Part III of III
laws. A simple search of the Internet
under “Estate Tax” or “Gift Tax” will provide many good
resources, including the IRS, which should give you the
insight you need.
For many years the “Applicable Credit”
shielded $600,000 per person. You had a credit and your
spouse also had a credit. The problem came when you left
your estate to your spouse by will, or died intestate.
Your funds were then added to your spouse’s and in
essence, upon the surviving spouse’s death, only
$600,000 remained exempt. A simple solution was
developed in the form of an “inter vivos trust”
(revocable living trust) shielding $1,200,000. in the
past.
http://www.investorwords.com/2577/inter_vivos_trust.html
You have heard of this under a lot of
fancy names including “Loving Trust”. This form of
“Revocable Living Trust” is simple and may be
established at a very reasonable cost. A “Pour-Over
Will” is also executed at the same time, placing any
property you may have failed to include within the trust
into the trust upon death. The spouse never owns the
contents of the Trust but does have the use of the trust
assets, subject to minor limitations. This preserves the
tax exemption for your children and the net result was
an exemption covering an estate (husband and wife
combined) of $1,200,000. Now the figure would be
$3,000,000. for year 2005. This way, you have no
property upon death. No clothes; no cars; no airplanes;
no boats; no house; no bank account; no jewelry; no
property, real or personal. All of these are owned by
your trust.
But what if I want to spend $50.00 for
dinner? When you write the check from your trust-held
bank account to pay the credit card bill you simply
“revoke” $50.00 of the Trust Assets. The same would
apply to any of your trust assets you chose to revoke
and dispose of. Again, you would grant your surviving
spouse the rights to use part of your trusts assets
after your death for living expenses, health needs etc.
You may make your spouse the “Successor Trustee” of your
trust upon your death or if your estate is extremely
large, it would be safer from a tax compliance
standpoint to name a bank trust department to assure no
mistakes are made in the handling of the Trust after
your death. Fees are negotiable and you may expect extra
charges to be made for assets such as real estate, which
requires additional handling. I have seen fees as low as
“45 basis points” to as high as “175 basis points”. (A
basis point is 1/100 of a percent.) The experienced
banks, handling thousands of these trusts, with usually
over 200 trusts per bank officer, are negotiable. Your
financial advisors should direct you to a choice of
banks.
One or two cautions: If your finances are
in mutual funds, you are already paying one fee for
management and the “bank fee” should be only a simple
handling charge. But if your assets require management
and investment services, then expect higher fees.
Second, the bank’s officer is not the person you want to
depend on, necessarily, as they may or may not have time
and/or the ability you want or expect. Have the bank
officer answer to someone in whom you have confidence.
i.e. spouse, relative, or trusted friend. Include
provisions for moving the trust to another fiduciary in
the event the bank does not satisfy your spouse.
At the right of this page is a table of
the effective exemption from estate taxes and maximum
you may give. “GST” is “Generation Skipping Tax” a far
more complex issue for which you should use a qualified
attorney, CPA or preferably a tax attorney with a
masters degree in tax law, in addition to their J.D. or
LLB degree. An attorney (with a masters in tax) can
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have a
fee structure which will seem very high, but you do have
the option to paying many times their fee in taxes if
you prefer. You “generation skip” when you gift or leave
estates to your grandchildren or in other parallel
persons.
A
separate additional annual exclusion applies to each
person to whom you make a gift. For the year 2005, the
annual exclusion is $11,000. Therefore, you generally
can give up to $11,000 each to any number of persons in
2005, and none of the gifts will be taxable or apply
against your lifetime “federal gift-tax exemption”. In
2005, both you and your spouse (if you are married) can
separately give up to $11,000 (for a total of $22,000)
to the same person, without making the gift taxable. If
one of you gives more than $11,000 to a person in any
one of these years, refer to gift splitting in
IRS Publication 950,
“Introduction to Estate and Gift Taxes”. Gifts to
individuals are not deductible but would reduce your
gross taxable estate.
Technically, at the current $11,000 gift figure, you
would arguably have to file a “Gift Tax Return” which is
a capricious decision enforced by some IRS agents. An
easy way to avoid this problem is NOT to gift the full
$11,000. but simply limit your gift to $10,990. Always
remember that the IRS rounds up and the Social Security
Administration does the opposite and rounds down. The
problem of capricious agents also has surfaced when you
give to family or charity from your inter vivos trust.
The
simple way to avoid this public servant (with seemingly
nothing better to do) is to set up a bank account in
your sole personal name and limit the balance amount to
$100. Then when you give money to any charity, person,
or entity you simply transfer the funds from your inter
vivos trust checking account, to your personal checking
account, and make the gift from your personal account. A
problem can occur when an arbitrary and capricious agent
claims that it was the inter vivos trust which gave and
not you personally. Incidentally, no tax return is
required of the inter vivos trust, as all income and
deductions are on your personal return.
In the next issues of
CONTACT! Magazine information will be provided giving
ideas on how to pass funds without tax, with reduced
tax, with some benefit to your loved ones, and to
charities while still receiving tangible and intangible
advantages to you. Future donors who give Aeronautics
Education Enterprises will be acknowledged with their
permission in this column of your publication.
CONTACT! Magazine and
AEE offer this reference material only as a suggestion
that ideas presented should be discussed with your
attorney, CPA, accountant and/or other financial
advisors.
Percy (Pat) Lorie III
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