Author Topic: Curious about something  (Read 4037 times)

AJD

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Curious about something
« on: January 22, 2014, 03:23:54 PM »
I have this idea of passing on some wealth to my children. I was wondering if there is an efficient way to setup an account for my kids that they wouldn't be able to access the money until it hit $1 million. Here are my thoughts. If I put $20k in an account and let it grow for around 50 years it would be worth around $1 million. I was thinking that when my kids turn 15 I would create the account and explain to them that when they are around 65 years old they can have this money. If they want it sooner they can put money in themselves to grow the account. Hopefully this will help motivate and/or reward living a frugal life and saving more then they spend.

My question is, how can I set this up in a way that stays binding even if my wife and I pass away? I looked into trust funds and they seem to be way to pricey for humble old me. I of course would like something that avoids getting taxed like crazy as well. My kids are still young, so I am really just trying to learn and explore the idea.

Thanks for the help.

Saverocity

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Re: Curious about something
« Reply #1 on: January 22, 2014, 03:30:23 PM »
You can set up a trust to do that.

But if I got one I am not sure that it would motivate me to live frugally, after all if I knew I getting a whopping million bucks why not run up the debt now?

KingCoin

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Re: Curious about something
« Reply #2 on: January 22, 2014, 04:13:46 PM »
Given the convoluted structure, you'll for sure need the advice of trust and estates lawyer.

I have mixed opinions about the idea. It will likely be a burden for your children to have to put money into the trust rather than into tax advantaged accounts or other investments that can benefit them in the meantime (saving for a down payment on a house for instance). Perhaps something like if trust+retirements accounts > $1mm, then funds are released could serve better.

I generally believe that these kind of incentives rarely work. If your kids are spendthrift and irresponsible, trying to grow this account to $1mm with additional funding will seem like an impossible task. If your kids are frugal and thoughtful about their money, then this scheme serves little purpose.

AJD

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Re: Curious about something
« Reply #3 on: January 22, 2014, 04:26:18 PM »
Thanks for the replies. I did think of the idea of just having them prove a net worth of $1M. I guess I wasn't thinking of it as a scheme (although it very well could be) I was just thinking more on a fun way to bless them and not screw up their life. I guess if that was the case I would just remove the entire idea of early access. Maybe I just needed to get it out of my head and get some helpful advice :)

Thanks,

AdrianM

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Re: Curious about something
« Reply #4 on: January 22, 2014, 04:40:43 PM »
I would suggest you read two books that contain a lot of information around this idea

The Millionaire Next Door
http://www.amazon.com/Millionaire-Next-Door-Thomas-Stanley/dp/0671015206

Family Fortunes: How to build wealth and hold onto it for a 100 years
http://www.amazon.com/Family-Fortunes-Build-Wealth-Series/dp/1118171411

Best of luck.

ShavinItForLater

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Re: Curious about something
« Reply #5 on: January 22, 2014, 05:18:43 PM »
One sort of proxy would be to contribute to an IRA for them once they reach working age (16)--as long as they have some income you could put in just about 100% of what they make.  If you put away $25,000 for a kid by the time they reach 21 in their IRA, if you assumed 10% return per year, it would be worth almost $1 million by the time they were 59. 

I realize it doesn't have the "release upon reaching $1 million" feature, but it would penalize them for withdrawing it early, and they would have to become productive citizens in the meantime.  It's also a very simple thing to do, no complicated trusts or lawyers.

The financial advisor Ric Edelman came out with a "product" along the same lines he called the RIC-E Trust.  The idea was you could put away $5,000 for a child, let's say when they were born, which could not be withdrawn until retirement.  Hypothetically if that had a 10% return per year, that $5,000 would turn into well over $1 million by the time the child was 59.  That particular trust is based on a variable annuity so I don't know that I'd recommend it due to high expenses, but in theory you could put away $5,000 yourself, and put the proceeds into the IRA as described above once the child reaches working age and has some earned income.

ritchie70

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Re: Curious about something
« Reply #6 on: January 23, 2014, 11:16:10 AM »
One sort of proxy would be to contribute to an IRA for them once they reach working age (16)--as long as they have some income you could put in just about 100% of what they make. 

There's no minimum age for contributing to an IRA. You can't contribute more than your earned income, though, and money paid for household chores isn't supposed to count. You have to decide for yourself whether you want to spin the big IRS audit wheel of fortune.

My employer has support in our new HR system for employees as young as 14.

AJD

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Re: Curious about something
« Reply #7 on: January 24, 2014, 09:00:27 AM »
Great advice. Thank you. Maybe because I work with teenagers for a living I am more cautious with allowing them to early withdrawal, even with penalty. What I don't want to have happen is for life to throw them a curve ball and because the money in that account was funded by myself (and possibly grandfather) the penalty doesn't have any significant weight. The entire amount is "profit" anyway. Hopefully my children will make good financial decisions, but I know enough to know that most young people will make some pretty terrible choices before figuring life out.