BY TARITA HUTCHINSON
All new parents are more or less the same – they’re either constantly worried or planning out every detail of their child’s life to keep them out of harm’s way right from the first cry. It’s something we can’t help. One of the questions that might pop up in your mind during this stage might be this – how can I give my kid a shot at retiring early?
If you analyze financial historical data from the United States all the way back to 1956 (65 years ago) and assume an initial investment amount of just $100, that would have grown to a whopping $45,000, had you invested it into an S&P 500 index fund with a dividend reinvestment option.
Just imagine what you’d be able to achieve by investing $1000 in an index fund when your kid is born. Let it compound continuously till they turn 65. The magic of compound interest will turn that measly sum into $450,000 by the time they’re ready to retire. That is $450,000 they can count on to finance their twilight years.
There’s a very common misconception regarding trust fund beneficiaries – it’s only for rich children born into a wealthy family.
But that’s simply not the case. If you look at the data, you’ll find that parents from all income levels are now setting up trust funds to protect their child’s future from financial worries and disasters.
The primary reason for creating a trust fund is to make sure your child can expect some level of financial security. People like to pass on the fruits of their investments and hard work to their children and grandchildren. Trust funds help you to ensure your family is safe and free from major financial difficulties.
The person settling the funds on behalf of the trust fund is called the grantor or the settlor. They generally work alongside estate planners for drafting a trust fund deed that will select a trustee, beneficiaries, and other officers. This document will dictate how you want these funds to be utilized.
It’s highly important to select the right person as the trustee for your trust fund. Make sure they’re someone you can rely on and depend upon unconditionally, If you were to pass away unexpectedly, you would want your children to be looked after and cared for. Your trustee by law, should prioritize asset protection in the best interest of the beneficiaries, over everything else, so as to ensure the trust fund is never at risk.
Southpac has been establishing asset protection structures for nearly 40 years and has amassed a depth of experience that can be relied upon to manage, grow, and execute trustee duties while meeting tax and reporting obligations effectively.
While setting up a trust fund, a letter of wishes is given to the trustee to provide non-binding guidance on how you’d like them to manage, invest, and distribute trust assets. This could also include your general wishes. Some common requests are: paying for international travel experiences; school fees; graduate and post-graduate fees; a car; mortgage down payment; periodic living expenses; or even a retirement fund.
The grantor can also specify instances where distributions are not to be made in the trust agreement. This could include clauses where payments will only be made if certain milestones have been accomplished, such as graduation; marriage, or employment. Distributions may also be restricted if beneficiaries engage in addictions like alcohol, drugs, or gambling.
You can tailor the letter of wishes to the individual circumstances of the beneficiaries so that it is meaningful and fair for all of them; or so that it is clear to the trustee that you would like them to prioritize the needs of certain beneficiaries over others. If beneficiaries’ circumstances change, then you can provide an updated letter of wishes which takes account of this.
Trust fund resources are generally only accessible to the beneficiaries. You can name yourself or your spouse as the primary beneficiary. You can also list other named beneficiaries. In some cases, you could even create different classes of trust fund beneficiaries like adopted and biological children; grandnieces and grandnephews; nieces and nephews.
Some parents may be reluctant to reveal the existence of the trust fund to their kids as they believe that it could limit them from becoming productive members of society. Others prefer to educate their children about the trust fund’s existence and provide appropriate guidance that can help them spend these funds wisely.
You can use the letter of wishes to convey your thoughts and feelings to your beneficiaries regarding how you’d like them to utilize the funds.
Offshore trusts are a more proficient asset protection strategy compared to domestic trust funds and recommended for people with family members in different places. They can also help you access offshore banking systems and protect yourself from creditor claims and lawsuits in the US.
We often come across cases where family trusts get caught up in the crossfire during divorce settlements. Asset protection has now become a top priority with many families changing their trust fund deeds to defend against such events. It’s not something that happens only to ultra-rich families – even middle-class families may be at risk of facing large financial losses in situations like these.
A trust fund can benefit your children immensely by ensuring their financial protection. It requires you to take several important decisions regarding who is responsible for managing the trust fund and when its assets may be distributed to the trust’s beneficiaries. It’s an outdated idea that trust funds are only for the rich and wealthy – they can be utilized by people hailing from all income groups for asset protection purposes. It offers peace of mind and freedom from financial worry to both the trustee and the beneficiaries.
Trust funds are amazing if you wish to ensure the financial safety of your loved ones in the future. However, establishing them might take you some effort and require ongoing communication on your part. You can keep modifying the deed to reflect changing family circumstances as and when required. Southpac is here to make that burden lighter.
Contact Us to get started.