I am a second-generation, happily newly divorced, 52-year-old professor without a will. I am incredibly fortunate to be successful in what I do. Because I am a state employee, I have a generous pension awaiting my retirement. I have significant savings, and several properties that followed from moving from one state to another.
I am also the executor of my mother’s estate (she predeceased my father), and the simple sale of our family home in California will guarantee my brother and sister have a significant estate of their own after her passing. I have a sister and a brother, both of whom have two kids who I hope will be very old adults by the time I pass, as well as a stepson whom I love dearly. We are fortunate that we are not a family of conflict.
“‘I would really love to create a mechanism (maybe a trust) that pays out scholarships or educational benefits to members of my family across generations.’”
Traditional models of distribution would mean my estate would and/or should be apportioned to my extended family. I understand that is how generational wealth works. Families, over time, can build themselves on the success of their forefathers — or, in this case, their “foreuncles” — but I have had some thoughts about what targeting my estate might mean. That is, I would really love to create a mechanism (maybe a trust) that pays out scholarships or educational benefits to members of my family across generations.
As a professor, I believe education has been central to my experience and social mobility, and I want to make sure that future generations have that opportunity. I am thinking bigger than traditional models of college saving (based on how I understand 529s work).
For instance, creating a fund that allows eligible beneficiaries to receive a lifetime educational support benefit based on the average tuition for a four-year degree over their lifetime. If no one uses it, I just want it to grow for the next generation. It is distributed to people who are given the agency to meet the world where they are and make decisions about how to better their life.
First, what are your thoughts about this from a generational perspective? Second, if I choose to set up something like this, how would I find a long-term trustee? Third, is a trust the right way to think about this, and could I use a 529 plan to accomplish this?
A Future Foreuncle
Dear Future Foreuncle,
The three most important things in a young person’s life, in no particular order: education, education, education. Kudos to you for thinking ahead, and putting the money you won’t spend during your lifetime to use. The younger members of your family are, indeed, fortunate to have such a thoughtful and generous uncle. If we are not here to help and support one another when we can, what is the point of any of us being here in the first place? You are among the fortunate ones, as you have options. You may wish to set up a trust and 529 plans.
A trust, however, gives you more flexibility than a 529 plan. Creating such a vehicle can be expensive, but given the amount of money you appear to be dealing with, it seems very worthwhile. And yes, you will also have to think of a trustee: a relative, friend or even a bank. Choosing a trustworthy trustee is a tough job, and you can have more than one trustee. Naming a family member can get complicated, especially if there is disagreement about how the trust is handled. Either way, consult an estate-planning attorney.
Trusts are flexible. You should think about how you want the funds to be distributed — in lump sums and/or as an annual income to pay certain expenses — and for what educational purposes. You may decide to include alternative forms of education aside from a four-year college degree, for example. And what happens to those family members who choose not to go to college, and to take another road? Will they receive funds for a down payment on a house or seed money for a business, for example?
Setting up a 529 plan
Uncles and parents and even grandparents are ideal candidates to set up tax-advantaged 529 plans for their younger family members. You are young enough to see your nieces and nephews go to college. There are two kinds of 529 plans: prepaid plans for tuition at today’s rates for certain colleges, and a flexible savings plan for tuition, accommodation, and sometimes textbooks.
There are potholes to avoid, or at the very least be aware of. As my colleague Beth Pinsker points out: “Any money from a non-parent given to a student while eligible for aid can count as student income and is assessed at a much higher rate than a parental asset. Say you gave $5,000 to a high-school grad as a present in May 2022. They are supposed to report it as income on the Free Application for Federal Student Aid (FAFSA) this year — for their sophomore aid package — and the likely result is that the college lowers its award by $2,500.”
But 529 plans are popular. To give you an idea of just how popular they are, and the financial commitment involved in setting up such a plan: More than $434 billion in assets were invested in 529 education-savings accounts last year, up 10% on the previous year, according to the College Savings Plans Network. The average account size was $30,287. The money withdrawn is tax-free if used for the approved education-related purposes.
Intergenerational wealth transfer
As to your broader note, you are correct about intergenerational wealth transfer. It gives the next generation a helping hand, and it helps keep wealthy families wealthy generation after generation after generation. While that doesn’t quite help economic inequality in our society or intergenerational mobility for people in poorer households without such advantages, not every branch of one family has equal access to funds. You are trying to level the playing field for everyone in yours.
As Thasunda Brown Duckett, the CEO of TIAA who oversees a retirement account manager that has $1.2 trillion of assets, said at MarketWatch’s Best New Ideas in Money Festival last month: “In the next five years we’re likely to see the start of one of the greatest transfers of intergenerational wealth. It’s estimated that upon their deaths, the Silent Generation and baby boomers will transfer somewhere between $30 trillion to $68 trillion to their adult children.”
Duckett is somewhat more optimistic about the impact on economic inequality than other parties, including the authors of this paper for the Center for Economic Policy Research. “This will put younger generations in the driver’s seat and has the potential to reshape our economy. Millennials and Gen Z should be prepared for this shift in wealth by making sure they’re working on their financial literacy, considering if they will need to meet with a financial adviser, and thinking about their long-term investment strategies,” Duckett added.
I hope this provides context and perspective for your own plans. You have the money to change and/or improve the lives of your family’s younger generations. Education is among the best gifts you can give. In the meantime, do yourself a favor and make a will.
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