It may sound impossible, but it's not. I must give credit for this ingenious idea to my good friend Paul Merriman, president of Merriman Funds and Publisher of Fund Exchange. Not only has he come up with a way to turn $10,000 into $20 million, but he is doing it in a way to help society more than himself or his family.
HERE'S THE DEAL. Paul wanted to do something for his new and first grandson, Aaron. He wanted to provide him with a comfortable retirement at, and not before, age 65. He wanted the money to grow without any tax liability, to provide at least $20 million to charity and all for a one-time-only investment of $10,000.The way to do it is with a trust, a variable annuity and lots of time. This is quite an extraordinary gift to give, especially when you know that you won't be around to see the results.
TRUST ME. I'm sure many of you are familiar with trusts. A trust is a legal relationship where one person has legal title to property, in this case money, and has the duty to hold it for the use or benefit of another person. The person whom the trust benefits has equitable title, and is the real owner even though the trustee has the legal title.
Trusts are created for many reasons, there can be income tax or estate tax advantages, depending on the type of trust established and the provisions of the trust. Paul and his wife made their gift of $10,000 into an irrevocable trust. In an irrevocable trust, the grantor can't change the terms of the trust or cancel it and take back the property. Once the trust is set up, that's it. The money can't be touched until the terms of the trust are fulfilled, in this case not until Aaron turns 65.
The $10,000 is invested in a variable annuity. A variable annuity is a contract with an insurance company where you invest a lump sum into an annuity in which you direct the dollars to various mutual fund-like accounts. In most cases, you have the choice of stock, money or bond funds. Because the money is in a variable annuity, it can compound on a tax-deferred basis. With a variable annuity you have the opportunity to make higher returns than with a fixed rate annuity, and the underlying assets aren't owned by the insurance company, so if the company should fail, creditors can't touch your assets.
The trustee decides in which annuity to invest the money. Jeff Merriman, Paul's son, is the trustee and chose to invest the money in the Scudder Variable Annuity. Other choices that you might consider are Vanguard and Schwab, which also have low-cost variable annuities.
HOW DO YOU GET TO $20 MILLION? Let's assume that the annuity achieves an achievable compound rate of return of 11.2 percent. Given this rate of return, in 65 years, at retirement, the annuity will be worth $10 million.
However, the terms of the trust don't make Aaron a millionaire at 65. What the beneficiary receives is 7 percent of the assets every year as long as he lives. The first check should be about $700,000. That is not as much as it sounds; remember we are talking 65 years into the future. With an assumed inflation rate of 3 percent, that would be worth $102,500 a year today.
For the trust to reach $20 million, Aaron must live another 20 years to age 85. If in this time the annuity continues to earn 11.2 percent a year, even with Aaron withdrawing 7 percent a year the annuity will grow to $23 million.
GIVING BACK. When Aaron dies, the remaining assets will go to charitable organizations with a tax-exempt status. The trustees will decide which charitable organizations the money will go to. It is even possible that there will be enough money to set up a Family Foundation with earnings and proceeds directed to various charitable causes, and possibly compensate family members for running the foundation.
This part of the trust is truly what makes it unique. Many of us don't have the ability to give away significant amounts of money to charitable organizations. This trust gives the beneficiary the power to make a significant impact on society by giving back to it. All of us in some aspect of our lives are affected by either a disease or feel strongly about a social cause. This trust empowers the trustees, hopefully under the wishes of the beneficiary, to make a difference toward something they feel strongly about.
BUT THE FUTURE IS AN UNCERTAIN PLACE. It is unfortunately quite possible that Aaron could never receive a dime from this trust. If Aaron doesn't make it to his 65th birthday, then he won't get any money himself, and the money in the trust would go directly to charity. The trust wouldn't be a total waste, since there would be a lot of people benefiting from the money, not just the beneficiary and his family.
This might seem a bit harsh because what if Aaron becomes disabled and can't work? He still wouldn't, for instance, be able to access the money in order to pay for living expenses or hospital bills. What this means is Aaron must still provide for himself and his family in every way until he reaches age 65. And even then he won't become a millionaire; he will just have a comfortable retire-ment.
LIVE LONG AND PROSPER. Paul sees this as an opportunity to give his grandson an incentive to live a long and healthy life. He might even be able to fund an early retirement himself, and then the trust payments would kick in when he reaches 65.
This is a great way for Paul to teach his grandson the importance of being socially conscious and give him the opportunity to benefit society and himself. What a great feeling to know that you have the ability to significantly help whatever cause is important to you.
YOU CAN DO THIS, TOO. Paul is excited about this trust and I am, too. I think is a marvelous idea and I hope that you will consider this example when making investment decisions for your family.
There are legal costs involved in setting up the trust, but Paul has made it a little easier for you to get started. You can get a copy of his trust document, not as legal advice but as a starting point for discussion with your attorney. You can obtain a copy for $10 (to cover costs) by writing to Paul A. Merriman and Associates, 1200 Westlake Ave. N. Suite 700, Seattle, WA 98109.