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Beyond the Grave: The Right Way and The Wrong Way of Leaving Money to Your Children (and Others).

Did you know that if you can't provide for your grandchild's education while you are living, it's possible to do so beyond the grave?

Are you familiar with the adage "if you don't want the blame, treat your children the same"?

Does Mom realize that each $10,000 gift she makes now will mean $5,000 less the IRS won't get later?

Did you know that you can give away an income-producing asset but still retain the right to receive the income?

You'll find the details anchored solidly in the 360 pages of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others). Written by the father-son lawyer team of Gerald M. Condon (father) and Jeffrey L. Condon, the reader-friendly book deals with everything from second spouses, in-laws, and real estate to income-producing property, gifts, and the competence of heirs.

Specialists in inheritance planning, the Condons have seen it all. Gerald alone claims 35 years' experience as a family inheritance-planning attorney. It thus behooves a parent with no plans for a coffer in his coffin to pay attention.

Let's say that you would like to provide for that little granddaughter's college education, but your current income bracket doesn't provide the possibility. What to do?

First, you can invest in an insurance policy on your grandchild's life, a policy owned by her. At college age, she can borrow against the policy's equity. By borrowing (rather than cashing in the policy), she will not have to pay an income tax--and the policy remains in effect.

Second, in your will or living trust (see sidebar), specify that a portion of your wealth be held "in trust" for your grandchild's educational purposes. When you die, a trustee will hold the funds for that purpose. (Note: If your financial situation allows you to write a check to cover college expenses when the time comes, the Condons warn against making the check payable to the grandchild. Not that she might run off to Reno and blow the whole wad at the gaming tables, but by making the checks payable to the school for tuition, this expense can be covered tax-free, with no gift tax for you, no income tax for your grandchild. Also, if you are fortunate enough to have this concern, the amount will not come off your $600,000 Lifetime Exemption.)

Third, there's the Family Limited Partnership. This applies to giving a grandchild securities, bonds, or real estate that she can do absolutely nothing with--except retain. Once the asset is transferred, it becomes Partnership property. However, as General Partner, you (the giver) continue to control it. Dear little grandchild is prohibited from selling, transferring, or encumbering the property.

Then there's the not easily ignored advice concerning charities. Should you have more property than cash, and charities are dialing your number or stuffing your mailbox with urgent requests for a starring role in your will, you'll find that they are not eager to assume the liabilities of your real estate. It's cash they are after. Thus, the authors explain how you can sell your investment real estate and still reap the income for the rest of your life.

What they refer to is a Charitable Remainder Trust (CRT). From it, you will receive a number of benefits:

* An investment real estate not in your name, so there'll be less death taxes at your demise.

* More income than you are presently receiving from your investment real estate.

* Sale of your property without incurring a capital gains tax.

A CRT, the Condons hasten to add, is not for everyone. However, if you are in your 50s or 60s and have a house and other investment property (such as a ten-unit apartment building), it may pay you well to check out the CRT scenario.

Keeping the insatiable hands of the IRS off your hard-earned assets is another scenario available in several acts. The first act may be a yawner as far as you are concerned, because it applies to what happens if Mom dies leaving the rather pleasing amount of more than $600,000 (referred to earlier).

Within nine months, the IRS requires that someone (typically one of the children) file an Estate Tax Return. This is a list of everything Mom owned at the time of death: bank assets, stocks, bonds, mutual funds, Treasury bills, IRA accounts, life insurance policies, annuities, pension plans, 401K plans, cars, jewelry, fur coats, works of art, real estate, business interests, contents of safe-deposit boxes, coin and stamp collections--you name it. If you fail to name it, the IRS will--and the IRS will receive a share of those assets in the form of a death tax.

Whatever the total of Mom's estate, the first $600,000 goes to Mom's children tax-free, an amount called the Lifetime Exemption. The children, however, must pay a death tax on any amount greater than those 600,000 big ones.

However, if Mom loves her children more than she loves the IRS, Beyond the Grave offers 11 planning opportunities to aid the kids in thwarting the feds. Let's explore some.

When a widow continues to deposit her investment income, her husband's retirement fund, and her Social Security check in the bank, she is actually banking money for the IRS. The authors, therefore, will tell that widow not to save it, but to spend it. Put her children and grandchildren on a plane and take off first-class to Honolulu. Buy a new car. Go on a cruise. It is the IRS's money she is spending, not her own.

Widows, however, as prisoners of the past, tend to ignore the advice, claiming they want to be sure they'll have enough money for a "rainy day." The Condons have this ready answer:

"The rainy day is long behind you. When you reach the time in your life when the death horizon years can be measured in single digits, continuing to accumulate savings you don't need serves no purpose (other than the deep psychological need to accumulate). Unless you need your income for support, why save for the IRS?"

Then there's the planning opportunity labeled by the father-son authors as the "Annual Exclusion Gift law." It pertains to giving your money or property tax-free to your children or grandchildren while you are still above ground. This law enables you to give $10,000 tax-free each calendar year to as many individuals as you wish. Also, for each of those $10,000 gifts, you'll be jerking $5,000 from the greedy grasp of the IRS when you die. After all, your children or grandchildren will be getting the stuff anyway, so why not now, when it's tax-free? Besides, hearing a "thank you" from beyond the grave is so difficult.

Along with the Annual Exclusion gifts, you can unload still more tax-free money by paying directly your children's or grandchildren's medical bills and education expenses. Nevertheless, you should, as previously noted, make the checks payable to the hospital or the school.

In another scenario, let's say Mom has the seemingly bright idea of putting a daughter's name on her house as a joint tenant, thus preventing it from going through probate when she dies. There's a section in Beyond the Grave reserved for this situation. It goes like this:

If you don't want to run the risk of losing your house, do not put it in joint tenancy with your children, the authors warn. One of their clients did so, despite being told how a Living Trust was the way to keep her children and her property out of probate court.

Years later, the lawyer team got a frantic call from the client: the bankruptcy court was claiming one half of her house and her apartment; it seems the client had put her daughter's name on the title of her real estate as a joint tenant. Thus, when the daughter and her husband declared bankruptcy, the court discovered that she owned 50 percent of her mother's house and apartment building. The trustee then took control of the properties to pay off the creditors.

The authors point out still other problems of trying to avoid probate through joint tenancy:

Accidents. If that daughter or son-in-law should be involved in a car crash without sufficient liability coverage, an accident victim could go to court to get a judgment that could force a sale of your home.

Marital Problems. If your daughter and her husband divorce, the husband could claim your house as an asset subject to the division of marital assets.

IRS Problems. If daughter or her hubby incurs tax liabilities, the IRS will attach a tax lien against any real property in either of their names--including mom's house, if daughter's name is on it.

The Solution--a simple Probate-Avoidance Trust. This method allows you to retain full ownership of your real estate, stocks, and bank accounts without "subjecting them to matters beyond your control." However, once you have made your child a joint tenant to your property, if the child subsequently incurs a credit problem, he or she cannot avoid the debt by transferring the share back to you.

The seasoned lawyers warn parents that children can be very persuasive when it comes to getting their names on titles to property as joint tenants. Convinced that putting all their assets in joint tenancy with the children will eliminate the death tax, parents allow the names to be added. As far as the IRS is concerned, any asset you owned jointly is 100 percent yours, and a death tax will be charged on the full value of the asset. Your child can challenge this treatment, however, by showing that he or she paid for the 50 percent share.

Though the Condons don't discourage clients from putting their bank accounts in joint ownership with their children, they urge caution if the cash or brokerage asset is substantial.

The book further delves into the problem of parents disinheriting a child for whatever reason. As an alternative, the child can be left an inheritance in trust. When the parents die, the inheritance will pass directly to a trustee who will manage the money and pay the wayward child the income. Should said child convice the trustee that (let's say) he has cleaned up his act, the trustee can terminate the trust and give the reformed young man his inheritance share outright.

Let's look at another sticky wicket. When the parents die, the death tax takes 50 percent of an inheritance. When the child dies, the IRS taxes it again. Is there any way to prevent taking two slices out of the same pizza?

The answer is yes--but it will require the parents' cooperation to prevent the taking of that second slice. When they die and you inherit their wealth, the trick is not to own your inheritance. This is where your parents' cooperation comes in. They will have to include some special anti-second-slice provisions in their inheritance plan. If they already have a will or living trust, they must amend it. You will not own the inheritance; instead, it will be owned by what the authors call a Skip Trust. You will be entitled to the income from the trust and, occasionally, some of the principal. When you die, the inheritance will pass tax-free to your children.

You are, of course, limited in your ability to dip into the inheritance. Should you do more dipping than is legally allowed, you will be deemed to own your inheritance--and the IRS may impose a death tax on it when you die. Thus, you haven't skipped the tax after all.

Finally, no matter what the family resources, no matter how devoted the family members, the Condons assert that the area of inheritance presents a host of potential family conflicts. Thus, they have thoughtfully reserved a section titled "The Unequal Inheritance, or If You Don't Want the Blame--Treat Your Children the Same."

By leaving more to your "needy" child and less to your "successful" child, they point out that you are rewarding failure and punishing achievement. They explain that by talking it over with the children, in a few cases the successful one might agree that the one with less should be given more. More than likely, there will be resentment and anger. The solution: regardless of circumstances, treat your children equally. Trying to make up beyond the grave for unequal distribution this side of the grave "simply does not work," the Condons have found.

To find out what else the authors have to say about the most common squabbles and conflicts that occur when parents die and children divide the inheritance, read Beyond the Grave ... while you still have time to put its wisdom to use, that is.


If you have questions about a Living Trust, the authors of Beyond the Grave are more than generous in supplying the answers.

1. What is a Living Trust?

This is a predeath arrangement setting forth your instructions concerning who gets what of your real estate and other assets. The person who carries out these instructions is known as your "Successor Trustee." Regardless of what your may have heard or read, a Living Trust does not save one penny in death tax.

Until your death, you remain owner of your real estate and other assets, taking out or putting in as you wish. You can also amend the trust to include new instructions, and revoke it at any time.

Following the death of the first spouse, the surviving spouse automatically becomes the sole owner of all trust assets. After the surviving spouse's demise, the Successor Trustee resumes authority to distribute the real estate and other assets according to the wishes set forth in your Living Trust. The trustee may not deviate from those wishes.

2. Do you already have a will and would like to know if you may still set up a Living Trust?

The answer is yes, and the trust will usually supersede the will. Setting up a Living Trust often takes a few weeks, because it involves two or three consultations with the attorney, but making the decision can result in a significant sense of satisfaction from having put things in order.

3. If the Living Trust offers so many benefits, why hasn't it become more popular?

Mostly, because we humans are creatures of habit. For one thing, wills and the probate courts have been the traditional means of transferring the family wealth. For another, public acceptance of Living Trusts has been slow, and lawyers not specializing in estate planning tend to disregard Living Trusts altogether.

4. If you own real estate in states other than your own, can you use the Living Trust to avoid adding to the wealth of probate lawyers in those states?

Yes, you can--with the occasional exception of Louisiana.

5. Can you put your life insurance policy in the Trust?

No. Make the Living Trust a primary or secondary beneficiary of your life insurance policy.

6. How about my qualified pension plan or IRA?

No. The authors of Beyond the Grave call these "self-executing assets." After you die, those assets will pass without probate to the prearranged beneficiary.

Stocks, however, can be put into the Living Trust. The problem is, every company will require you to fill out a number of documents so the stocks can be retitled into your name as trustee. If you have shares in many companies, this can be a big hassle. The Condons suggest opening a stock account with a brokerage house, putting your name as trustee, and depositing your stock certificates into the account.
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Author:Stoddard, Maynard Good
Publication:Saturday Evening Post
Article Type:Book Review
Date:May 1, 1995
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