Estate Planning An Installment Plan For Building A Legacy

Most of you would like to use Estate Planning to set up a nice legacy for your grandchildren. You want a nice sum of money to be available when a grandchild really needs it – for college education, a first car, a first house, or even to start a retirement fund. But since you can’t afford to put a sizable chunk of assets in a trust for the grandchild, you decide instead to leave something in your will.

But there is a better way. You can start building a fund for your grandchild on the installment plan. Start with an initial investment to open an investment account. Then each month add a small sum, such as $50 or $75. Over the years your contributions plus the investment gains will compound to a meaningful sum for your grandchild. This estate planning strategy avoids gift taxes, because the annual contributions qualify for the annual gift tax exemption. Estate taxes also are avoided, because the gifts put the money out of your estate. And if you invest in appreciating assets that are held for a long time, there will be few or no annual taxes on the fund.

Suppose you start with a $10,000 initial investment and add $50 per month. The money is invested to earn about 8% annually. That’s conservative by recent standards, but pretty much in line with historical, long-term returns in the stock market. After five years, there will be $18,522 in the fund, including your contributions of $13,000. After 10 years, the fund is worth $31,294 on your contributions of $16,000. You have used the market to double your gift and avoided taxes.

Increase your monthly contributions to $75 and the fund grows faster. It will have $20,334 at the end of five years on contributions of $14,500, and $35,842 after 10 years on contributions of $19,000.

Brokers and mutual fund companies make this type of estate planning easy to set up with the automatic investment programs (AIP). Under an AIP, once an account is set up, the broker or fund company automatically drafts a set amount from your checking account each month and invests it according to preset instructions (which can be changed). You can find these programs at most mutual fund companies and brokers. The minimum monthly investment usually is between $50 and $100, though some allow monthly investments as small as $25 and some require as much as $250. You can stop the payments at any time.

Most people set such funds up using Uniform Gift to Minors Act (UGMA) accounts. But I normally don’t recommend that, because the grandchild gets full control of the money at age 18 or 21, depending on the state. I think you are better off setting up a simple trust that determines at what age the grandchild initially gets control over the money and allows payments before then at the trustee’s discretion for specified expenses. You can serve as initial trustee if you want and provide for the grandchild’s parents or someone else you trust to serve as trustee after you.

You can see that a relatively small sum, given regularly, can amount to a meaningful legacy and a great advantage for your grandchildren. Time, tax-deferred compounding, and low taxes are a hard-to-beat combination.