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In trusts we trust
By Suze Orman
Would you please explain the pros and cons
of a revocable trust and an irrevocable trust?
Costanza G.
Los Angeles, California
Also:
■ Post-retirement investing
■ Investing for college
PEOPLE WHO ARE worried about getting sued or
have enough assets to trigger the federal estate tax
find that an irrevocable trust can be a useful tool.
Assets inside an irrevocable trust are protected from
creditors, and the assets are not considered part of
the estate for purposes of calculating federal estate
tax liability. In 2013, the first $5.25 million of each
individual’s estate is exempt from estate tax. (Going
forward, that threshold will be indexed to inflation.)
If your estate isn’t near that limit, I think it’s
important to understand what you give up if you
place assets inside an irrevocable trust: control of
that money. That’s what the “irrevocable” is all about.
With a revocable living trust you maintain complete control and flexibility. While you are alive,
assets you have put inside your trust remain 100 percent yours to use as you please. You can also make
changes to your trust as often as you want, altering
beneficiaries or changing the terms of how you want
your assets handled once you pass.
Creating a revocable living trust with an incapacity clause will allow someone you designate to step in
and handle your financial affairs if at some point you
can no longer make those decisions for yourself. And
when you die, your heirs will not have to deal with
probate. Wills are required to be approved by a probate
judge; with a revocable trust your estate is disbursed
exactly as you have laid out in the legal document. No
need for your heirs to get court approval.
The bottom line is that both types of trusts are
very different, and one doesn’t exclude the other. Get
yourself a good estate lawyer and check them out
for yourself.
Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.
Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.
100) minus your age. I happen to think dividend-paying stocks are a smart way to invest in stocks.
Some low-cost exchange-traded funds and no-load
mutual funds that focus on dividend-paying stocks
are currently yielding 3 percent or more.
As for how much you can afford to withdraw
from your accounts, 4 percent is a good benchmark
for someone who retires at 65 or so. Someone retiring earlier might want to start with a lower withdrawal rate. Retirees at 70 or so might consider a
higher initial withdrawal rate (that you then adjust
for inflation each year). The goal is to make sure you
don’t outlive your money. But I want to stress that
the 4 percent rule is just a solid starting point to run
your own numbers. Someone with an old-fashioned
pension and Social Security might be able to invest
more in stocks or withdraw at a higher rate because
of those guaranteed income streams.
BRIAN BOWEN SMITH
I am 31 years old and just had a baby boy, and
was looking to invest money for his college
fund. I read mixed reviews about 529 plans.
And if not 529, what other plans are there?
Where to securely invest so my son has
money for college?
Julia T.
Springfield, New Jersey
I have been retired for 20-plus years. What
is a creditable recommendation for investment allocation between stocks, bonds
and cash after retirement? Also, I follow the
4 percent guideline for withdrawals from
investments. Is that prudent? I know many
retirees have the same allocation question.
Bill S.
Sequim, Washington
More in archives
On Costco.com, enter
“Connection.” At Online
Edition, search
“financial connection.”
RIGHT NOW, HIGH;QUALITY bonds earn 2 to
3 percent, and I don’t have to tell you that cash
earns close to nothing. Meanwhile, inflation is running around 3 percent or so. If all your money is
in cash and bonds, you’re likely not earning
enough to maintain your standard of living.
Stocks can provide higher inflation-beating gains.
Of course, they can also go down in value, thus the
guideline to limit your stock allocation to 110 (or
MARCH 2013 ;e Costco Connection 15
I DON’T KNOW what reviews you’ve read, but
529 college savings plans are a smart way to save for
college. Of course, as with most any investment,
there are good options and less good options. At
Savingforcollege.com you can learn about “
direct-sold” plans, which have the lowest fees. That’s what
you want. Avoid the more expensive “adviser-sold”
529 plans. (If you work with an adviser, that’s fine. But
you should pay the adviser a flat fee, not commissions
on investments.)
You don’t have to stick with a plan offered by
your state. Anyone can invest in any state’s plan and
use the money to help pay for any college in any
state. The only advantage to sticking with an in-state
plan is if special state-tax breaks are offered.
So now that I’ve told you how to find the good
529 plans, I have to tell you that your first priority
must be to have your retirement savings on track.
Most 31-year-olds I meet, especially new parents,
aren’t anywhere near on track.
There are loans for college. There are no loans for
your retirement. Trust me: 20, 30, 40 years from now
your little boy will be a grown man who will thank you
for being in such great financial shape that he won’t
need to step in and support you later on. C
