Hacker News Reader

Comment by jellicle | Hacker News Reader

This should be a great way to fleece unsuspecting unsophisticated investors trying to provide for their children. For instance, front-loading a bunch of fees against the deposited amount, so that if, say, the child dies, you get to keep most of the money.

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.

View on HN

What basis do you have for believing TrustEgg will do any of the unethical things you list? Your logic seems to be "there are unscrupulous financial service providers in the trust fund business, therefore TrustEgg is unscrupulous." Which deserves an F for logic and a second F for constructive feedback.

My assumption is that there a few ways a company can grow and be successful. One is by providing something of value, and charging people for it. However, the service in this case is of negative value. There are ZERO trust fund benefits for most people, and if your kid goes to college, the trust fund will be a substantial negative - your parents should have kept the money in their bank account. So that can't be the way forward for this company.

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.

> There are ZERO trust fund benefits for most people, ...

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.

You have a pretty high karma here so I don't know if you are joking, being sarcastic, or trolling. If TrustEgg discloses all fees prior to sign up and provides the same benefits a typical Trust Fund does, then what is the problem?

Jeff CEO/Founder - We will be disclosing all fees, which as a financial institution we would be required to do anyway. We also aren't charging any upfront fees or 'loads'.

I flagged this comment--this is an unwarranted and extraordinarily mean-spirited accusation, accusing the founders of seeking to steal from the poor, based entirely on a scenario that the author seems to have made up based on one article he read about one incident. Actually, this comment is so awful, I wish there was a way to flag the people who upvoted it!

Wow, this is uncalled for. What evidence do you have that this is the motivation behind this service?

Couldn't it also be a way for low-income families to benefit from the tax advantages normally only afforded to the wealthy?

I agree that the GP comment is uncalled for - we have no way of knowing if this company will help or hurt families, so let's give them the benefit of the doubt.

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.

It's almost certain that putting money in the child's name will serve to reduce their financial aid package. Financial aid, since the system was invented, has always counted assets in the child's name as being highly available to meet college needs, while parental assets are less available. This is going to be true 18 years from now even if the system is tweaked in the meantime.

Putting money in a trust fund for your child will reduce their eligibility for financial aid, full stop, no doubt about it.

Jeff - Founder/CEO It does reduce financial aid, but only 20% of the child's assets are included. TrustEgg assets also don't have to be used for education, while a 529 plan would assess a 10% penalty for non-education withdrawals. Having the assets in the child's name also protects the assets from the parents, and parents creditors, which is necessary when taking deposits from other family members.

I see your points here, makes sense.

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.

What tax advantages are those?

Low-income families aren't going to be taxed on any of the money they gift to their children.

Jeff - CEO/Founder - The tax advantage is for the income earned on the investment. The kiddie tax exemption eliminates the the first $950 of unearned income. As long as deposits are less than $13,000 per parent/grandparent each year there are no tax issues for them either.

Could you explain why a trust fund is a net minus for most people, and how college financial aid is affected by it?

At many of the top colleges and universities in the US, the institution is able to meet 100% of the "demonstrated financial need" of the family. At several schools, all of the provided financial aid comes in the form of grants, which is basically free money.

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.

But it also depends on how the trust is created. I have no idea how TrustEgg establishes the trusts, but many people set up trust funds for their children - but name the child as an alternate beneficiary, after themselves. So, if I set up a fund for my child - the trust fund would be mine until I died. Assuming I was still alive while my kid was at college, the trust fund would be mine and not hers.

From what I recall the parents assets can be used, up to a certain percentage, to determine what the child is eligible for. One way around this is to use a Roth IRA, since it allows you to take money out for college without a penalty and would not be used to determine FAFSA.

Most private colleges charge the maximum you can possibly afford after going into significant debt.

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).

Jeff - Founder/CEO - A UTMA is in the child's name, so 20% of the assets are considered for financial aid. http://www.axa-equitable.com/plan/education/can-UGMA-UTMA-ac...

It reduces your financial aid package 20% each year.

The formula for financial aid counts assets in the child's name as being highly available to pay college costs, while parental assets are much less so.

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 average American kid has an IQ of 100 and will attend a state subsidized community college, trade school, etc. They need to minimize loan interest and time spent working their way through school with menial jobs, not worrying about the exact financial aid efficiency of Harvard.

Reply on news.ycombinator.com