Rethinking Your Estate Plan - Question 2

This is a continuation from the previous day. An article in Money Magazine could prove very beneficial to you and so I share the 5 questions posed in the article with you over the next few days.

2. SHOULD DISTRIBUTIONS TO CHILDREN BE EQUAL OR FAIR?
"How should you split your money among your offspring? In a 2007 Money survey, 69% of respondents said dividing their estate equally was very important to them. Experts agree that equal is generally better, even if one of your kids is a struggling actor and another is a successful software developer. You don't know what the future holds. Your single son marries and has five kids; your techie daughter loses her job and becomes a teacher. Unless you're willing to constantly tinker with your will - and explain every change to your kids - parceling out different amounts can back-fire bigtime.

A better solution: Bequeath your children an equal amount upon your death, but make gifts as needed to them while you are alive if you can afford it. Want to help your daughter with your grandchildren's education? Contribute to their 529 college savings plans. (The IRS allows you to make the equivalent of five years' worth of gifts to a 529 all at once - that's $65,000 a child, or $130,000 if given by a couple.) The struggling actor is trying to buy a home? Help him with the down payment.

There are exceptions to the "equal" rule, however. A disabled child who is dependent on you will probably require a bigger share of your assets, which you can provide through a so-called special-needs trust. A child who works in the family business may deserve a larger share of it than one who doesn't. No matter what you decide, explain your thinking so that your kids won't have wrenching and potentially costly disputes later."

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How can I avoid Federal Estate Tax?

Question:
My husband died unexpectantly and without a will. The estate is worth in excess of 3.5 million dollars. My husband had children from a prior marriage and we had children together. Can I avoid Federal Estate taxes? How can I best provide for all of his children?

Answer:
Yes, you can avoid federal inheritance tax because of the unlimited marital deduction applied to estate assets that pass from your deceased husband to you. However, since your husband died without a will, there was no planning in place to take advantage of his lifetime exclusion amount or his credit against potential future taxes. Further, there will be taxes on the monies which go directly to the children.

WHY, you might ask? When someone dies without a will, the state determines who inherits what assets. In your case, Pennsylvania provides that ½ of the estate would pass to you and the other ½ would pass equally to all of his children. However, this only applies to probate assets – assets that were titled in your husband’s name only. The intestate (to die without a will) laws do not apply to jointly held property and assets providing for designated beneficiaries.
Assuming that most of the estate was held jointly or provided you as the designated beneficiary, the following estate planning strategies are available to provide for the children while minimizing the Federal estate tax:
Gifting: $13000 can be given annually to each child tax free. Such funds could be placed in a trust for the benefit of the children.
529 College Saving Plans: $6,000 (representing 5 years of annual gifts of $13000) is permitted for each child.
Family Limited Partnership: is another gifting vehicle.
Irrevocable Life Insurance Trust: takes life insurance proceeds out of your estate.

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How can I provide for my grandchildren?

Here is another question raised by a reader.

"How can I best provide for my grandchildren? My son has been divorced twice. His 2 children (5 and 9) do not have the same mother. I have a wonderful relationship with my grandchildren but not with their mothers. My son has full custody of his 9 year old son and joint custody of his 5 year old daughter. However, he is not financially responsible. What is the best way for me to provide for my grandchildren during my lifetime as well as when I die? Giving or leaving money to either parent for the care of the children is not an option."

In Response to your question:
During your lifetime, you may want to consider a gifting program. This would allow you to annually gift up to $13,000 (as of 2009, amount changes periodically) in a separate trust for each child. The terms of the trust will dictate how the money will be spent. You should not serve as the trustee but designate a person or institution that you trust. Other options for gifting would include custodian accounts (distribution required at 18 or 21) and 529 Plans (limited to college education expense). You should also be aware of any tax implications. Prior to any final decision, consult with your tax advisor.

If you set up an irrevocable trust during your lifetime, it could continue under the same terms and conditions when you die. If you did not set up anything during your lifetime, you could establish a testamentary trust with terms and conditions that you desire for the care of your grandchildren. However, whenever assets skip a generation (ie. to grandchildren instead of children), a generation-skipping transfer has occurred and a tax is imposed unless the amount is within the exemption. There is no tax if you do not exceed your 1.5 million dollar lifetime exemption.

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