1. Estate: Reader Question: A Trust For Grandchildren
Imagine what it would be like if each one of your grandchildren earned a scholarship to pay their
college costs. Wouldn't that be great? In a sense they can. Not only that, they could receive grants to
help them purchase their first home, start a business and even provide additional retirement funds!
Read on to find out how.
You don't have to rely on a government program or the generosity of a school to provide a college
'scholarship' for your children, great-grandchildren and even your great-great-grandchildren. You
don't have to rely on special grants to help them buy a home or start a business. And their potential
retirement doesn't have to depend on the largesse of increasingly stingy employers.
No. You can award those 'scholarships' and 'grants'. You can take steps now that may provide such
funding for generations. Imagine, your great-grandchildren growing up knowing that if they work hard
and get good grades that you will pay some or all of their college education! Talk about a legacy.
It's not as hard as you think. Recently, I received a question from a reader who wanted to set up a
trust that would provide retirement assistance to future branches in his family tree.
There are several advantages to setting up a multi-generational trust. The money can pass from
generation to generation without any estate tax. The money is protected from divorce, lawsuits and
the claims of creditors. And you get to set the terms of how the money is administered and
distributed. That means the trust can provide incentives related to things you find important.
For example, there can be educational assistance based on grades. There can be financial
assistance for starting a business, for doing charitable work or for saving for retirement. The trust can
own homes--even vacation homes. The possibilities are endless. You determine what they are and
how they will function.
An irrevocable trust will typically be used in these situations. Once you set it up, the terms of the trust
can't be changed. So it's important that you thoroughly think it through before signing it. Just because
the terms can't be changed doesn't mean these trusts can't be flexible. You can build in flexibility.
For instance, the terms can state that the trustees are able to determine the conditions upon which
educational funding will be provided based on the current tax, legal and economic environment. They
can take into account the financial wherewithal of the individual and their parents. You don't have to
say, 'If this, then that'. Instead you can set guidelines for the trustees to follow. Of course, you also
specify how trustees are determined and under what circumstances they can be changed. Since the
trust is irrevocable, the more flexibility you can leave the trustees, the better.
Once the trust document is prepared and signed, it's time to move money into it. Since the trust is
seen as a separate legal entity, money and/or assets are gifted to it. Check with state laws to see if
gifts above a certain amount are subject to tax. At the Federal level, you can gift $12,000 a year per
person without tax consequences. There is also a $1 million Federal lifetime exemption, so $1 million
if you're single, or $2 million if you're married, can be transferred into the trust all at once without
incurring Federal Gift Tax.
There are many ways that trust money can be invested. It can own real estate, insurance, annuities,

2. stocks, bonds and mutual funds. In fact, what it can own is only limited by what the person setting up
the trust decides.
Many suggest annuity or other tax-deferred products so the trust doesn't have to pay taxes on the
income each year. I don't agree. Using annuities only pushes the taxes down the road, causing them
to snowball. They are still subject to tax when withdrawn and will be taxed at ordinary income tax
rates.
Stocks, bonds and real estate can be managed in such a way that they generate dividends and
capital gains. These are taxed at a much lower rate and provide greater control and flexibility. Life
insurance on those setting up the trust and/or other family members can be used to continue to
replenish the trust from one generation to the next.
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