Author Topic: A retirement fund for an adult sibling rather than a child  (Read 4064 times)

Mesmoiselle

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A retirement fund for an adult sibling rather than a child
« on: November 21, 2014, 10:32:04 AM »
I make more than both my siblings do. Their future incomes aren't going to see much of an increase either. One sibling never asks for money and the other has had interest free loans from me going on two years. My income is going to double in about 5 years, with FI about 5-9 years afterward.

I actually intend to work after FI is achieved, just within a field that the income would be uncomfortable to live on if that's all we had. But I have considered working longer at the high paying job I may or may not love for a year or more to start some sort of retirement savings for my siblings in their names without telling them. Because the point of doing so would be so that they could retire at 60ish and not eat cat food (at 25 and 30, both are scraping by on low income and retirement is not on their horizon).... not so they could buy a new car.

I don't claim to know tax laws at all, not even a little bit and they may change a lot a decade from now. But I was trying to avoid that "gift tax" I do know of that I worry would hit the index funds pretty hard if they were transferred all at the end if I were to purchase them in my name? But it may be illegal to purchase index funds in their name? I don't even know.

Catbert

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Re: A retirement fund for an adult sibling rather than a child
« Reply #1 on: November 21, 2014, 10:40:38 AM »
I don't think there is any want to set up any kind of account in their name (and SSN) without them knowing. 

You could look at things like the KISS trust or Giftrust that would tie up $$ until a specified date.

I wouldn't be too worried about gift taxes however.  Any person can give any other person up to around $14,000 (not sure of exact amount, indexed for inflation).  If you're both married then that could be $56,000 from one couple to another.  Even over that, you just have to file a form and it counts against the $5 million or so you can bequeath at your death. 

mcneally

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Re: A retirement fund for an adult sibling rather than a child
« Reply #2 on: November 21, 2014, 10:56:24 AM »
As Mary said, the current $14k per person gift tax exemption is to exempt you from even filing a gift tax return. After that it goes against your lifetime exemption. Unless you will give away several million (to entities that are not qualified charities) during your lifetime/ at your death, there is no gift tax.

You'd need to visit a lawyer to fund out whether you can create a trust to actually put the money in their name now while not allowing access until retirement age. I'd just segregate the amount on paper/ in my head if I wanted to do this. It part because I wouldn't want them to know. It could make them rely on you entirely for retirement and maybe get expectations of even more help. It also gives you 30 years to change your mind.

mxt0133

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Re: A retirement fund for an adult sibling rather than a child
« Reply #3 on: November 21, 2014, 10:58:45 AM »
I'm more of a teach a person how to fish than give them a fish kind of person.  So I would front-load any contributions you were going to make on their behalf and send them to school or invest in a business idea if they are incline to that ideal.

Another options of making sure they don't eat cat food in their 60s would be an annuity (variable most likely in this case to keep up with inflation).  It is not as efficient as investing the funds yourself but the gains are tax differed but you own the policy with them as the annuitant.  The fees are high, I repeat the have expensive maintenance fees but it is insurance, they cannot outlive the money.

Mesmoiselle

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Re: A retirement fund for an adult sibling rather than a child
« Reply #4 on: November 21, 2014, 11:22:37 AM »
I'm more of a teach a person how to fish than give them a fish kind of person.  So I would front-load any contributions you were going to make on their behalf and send them to school or invest in a business idea if they are incline to that ideal.

Another options of making sure they don't eat cat food in their 60s would be an annuity (variable most likely in this case to keep up with inflation).  It is not as efficient as investing the funds yourself but the gains are tax differed but you own the policy with them as the annuitant.  The fees are high, I repeat the have expensive maintenance fees but it is insurance, they cannot outlive the money.


Direct help vs secret stache of money to help them survive their lifetime of anti mustachianism.

I've thought of other things like... if they had a car note, I could pay it off and then let them pay me off interest free but that's an application of now rather than a decade from now as my sister just bought a new car two years back; hopefully she won't buy another new car for a long while. She has also actively resisted my paying for off her debt to consolidate and let her pay me back. She says its one thing to owe companies money and a whole other thing to borrow from family. I agree! We just disagree on which is the better thing to do. She actually got oferred a business for sale lately and turned it down as the idea was "too much stress." Like living under the poverty line doesn't stress her?

My younger brother's dream is to scrape by as a waiter in new york until he "makes it big" in about 2 years after college, he's the one that borrows interest from me right now. I don't have high hopes for his success, but recognize the joy you can get from going after a passion and I admire that. I've thought about the heavy expenses of such an idea. Maybe I could subsidize him, pay a portion of his rent every month up there in expensive as hell new york; or pay the minimum payments of his likely to be HORRENDOUS school loans as he's been near entirely living off of them thus far. But another part of me says he should sort of suffer for such an absurd passion. Starving artist thing? And that I should do something more about his quality of life in old age if his anti mustachianism continues ever after.

 But he's also asked me to fund entrepreneurial ideas. Well, idea. He wanted to open a hot dog stand using a golf cart with a refrigerator on the back. After I explained to him the obvious flaws (it's seasonal, it's a GOLF CART, do you know what permits you need, etc) I told him that there was a possibility in the future that I would want to open a business. But that he needed to get some finance, management, and cooking classes in there among all his "art" and he needed to come back with a true business plan before I'd ever take him seriously.
 I haven't heard about owning a business from him since. Maybe after I knocked him with reality, he realized it was a lot of work and went off back to his expensive art learning.

I don't know. I can't MAKE them see my ways, I can't MAKE them be somebody they aren't. But I care about them and know SS doesn't cut it for anybody so I started thinking perhaps my contributions could go that direction

GizmoTX

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Re: A retirement fund for an adult sibling rather than a child
« Reply #5 on: November 21, 2014, 12:27:28 PM »
You can & should set up your funds in a trust, which can be revocable or irrevocable (a lawyer can explain which applies to what you want to do). The trust does not need your sibling's SSN number, as it will have its own number & file its own taxes separate from yours, which is a huge advantage if you are in the higher tax brackets. You are the trustee, with sole power for managing the assets, which get titled in the trust's name. You'll want to specify in the trust document how the assets get dispersed, plus contingent beneficiaries & a backup trustee for yourself. I think it's best to set up a separate but identical trust for each sibling, as disbursements will likely differ as time goes on. While the primary purpose of your trust is for retirement, you may want to specify some latitude for things like medical emergencies, at your discretion. The cost to draft a trust document like this should not cost more than a basic will -- keep it simple.

You can gift your maximum amount for each sibling every year; over time, this will really grow when the investments are set to automatically reinvest. Or you can tap your lifetime gift allowance if you want to front load the investments.

I've set up & managed several educational trusts for nephews & our DS. Doing something similar for growing a retirement fund is no different. I file the tax returns, but you could get a CPA to show you how the first year & just model it until you need to learn how to manage disbursements. Capital gains & ordinary income rules apply in the same way as to individuals, so investing within the trust should be with tax efficient investments that you can run on autopilot.

I understand your desire for anonymity, as the existence of a trust could make spendy siblings even more carefree. As for funding your siblings' expenses now, be careful or you will be increasingly hit up for all kinds of "opportunities" or disasters. In my experience, loans to family members only cause grief in the long run -- they almost always consider them gifts, which is how you should too. If you haven't already done so, read the "Millionaire Next Door" about the perils of adult economic outpatient payments.

Mesmoiselle

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Re: A retirement fund for an adult sibling rather than a child
« Reply #6 on: November 21, 2014, 01:12:26 PM »
You can & should set up your funds in a trust, which can be revocable or irrevocable (a lawyer can explain which applies to what you want to do). The trust does not need your sibling's SSN number, as it will have its own number & file its own taxes separate from yours, which is a huge advantage if you are in the higher tax brackets. You are the trustee, with sole power for managing the assets, which get titled in the trust's name. You'll want to specify in the trust document how the assets get dispersed, plus contingent beneficiaries & a backup trustee for yourself. I think it's best to set up a separate but identical trust for each sibling, as disbursements will likely differ as time goes on. While the primary purpose of your trust is for retirement, you may want to specify some latitude for things like medical emergencies, at your discretion. The cost to draft a trust document like this should not cost more than a basic will -- keep it simple.

You can gift your maximum amount for each sibling every year; over time, this will really grow when the investments are set to automatically reinvest. Or you can tap your lifetime gift allowance if you want to front load the investments.

I've set up & managed several educational trusts for nephews & our DS. Doing something similar for growing a retirement fund is no different. I file the tax returns, but you could get a CPA to show you how the first year & just model it until you need to learn how to manage disbursements. Capital gains & ordinary income rules apply in the same way as to individuals, so investing within the trust should be with tax efficient investments that you can run on autopilot.

I understand your desire for anonymity, as the existence of a trust could make spendy siblings even more carefree. As for funding your siblings' expenses now, be careful or you will be increasingly hit up for all kinds of "opportunities" or disasters. In my experience, loans to family members only cause grief in the long run -- they almost always consider them gifts, which is how you should too. If you haven't already done so, read the "Millionaire Next Door" about the perils of adult economic outpatient payments.

Interesting. Very helpful. So like, "In case of cancer, full access will be given" sort of thing? There seem to be a lot of trust types, some of which have "interest" in the title. Are trusts mostly just a pile of money that gets divvied out at the specified time or do they get to sit in an interest gaining account? You can't have them in MMM like index funds?

 I definitely wouldn't want them to know. Even for them to know it will surely be there come retirement would be awful, because unless they learned about investments and dividends and all that, they may end up thinking my minor to moderate contributions will make them all "set" in retirement, and nothing is further needed from them over their lifetime.

I really don't like loaning money at all. Without paperwork to back up a loan, it's a under the table gift. My younger brother has been slow but consistent about paying money back, but the fact that he needs to borrow for every single "emergency" (and apparently just straight up keeps money from our father) just makes me worry about his financial attitude. I think Millionaire Next Door is on my reading list. I am very strongly considering not loaning any further money after his this next repayment but I don't know. Interest free loans to him are about the only way I help out my beloved little brother. 

sokoloff

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Re: A retirement fund for an adult sibling rather than a child
« Reply #7 on: November 21, 2014, 04:24:56 PM »
I think it's a very noble idea, and I provide a measure of support to my nieces and nephews via 529 contributions, but nothing to the level that you seem to be contemplating, as I still have my own family's security to provide for first.

My thoughts:
First, be sure to thoroughly consider whether you might need the money in your own future (and have that inform the exact form of account to save the money within). As noble as your plan is, I'd hate to see YOU eating cat food if you should become disabled or have some other disastrous financial outcome while your siblings are retired more comfortably from your generosity. Obviously, you have to take some risk of this happening, but be really sure of your own situation and security before irrevocably committing a life-altering amount of money to someone else, even family.

Second, I don't think anyone's mentioned the 5-year lump sum gifting rule, nor the per-person-pair nature of the annual gift limit. The 5 year lump sum basically allows you to gift $70K all in one-shot and then bars you from gifting the $14K for the next 4 years. If you wanted to kick-start their account and then just let it grow, this may be of interest.

Third, the per-person-pair issue is that if you are married, you and your spouse can EACH gift $14K per year to anyone. Similarly, if your siblings are married, you could gift $14K to each of them and their spouses (and you and you spouse could make 4 gifts in total to your sibling and their spouse).

Combine this with the 5 year lump sum rule and you could potentially gift 20x the $14K limit if everyone's married (or otherwise in a reasonably permanent relationship).

GizmoTX

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Re: A retirement fund for an adult sibling rather than a child
« Reply #8 on: November 21, 2014, 04:27:53 PM »
I invested our contributions to the educational trusts in index funds, including the Vanguard Total Stock Market Index fund. Very tax efficient. You want growth appreciation, not dividends or interest.

Our trust titles are along the lines of "[Name of Beneficiary] Educational Revocable Trust". Assets like index funds are usually titled as "[Trustee name], Trustee, for [Name of Beneficiary] Educational Revocable Trust". The "Educational" part speaks to the purpose but doesn't have any special legal implication that I am aware of. (I am not a lawyer.)

You want any language for early distribution to be appropriately vague but totally at your discretion. What we have is language that says "during the term of the trust, Trustee shall distribute to the beneficiary so much of the net income and principal as the Trustee deems necessary to provide for the beneficiary's health, support, maintenance, and education". Alter this as you wish.

I saw the fallacy of "vast" inherited riches in my father. He was convinced that his parents were made of gold, so he did nothing himself for his retirement & made foolish financial choices (which I got to see growing up & learned not to do). My grandparents had immigrated from Europe & were very hard working & frugal. They lived comfortably yet simply & left a modest estate, which my father was shocked to discover. Fortunately my grandmother left him $10K of it in a trust created at her death, with me as trustee -- I was to invest it for 10 years & I doubled it (early 80s). By that time he had nothing but SS.

Ironclad paperwork helps with loans but in the end it depends on a person's honor. Unfortunately otherwise good people tend to not honor commitments to family and/or end up being resentful rather than appreciative. It's a lose-lose scenario. We never loan anymore. It only encourages more of the same, instead of that person figuring out how to manage themselves. We occasionally gift, but as our idea, never when asked.

The fact that your little brother doesn't repay your father & repays you very slowly says that he's already on the path of viewing you all as banks. I recommend you provide him with lots of financial information but no more loans.




Mesmoiselle

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Re: A retirement fund for an adult sibling rather than a child
« Reply #9 on: November 21, 2014, 04:47:46 PM »

The fact that your little brother doesn't repay your father & repays you very slowly says that he's already on the path of viewing you all as banks. I recommend you provide him with lots of financial information but no more loans.

There were no alarm bells regarding the loans until he said he didn't repay our father. The slowness is because he pays me with his student loan disbursements. So it's been "loan, wait 6 months, get repaid. Repeat." Two months after recent repayment he realized his disbursement hadn't paid off his books before ending up in his account and they weren't letting him enroll for the spring. Some of it is I cover his cell phone bill so he's never without a phone and then he pays off at disbursement. He's sometimes even gotten a positive balance with me so his cell phone would be paid in advance.

GizmoTX

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Re: A retirement fund for an adult sibling rather than a child
« Reply #10 on: November 21, 2014, 06:20:26 PM »
Doesn't this mean he's paying you with money he's borrowing?

« Last Edit: November 21, 2014, 06:28:49 PM by GizmoTX »

Mesmoiselle

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Re: A retirement fund for an adult sibling rather than a child
« Reply #11 on: November 21, 2014, 06:27:41 PM »
Doesn't this mean he's paying you with money he's borrowing?

Indeed it is. The way I view it is that if he could settle his brain cells down and actually allocate his school funds correctly, he wouldn't borrow from me at all. But since he's completely disorganized it leads to a mountain valley effect and my intermediate loans just smooth out his ever increasing ride to "ridiculous amount of debt to a useless degree."

Why?

GizmoTX

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Re: A retirement fund for an adult sibling rather than a child
« Reply #12 on: November 21, 2014, 06:30:51 PM »
Wow. Sounds like he needs a crash course on Personal Finance 101 as a condition for your continued assistance.

Argyle

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Re: A retirement fund for an adult sibling rather than a child
« Reply #13 on: November 21, 2014, 06:39:18 PM »
Your siblings are 25 and 30 and you're considering subsidizing them?  It's early days!  I know a ton of people who were working in stupid go-nowhere jobs at those ages, and are now raking in the dough or at least financially comfortable.  I would say it's the norm to be 25 or 30 and not making a ton of money.  Sure, some people have high-power careers then, but thousands don't, and they get by fine.  I really would let them find their own ways.  They're not going to be eating cat food when they're 65.  You're jumping to conclusions.