Trust Fund Has the Makings of Truly Grand Idea : Investments: Money manager’s $10,000 gift to his grandson could pay big dividends, projected as much as $10 million, when the tot becomes a retiree.
Paul Merriman is a Seattle money manager who shows all the signs of having too much money and too much time to think about what to do with it all.
Since he’s also a creative thinker and a family man, he often comes up with investment ideas that are grandiose, employ every tax angle and arcane investment product and benefit his heirs.
His latest “big and preposterous” (in his words) plan does all of the above and may hold some seeds of advice that the rest of us can use.
Here’s the plan:
When Merriman’s grandson Aaron was born earlier this year, Merriman made a gift of $10,000 to an irrevocable trust for Aaron’s benefit. The gift is not taxable to Aaron, whose parents are the money-managing trustees. They have directed the $10,000 to a variable annuity that lets the money build tax-deferred within the trust, and that lets them select mutual fund investments within the annuity.
The trust is set up so that Aaron can’t touch the money until the year 2059, when he’ll turn 65. At that point, Aaron will be able to receive 7% of the assets every year until he dies. Those payments, under current tax law, will be taxable as ordinary income to Aaron.
When Aaron dies, what’s left in the trust will go to charitable organizations that are tax-exempt. By then, Merriman hopes, there will be a Merriman Family Foundation, staffed by (well-paid) junior Merrimans who direct the funds to the charities of their choice.
And these are the numbers:
Merriman expects the trust to grow at an annual average rate of 11.2% a year, so that it holds some $10 million when Aaron turns 65. That’s a little optimistic but may be made more possible by the long-term investment horizon of the trust. A 9% rate of return compounded over 65 years would leave about $3 million in the trust.
Using Merriman’s figures, Aaron’s 7% cut would give him $700,000 in the first year, a figure worth about $85,000 today given past inflation rates. Aaron’s cut will increase every year as the trust grows, and after 20 years, there still be some $23 million left in the trust to turn over to charity, Merriman said.
Whew!
There are, of course, a couple of bases Merriman didn’t cover.
What if Aaron becomes disabled or has a pressing need for the money before he turns 65? What if tax laws change and the annuity build-up becomes taxable every year? What if Aaron dies before he collects a penny of the money?
Merriman shrugged his shoulders at all of it:
Tax laws always change; at least there’s the chance that previously established annuities will be protected by future tax changes.
Having to wait until he’s 65 will protect Aaron from being a non-productive “trust-fund kid.” He’ll have to make his own way in life before he meets his retirement bonus. And if he never collects a penny, that’s $10 million or more to charity, and what’s wrong with that?
It’s all more than most of us can fathom. Those who have grandchildren and can afford to help them may be thinking more about school clothes and college than their grandkids’ retirement. But there are pieces of the Merriman master plan that anyone can benefit from. Here are a few:
* You can start early and put money away for a long, long time. Take $3,000 and stash it away for your grandchild’s college or house down payment, and he can have $15,000 in 18 years or $28,000 in 25 years, at a 9% rate of return. Or a $70,000 bonus when he’s 35.
* You can use an annuity to save tax-deferred for your own retirement. Merriman recommends those from Scudder, Vanguard and Schwab as low cost, well-run annuities. Do this only after you’ve used up other opportunities for tax-deferred retirement savings, like 401(k) plans, IRAs and Keoghs. Let the money build until you retire. Then, if you still want to help your grandchildren, you can take money out of your annuity without early withdrawal penalties and hand it over.
For college, there’s an added bonus to this strategy: Money in your annuity will not hurt your grandchild’s chance of getting financial aid; you can let him obtain as much as he can without your help and then kick in some money.
* You can set up trusts for as little as $10,000 to funnel money to children, grandchildren and charities to great tax advantages. You can set up charitable trusts that give the income to you (or your heirs) and the principal to charity. Or, you can do it the other way around and let the charity collect income for 20 or 50 years and then let your offspring benefit from the lump sum that’s left.
* You can, if you want, do Merriman’s whole plan. He’s selling his trust documents for the $10 it costs him to photocopy and mail them. The package includes supporting documents and alternative language for those who want their grandchildren to get all the money when they turn 65.
For more information, contact: Paul Merriman & Associates, 1200 Westlake Avenue, N. Suite 700. Seattle, Wash. 98109.
