September 26, 2019 Andrew Tarpey


Toddler and parBY ANDREW TARPEY

I have a new baby on the way and it got me thinking – if I put a small amount of money away for this baby today, what would it be worth when baby retires?

To answer this question I went to our trusted Southpac Investment Specialist, Guy Carson ([email protected]). Guy showed me a great online tool that answers that question.

I used historical figures to work this out by plugging in a birth date 65 years ago (1956) and an initial investment of $100. Google did its magic and calculated based on the S&P 500 return with dividends reinvested. That small amount gave a whopping return of $45,000.

Imagine investing $1,000 at the birth of a child into the equities market and let it sit there for 65 years. Time and compounding interest could turn it into a solid nest egg of potentially $450,000.

This gets me onto the topic of setting up a trust for your children. There is a common misconception of trust beneficiaries: rich kids born with a silver spoon in their mouth.

However, such trusts are not only for the wealthy. These days, more parents of varying income levels are creating trusts to provide for their children’s future.

Here we’ll take a look at setting up a trust for your children.

The main reason parents set up trusts is to ensure security for their children’s future. Most parents would like the proceeds of their hard work and investment to be passed down to future generations, and a trust is a safe way to know that your wishes will be carried out once you are gone.

When a trust is established the person who settles the funds on the trust is known as the settlor or grantor. This person will generally work with an estate planner to draft a deed which will appoint a trustee, other officers, and beneficiaries, and set out how the funds should be administered.

Selecting the right trustee is one of the most important decisions to be made when setting up a trust. The trustee should be someone reliable and trustworthy, such as a family member or close friend. If the parents were to unexpectedly pass away, they would want someone who cares for their children to be active in the role of trustee, and to look after the children’s financial future.

The right family member or close friend may be a good choice of trustee. You may trust them with financial matters and especially with your children’s wellbeing.

If the trust is complicated and has multiple beneficiaries, or you are concerned that your friend or family won’t be around to serve as trustee until the children reach maturity, it may be better to employ a professional trustee who is knowledgeable about managing money, making it grow, meeting tax and other reporting obligations. You could have both a family friend and a corporate trustee working as co-trustees.

As grantor, when you first settle the funds in the trust, it is advisable to provide the trustee with a letter of wishes. This sets out how you would like the trustee to invest, manage, and distribute the assets. It can set out any general wishes you have. Common requests include paying for school fees; tertiary education fees; overseas travel experiences; a new car; wedding; down payment on a home; the birth of a child; periodic living costs; or the start of a retirement fund.

The letter of wishes often states when the grantor does not want distributions to be made. Such common items include only making payments if children have reached certain milestones like high school or college graduation; upon marriage; or gaining employment. It may also restrict distributions if a beneficiary has addiction problems such as gambling, drugs, or alcohol.

The letter of wishes can be tailored to suit the circumstances of the grantor and family and the unique circumstances of each beneficiary.

Beneficiaries are generally the only people who will have access to the trust funds. You and your spouse can be beneficiaries. Other beneficiaries can be listed as named beneficiaries such as Matthew, Mark, and Mary or they could be classes of beneficiaries such as biological and adopted children; nieces and nephews; grandchildren; grand nephews, and grand nieces. The list is extensive and there are some pros and cons to listing specific people by name or listing a class of people.

Sometimes parents do not want to let their children know about the trust existence because they believe this will get in the way of them becoming productive and contributing to society. Other parents want children to be aware and do all they can to prepare them for the day when they will have access to the funds.

There is no right or wrong answer on this but again, you can make your thoughts known through a letter of wishes.

So, trusts are a great way to help you plan for your future and the future of your family. Setting them up requires some thought and, once in place, will require ongoing communication with the trustee to be sure that they are aware of any changes in the family circumstances and can act appropriately.

Offshore trusts generally provide greater protection than domestic trusts and may be ideal for families that live in different countries, want to access offshore markets, and are looking to protect themselves from the risk of lawsuits and creditor claims.

More commonly we are seeing attacks on family trusts in divorce settlements and so we see families are planning more carefully to avoid this outcome. This is not a problem of the ultra wealthy only. Moderately wealthy families can have large losses in these situations.

Creating a trust to benefit children is a big step in someone’s financial life, and involves important decisions with regard to who will manage the trust and when the trust’s assets will be passed on to the beneficiaries. However, establishing a trust can provide a great sense of relief and peace of mind that the proceeds of a person’s savings can provide financial security to their children. The idea that trusts are only for the wealthy is a myth; they can offer a way for people of various income levels to protect their assets and provide for their family long after they pass on.

If you want to find the best tailored solution for establishing a trust for your children, contact us today at [email protected]

Andrew Tarpey

Andrew Tarpey is Southpac's Compliance Officer. He is responsible for ensuring AML and financial best practice is followed throughout the business.
Get In Touch Today

Please fill the contact form below and one of our team will contact you shortly.

    Contact Us