Create a Financial Legacy With a Living Trust

Perhaps one of the most common tragedy's that occurs around us every day is people wasting their money.

No, I'm not talking about frivolous spending on unnecessary consumption. That's a topic for another website.

I'm talking about the opposite end of the spectrum.

I'm talking about people who hold onto their money so tightly that they go to their grave having wasted many opportunities to leverage their impact on the world by using their financial resources to strategically help people and causes they care about.

Let me cut to the chase.

Our government (and most governments in the world) has set up the tax system to encourage certain behaviors.

For instance we get a tax break if we:

  • Invest in an Individual Retirement Account (IRA) or a 401k plan;

  • Start a business;

  • Buy a house;

  • Invest in a Coverdell Education Savings Account (ESA) or 529 Education Savings Plan; or,

  • Contribute to a charitable organization.

These are just a few examples of the smart things we can and should be doing with our money. Effectively, the government subsidizes us to do these things.

Saving Tax

For instance, if you are in the 25% tax bracket and put $4000 into a tax deductible IRA, you just saved $1000 in federal taxes alone and you continue to earn tax deferred income on the $4000 until you withdraw it.

Engaging in some, or all, of these tax-advantaged behaviors can make the difference between a very nice, comfortable, life or one in which you struggle. It's a very big difference.

Now, you are saying: "What in the heck does this have to do with living trusts?"

My point is that (if you have the money) you can use assets in your living trust to do smart things with your money. You also can use the assets to help the people and causes you love do financially smart things as well. In this way you leverage your assets!

Many of you have children who should be doing some or all of the things above. Some don't do these things because they can't afford it. Effectively, they are leaving government money on the table.

With the IRA example, they are paying at least $1000 more in taxes than they should. But, they can't afford to invest the $4000 to save $1000.

But, not only has your child lost that $1000 tax break. Your whole family has. Your family is $1000 poorer.

And when you multiply that by many such opportunities over many years – your family has lost a lot of wealth.

The point is, if you die leaving your kids $1,000,000, that's really nice.

But, how much nicer if you'd used your $1,000,000 while you were alive to help your kids (or other people/organizations) do financially wise things when opportunities arose. Perhaps you would have leveraged that $1,000,000 into $10,000,000 or more.

What a tremendous legacy of financial stewardship to pass on!

What a great way to teach your children and grandchildren the power of saving and investing money.

And, you would gain the enjoyment of seeing your wealth put to good use while you are still alive.

If you don't know already, you should find out if your children are investing in IRA's, 401k's, ESA's. If they are not, find out why. If the reason is money, see if you can help.

If you think priorities and motivation are an issue, use your money to provide incentives to your kids to save. For example, you could offer to give your child .50 cents for every $1 they invest.

Maybe you could use money from your living trust to contribute to your child or grandchild's 529 college savings plan? ["529" refers to the IRS code section that authorizes this type of account.] A 529 account grows tax free when used for college costs. And it shouldn't affect the beneficiary's ability to qualify for financial aid.

If you have a living trust, you can transfer money from it directly into the 529 account or another tax-advantaged account.

The gift wouldn't even be subject to gift tax as you can currently give away up to $12,000 a year (per person) gift tax free. And each spouse can give away up to $12,000. So, that's $24,000 that a husband and wife could give to each child, grandchild, etc. each year. That can add up pretty fast.

And, as an additional benefit, if your estate is substantial enough to have to pay estate tax, your gifts will reduce that tax later on.

That's what I mean when I talk about the benefit of being able to use a living trust to see your estate plan begin to work -- while you are still alive.

[Making distributions from a living trust is certainly not the only way you can do this. But, a living trust is probably the simplest and most flexible way to do it.]

In all likelihood, your assistance would improve the well-being of everyone in your family. And, that might help all of you have more time, money and flexibility to be able to spend more time together, building relationships, and enjoying each other.

Heck, use $10,000 to pay for a family reunion somewhere. What great memories! Isn't that better than leaving the money in your will?

Anyway, it's something to think about.

I know that many people, probably most people, can't afford to give anything away while living. Obviously you need to retain a sufficient cushion to handle any expenses you could reasonably expect to incur.

So, this article is not aimed at the majority of people who can't afford it.

But, for those of you who can afford to give away some of your wealth, it seems tragic to die with your assets hidden "under the mattress" when they could have been put to much better use.

It's worth considering whether you can use a living trust to help create your financial legacy.

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