Personal Finance
Estate planning and trusts
February 11, 1998: 3:30 p.m. ET

Experts say you can protect your home and other assets for survivors
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NEW YORK (CNNfn) - If death and taxes are the only certainties in life, trusts can soften the blow.
     You can shield your survivors from bruising estate taxes and the headaches of Probate Court if you put your assets into a fiduciary entity called a trust, estate planners say.
     "It gives you some control from the grave," said David Eaton, president of Eaton Group, a financial and estate planning firm in New York.
     A trust pays taxes and exists outside your estate. You can put a house, cash or stock in a trust for a loved one's benefit. In some cases you can earn income off the trust -- or even live in a house that's in a trust -- but you won't actually own the asset any longer.
     The easiest type of trust, a Uniform Gift to Minors, is often used to set aside money for a child's college education, said Gary Schatsky, president of IFC Personal Money Managers, a New York investment management firm.
     In many cases, a parent will give up to $10,000 per year per child to take advantage of a tax exemption on gifts of up to $10,000.
     But any other type of trust is complicated to set up and requires a lawyer's help, Schatsky said. You also need to pick a reliable trustee to manage the trust.
     "This is a very complex area," Schatsky said. "In setting up a trust, I would always seek professional help…trusts are a lot more complicated than doing a tax return."
     Most people use a "living trust" instead of a traditional will to avoid Probate Court, said Jeremiah Doyle, vice president for Mellon Private Asset Management, an investment management firm in Boston.
     "If you have a burdensome Probate Court, like we do in Massachusetts, it makes sense," Doyle said.
     While Probate Court is open to snoopers, a trust is private, Doyle said. A probate attorney is expensive, and the judge will have the power to meddle in your estate. It could also take years to get your will through Probate Court.
     But the pitfall many people miss is that your heirs will have to pay estate taxes on a living trust, said Kevin Donnelly, president of K.J. Donnelly & Co., an investment management firm in New York.
     Depending on the amount of the estate, the taxes could be as high as 55 percent.
     To counteract the death tax sting, Donnelly recommends an "irrevocable" insurance trust. The trust buys a policy on your life and the beneficiary can use the money to offset the taxes.
     Another popular trust will allow you to pass your house on to your children and spare them most of the tax burden, Eaton said. You put your house in a Qualified Personal Residence Trust (QPRT) for a certain number of years and then your children will own it. You can live in the house during the life of the trust.
     The advantage is the government lets you calculate the worth of the home at a reduced value based on actuary tables, Doyle said. So your children could get a home valued at $1 million that's taxed at $600,000, for example.
     The risk is if you don't stay on good terms with your kids, they could sell the house and kick you out if you outlive the trust.
     The Credit Shelter Trust will help you take advantage of federal estate tax exemptions. By law, the first $625,000 of your estate is tax-free in 1998. (The number will increase gradually to $1 million by 2007 because of revisions to the tax code last year).
     That means you can put $625,000 in the trust for your children and leave the rest of your estate to your spouse tax-free because of the unlimited marital deduction provision. Your spouse can set up a second Credit Shelter Trust when he or she dies.
     You can also set aside assets like stocks for your kids and earn income at the same time with a Grantor Retained Annuity Trust (GRAT). You decide your annual income (the annuity), and your kids will keep whatever is left at the end of the trust.
     You'll pay income taxes on the annuity and your kids will pay estate taxes on their portion.
     Lastly, you can control how your spouse and kids spend your money after your death through a Qualified Terminal Interest in Property Trust (QTIP).
     The QTIP is a good idea if you're worried you're husband is a spendthrift or you think he will re-marry and cut your kids out of the estate, Eaton said. You can give your spouse a percentage of the income to live on and leave the principal for your children after he dies.Back to top
     -- By staff writer Martine Costello


Answers to your retirement planning questions - Sept. 12, 1997


National Association of Financial and Estate Planning

International Association of Financial Planning

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