Trust Funds 101

Ray’s Take: Most people have heard the expression, “He/she is a trust fund baby.” But what does that mean exactly?


Most people do not understand the basics of a trust and think they are only applicable to children or heirs of high-wealth individuals and businesses. While many times this is true, there are certain situations when a trust might serve as an integral part of your overall planning.


So what is a trust? By definition, a trust allows a third party, or “trustee,” to hold your assets on behalf of a beneficiary or beniciaries. A trust is made up of three parties: the “trustmaker” (you); the “trustee,” which is the person responsible for managing the property or asset until it is transferred; and the last party, the “beneficiary,” which is the person or entity you name as the recipient of the benefits you leave for them.


Before the option of 529 accounts became available, I’ve seen families use trusts to help save for their children’s college and professional education. In addition to professional management, there are a number of estate and income tax advantages. Further, there are asset protection opportunities that are not insignificant in this litigious world.


A trust may be useful when a family has a special needs or grown adult child that may not be able to handle a large sum of money if given to them through a traditional will.


Putting money into a trust allows the trustee to distribute the funds within your selected timeframe and parameters. It also protects those assets from judgments should the beneficiary be liable for damages or divorce settlements. Money in a trust does not go through the court system, allowing access to it more efficiently.


It’s important to understand that once you place assets into the trust, they are no longer yours. But since they are not yours, you will not pay income taxes on the money. It’s a useful tool that can help reduce your estate taxes.


Don’t be afraid of trusts; just know when it’s appropriate to use one. And always consult with your financial adviser or attorney when trying to decide if a trust is right for you.


Dana’s Take: Think of people you know who have inherited wealth. Did it bring them happiness or problems? A gift of money might sap a child’s drive to work and could even cause friction in their relationships. Inherited money often becomes “my” money in a marriage, while earned money is usually “ours.” However, leaving money to worthy causes, instead of family, can breed resentment.


Experienced financial planners and estate planning attorneys have seen every variation and can advise you of options that may achieve a balance that reflects your wishes and values.


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Revisiting Your Will

Ray’s Take: The start of a new year is a great time to get out your will and really read it. If you don’t have one, call your attorney today and get one. I do not recommend that you try and do this yourself or through an online program. Most people do not have financial situations that are so specific that you won’t need a lawyer. And oftentimes self-prepared wills are not executed correctly. I have lived through too many disasters of flawed wills to go there.


If you do have a will, make it a priority to read it annually. You will be amazed at what might need attention. Things change in our lives and estate planning should not be static.


Most people find creating and reviewing their will to be an uncomfortable task, but in actuality you are creating an invaluable resource for your friends and family should something happen to you. Having an updated and comprehensive plan upon death saves those closest to you lots of time and energy during an already difficult time.


When reviewing your will, double-check your beneficiaries. Have you had a birth or death in your family? Did you get married or divorced and need to add or remove a spouse or other family member? Re-evaluate your executor, guardian and trustee. Are these still the people you want in charge of making important decisions about your estate?


At the same time you are reviewing your will, you should also think about other essential estate planning documents like financial and health care-related powers of attorney. These ensure your wishes are carried out while you are still alive but unable to speak for yourself.


Keep in mind that some insurance and retirement policies are not included under your will, so you will want to review the beneficiaries on those documents separately. Beneficiary designations in these areas will override what’s outlined in your will.


Dana’s Take: I think we can all agree that thinking about death, especially our own, is an unpleasant topic that we would all like to avoid. But death is a natural part of life. And having an up-to-date, clear and concise will should give everyone peace of mind, especially you.


Don’t be afraid to communicate your wishes with your loved ones. While it can be scary and uncomfortable to discuss this topic with friends and family, it’s important that those closest to you know what their role is and what to expect.


Your children should know who will take care of them should something happen to you. Creating open dialogue in your home around this topic, may even help you in your decision-making process. Communication provides security and peace of mind that everyone will be taken care of and supported both emotionally and financially should the unthinkable happen.


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Living By Giving

Ray’s Take: “We make a living by what we get. We make a life by what we give.” This was the wisdom of Winston S. Churchill, but living a life of generosity is beneficial for you, your family and your community. Some of the most successful and powerful people in the world have tapped into the power of giving.


Since our kids were young, Dana and I have tried to model the importance of giving back. We have been blessed in many ways. Tuesdays have always been Rotary Day, and at dinner I try to share what happened that day at the meeting and the important things our club is doing both locally and internationally. Creating a charitable culture in your family should be a fun bonding experience. Even the youngest members of your family play an important role and you should listen to them. Having buy-in from each member of your family is crucial to creating a family-giving plan.


Start by meeting once a year to determine what causes are important to each member of your family. Then start creating a plan to help you support those causes financially and with your time.


The causes you support may change from year to year as kids grow and life takes different directions. Be sure to have an annual report from each charity you are considering at your family meeting. This will help determine what resources they need and where your money can make the most difference.


Typically, people donate anywhere from 3 percent to 10 percent of their taxed income. However you decide to divide up your donations, charitable giving requires forethought. You may want to single out one charity and make a sizable donation through a monthly pledge or you may choose to shotgun money to different charities if your income fluctuates each month.


The Community Foundation of Greater Memphis is an invaluable resource in the Memphis area. For more information about the organization, visit


Dana’s Take: I have chronic guilt that I’m not giving enough money to all the great causes in Memphis. What I need is a phone app to automate giving a gift every day of the year to my favorite charitable organizations. I would like to be able to check off organizations from a list and have a fixed amount gifted daily from my bank account. Is that so much to ask?


Perhaps every Sunday a gift would be sent to our church, but Mondays to a health care organization like the Church Health Center, St. Jude or Le Bonheur. Tuesdays could be homeless and food scarcity missions. Wednesday could be women’s causes like YWCA women’s shelters, Women’s Foundation of Greater Memphis or Dress for Success. Thursdays could be blanket organizations like the Community Foundation of Greater Memphis and United Way. Fridays could be for schools and youth programs like Streets Ministries and Youth Villages. You get the idea.


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Tax Time Tips

Ray’s Take: It’s that time of year when many people find themselves scrambling through file cabinets, sorting through stacks of papers and gathering receipts in preparation for filing their yearly tax return. If you are unhappy with the lack of organization in your tax preparation, that could be your resolution for the coming year.


In a perfect world, your refund should be minimal, if you get one at all. Your personal situation will determine how accurately you can calculate your total tax liability for the year.


If you estimate your refund to be substantial, you may be over-withholding (giving the IRS an interest-free loan and missing out on last year’s market gains). If you are overpaying, the easiest correction is to complete a new W-4 form through your employer. If you’d like to get some extra money back each paycheck, increase the number of withholding allowances you claim.


If your refund is more reasonable in size, you are right on track. But don’t run out and spend it all in one place. Create a savings/spending “contract” with yourself. Commit to a fixed percent of certain windfalls (bonus, tax refund, etc.) that must be saved and the rest you can spend guilt-free.


It’s important to remember that the personal exemption, under the new tax bill, will disappear starting with 2018 taxes, but it still operates for your 2017 taxes according to the number of withholding allowances you claimed on your W-4 form.


And don’t wait until the last minute to file your return. This can set you up for a late-filing penalty of up to 5 percent of the amount due every month. Avoid the common mistake of thinking that getting an extension means that you don’t have to pay your tax bill in April; you will still owe interest and a late-payment penalty.


Dana’s Take: If you had a toothache, would you pull your own tooth? Unlikely. So why do non-accountants file their own taxes?


When I was single, I filed my own taxes. I didn’t know that emptying my 401(k) to buy a used Honda Civic was a big no-no. Well, the IRS took their sweet time to discover my error. The penalties and interest they charged me totaled more than the cost of the car.


Now, I pay a dentist to pull teeth and an accountant to file my taxes.


I know that CPAs charge a lot of money. But not only will they save you penalties and jail time, a CPA will provide you with organizing tools to make your job, and theirs, much easier. Most everything is handled via email.


I remember my father sitting at his desk preparing our taxes, looking miserable and overwhelmed. If you can afford it, give yourself a break and hire a CPA. He or she might even save you some money.


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Setting Financial Goals

Ray’s Take: A new year for many brings with it thoughts of New Year’s resolutions. Whether it’s stopping smoking, losing weight, saving money or spending less time at work, resolutions too often feel negative or depriving. Instead of talking about “making resolutions,” we should be talking about “setting goals.”


One of the most important things you can do to set yourself up for financial success is to set financial goals each year. There are a lot of people who make lots of money but wind up broke because they did not set financial goals and manage their money accordingly along the way.


These goals should not be vague. Your goal should not be to be “rich” or to retire “someday.” It should be to retire on a specific date with a certain amount of resources. If you want a vacation home, your goal should be to buy the home at a specific location, costing a specific amount, by a specific date.


Once you create your goals, then you can start working backward to create the plan to get there.


Success is rarely a sudden event. It is a series of consistent choices. Think of small things you can do each month to help you reach your ultimate financial destination. And don’t forget to create measurable goals so that you can keep track of how you are doing and build off your success or clearly see areas that need to be reevaluated or improved upon.


Review your financial goals at least once a year. Some things that may have been important at the first of the year may not be important by the end of the year. And some goals you set in your 40s may not be important in your 60s. Your financial goals will change, so review them periodically to ensure you are on the right track.


Dana’s Take: On cold winter days, I dream of sugar-white beaches. It’s a pre-retirement fantasy of spending more long weekends in sunny places. I guess you could call that a financial goal. So, I must ask myself, “What I can do now to make those dreams a reality?”


First, I could delay replacing my car. Even though the car has passed its 10-year birthday, it works great and I could drive it for at least another year.


Second, I may be investing too much in renovations and redecorating of our Memphis home. I could free up some of that cash for a sandcastle on the beach.


Third, I can look in the trash. What am I giving away to Goodwill that I can stop buying in the first place? Target and Amazon impulse purchases will be a good starting point.


By reining in home renovations, car purchases and impulse shopping, I can already smell the sea. I’ll see you there.


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