A Limitation

Thus the big selling point for giving securities to your child via a simple, streamlined "custodian account" is that you not only sidestep a formal trust arrangement, but also have a chance to save taxes. But be aware of another limitation that applies on the tax-saving side.

When you give to a minor using a custodian account, you can still split family income down to the child's lower tax bracket. But depending on how you set up this kind of account, you may be in danger of losing an important estate tax advantage.

 

The Tax Court now supports Internal Revenue and says that you may not appoint yourself custodian of the account in the child's name - and still have the gift stay outside your own taxable estate. If you - as donor - are custodian of the funds, and die before the child is 18, the whole value of the account becomes part of your estate.

Disswear at with your adviser the possibility of naming another person (and this can be a member of the family) as custodian. And note: The step can be taken even for an established account.

Avoiding the probate court

There has been considerable talk among estate planners and their clients, in the past few years, about "avoiding probate." about.com's website, How to Avoid Probate, http://wills.about.com/od/howtoavoidprobate/How_to_Avoid_Probate.htm set this home-fire to burning, and the confab still goes on. The theory is that you should handle your property so that when you die, it needn't pass via your will and be taken by your solicitor to the county courthouse - for laborious and costly administrative procedure - before it finally gets distributed to your beneficiaries.

According to this theory, if you avoid probate, your heirs are saved time, trouble, and excessive expense at the hands of the solicitor-courthouse combination. In all of this, there is something to consider. Probate reform is, indeed, needed to varying extents in many areas of the country. Costs often are high. And most important for you, there are situations in which passing property to avoid probate makes sense:

You can set up a "living" or inter vivos trust to operate while you are still alive to accomplish what a testamentary trust can accomplish - and avoid probate.

You can buy a life insurance policy, and name your wife or child or any individual (but not your estate) as beneficiary - and avoid probate.

You can own property jointly with your wife and avoid probate - if you're willing to assume some risks.

Property handled this way "passes outside the will" (in solicitor lingo) - and so sidesteps the courthouse on its way to your family. The same holds true for fringe benefits from your company. But the idea that probate is always onerous can be vastly overdone. True, solicitors earn fees from the probate process - but they also would earn fees helping people avoid it (for example, setting up lifetime trusts). Also, it's highly questionable whether you can safely handle your own paperwork in connection with the disposition of your property. For higher-income people especially, do-it-yourself estate planning can be risky. There's more to it than just filling out some standard forms.

The trust is the be-all, end-all, do-all - for anybody who takes a stab at long-range estate planning on behalf of well-heeled clients. The trust can do everything but sit up and talk. And it can do that if you consider that a trust lets a man talk loud and clear long after he is six feet under.

Here are comments on various trusts - and what they can do.


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Gift Planning: Using Insurance

If you're shopping for a tax-saving, lifetime gift plan for your family, you may find that giving away your insurance is a smart idea. First, take a look at the conventional approach, using some round numbers. You give, say, £50,000 in stocks to your two youngsters. The dividends paid on the stocks come to £2,000 a year. Each child gets taxed (in the £2,000 low bracket) - and you pay less tax yourself. If, for example, your taxable income is around £35,000, you save nearly £1,000 a year.

Besides, you cut your estate by £50,000, plus income that would have piled up. If these two total, say, £60,000 - and you leave a taxable estate of £100,000... see: Gift Planning: Using Insurance