TrustEgg (YC W11) Allows Anyone To Set Up A Trust For Their Kids
techcrunch.com
techcrunch.com
I think that we're at a Nash Equilibrium for Trusts, at the moment. That is, Trusts are only useful and good for sheltering assets because only a privileged few know how to use them to their advantage. Since the volume of people is small, and enough of those people are sufficiently influential, the IRS looks the other way.
As soon as a large amount of people can create trusts easily, I predict that two things will happen, roughly in order:
1) The IRS will attempt to reclassify trusts in a way that preserves revenue.
2) The privileged few who have always used trusts as a matter of routine financial planning will seek to create a new class of trusts that will not be vulnerable to #1.
Given that #1 is inevitable, and #2 will add some sunlight on things, I have to say that this is fascinatingly disruptive.
I think this is maybe a little misleading (at least to those who don't know much about them) because trusts generally don't really shelter income from the IRS. For the most part, they just change timing. Trusts, in fact, can actually be subject to higher tax rates than most individuals are. As I understand it, the tax benefit usually comes from giving money now and not having to worry about gift or estate taxes on a higher future valuation, only the current valuation.
Trusts are good for anyone who wants to avoid probate costs, which depending on location can be 5% or more (in addition to the other disadvantages of probate). Many middle to upper middle class families would fall into a situation where a simple trust could save their children tens of thousands of dollars in probate court costs.
There are also a number other situations where the non-"privileged few" can and do benefit from trusts, including the one that this seems to be set up to handle -- gifting money to a child or grandchild for their future, without giving them immediate access to it.
I think pairing "donations" with physical gifts is ideal. Parents should ask for gifts to be half as big, with the other half put into the trust.
I had fully intended to set up the trust ... the old hard way ... but this will make things easier.
Will you be offering trusts that can pass on digital assets?
Best of luck to the founders! Just signed up and sent the link to my friends with kids.
As a single-father I am very interested in any knowledge that can be shared on this subject.
First..there are many kinds of trusts...life insurance trusts, bypass trusts, crummey trusts, etc. There's a lot of possible reasons to do it/them; however, the main ones that interested me were:
* avoiding probate
* tax implications (by utilizing a trust properly, one can reduce estate taxes...for example...using a life insurance trust...you don't "own" the life insurance...so when you die, it's not considered part of your taxable estate.
* peace of mind around having things explicitly layed out. If my wife and I die, we know who takes care of the kid next and how the trust works (as far as education, giving to charity, etc.)
Hope this helps
Aside from tax issues, the primary benefit of a trust is the ability to exercise additional control over your property and assets after your death. Wills generally just say who to give how much to. Understandably, many parents think that handing over their entire life savings to a 16 year old is a bad idea. A trust can let you leave someone else (a Trustee) in charge of the money until your child is older and (hopefully) more responsible. One of the largest challenges in most estate planning is that we don't know when you're going to die and we don't know what your assets will look like when you do. In this way, a trust can mitigate one problem of dying with children.
You can exercise a lot more control than that with a Trust, but I find most people are just worried about handing a huge lump sum of assets over to a young kid, and the cocaine fueled spending spree that might follow.
The downsides of a trust vary depending on the type of trust. In its most basic form, you're still looking at additional set up costs. From there, the restrictions can go up to include limited and restricted access to the assets in the trust, administrative overhead, and time to manage the assets. Very few of my clients opt for the trust, even though all those with minor children could benefit from it.
The Uniform Transfers to Minors Act (referenced in this thread) aims to solve some of the problems of a trust by allowing for ad hoc creation at the time of transfer. You don't have to set as much up, since it's mostly statutory. It's a great tool, and (at least in Montana) underused.
1. Funding college is not a concern for whatever reason.
AND
2a. You have enough assets that someone might try to sue your estate for a piece of it when you die.
or
2b. You want to make things as easy as possible for your kids on the day after you die.
Also, trusts allow for immediate access to funds upon death, avoiding lockup during probate process.
Have you guys considered branching out into other types of trusts?
That seems the only downside of not having one of the parents retain custodianship (which is bad tax-wise if they die). It's not really a big deal for me, since I'm using my kids UTMAs as college-savings/nest-egg and have no plans of using it before they are 18.
http://www.moneyville.ca/article/1244729--fees-eat-up-90-per...
Be sure to market it to the poor primarily. The marketing tagline can be something like "The wealthy use trust funds to provide for their children - now you can too!"
Should be highly successful, even though there are zero benefits to trust funds for 99% of the population. Actually it's probably a net minus for most people, due to the way college financial aid is calculated.
I give it an A+ for income potential, C- for utility, F for ethicality.
At all of these schools, while the tuition price tag might be $50,000 per year or more, relatively few families actually have to pay this sticker price. At my alma mater, Bowdoin, the overall cost is around $54k, but the average financial aid package (according to the College Board) is $41k, leaving the average Bowdoin student on the hook for only $13k a year.
If you're a family that otherwise would qualify for a large amount of financial aid, but you've saved up into a trust or other savings plan for the purpose of funding your child's education, you'll lose this free money. The institution will count this amount against your demonstrated financial need.
Some families with means are able to hide away these funds, and still get significant financial aid from a school like Bowdoin, but most families don't have the resources or savvy to do so.
Of course, if we're talking about institutions that don't have such strong financial aid programs – which is the vast majority – you probably want that savings. Deciding to save for your child's education is, statistically, usually a good decision. If your child ends up going to one of the above, though, it can be a costly one.
The "maximum you can possibly afford" goes up on almost a 1:1 basis for every dollar in the child's name.
You might as well just write the check directly to the college as a donation. At least you can deduct it as a charitable donation that way (assuming it's a qualified non-profit blah blah).
Family A: parents have $10K, child has nothing
Family B: child has $10K, parents have nothing
Family B will be calculated to have more money available to spend on college (OBVIOUSLY the child should pay for college out of his own assets first...) and will get less financial aid. This will be true 18 years from now even if the system is tweaked slightly in the meantime.
The second way is by exploiting something. Exploiting people's desires to provide for their children. Exploiting their financial illiteracy. Scamming people, in other words. This is also a successful business model, in that it works for the business (bad for society, of course).
We have something that looks like a duck and walks like a duck. We have not actually heard it quack like a duck, not yet. But the question in my mind is, how COULD this be a successful business? The product being offered has zero or negative value to almost everyone[1], and this is an age of financial scams of various sorts, the "grifter economy" as it has been dubbed. Am I so off-base in suggesting that this might be one of them? Am I crazy?
[1] Just a caveat: trust funds can be useful in a few cases, but you aren't rich enough to benefit.
Trust funds are a liability shield.
> ... your parents should have kept the money in their bank account.
Where it can be taken in a personal injury claim, or seized as alimony by a vindictive ex wife, or spent down by a the parent's medical trustee, or hundreds of other financial disasters.
The point of establishing a trust fund is to give a young person money that cannot easily be diverted or frittered away. Strings can be attached so that a teenager does not destroy themselves with money.
P.S. Companies like this make money by keeping overhead low and scaling up to bazillions of customers. You don't have to be a cheat or even expensive if you can get 10,000,000 customers.
Couldn't it also be a way for low-income families to benefit from the tax advantages normally only afforded to the wealthy?
But let me address your second question.
The way that a trust is set up, it's not always the best solution for reducing the cost of college, particularly if you think you will qualify for financial aid (though that's a very difficult projection to make for the year 2030 at this point).
The way financial aid is calculated, these assets count against your eligibility. So while having the money won't 'hurt' you in some sense, there's the possibility that you'd receive that money from financial aid anyway, and by saving e.g. $10,000, you've reduced your financial aid eligibility by the same amount.
Of course, if you are able to save up the cost of college (>$200,000 for private schools) over two decades - or at least come reasonably close - then yes, it is good to have that money at the end of the term in case you wouldn't have qualified for financial aid anyway, but as you can see, having the fund doesn't necessarily leave you better off than the alternative.
The kicker is that the very-wealthy are able to secure vast amounts of financial aid for their children. I went to an Ivy League school, so I'll speak to their policies, as all Ivy League schools but one have the same financial aid policy: guaranteed to meet 100% of 'demonstrated need'. The problem is that 'demonstrated need' is very easy to manipulate if you're savvy enough to know how to reduce your taxable income, reduce your child's net worth to zero (or less), and exploit several other loopholes that are nevertheless entirely legal.
The end result is that I had some classmates whose families were wealthy enough to donate tens of thousands of dollars in charitable donations, and yet they also received the top financial aid packages reserved for the 'high need' (ie, very poor) families.
All of that is orthogonal to the company we're discussing: it's possible they may help, and it's possible that they may 'do no harm' (ie, it will be a wash for the family). Or they may be able to help educate these families how to take advantage of those same loopholes, but that would be difficult, and it's completely unrelated to the business of simply having a trust.
Putting money in a trust fund for your child will reduce their eligibility for financial aid, full stop, no doubt about it.
However, in my opinion, promoting individual saving for higher education and reducing government subsidies is a positive step. Because of the uncertainty about the situation in 2030 (as you mentioned) and government subsidies tend to lead to unintended consequences (see housing price bubble and collapse).
Edit: Also, the money doesn't have to be used for college.
Low-income families aren't going to be taxed on any of the money they gift to their children.