Spending Your Kids’ Inheritance – Part III

by admin

This is the third of a three-part article designed to summarize various mechanisms by which you may pass property to your children or others to be used as an outline of possible options to discuss with your attorney or accountant and is not an exhaustive list. Please refer to my earlier postings “Spending Your Kids’ Inheritance, Parts I and II,” for further introductory information.

Revocable Trust

A revocable trust is a method approved under state law to allow you to hold your personal assets under the name of the trust so that on your death, rather than going through probate, the trust agreement itself designates your succession plan. The trust lists a successor trustee to enforce the trust once you die and outlines how that successor trustee is to distribute the property held by the trust. The successor trustee acts by right of contract, and no court intervention (probate) is required. The trust is deemed revocable because you retain the right at any time during your lifetime to amend any of the provisions. Your right to amend includes changing beneficiaries, successor trustees, or how assets are to be distributed. There can be tremendous flexibility in the trust document. It can allow you to take care of special needs children, provide for the care and guardianship of minor children, or designate charities to receive the assets in the manner your direct. Even though the trust is revocable during your lifetime, generally the terms of the trust become irrevocable once you die, so that the successor trustee cannot change how the trust assets are distributed. The successor trustee can only comply with the terms of the trust in distributing the assets. Many times the revocable trust becomes the key foundation to a well-thought-out estate plan and can greatly increase the overall value of your estate planning. It is critical that you receive good counsel in setting up the revocable trust, as improperly drafted or aged trust agreements can have devastating consequences to your overall plan.

Gifting

In some circumstances, your estate may end up being subject to inheritance tax. This tax is based on the overall value of the assets. This status can generally be determined before you die. In order to minimize the tax impact, you are permitted to make gifts to your children up to an annual limit to begin transferring your wealth while you are still alive. The timing, amount, and type of assets you give should be carefully considered for both your tax consequences and the tax consequences you create for the person receiving the gift. For this reason, you should consult your attorney or accountant to get the maximum benefits of lifetime gifting.

Other Methods

In addition to these basic components of a good estate plan, there are a number of other types of trusts, including irrevocable trusts and proper use of limited liability companies or shareholder agreements within closely held corporations, that can also facilitate the transfer of wealth at your death. Depending on your individual and family priorities, a plan can be established specifically to meet your individual needs.

This article is not intended to be legal advice. Receipt of this information does not create an attorney-client relationship.

IRS CIRCULAR 230 DISCLOSURE: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in, omitted from, or implied by this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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