Trust Fund Basics for New Parents

When I discuss trust funds with new clients, it often elicits a range of emotions. Many people equate trust funds with spoiled children or the very wealthy. However, there are many different types of trusts, and as a new parent, a trust could be a smart way to ensure that your loved ones are taken care of in the future.

What exactly is a trust fund?

A trust is formed when a person gives their assets to a third party for someone else's benefit. In this example, the person giving away the assets (the grantor) would hand them over to a trust-worthy third party (the trustee/custodian), who would look after the assets for the sake of the future recipient (the beneficiary).

The main benefit of setting up a trust fund is that it could offer protection from lawsuits, lower taxes, or avoid probate after a grantor dies. However, there are costs associated with setting up and maintaining a trust fund, which is the main reason why they aren't suitable for everyone.

Types of Trust Funds?

Most trust funds can be divided into a few different categories: living or after-death, and revocable or irrevocable. For example:

  • A living, revocable trust is set up while the grantor is still alive and the assets are revocable, which means that the grantor can amend the trust or pull the assets back at their discretion
  • An irrevocable trust is one that can't be changed after it's created, which generally offers tax benefits because the grantor is legally giving away their assets at the time the trust is established rather than at their death.
  • If the trust were set to be irrevocably created at the grantor's death, then it would be referred to as a testamentary trust.

Special Types of Trust Funds

Some trust funds are designed to address a specific need or concern. Some of the most common ones are:

  • Spendthrift trusts limit the beneficiary's access to the trust fund's money so that they aren't able to make poor decisions with it. Instead, the trustee decides how the funds are used for the beneficiary's benefit.
  • Education trusts only allow for the trust fund's assets to be used for educational expenses - we rarely see these as UTMA's are generally cheaper and easier to set up.
  • Gift trusts allow for high-end or expensive gifts to be given - though, we also rarely see these because a gift would have to be very expensive, maybe $100,000- $200,000, to be worth establishing a trust for.
  • Special-needs trusts are designed to establish care for a family with a special-needs child. This is because it is nearly impossible to leave money to a special-needs child, a trust for this purpose helps to allow a smooth transition of funds from the grantor to the beneficiary.
  • Charitable trusts are more common and are usually set up as an irrevocable trust, either living or after-death, to oversee and distribute assets to one or more charitable organizations. 

Is a trust fund for me?

Well, as a new parent, there are two main reasons why you might want to get a trust:

  1. Estate planning -- regardless of your level of wealth, any family with young children should have some sort of estate plan in place, which could very likely include a living or testamentary trust.
  2. Divorce -- rarely brings out the best in people, and a trust set up for your children may mean that their inheritance can't be seized or misused by your former spouse or their new partner down the road.


Trusts are very flexible and can offer a lot of benefits, but there is a price to pay for them -- generally in the way of billable hours to your lawyer and the cost of regularly maintaining and managing the trust. However, it's tough to put a price on financial security and peace of mind.

If you think a trust might be an option for you or your family, please feel free to reach out to us for a free consultation.



The Basics of Life Insurance

Do you need life insurance?

Do you need life insurance?

It's true that sitting around thinking about what would happen to your family if you died is not as pleasurable as say, binge watching Netflix or going out for ice-cream, but it is something we need to take a little time to think about. A few minutes of planning and organization now can save your family a huge amount of stress and hassle in the event of a tragedy.  Once you throw children into the mix, a conversation about life insurance is as important as any conversation about childcare, sleep training or diet. Children need to be provided for and it's your job to figure out how, even in the event of your death. 


What type of life insurance should i buy?

There are two types of life insurance policies, term and permanent. The difference being one is only active for a set amount of time and the other is, well, permanent.

For most new parents, term life is the way to go, providing a way to support a spouse and children if they were to be without your paycheck. Permanent life insurance tends to be used by individuals who want it as part of their overall estate planning needs, a way to pass assets at the point of death rather than a source of income replacement. 


How much do I need?

Working out how much life insurance you need is not as difficult as you might think. There are many online tools and calculators to help you, but beware of estimates provided by insurance companies; it's in their interest to sell you as large a policy as possible so expect their numbers to be a little inflated.

We love the calculator at which will generate a number for you based on your income, savings and comfort level (how able is your family to replace your income).


Buying life insurance

Many people are offered life insurance through their employer and this can be an easy way to get started. However, these types of policies often don't provide adequate coverage and also will likely be fixed to your employment; if you move jobs you will lose the policy. We suggest using an online comparison site such as to compare quotes from multiple providers.

If you decide to go with a broker, make sure they work with more than one company to provide you with a variety of quotes. Once you have your quotes in hand, be sure to check out the provider on a rating service such as Moodys or A.M Best which gives insurance companies easy to understand ratings. This should help you find a reputable company that will continue to meet your needs for the life of the policy.

Do I Need an Emergency Fund? (Yes.)

What is an Emergency Fund?

If you don't already have an emergency fund, it's probably a good idea to get one. But what is an emergency fund?

It's a sum of money that is either already liquid or can be easily liquidated in case of an emergency. That's it in a nut shell, but it doesn't really tell the whole story or help you to figure out what, how much, and where you should be saving. 


How much should be in my Emergency Fund?

Most resources insist on a six month emergency fund, meaning that it has enough money in it to sustain you for six months of living; mortgage, car payments, insurances and general expenses such as groceries and gas. But really, to assess how much you need for an emergency fund you need to assess your lifestyle and work situation.

Questions like, 'how reliable is your job?' If you had to leave it suddenly for any reason, how long would you expect it to take to get a job with a similar level of compensation? If you work in a high-demand field and have a stable position, a three-month emergency fund would probably suffice. For anyone working in a contract-based environment with an uncertain future, aiming for a more substantial, nine-to-twelve month emergency fund would probably be wise. 


What is an Emergency Fund used for?

An emergency! Plain and simple. Unexpected medical bill? Emergency fund. Sudden loss of job? Emergency fund. New Xbox? Probably not. Most recently, I knew of someone who was able to easily pay for a major surgery for their dog from their emergency fund, which is something that would have resulted in some painful decision-making had they not been prepared. 


What comes first, Emergency Fund or Retirement?

This is a very common question and it can often seems as if there is an endless amount of 'pots' your need to put money into: 401(k), Roth IRA, regular IRA, your kid's college fund, and now an emergency fund too. 

What should come first? The thing about an emergency fund is that the cash is readily available for whenever you need it, unlike most forms of retirement savings. If you face unexpected expenses and need to dip into your 401K or IRA you can face huge penalties which, as we know, is a terrible way to spend, or rather lose, money.  Having a well stocked emergency fund protects your other savings from this type of hit. So, it's important to prioritize this, at least for a short time, while you build up your fund.


How and Where to Save an Emergency Fund

The key to a successful emergency fund is to have it close-to-hand, but not too close-to-hand. For some people, holding it in their checking account suffices, but for others the temptation to spend it is just too much. You may prefer to hold it in a savings account or even at a separate online bank, so you can't just go into the branch and withdraw funds when you fancy a nice dinner out or weekend away.  

Saving in CD's is also an option, although you need to remember that the funds need to be able to be liquidated in a timely fashion. If you save in a CD, it might be worth keeping enough money in your regular checking or savings account to get you through the holding period.

It would be wise to factor in saving for your emergency fund in your monthly budget. If you take the money out as a priority and work on not touching it, before you know it you will be well on your way to to ultimate preparedness. 

What is dollar cost averaging?


At the risk of answering the question in the first line of a blog post, dollar cost averaging is an investment strategy, where an investor places a fixed dollar amount into a given investment on a regular basis. The investment is then made each and every month, for example, regardless of what is happening in the financial markets.

The result is that more shares are purchased when prices are low, and fewer shares are bought when prices are high. And for many clients, we think dollar cost averaging is the best way for them to responsibly build their portfolio over time.

However, I've heard the term misused a number of times in the past, and so I wanted to devote some time to what 'dollar cost averaging' is and why it's worthwhile. 

The myth of dollar cost averaging.

My wife and I were at dinner with some friends a week ago, and they started talking about the stock market. Now, I generally don't bring up the stock market while I'm out socially because I understand that it doesn't always make the most riveting dinner conversations, but since I do find it quite fascinating, I'm always happy to indulge others. 

Anyway, one of our friend's was talking about their position in GoPro (NASDAQ: GPRO) and how they were continuing to buy more of the stock as it declined. Even though they were losing money on the stock, the rationale was that they were also lowering their cost of ownership as the stock declined. "Dollar cost averaging!" our friend mistakenly exclaimed.

How does it work?

For those that aren't following me, consider that you spent $10,000 on a $100 stock of which you now own 100 shares. If that stock declined to $50, your investment would now be worth $5,000, but you'd still have 100 shares. Now, if you bought another 100 shares at $50, it would only cost you $5,000 - but you'd have twice as much stock now. In total, you'd own 200 shares and have spent $15,000.

The logic is that you've gotten a better deal on the stock because you've gotten it at such a great discount. After all, on a weighted basis, you now own 200 shares at a cost of $75 per share.

This often makes people feel great because when they look at their investment statement, it feels like you don't own a $100 stock that trades at $50 - but are instead holding an $75 stock that trades at $50. And, after all, if the stock goes back up to $100, you won't just break even - you'll have made a great profit.

This is terrible advice.

This is bad logic, and it can be dangerous, especially if you're dealing with individual stocks. That's because these stocks have the ability to decline further, and if you keep buying into them, your tying up an increasingly large percentage of your worth in a company that is declining. It's like the idea of going to Vegas and doubling your bet size every time you lose a hand of blackjack. You may swim out of it nine-out-of-ten times, but on that tenth time, you'll  go broke trying to dig yourself out of a hole.

So what is dollar cost averaging?

A key difference between the above example and when dollar cost averaging is at it's best, is your 401(k), where you have a set amount of money regularly deposited into it and invested at whatever price the market is trading at.

And since you're investing into a diversified bundle of securities, and not just one stock, the real risk isn't that your portfolio goes to zero, but rather that you'll have to manage your liquidity needs, such as making sure that you don't have to buy a house with that money while the market is down - but will instead be able to keep saving money into your investment account at that time.

It's this discipline that defines 'dollar cost averaging,' and it's why I don't feel that you can apply it to an individual security.

What are the benefits?

I think that there are three main benefits to dollar cost averaging, which are:

  1. It prevents procrastination. Many people either ignore their investments or just have a hard time getting started. I think that most people know they should be investing for their kids or their retirement, but it's hard to get around to it. And if you wait until you have a large sum of money before you want to invest it, you'll most likely find that you'll never have a large sum of money.
  2. It minimizes regret. Money and emotions often flow together, and even after two decades investing in the market, it's easy to feel regret when an investment proves to be poorly timed. The only thing worse is when you use that regret to disrupt your investment strategy in an attempt to make up for the setback. Through dollar cost averaging, because you're always investing in the market, your identity of an investment's worth is less anchored to one perceived value, and therefore has less of an emotional impact on you.
  3. It avoids timing the market. Dollar cost averaging ensures that you participate in the good times and the bad ones. While this doesn't guarantee a profit or protect against a loss, it does eliminate the temptation to try for random, long-shot strategies that seldom succeed.


There are a number of ways for people to successfully invest in the markets, and dollar cost averaging is just one example of that. But, if you like the discipline of investing small amounts of money as you earn them, there's something very satisfying about regularly socking money away into an investment account. Or, if you're prone to regret after a large investment has a short-term drop, it's worth recognizing that dollar cost averaging helps to minimize the emotional impact of investing.


Applying for Financial Aid


Should my child apply for financial aid?

Congratulations, you’ve survived the diaper stage, taught them to tie their shoes and tell the time, you’ve even made it through years of puberty. You are finally ready to send them off to college.  One item that might be looming large on your to-do list is applying for financial aid.  This can be a difficult task to tackle, as often parents don’t want their children to stress about the cost of their dream school, all the while they are stressing out about how they can possibly pay for all the costs of a high priced further education.

Here are our suggestions for dealing with the issues of financial aid.

1. Apply Apply Apply

One of the most common statements we hear from clients when discussing their children’s upcoming school enrollment is “We didn’t apply because we didn’t think we would qualify”. This is a classic mistake. The number of people we would recommend not applying for financial aid it so small, I could probably start naming them. Warren Buffet, Bill Gates… That’s not to say that anyone earning less than Mr. Gates will receive aid but there are always situations and scenarios that open the door for even small amounts of financial aid.

2. Apply every year for every student

Another thing we regularly hear from clients is “We applied for Child A and didn’t qualify so we didn’t bother to apply for Child B”. Things change and it’s wise to submit an application every year and definitely for every child. One thing many people don’t realize is that schools take into account how many students a family have enrolled in school, and as that number goes up, so the threshold for financial aid goes down. For example, if you have a combined household income of $280,000 and your first child attends an expensive private school, you might not be eligible for financial aid. But, if your second child will be in college concurrently, especially if it is another private institution, you could be eligible at that time for some level of financial aid for both students.

3. Remember, retirement accounts don’t count toward aid assessment

Financial Aid offices aren’t looking into your retirement accounts when they assess eligibility. The basic calculation method looks at taxable assets, including bank accounts, saving accounts, brokerage accounts, investment real estate and 529 college saving accounts etc. From that, they deduct between $30,000 and $50,000 as an emergency reserve allowance. From the remaining balance, parents are expected to contribute between 5% and 6% toward the cost of college.

4. Applying for financial aid won’t hurt your kid’s chances of getting in

This is a tough one to explain and there may be situations where an advisor would suggest not applying for aid but it’s definitely not a black and white situation. For one thing, if you apply and don’t qualify, your child’s application goes right back in the pile with all the other non-financial aid kids, no harm no foul.  A number of schools, including Harvard and MIT are ‘need-blind’ schools, meaning applicants are not judged at all by their financial needs. Most other schools are ‘need-aware’, meaning some importance is placed on the student’s ability to pay. However, this generally only affects borderline applicants who are also looking for a large amount of aid, and if you need large amounts of aid there is no avoiding applying for it, unless you plan to finance the whole thing through outside loans. Good candidates looking for small amounts in aid will not be affected by this situation. 

If your kids aren’t yet old enough for college, check out our article on saving for college for an idea of how much it might cost to send your little one off in the future.

Let's Talk about Roth IRAs


In 1997, William Roth, the late senator from Delaware signed the Roth IRA into being, but why go to all the effort of creating a new type of retirement account?

Let's compare the Roth IRA to a traditional IRA.

First, there are some similarities between a traditional and a Roth IRA, namely that they’re bound by the same contribution limit. As of 2015, you can put up to $5,500 into either your traditional or your Roth IRA, as long as you’re under 50. If you’re over 50, you can put up to $6,500 a year into either your traditional or Roth IRA.

It’s worth noting that there are some loopholes to this that will allow you to either contribute more money into your IRA or will allow you to move money from your traditional to your Roth IRA. If that’s something you’re considering, you should speak to an investment advisor

Second, for either a traditional or a Roth IRA, the earnings on the money inside of the account aren’t taxed. This means that if you hold a bond in the IRA that pays interest, you won’t be taxed on the interest payments you receive in that account. This often means that an IRA investment account may benefit from holding different securities than a taxable account, but that’s outside the scope of this article.

As for key differences, when you turn 70, a traditional IRA will force you to make withdrawals from your account, it's called the 'required minimum distribution' or RMD for short. However, a Roth IRA won't force you to take a distribution and this can result in some useful strategies for transferring money to your heirs.

The biggest difference though is that the money you put into a traditional IRA is tax deferred. This means that if you put $5,000 into your regular IRA, you won’t pay taxes on that money. However, if it was a Roth IRA, you would pay taxes on that $5,000 because a Roth IRA isn’t tax deferred.

That might not sound so great, but the big advantage of a Roth IRA is that the withdrawals are tax-free!

As an example, if you are over 59 and 1/2 years old and are doing a withdrawal from your traditional IRA account, you’ll be taxed on that money at the ordinary income tax rate. [This is what ‘tax-deferred’ means because you haven’t eliminated the taxes on that money, but you may have delayed it by a couple decades.] While in the Roth IRA, you pay no taxes on that withdrawal.

The big advantage of this is that you pay taxes on the smaller amount of money that you put into your Roth IRA, and not on the larger total it grows to over a few decades, - that will be tax-free when you withdraw it.

Lastly, for a traditional IRA, any amount taken out before retirement age is subject to a 10% penalty fee plus you have to pay taxes on the withdrawal, but for a Roth IRA, you don’t pay taxes on your withdrawal - as long as it’s only part of the principal that you originally put in. Additionally, there are some exceptions that let you withdraw money from your Roth IRA for a first-home purchase or college expenses (as of 2015), but generally, this is not recommended because there are usually better ways to finance those expenses than from your Roth IRA.

So, let’s look at some numbers.

Let's go step-by-step and see how the economics change whether you're using a traditional or a Roth IRA.

Traditional IRA

  • Start with $5,000
  • Won't pay any taxes on the contribution, just on the withdrawal
  • Principal of $5,000 goes into the traditional IRA
  • Invest it!
  • Let's say you invest it for 5 years in the stock market and it doubles. So that $5,000 is now worth $10,000.
    • Hypothetically, if you needed $3,400 for an emergency and you're not 59 and 1/2 years old, you'll have to do two things. First, you'll have to pay taxes (let's assume 32% tax bracket again) of about $1,088. Second, you'll have to pay a penalty of 10% or $340. That'll leave you with $1,972 toward your emergency.
  • Now, let's assume you never took any money out, and go all the way to retirement and your investment has doubled again and is now worth $20,000 and you're at a 25% tax bracket, as you're no longer working.
  • If you were to withdraw all $20,000, you'd pay $5,00 in taxes and would be left with $15,000 for retirement.


Roth IRA

  • Start with $5,000
  • Assuming a 32% tax bracket, you'll pay $1,600 in taxes on the contribution.
  • The remaining $3,400 is the principal that goes into the Roth IRA.
  • Invest it!
  • Let's say you invest it for 5 years in the stock market and it doubles. So that $3,400 is now worth $6,800.
    • Hypothetically, if you needed $3,400 for an emergency and you're not 59 and 1/2 years old, you can withdraw that without taxes or penalties because you put in $3,400 in principal at the beginning. However, if you needed more than that, you'd have to pay penalties and taxes on the excess just like a traditional IRA.
  • Now, let's assume you never took any money out, and go all the way to retirement and your investment has doubled again and is now worth $13,600 and you're at a 25% tax bracket, as you're no longer working.
  • If you were to withdraw all $13,600, you would pay no taxes on it so your tax bracket doesn't matter, and you would just get all $13,600 in the account - but still $1,400 less than a traditional IRA!


In many cases, yes - a Roth IRA won't perform as well as a traditional IRA. Here's a study by the Clute Institute on the circumstances where a Roth IRA does outperform a traditional IRA.

However, a Roth IRA will generally outperform a traditional IRA if either: i) your tax rate right now is currently very low, or ii) your tax rate at retirement is very high. 

And while the end results for a Roth IRA or a traditional IRA may be quite similar, it's important to remember that a Roth IRA has some additional flexibility, and that depending on your circumstances, may be a great option for you. If you have additional questions, feel free to reach out to an advisor to see if a Roth IRA is a good option for you.





Let's Talk About 401Ks


The other day, I was reading about a startup that wants to change how small businesses set up savings plans for their employees. Much of the discussion was about how they use IRAs instead of 401Ks to make it easier for employers to set up a retirement plan. So I wanted to take a few minutes to talk about 401Ks, and what their pros and cons are relative to an IRA retirement account.

401K Basics.

The 401K retirement plan was created in 1978 by the IRS when they defined the guidelines in - you guessed it - section 401(k) of the Internal Revenue Code. A 401K is a retirement plan much like a traditional or Roth IRA, and in particular, it has a lot in common with a traditional IRA.

Similarities between a 401K and an IRA.

The biggest similarity between a 401K and a traditional IRA is that the contributions are tax-deferred, which means that if you put $5,000 into a 401K or a regular IRA in any given year, you won't pay taxes on that $5,000. So, depending on your tax bracket, you could easily save over $1,000 on your taxes since that $5,000 won't be counted as income for that tax year.

The advantage is that deferring taxes allows more money to go into the savings account and be compounded over time. You will, of course, have to pay taxes on the money eventually but by the time you need to make withdrawals you will be retired and likely be in a lower tax bracket, plus the money will have grown over time. However, it's worth noting that a Roth IRA functions differently since you pay taxes on any money that goes into the account, so once you start taking distributions from it, the money that comes out is tax-free since it's already been taxed once.

Another similarity is that earnings on assets inside a 401K or any IRA (Roth or traditional) aren't taxed while they are in that account. This means that if your 401K or IRA holds a bond, you won't pay taxes on the regular coupon payments that come from that bond, whereas in a regular investment account these payments would be taxable as income.

Likewise, a 401K and a traditional IRA have similar penalties for early withdrawal, such that if you take any money out before you're 59 1/2 years old, you pay taxes plus a 10% penalty on any money that comes out. This is a retirement account after all, and the government wants people to remember that. The caveat is that a Roth IRA will let you take out the original principal that was contributed to the account, but you'll pay taxes and penalties for any amount over that. 

Lastly, after you turn 70, you'll be required to take a minimum amount of money out of either your 401K or your IRA every year or face some stiff penalties. 

If they're so similar, why have a 401K?

There are a few key differences between a 401K and an IRA, but the biggest are probably the organizational and contribution differences. Namely, a 401K is set up by your employer, whereas an IRA is set up by you. And since the 401K is set up by your employer, they often match contributions by employees into their 401Ks. This means that you can put a lot more money into a 401K than an IRA (see our blog post on Is Maxing Out My Roth IRA Enough to Retire On?). As of 2015, an employee can contribute up to $18,000 every year to their 401K, but the total contribution limit between the employer and the employee is $53,000 a year. This  means that you, as an employee, can put in $18,000, but if you have a really nice employer, they can not only match your contributions but also give an added top-up to your 401K up to the $53,000 limit. 

This makes the 2015 IRA contribution limit of $5,500 ($6,500 if you're over 50) look rather paltry. So if you have a nice employer that provides you with some contribution matching, a 401K can be a lot more attractive than an IRA in terms of setting aside money for retirement. After all,  you can always roll your 401K into an IRA, which many people do when they switch jobs or retire.

Another key difference is that there are no income limits for tax deductions for a 401K as opposed to an IRA. It gets a bit convoluted, but if you or your spouse don't have access to a 401K, then there's no difference between the 401K or the traditional IRA. However if either of you have access to a 401K, your tax deductions for your traditional IRA contributions have diminishing returns depending on your annual income. For example, lets say you or your spouse are covered by a 401K at work and you file your taxes together, if your combined income (as of 2014) is more than $116,000 a year, you won't get any deduction on contributions made into your IRA. Whereas, if you made less than $96,000 a year, putting $5,500 into your IRA would allow you to deduct $5,500 from your annual income for tax purposes. You can find more information on IRA deduction limits on the IRS website.

Lastly, you may be able to borrow money from your 401K if your employer allows it, but you won't be able to borrow from your IRA without incurring the penalties for an early distribution. However, it's tricky borrowing from your 401K and it often carries a lot of hidden costs and dangers, as explained in this article by Forbes.

Amongst these differences between a 401K and an IRA, there are also a few disadvantages for a 401K. Arguably the biggest disadvantage is that a 401K is generally more restricted in what it can invest in because it will only have access to investments that have been white-listed by the 401K plan provider and the employer. Meanwhile, an IRA will allow whatever investments the custodian is willing to hold, which could include low-cost ETF or mutual funds that aren't available to a 401K participant.

For more information on the advantages and disadvantages between a 401K and an IRA and which plan may be right for you, feel free to contact us here or send us a tweet.