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This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.


The first building block for any estate plan is the Living Trust. If you do not have a Living Trust, please see our Brochure.

If you already have a Living Trust, you should be aware of a feature easily adopted into it: a Perpetual/Dynasty Trust for your heirs. Rather than leaving your heirs an inheritance outright, we can let them invest it and spend it any way they want to, without ever owning it!

If an heir inherits directly, the heir owns it. If he is ever sued (for anything, such as a business problem, car accident, or personal injury), or divorced, the inheritance may be at risk, since he owns it. While he is alive, he pays income taxes on the annual profits it generates, since he owns it. At his death, it is subject to death taxes, since he owns it. (Also, he can give it or leave it to anyone, since he owns it.)

If you leave an inheritance in a Perpetual Trust, the heirs never own it. They may invest freely and spend it to the extent they deem appropriate for the health, education, and support of themselves and their families.

If your heirs are ever sued, the inheritance cannot be seized, because they don't own it. [If they are hit with a huge judgment, the creditor cannot touch the Trust, but can get an order allowing interception of any payments coming out to the heir. Then, that heir must stop taking money out for himself, but may take money out for other family members he selects.]

If your heir is ever divorced, his spouse won't be able to get any part of it, because the heir doesn't own it. [Alimony and child support may be affected, but not the property division.]

When your heir dies, it is not taxed, because he doesn't own it. This is true even if you grant your heir the right to determine which members of your family get any remaining assets at his death. This keeps the inheritance in your bloodlines. [Actually, you may leave only $1,000,000 free of future tax when it passes to grandchildren; tax is imposed on any excess.]

While your heirs are alive, income taxes are owed on annual profits by whomever gets the money. This gives your heirs flexibility to split that tax liability among whichever members of their families are in the lowest tax brackets.

The only detriment to this plan is that after your heirs get their inheritance in Trust (after your death) special income tax returns [IRS Form 1041] are required every year, but the tax liability normally is the same or less than it would be with an outright inheritance.

Unfortunately, we cannot provide these benefits for our own property, but we can build these benefits into inheritances we leave to others, or request that our parents consider such provisions for us.

This is all done through a self-managed, Perpetual Trust, easily built into a Living Trust.

Almost everyone should have a Living Trust. More sophisticated ideas contemplated in this Brochure begin with the assumption that a couple has wealth in excess of $1,200,000, or an individual has wealth over $600,000. These are the current amounts which may be left tax free; above these amounts, death taxes start at 37%. But taxes can be avoided for people who have assets greater than these limits. The only question is: Is it worth it? The tax savings do not help you one bit; death taxes are not owed until both you and your spouse are deceased, so these tools will only help your heirs.

Unlike a Living Trust, in which no control or rights are given up (a Living Trust can be changed at any time, and does not reduce income or death taxes), the following advanced techniques all have a cost: they either cause a loss of control or are irrevocable.

There are two basic rules for advanced estate planning: $10,000 per donor per recipient per year may be given away completely tax free; additionally $600,000 may be given during life or at death.


The most simple technique to reduce death taxes is by giving it away today. This accomplishes 2 goals.

First, it gets the gifted assets out of the taxable estate. Second, it also takes with the gift all future growth in value which would otherwise have accrued to the donor, and increased death taxes even more.

Every person may each give $10,000 to any recipient, each calendar year. A married couple may give each recipient $20,000 per year. There is no income tax or gift tax to either the giver or the recipient.

Gifts may be made directly (by check, stock transfer, or deed). Gifts may be of a percentage of an investment. Gifts may be to minors. There is no limit to the number of people to whom you may give $10,000 each year.

Gifts in excess of $10,000 per donor per recipient per year consume portions of the donor's $600,000 tax free amount.

A single person gives his unmarried child a $15,000 Christmas present. The first $10,000 is tax free; the next $5,000 consumes a portion of the donor's lifetime/deathtime tax free amount, leaving him with a balance of $595,000 which may be given tax free. Even though the gift was over $10,000, no tax is due at the time of the gift; the only cost is a reduction in the remaining amount which may be left tax free at death.

[This should have been split into 2 gifts. By giving $10,000 at Christmas and $5,000 a week later, it is all tax free.]

Besides reducing the donor's potentially taxable estate, the gift also takes with it future profits the gift would have earned.

If you have $610,000 of assets, including $10,000 of XYZ stock, and give the XYZ to your son, 15 years later at your death XYZ is worth $50,000. If you had kept it, the entire $50,000 would have been taxable. By giving it away, your son gets it out of your hands when it was worth $10,000, at absolutely no cost.


Irrevocability of Gift

There are no guarantees that children will take care of a parent after receiving the parent's assets. While this may be the best tax plan in the world, making yourself dependent on someone else to save future taxes for your children is not wise. [Remember, these tools save taxes for your heirs after your death - they save nothing for you.] Independence is a factor which cannot be measured against tax savings.

We have heard horror stories about parents who are evicted after giving their homes totheir children. But your kids would never do that.

Even if we could guarantee that a child would never willingly turn you out onto the street, he may die (leaving everything to a spouse who will throw you out), he may get divorced or be involved in a lawsuit (for business or personal reasons), or have other reverses orchanges of heart. For these reasons, we do not recommend gifting unless you have enough other assets to guarantee your protection.


Inherited property receives an increase in tax cost (basis) to the date of death value. This is called a step-up in basis.

Lifetime gifts do not receive a step-up in basis.

However, if you make lifetime gifts, your children never get a step-up in basis; they did not inherit the property. Their tax cost is the same as yours. When they decide to sell it (unless they do a tax free trade), all the profit is subject to income taxation.


Gifts are extremely useful to lower taxes, but most people are not in a financial position to give cash gifts, and are reluctant to give cash to a young person who might spend it foolishly.


One possibility is to give your child (or anyone else) a $10,000 share of real estate.


Allows Control: A better technique is to form a Family Partnership. Your descendants are given Limited Partnership shares. You retain 100% control as General Partner. You can never be outvoted, even if you have only 1% ownership.

You retain full control. You decide when to sell the property. You decide how to reinvest the proceeds. You control everything.

Minority Discount: You may give more than $10,000 face value of property, because a minority ownership of real estate subject to another person's control is worth less than $10,000, due to lack of voting power, control, and limited marketability of a Partnership share.

Common Concerns: Property taxes do not increase for transfers of real estate into Partnerships or for transfers of Partnership shares until 50% or more has been transferred. [Expert advice is necessary to structure the formation of the Partnership and subsequent gift transfers of Partnership shares to avoid reassessment (which can be triggered if not done exactly right).]

Tax Returns: Partnerships require annual Tax Returns. California imposes a minimum tax of $800 per year for a Limited Partnership (you would be the managing General Partner). Using a General Partnership will save that $800 annual fee, but cause a loss of control by the donor.

See our Family Partnership Brochure.


There are normally three reasons to have life insurance:
  1. To care for those whom you would ordinarily support, after your death;
  2. To pay death taxes; and
  3. To make taxable assets tax free assets.

Life Insurance is usually subject to death taxes at the face amount. This becomes important if the purpose is anything other than to support a surviving spouse.

Support of Spouse

If a husband has insurance payable to his wife, at the death of the husband there is no tax; gifts to a surviving spouse are tax free.

Support of Children

If the primary intent is to care for children rather than the spouse, tax considerations become more important, as discussed below. Since Life Insurance is usually subject to death taxes, tax protection discussed below is vital, or the insurance will cause additional taxation.

Payment of Death Taxes

A single person owns one asset: a home worth $750,000. He wants to leave it to his children. He figures that with an estate of $750,000, he needs a policy for $55,000 to pay the death taxes. However, his death taxes are based on his total assets, which usually includes insurance. Because the insurance is subject to death taxes, on his $805,000 estate death taxes are $76,000. His kids come up short.

Imposition of death tax on insurance causes a vicious circle; buying more insurance causes death taxes to go up more. He needs almost $100,000 of insurance to pay tax on the house and the insurance.

This can be avoided by making sure that the insurance is tax free.

Converting Taxable Assets to Tax Free Assets

An elderly single person worth $600,000 has no insurance. She has extra income from her investments of $30,000 per year more than she spends. Why should she buy insurance?

If she saves the $30,000 per year, she will leave it to her son. But only $600,000 may be left tax free. The extra $30,000 per year will cause death tax of $11,100; her son gets only $18,900 for every $30,000 she saves.

If she planned it right, she could buy life insurance which her son would get tax free.

Assuming that she can buy $300,000 of insurance for $30,000 per year, why should she? It costs too much!

But wait. After 10 years, she has paid $300,000 in premiums. She dies. Her son gets $600,000, plus the $300,000 policy, tax free.

Alternatively, if she saved the $30,000 for 10 years, her taxable estate would have been $900,000. Death taxes would be $114,000. Her son gets $786,000.

Life Insurance can convert a taxable asset to a tax free asset, saving substantial taxes.

Taxation of Life Insurance Proceeds

Life insurance proceeds are usually subject to death taxes, depending on the form of ownership. Therefore, proper ownership of a life insurance policy is very important.

If you own insurance (or even retain the right to change the beneficiary of the policy) on your own life, the death proceeds are part of your taxable estate. To put it simply, if you are single, and have a $600,000 policy, and $100,000 of other assets, at your death, your estate will owe $37,000 in taxes.

If the beneficiary owns the policy, there are no taxes at your death; the policy is not taxable in your estate because you didn't own it.

Young beneficiaries pose a problem. A young child cannot (or should not) be outright beneficiary of a life insurance policy.

The best method of owning insurance is in a Life Insurance Trust.

[A Life Insurance Trust different from a Living Trust. It has different rules and purposes.]

When a Life Insurance Trust is formed, you name a person to manage it. Normally, that will not be you or your spouse.

If you have an existing life insurance policy, you can put that into the Trust, or you can have the Trust buy a new policy. The annual premiums are paid from funds which you contribute.

A Life Insurance Trust is irrevocable. If you form a Trust for the benefit of all of your children equally, and later would like to `disinherit' one child, you cannot change the Trust. All you can do is to stop making gifts to the Trust, leaving it with an insurance policy which lapses due to nonpayment of premiums.

Of course, the major reason to have a Life Insurance Trust is to avoid the risk of ownership by another person, and to ensure that the beneficiaries do not receive substantial assets until they are mature enough to handle them.

Adult Children as Owners: Of course, if your children are mature and stable, they may be the owners personally, paying premiums with money you give them. However, a Trust could provide them with the asset protection features of the Perpetual Trust discussed on page 1.


[Note: this type of Trust is for greedy people. It is not for charitably inclined people. It is often called a "Capital Gains Avoidance Trust."]

This kind of Trust may be advantageous for some people. It is less flexible than a Living Trust, but in the proper circumstances, it may be very useful.

A Charitable Remainder Trust will allow the owner to contribute property to a self-controlled nonprofit Trust. The owner (and his spouse) have the right to take out a predetermined amount of income (set by them) from the Trust during their lifetimes. After the death of both owners, the assets will go to the charity they select.

During the lifetimes of the owners, there are no taxes until the income is distributed.

Although it can be structured in many ways, the basic plan is as follows:

As with a Living Trust, you are the sole manager. However, you cannot change any terms of the Charitable Trust, other than to appoint a different charity to take the assets at your death.

[With the Living Trust, you can change any term at any time. You can alter beneficiaries, cancel the Trust, or change anything. With the Charitable Trust, you can only change the charitable beneficiary.]

Another advantage is a charitable deduction on your current income tax return immediately upon formation of the Charitable Trust. The deduction is based on your life expectancy and income rate, so it is not large. For example, if you and your spouse are in your mid- 40's, you have a life expectancy of 40+ years. If you select a 5% return, your current tax deduction may be only 17% of the value of the contribution, because the charity will not actually receive the gift until both have died (40 years from now), and you will be taking out 5% each year until then.

In the right circumstances, a Charitable Trust will increase your annual after tax income and allow you to better meet investment objectives (by selling tax free thereby allowing diversification). The Charitable Trust is often coupled with the Life Insurance Trust [to replace the assets going to charity with tax free insurance for your heirs]; usually, the post tax cash flow for everyone (except the IRS) is improved dramatically.

The risk of a Charitable Trust is that it cannot be changed even if a dire emergency arises.


Another technique to consider in making a lifetime gift is a Qualified Personal Residence Trust [QPRT]. This is a tool usually used to give a residence from parents to adult children. It is only useful for people who want to make a substantial lifetime gift to their children, with a minimal tax cost.

The parent's residence is placed in a Trust. The Trust has a duration selected by the parent. At the end of the term, the residence is distributed to the remainder beneficiaries of the Trust (the children). At that time the children own the residence and rent the property back to their parents for continued use as the parents' personal residence.

If the parent does not live until the end of the selected term, since he retained an interest in the residence, the entire residence is included at its then fair market value in his estate, and the whole plan was a waste of time and effort. If the parent lives past the end of the term, the residence is not included in his estate and substantial taxes are saved.

For more information about this type of Trust, please see our QPRT Brochure.


As discussed above, lifetime giving might be appropriate for some people. Giving minors money for college is a great idea, but how do you make sure it is invested and spent for college, rather than a Corvette?

A College Fund Trust might be appropriate. It is more expensive than a Custodial Gift. [A gift to a Custodian under the Uniform Transfers to Minors Act, (previously the Uniform Gifts to Minors Act) is a simple and inexpensive procedure, but the Custodian has control only until the minor reaches age 21 when whatever remains must be distributed to him.]

Some clients are more concerned about controlling it past age 21, so a Trust is needed.

Recently, a client said, "Use the fund only for my grandchildren's college. If there is extra left over, it is their college graduation present. If they don't go to college, they don't get it until they reach age 35. That will motivate them to get educated!"

If the clients (a married couple) have 5 grandchildren, they can give into the Trust $100,000 every year.

If you were the children and knew that your parents had set up a College Fund Trust for your children, you can now relax; at least college is covered.

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