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Asset Protection and Tax Savings

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."