Tax Planning

[S T]

For Tax Planning Purposes

A client recently divorced with two young children (minors) is in the process of setting up a LIving Trust. A question arose, as to whether or not her 401K beneficiary should be the minor children or the Trust (which the minor children are named in). Most states will not allow Minor Children to receive funds without a Guardian, Trustee or Court Intervention.

I am trying to stay out of the "legal issues" and advised the client to discuss with the attorney, the attorney came back and said to discuss with the Tax Advisor - issue being that if the client passed away while the children were minors, the Trust would be taxed at a higher tax rate than the minor children's tax rate would be

However, would it not be true that if the Trust had an annual distribution amount - that would be passed through via K-1 to the minor children and then taxed at the children's tax rate. And there should be some Adult, etc in charge?

Seems like the Attorney and I are playing ping-pong - and how can anyone do any future estate planning right now

Words of wisdom are very much solicited

Thanks,


Sandy

[Snaggletooth]

Quagmire

Certainly no expert here, but you are caught in a classic "which came first the chicken or the egg" thing with her lawyer. A classic.

I think the only relevant question boils down to whether the grantor wants the current earnings to be available to the children or whether the current earnings are to be accumulated and retained in the trust. Only the grantor can answer this, not her lawyer.

You can contrast the tax effects of both these scenarios and simply stay out of the legal issues involved with them. The tax effects would be dependent upon the size of the trust, and current distributions could range from insignificant to launching a "kiddie tax" under certain circumstances. The vehicle as to whether or not a guardian should be involved, or the children's knowledge, should be a question for a lawyer.

If the children are not to know they are receiving income, at some point in their teens should they get a job, it will be impossible for them to file a tax return without having to deal with the income. I had this happen a few years ago, where the children didn't know they had a trust or income, and I filed their returns for 3-4 years. This worked fine until the oldest got a summer job and made $5000 one year and wanted to file a 1040-EZ to get money back.

[Davc]

Sounds like a job for Richard Cheney.

[JG EA]

If your IRA does pass to your estate, then it will be distributed according to your will if you have a will. That means that your IRA which should be a non-probate asset, will now become subject to probate and the related legal complications.

Found thisat http://money.cnn.com/2000/06/28/stra..._retire_slott/

I remember reading it lots of places that I can't find right now, but that was the general idea. I would assume the same advice for a 401K?

I know you were asking a more specific question, but I don't know the answer about that and minor children.

[S T]

Thanks All

Attorney finally made a decision for the legal aspect, can't say I agree, but then I can't practice law. Even Fidelity Investments (for 401K) didn't agree as well with the Attorney's decision and pointed it out to the client.

No more ping-pong table match

Sandy

[JohnH]

Let's see now. Attorney didn't understand tax implications of his recommendation so he makes a lame attempt to hand that off the the tax preparer. Attorney doesn't understand possible future tax complicatoins he may be creating for the kids (or doesn't care). Attorney finally makes a recommendation that even Fidelity doesn't agree with.

There's a common denominator here - has the client figured this out yet?