Planning for your Family's Cashflow needs.
Updated: Aug 10, 2020
For most people life is cyclical, we have times of being in good health and times when we have aches, pains or illness. We have times when we are able to meet our financial needs without much worry and times when the lack of finances seems to control our lives. When we have times of good health, we need to take care of our bodies by exercising, getting good sleep and eating right, so that the times of sickness or pain will be shorter and easier to manage.
The same is true with our finances.
When we have plenty, instead of buying those things that you want but really don’t need, we need to store up those finances for family cashflow needs that may arise at future times, such as retirement or family crisis. Proverbs 6 puts it this way, “Remember the ant . . consider its ways and be wise . . . it stores up its provisions in summer and gathers its food at harvest.”
IRAs, 401ks or 403(b) are retirement tools that allow us to put money away now in a tax advantaged way to provide for cashflow needs when we retire. In most states, these funds are protected from bankruptcy or creditors so they provide a separate estate that provides security for our families. Money invested this way over time allows you to take advantage of the 8th wonder of the world, compound interest!
The Charitable Remainder Trust
I have long been a proponent of the “separate estate”. Setting resources away securely during times of plenty so that they are available when we need them in the future. In addition to the retirement plans, one of the best tools to use to create a separate estate is a Charitable Remainder Trust. The trust can be set up so that it is outside of your estate and cannot be reachable by creditors. The Charitable Remainder Trust (CRT) is a split interest trust that pays an income to beneficiaries for life or a term and then goes to charity. It is similar to a deferred annuity except that the residue of the trust goes to charity instead of an insurance company. If you are going to sell a piece of property or a business and receive profit or capital gain, consider putting a portion of the property or business into a charitable trust. Not only will you avoid capital gain on that portion of the property, but you will get a small tax deduction for the future gift to charity.
The trust is also tax exempt like a retirement account so that it can accumulate in a tax- free environment if you do not need the income immediately. It can also be set up so that funds can be paid to other family members and taxed to them in their tax bracket instead of being taxed in your tax bracket. You can also do your charitable giving from the trust by releasing principal each year which will give you a current income tax deduction to uses against other ordinary income without having to declare the income first. In many cases, a term of years can be added to the CRT so that it will pay out to your children after both of your deaths so it can be used for an inheritance.
The CRT can also be used during times where you are receiving more income each year than you need. If you have royalty interests, rents or other business income that is above your annual needs and you have funded your retirement program, consider having the income go to a CRT. It will not be taxable to you currently and can be accumulated in your tax-exempt storehouse until you need the income at a later date, or you can have the pleasure of giving it away to your favorite charity either now, in the future, or at your death.
