A fictitious story to illustrate a fascinating idea on how to skip one generation to help make the next generation financially secure
A grandfather has a granddaughter who is such a joy to him he can’t imagine not having her in his world. Though her grades are not good enough for her to be able to obtain scholarships for higher education, they are good enough for her to get into a respectable university where she can gain an education which will allow her to have a comfortable lifestyle. A major hurdle stands in her way of obtaining that education–she has a physical handicap which makes it impossible for her to earn enough income to pay for her schooling.
Her parents are good people, but their circumstances in life have made it impossible for them to set aside money for her education. They would love to see her have the opportunity to go to college, but things look very bleak for that to happen.
Grandpa has carried a substantial amount of life insurance on his life, which has accumulated a considerable sum of cash value. He has always had his son as the primary beneficiary so in the event he were to pass away the son would receive the death proceeds. However, in light of his granddaughter’s physical conditions and the circumstances surrounding her financial future, he has determined to make a change in how the proceeds from his life insurance would be distributed. Here’s what he decided to do.
Since his granddaughter is still a minor, he changes the ownership of his policy to a trust along with a beneficiary change naming the trust as the new beneficiary. This allows a resource to assure the granddaughter will have her financial needs met when she has been accepted at the university of her choice. Instructions are given in the trust agreement that the executor is to request a loan against the cash value of the policy sufficient to pay the educational expenses of his granddaughter, with the understanding these expenses will continue to be paid as long as she maintains a certain degree of proficiency in her chosen field of study. If she fails to maintain the standard then the financial spigot will be turned off and she would have to find another way for funding her continued schooling.
If the grandfather passes away before she completes her schooling, the death benefit proceeds minus the outstanding loans would replenish the cash coffers and her financial aid would continue with the same instructions.
Since the trust is owner and beneficiary of the life insurance policy, any proceeds would skip the father to son generation and would go directly to the grandchild. This generation skipping provision is made possible simply by the grandfather instructing the executor of the trust how to distribute the funds, a loan against cash value for schooling; distribution of death benefits to continue financial assistance if the granddaughter has not completed her education prior to the grandfather’s death; and death proceeds getting to the granddaughter after schooling without having to be distributed by the father of the granddaughter.
This procedure does several positive things for the grandfather, i.e.
- By making it an irrevocable trust it removes the face amount of the life insurance policy from his accumulated estate.
- It allows him to dictate at the outset how he wants the proceeds to be handled during his life and also upon his death.It clearly establishes his intentions and creates a bond between him and his granddaughter.
Two major disadvantages once he has determined this to be an irrevocable trust:
- He cannot go back and change his mind.
- He cannot have anything that could be construed as incidental ownership in being able to keep it outside of his taxable estate.
He should be very careful what he puts into the trust because once it goes in he cannot take it back out and; two, he has no control as to future changes he may want to make.
This is then a simple and easy way to keep wealth in a family, skipping one generation in the process. Careful planning becomes the functioning word in order to make it work.
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