NEW YORK (AdviceIQ) -- How do you stop your offspring squandering their inheritance? When passing wealth to your kids, consider creating a trust to limit the later generation's ability to tap into the principal.Several astute readers suggested this strategy after my recent article cited research that shows 90% of inherited wealth is gone by the third generation. There is no question a trust, done correctly, can go a long way to preserve wealth after the death of the wealth accumulator. Let's explore what "done correctly" means. 1. Trust law is complex. Engage an accountant and attorney with strong skills and expertise in trusts. 2. Be sure the assets you intend to go into the trust will actually transfer.
By Rick Kahler
4. If a trust still seems like a good strategy after the above caveats, the next question is how much to limit heirs' ability to withdraw money. From an actuarial standpoint, it's fairly simple. If you limit annual withdrawals to 3% of the principal, there's a strong probability of the money lasting several generations with its buying power intact. Provided, that is, the trustees pay close attention to the next point. taxes. Congress recently increased the top income tax bracket to 39.6% on wealthy taxpayers. Any trust that keeps more than $11,950 of annual income is considered "wealthy." So here is the problem: If the trust retains enough earnings to increase the principal and offset inflation, it will have to pay substantial income tax and will probably need to restrict annual withdrawals to 1% or 2%. All of a sudden, a multimillion-dollar inheritance becomes simply a source of secondary income similar to Social Security. Trusts are valuable estate planning tools. But like any other powerful tools, they are best employed by someone with the skills to use them well. -- By Rick Kahler, CFP, president of Kahler Financial Group in in Rapid City, S.D. AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions. To subscribe to AdviceIQ's Rss feed for personal finance articles written by financial advisors and AdviceIQ editors,
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