follows me.
The financial deliverables, to the kids, are done within my life expectancy.
My true legacy will be non-financial in nature.
529 Education Accounts – Our contributions had the benefit of a state tax deduction, which mitigated the increase in expense ratio. Gains and income roll up tax free. The assets can be swapped widely within families, and descendants. Assets sit outside the contributor’s balance sheet, and are treated as a completed gift. This can be an effective way to build assets for kids, grandkids and between extended family members.
=> This provides comfort, today. Having that much capital tied up in a non-discretionary account constrains my action. I ignore these dollars when I plan for the future BUT I can also ignore the contingent liability of wanting to help my kids get educated.
=> I also give them a big financial incentive for figuring out how to educate themselves, for less. In my mind, that money is already “theirs.”
Irrevocable Trust – if you are in a line of work that could result in litigation, or simply don’t want to give a financial incentive to anyone to sue (or divorce) a member of your family, then this can be an appropriate vehicle to establish. Assets within the trust sit outside your balance sheet.
Intentionally Defective Grantor Trust – an irrevocable trust where the tax liability stays with the grantor for their lifetime. A benefit of this trust is the income, and gains, associated with the assets are rolling up outside the grantor’s balance sheet, gross of tax.
=> example here might be a high-earning professional, in a field prone to litigation, setting up a trust to benefit their spouse/kids.
=> another example: I stick an investment property in a Grantor Trust and it rolls up to benefit my kids. That’s the capital bequest I want to deliver. Worried about possibly needing the money? Then one could add their spouse to the beneficiary class as a hedge against future circumstances.
There are other asset settlements, and other trust structures, that can be effective for families. Experts can tell you more.
Contingent Beneficiaries – Talk to an estate attorney about using a trust as a contingent beneficiary of any inheritance you might receive. Wills can be drafted offering you the ability to disclaim assets in favor of a trust. Separate from asset protection benefits, this could be a useful feature if the taxation rules around estate taxation change.
=> example: in 2021, the estate tax threshold is US$11.7 million (double for married couples). Current law has the threshold dropping to $6.2 million in 2025. Go further… what might happen to your potential estate tax liability if that threshold went to zero? Ask your local expert to explain how you can use part of your $11.7 million exemption, today.
Private Trust Company – how does one “run” the entire structure without ownership? Establish a private trust company and have someone reliable act for the corporation, this individual could be a family member, or not. Be very careful with decisions/officers concerning: investment strategy, trust agreement amendment capacity, beneficiary classes and distribution policy.
Move slowly, with intention.
Done well, these structures do not cost much (to establish, and to run) relative to the benefits they offer.
Thinking Ahead – with all this stuff, it’s not about where your family is “today.” Think about where you might be 5, 10, 15, 25 and 40 years from today.
- Our 529 Accounts are an example. We set them up when the kids were born, contributed heavily in our high-tax years and did “nothing but watch.” They’re super flexible and my kids could elect to roll them forward.
- The Grantor Trust => set up many years ago, it didn’t seem like it received a lot of assets. However, those assets have been compounding for a long time (gross of taxes). Change the tax law, and extend my lifespan, a trust could save real money for my family.
- Try to cast your mind back, say, to 2009. Asset values had been hammered. Roll forward to 2021, many assets classes are up by a factor of 3-5x and salaries in your field are likely up 2-5x. If inflation cranks up for a few years then the thresholds will seem even closer.
All Family Is Optional – We’ve built everything with the ability to be collapsed, split and changed… changes will happen after my death (certainly) and late in my life (with my consent). Siblings, blended families, step-parents… anticipating a split into separate vehicles should be the default position.
Things I learned from the process:
- Our structure paid for itself in reduced insurance premiums.
- Despite in-family expertise and external professional advice, “getting it right” took years and a few iterations.
- Move assets slowly and watch what happens. My kids’ financial education started in kindergarten. Next big step will be discussing allocation of 529 accounts – use, roll forward or trade? When appropriate, discussions about intergenerational capital allocation.
- Take advice from an expert in establishing these structures then… take advice from an expert at attacking your proposed structure. Know what can go wrong before you make irrevocable changes to your family’s balance sheet.
- Give each generation, and each individual, the flexibility to live their life as they see fit.
Remember, seek local advice. This post is meant to get you thinking, not offer professional advice.
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