Let’s Look at the Alternatives to 
the RIC-E Trust®

What makes the RIC-E Trust® so unique?

It’s the only vehicle that lets you save for a child’s retirement that (a) insures the money will remain untouched until the child reaches retirement age, and (b) completely defers taxes until the child begins to receive distributions.

I’ve heard about the American Century Giftrust? Doesn’t that do the same thing?

No. Although the Giftrust also enables you to establish an account that the child cannot access until he reaches a pre-specified age, profits earned by the Giftrust are not tax-deferred. Instead, a portion of the account’s annual profits are periodically distributed to shareholders, who must pay taxes on these amounts. This can reduce the amount of money that’s available to the child at retirement, as described more fully in the RIC-E Trust® Consumer Information Kit.

The Giftrust has another disadvantage as well: It offers no investment flexibility. The fund invests only in small cap stocks — a narrow and risky selection. This investment approach is widely regarded as appropriate for investors seeking aggressive growth, and although that might make sense for a child who will not touch the money for 40 years or more, such a strategy is hardly appropriate for someone nearing retirement age. Eventually, your child will be nearing retirement, but forcing a now-55-year-old to hold small cap stocks is hardly appropriate. Yet, due to the design of the Giftrust, the money cannot be moved to an alternative investment.

This is true even if the fund is performing poorly. Indeed, it’s a rare investor who would be willing to lock money into an investment that can’t be changed for as much as 65 years.

But isn’t the money locked up in the RIC-E Trust® as well?

Although money contributed to the RIC-E Trust® must remain in the Trust until the child reaches retirement age, the money is not stuck in any one specific investment. Instead, the variable annuity that is intended for use with the RIC-E Trust® offers a wide variety of investment options, including stocks, bonds, government securities, real estate, and even international securities. The money can be moved among these different choices at any time and in any combination. This enables the money to be invested based both on current market conditions and on the needs of the child.

And to help make the proper investment decisions, you’ll select a financial advisor to serve as the advisor to your child’s RIC-E Trust®. Most people don’t get a professional advisor’s services when dealing with the Giftrust.

But the Giftrust is less expensive than the alternative offered by the RIC-E Trust®.

True. The Giftrust’s annual expense ratio is 1%, compared to 1.52% for the RIC-E Trust’s® proposed investment (a variable annuity). The annuity also features separate investment account charges that range from 0.63% to 1.9%. But Giftrust’s lower fees don’t necessarily translate into higher profits. The Giftrust also can create annual tax liabilities that the RIC-E Trust® avoids. These annual tax savings can translate into higher values for your child in the future.

What about a Roth IRA, then? It offers tax-free growth, and the money can be invested wherever I like. Why shouldn’t I do this for my child?

Because you’re not allowed to. An IRA account can be established only by people who earn an income — something few young children have. Therefore, the Roth IRA as a savings vehicle for young children is not an option for most parents and grandparents.
But perhaps you are thinking of a teenager who works part-time. In that case, the Roth IRA can be a good alternative. But even here, there are some differences. First, the child can contribute only $4,000; the RIC-E Trust® allows much higher contribution amounts. Second, the child retains full legal control over his IRA. That means he can withdraw the money at any time.

In fact, millions of people make premature withdrawals from their IRAs each year. Not only do they incur taxes and penalties for doing so, they ruin their chances of having that money when they may need it most, at retirement. But the RIC-E Trust® prohibits premature withdrawals (except upon disability). That ensures that the money will be there for the child in the future.

Experienced parents and grandparents know that many things will come up during their child or grandchild’s lifetime — college, marriage, buying a home, children of their own, maybe even money problems — and all of these things will offer the child an excuse to spend whatever money they have available on the “crisis du jour.” This is why we created the RIC-E Trust®: It’s the only way to enjoy a tax-deferred build-up of money that is intended to be there for the child’s retirement.

And one final disadvantage with the Roth IRA: having this account hurts the teenager’s ability to qualify for college financial aid. But that doesn’t happen with the RIC-E Trust®. Because it can’t be accessed by the child, it does not interfere with financial aid efforts — in fact, its existence is not even reported on the Financial Aid Form!

Okay, so let’s forget the IRA. Why don’t I simply give the child money directly and let him invest it into a stock mutual fund, for example?

Because minor children can’t own assets. You’d have to establish a custodial account, based on the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA).

Well, then, let’s do that.

Unfortunately, you incur three problems with UGMA/UTMA accounts. First, as with Giftrust, many equity investments you might buy, including mutual funds, would produce tax liabilities every year. The RIC-E Trust® avoids this problem. Second, the money must be turned over to the child when he or she reaches age 18 or 21 — and that means the money is virtually certain to be spent before the child reaches retirement age. The RIC-E Trust® addresses this issue, too. And third, as with IRAs, money held in custodial accounts hurts the child’s ability to qualify for college financial aid. This does not occur with the RIC-E Trust®.

Here’s an idea, then. I’ll just keep the money in my name and leave it to my child in my will. That way he won’t have control over the asset, and it won’t count against him for college aid purposes.

True, but you create other problems that are even worse. Say you set aside $5,000 today and it grows to $2.4 million over 65 years (assuming a 10% annual return). If you die while owning that asset, the $2.4 million is part of your estate, and therefore is subject to a 50% estate tax. This means your child would stand to lose more than half the money to taxes — not a good prospect.

And what happens if you don’t die for many years? If you live to be 100 years old — not so farfetched these days — your child might not receive the money until he is well into his 70s. Conversely, if you die prematurely, your child stands to collect his inheritance while he’s still young — again, defeating the purpose. The RIC-E Trust®, by contrast, is designed to assure that the child receives the money at a certain age, eliminating potential estate issues and concerns.

Well, then, I’ll just start to give him the money when he’s old enough to handle it wisely and while I’m still alive.

Sounds good — if you can guarantee that you’ll never be hit by a bus. However, let us assume that you do survive long enough to make gifts to the child — current tax law limits you to giving only $12,000 per year. Any amounts you give beyond that are subject to the gift tax, which is 50% — the same as the estate tax.

And in the meantime, you’ve got to pay taxes on the profits you earn on those investments, seriously eroding the ultimate potential value of the account.

Also, during your lifetime, that money is yours — meaning you might lose it in a lawsuit or to creditors, or even in a divorce. But money held inside the RIC-E Trust® is protected against these concerns. Creditors cannot attach RIC-E Trust® assets, and you cannot lose them in a lawsuit, either. As far as divorce is concerned, money inside a RIC-E Trust® is not considered a marital asset, thus protecting it for your child.

Assuming my child or grandchild is already an adult, and out of college, why can’t I just give him or her the money directly and let them invest it on their own?

You can. You can even have them buy an annuity, obtaining the tax-deferred benefits that annuities offer. But the problem of access to the asset still exists, and despite the best of intentions, the child might give in to the temptation to raid the account and buy a car, or take a vacation.

If you’re confident that your child — or your child’s (eventual) spouse — wouldn’t do this, you might want to consider this strategy, and then hope for the best. But if you want the peace of mind that comes from knowing that the money will continue to be invested for the child’s retirement, no matter what, you should consider the RIC-E Trust®.

Well, after hearing all this, it does seem that the best way to go is a trust that invests its assets into a tax-deferred investment like a variable annuity.

And that’s exactly what the RIC-E Trust® allows for.

So why bother with the RIC-E Trust®? Why don’t I just go get my own trust and fund it with a variable annuity of my own choosing?

You can. But to get a trust, you need to hire a lawyer, and they typically charge several thousand dollars to prepare a trust agreement. But the RIC-E Trust® costs just $300.

We’ve covered a lot of choices here — the Giftrust, Roth IRA, custodial accounts, outright gifting and the RIC-E Trust®. It’s a lot to think about. How can I be sure which choice is the right one for me?

Each of the ideas we’ve talked about has its own merits — and its own disadvantages. While we believe that the RIC-E Trust® is the best option for those who want to save for a child or grandchild’s retirement, we understand that it might not be best for everyone. Therefore, the only way you can be sure that you’re making the right choice is to get independent advice. And the best way to do that is to talk with an attorney.

That’s why we insist that anyone who wants to obtain a RIC-E Trust® must talk with an attorney, for only attorneys are qualified to tell you if the RIC-E Trust® is best for you. If you don’t have an attorney, we can give you a list of attorneys across the nation who are familiar with the RIC-E Trust®. Only if you and your attorney decide that the RIC-E Trust® is appropriate for you, will they help you establish one. If you decide that an alternative solution is better, your attorney can help you implement that as well.

Because you pay your attorney, there is no conflict of interest. You can be confident that your attorney is working in your best interests, and will give you advice that meets your needs.

We know that, whatever course of action you choose, your child will be better off than if you do nothing at all. To that end, if there’s anything we can do to assist you, simply call 1-800-762-9797. We're happy to help.