Trusts a must to the moneyed:
Variety of plans offer tax breaks, other incentives
By James
T. Berger
Often, they put their faith in trusts to funnel their assets to succeeding
generations while avoiding as much as possible the grasp of the IRS.
In today's estate planning landscape, there are a variety of ways to pass
along wealth. They range from the dynasty trust, which ensures a hefty
bankroll for heirs, to the family incentive trust, which ties behavior
to financial reward.
Indeed, trusts can be flexible or ironclad. A revocable trust can be changed
at almost any time, while an irrevocable trust can't be changed or terminated,
even in an emergency.
Dynasty Trust
Those with a lot of money to protect often are drawn to the dynasty trust,
which can become a significant cash generator.
"This trust is based on an act of Congress that allows a person to
take $1,060,000 and set up an irrevocable trust that permits this money
to be passed on from generation to generation," explains Barry Siegal,
an attorney with the Chicago law firm Tishler & Wald Ltd.
A husband and wife can create a dynasty trust and together contribute $2.12
million.
"Let's make believe the money in this trust is invested and, after
10 years, it doubles," he says. "Now we have more than $4 million
in this trust for which no taxes need to be paid. The trust then goes to
the children, who don't touch it in their lives. Now, we have an exponential
expansion of money, from $4 million to $8 million to $16 million to $32
million, and so on, from generation to generation."
No taxes are owed until someone taps into the trust, he adds.
"At that point, somebody must declare income and pay regular income
tax," Mr. Siegal says. "However, there is never any estate tax
connected to this dynasty trust."
Eileen Trost, a partner with the Chicago law firm
Sonnenschein Nath & Rosenthal, says most heirs eventually tap into the
dynasty trust but generally leave the principal intact. Preserving principal
ensures children, grandchildren and future generations will have access.
Those considering a dynasty trust should take care when choosing a trustee.
"It's usually good to have a bank as a trustee because you know the
bank will probably be around for a long time," says Mr. Siegal, adding
that it's also important to have a "contingent beneficiary," such
as a charity or family foundation, in the event the trust outlasts all beneficiaries.
Passing on money, not taxes
Moneyed folks who want to dole out some cash while they're still alive,
without passing along the tax bite to beneficiaries, have a vehicle in
the defective grantor trust.
Instead of handing out the goodies directly, the grantor creates a trust
and sells property and assets to the entity, which eliminates the capital
gains tax. This strategy removes the assets from the estate even as they
grow in value.
"This kind of trust is one of the few ways you can both get the asset
out of your estate and still retain the income," Mr. Siegal says.
Looking to exert financial control from beyond the grave? Consider a family
incentive trust to ensure heirs comply with your wishes in order to inherit
the money.
One high-profile example of a family incentive trust was created a few
years ago by Atlanta Braves star pitcher Tom Glavine, who hired Atlanta
attorney John J. Scroggin to write his will. At the time, Mr. Glavine was
earning $8 million per year. Because he was a self-made man, he sought
to make sure his children followed his work ethic.
His trust will match his son's earned income up to $100,000 a year. His
4-year-old daughter had expressed an interest in veterinary medicine, so
the trust will provide her with $200,000 to set up a veterinary practice.
And because he wants his daughter to be able to be a stay-at-home mother
someday, the trust will provide her with $20,000 a month if that's what
she chooses.
"This kind of trust is becoming very popular," says Mr. Scroggin.
"I'm finding a great deal of interest among clients who are wealthy,
but not extraordinarily wealthy. A client with $2 million and three children
may not want to leave each child $700,000 outright. These clients have
generally made their own fortunes and want to encourage their descendants
to do the same."
Another of Mr. Scroggin's clients, a physician with a $7-million estate,
included a provision in his trust paying out $30,000 a year for any descendant
who opts to stay home and take care of their children, rather than work.
Academic encouragement
And to encourage his descendants to pursue professional careers, the physician's
trust provides $15,000 a year for those who go to graduate school and maintain
a B average, plus another $20,000 when they get their degree.
While most trusts are the tools of high-net-worth individuals, Ms. Trost
singles out Section 529 of the Internal Revenue Code as a way for people
of more modest means to set aside money for their children's education.
"In Illinois, there are two programs: prepaid tuition contracts and
college savings plans," according to Ms. Trost.
While not trusts per se, they function in a similar way.
"Under the prepaid tuition contract, a parent can set aside four years
of tuition cost at today's rates, and when that child goes to college (their)
tuition will be fully paid, even if tuition costs increase," she says.
This applies only to colleges in Illinois, she adds, but
there are provisions allowing students to use a portion of the money if they
go to college out of state.
In a college savings plan, parents can put away
$11,000 per year for five years or front-load the plan at $55,000. The money
earns interest tax-free and, by the time the child goes to college, the money
is available.
"Even if the child doesn't go to college, the money can be used, but
you have to pay taxes on it and a 10% penalty," Ms. Trost says. "This
is a real advantage, not for the high-net-worth individuals, but for middle-class
people."
04/15/2002
Crain's Chicago Business
Special Report: Personal Finance
Copyright (C) 2002 Crain Communications, Inc.
All rights reserved.
James T. Berger is a Chicago-area free-lance writer.
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