Estate Planning Law Firm of Louisiana

Make gifts to your child - save $3.625 million in tax

Was working with a family this week. The parents want to do whatever they can legally do to avoid federal estate tax. We don't know what Congress will do with the estate tax in the future, but let's assume they keep it. Let's look at how much estate tax savings would result from making annual exclusion gifts to your child.

Let's say the parents are 50 years old. They start now by giving $24,000 annually to their child - or to an irrevocable trust for the child's benefit. Let's further assume that the child (or the trustee) invests the gifted funds and earns a 10% investment return. If the parents continue the annual gifting at $24,000 per year and die at the age of 85, and assuming the child or trustee continues investing the gifts, then when the parents die, the child (or the trust) will have assets totalling $7,251,508. If those assets would have remained in the parents estate - and if the estate tax rate was 50% - then the family saved over $3,625,000 in federal estate tax.

We work with people in our office who like avoiding tax. If you want to know how you can legally and ethically plan ahead and provide for your children and grandchildren, then give me a call at (225) 329-2450, or send me an e-mail at paul@rabalaislaw.com

Paul Rabalais

Warning: Be Careful With IRA's and Revocable Living Trusts

Here's an example I dealt with recently: An individual moves to Louisiana from another state. Prior to moving to Louisiana, she created and funded a Revocable Living Trust in that other state. Her goal was to avoid probate. While in that other state, she named her Revocable Living Trust as the beneficiary of her large IRA.

When she died, the custodian of the IRA said that since the Revocable Living Trust provisions required that the trust be terminated at her death, the entire IRA must be taxed to the decedent in the year of her death. Had she named her children as the beneficiaries of the IRA (instead of the trust), they could have been able to take minimum taxable distributions over their lifetime.

Moral of the story: If probate avoidance is your primary goal, name individuals as beneficiaries of IRAs and 401(k)s. They avoid probate and there won't be any question about your beneficiaries' distribution options.

Paul Rabalais

For Families With More Than $2 million of Assets: Bad Wills Can Cost You $1,000,000

I met with an awesome family yesterday. The couple and their two grown children drove in from about an hour and a half away. We had done their son's estate planning a couple years ago.

We had a good time and we talked about lots of things. For me, the biggest issue was helping them avoid estate tax. Their current Wills (prepared more than 20 years ago) left their assets to each other. I told them this would "lump" all of the assets into the surviving spouse's estate and could require significant estate tax at the surviving spouse's death.

The solution was to arrange their estates so that when the first spouse dies, none of the "first spouse's assets" get included in the estate of the surviving spouse, but arrange it in a way so that the surviving spouse has contol and access to the assets. There's a few different ways to do this:

1. Set things up so when the first spouse dies, that spouse's assets go in trust for the benefit of the surviving spouse and then the children. This can be done in a revocable living trust format, or it can be done through "testamentary" trusts established in their last will and "testament."
2. You can give your spouse the lifetime usufruct of your estate in your Will. This should only be done for Louisiana residents since "usufruct" is a Louisiana term, and no one outside Louisiana knows what it means (or much less - how to pronounce it!)

Have questions or comments? Bring 'em on!

"Usufruct Account" May Not Be A Good Idea

Got a call today from a colleague. We had prepared his parents' estate plan and handled his father's estate administration when he died. He said his financial advisor was recommending his mother have two accounts - her own account and a usufruct account. Whoa!!!

If Mom sells stock over which she has a usufruct, she will have converted a nonconsumable (stock) to a consumable (cash). She then becomes the owner of ALL the cash but her estate will have a debt to the naked owners of this cash. If that cash is then used to purchase stock or mutual funds, those assets will be owned 100% by the surviving spouse - as far as the IRS is concerned for federal estate tax purposes.

Example. When Dad died, they owned 200 shares of ExxonMobil stock. Mom now owns 100 shares and has the usufruct of 100 shares. Mom later sells all 200 shares for $20,000. NO MATTER WHAT MOM DOES WITH THAT CASH, HER ESTATE OWES THE NAKED OWNERS $10,000 AT HER DEATH. If Mom buys Wal-Mart stock with that $20,000 and it grows to $50,000 (or decreases in value to $5,000), then all of the Wal-mart stock will be included in Mom's estate, but her estate will be entitled to a $10,000 deduction on the usufructuary accounting filed with the federal estate tax return within nine months of her death.

If Mom sells and buys and sells in a usufruct account, it can become an accounting nightmare. Sound confusing? It is.