Estate Planning Trusts Can Help Us All with Overspending

I believe strongly that most of us will overspend if we have easy access to a large checking account. The problem with this overspending is that it is insidious. Ongoing incremental spending, purchases, etc., have a way of later surprising us, to our financial detriment. I also have a finance degree and was around in the 1970s when President Gerald Ford referred to the then-rampant inflation as public enemy number one.   Overspending, coupled with inflation, can result in a double-whammy, horrible catastrophe.

On a more positive note, estate planning that places property in a trust for ourselves and family members, rather than dumping large value into a beneficiary’s lap, helps protect against this overspending.   First, a trustee (or co-trustee) can be used to help with the oversight and investment management.  Second, the trust document can include an express statement of your intent that the trust property not be used merely as an open checking account for unlimited current expenditures.

Also, from my perspective as a tax lawyer, trusts provide the only avenue for being able to opt in and out of income, estate, and gift tax planning options during the duration of the trust, in a manner not available if the property passes outright to the beneficiaries (and not in trust).

As to overspending, below is a sample financial projection that illustrates the important need for preventing overspending and for the trust protection of the property:

Assume within the trust document you include a statement of intent that your wife, after your death, ideally can receive an inflation-adjusted $100,000 per year for her spending needs (plus other payments to cover housing, reasonable automobile expenses and upkeep, health insurance, health expenses not covered by insurance, and any other property/liability insurance premium expenses reasonably related to her standard of living.

Let’s assume the above requires $200,000 per year. Assume your wife has a remaining life expectancy of 22 years. Assume after inflation and income taxes the trust can grow at a net 3% per year in value. Using a financial calculator, a trust for your wife (after your death) will need around $3.2 million to provide this 22-year annual stream of $200,000.  A more optimistic after inflation / tax 6% annual return will require $2.4 million.

As an aside, these funding amounts will have to be even larger if the annual $200,000 payout is itself increased each year for inflation (which ideally it should be).

The point of this post is not to speculate about these various numbers or after-inflation investment rates of return. But, rather to suggest that the estate planning use of financial projections and the design of protective trusts can greatly help prevent insidious overspending for our families.

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