While it is very nice to save on estate taxes,
most would be much more interested in saving taxes this
year, right now while you are still alive. The "estate
plan", when properly implemented has the delightful
side effect of making excellent use of your children
before they thought they could, or were inclined to be,
helpful. Remember that children over the age of 14
have their very own tax brackets which start at 0% and
linger at 15% for a time or so, just as yours did, and
only after more income than they will make or than you
need to give them for their support jump up to the
higher tax brackets. It is possible, especially for
the self-employed,to cut the total tax bite in half by
simply spreading the tax liability among family
members.
At this point you say, "Now just a minute, I know
what you are about to say, and I assure you that giving
assets or income to my children at this stage of their
teenage lives is a type of suicide that I do not
contemplate." You are right! Let me assure you that
no one is foolish enough to suggest that any assets or
income should be put under the "control" of children,
who at the age of 16 think that a 944 Porsche turbo
something or other is an appropriate investment.
The Family Limited Partnerships, and Children's
Trusts allow income to be attributed to the children's
tax brackets while leaving the "control" and "use" to
more responsible parties. In the case of the Family
Limited Partnership, the more responsible party would
be you. In the case of the Children's Trust, that
person would be a trusted other. However, the children
and their guardians, and once again, you, would be able
to have lower tax bracketed dollars available for
luxuries such as family trips, piano lessons, math
camp, private schools, college, medical school, etc.
Consider this: Mr. and Mrs. Business Partners set
up a Children's Trust for their children and funded it
with real estate in which their business was housed.
The kids wanted the building to be a retail space
suitable for an ice cream parlor, but since they were
not in charge of the decisions, the building purchased
was an 80,000 square foot steel and block industrial
building suitable for the parent's manufacturing
business.
The business, which had a good profit picture and
cash flow, paid rent to the Children's Trust, thereby
writing off the lease payments at a higher tax bracket
than the children's tax bracket and accepting the
payments in the lower children's bracket. Tax savings
were realized each year. In addition, Mr. and Mrs.
Business Partners suggest to the Children's Trust,
that, with the profits from the lease, it could buy
office equipment which it could lease to the business
on a "one year renewable lease" for market lease
payments, i.e., 75% of the value of the equipment each
year. More tax savings were realized.
It is only incidental to this discussion on the
advantages of the "estate plan" to mention that when
Mr. and Mrs. Business Partners went out of business
because the widgets which the parents were
manufacturing were replaced by a new super duper better
thing, the Children's Trust survived the parent's
bankruptcy and with the appreciated value of the real
estate and value of the still owned equipment, sold its
assets and loaned Mr. and Mrs. Business Partners
$500,000.00 to start a new business.
The above examples are illustrative of the old
adage, "divide and conquer." If they only file a joint
return, no married couple will ever get ahead tax wise.
If through a proper estate plan additional entities are
created the serve the dual purpose of providing lawsuit
and asset protection while dividing income into lower
tax brackets. Creating additional entities does itself
provide a record keeping and filing burden. It is bad
enough facing April 15th each year with one
incomprehensible form! However, if you are unwilling
to pay attention to the details there are others who
will do it for a fee. Failure to care may result in
exposure to judgments and the possible greater burden
of "starting over."
