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Pardon me for jumping into this after all the wisdom shown by the replyers, but I happen to be an advocate of generation skipping trusts, which are not held in much favor by southern lawyers, and Lump Sum pension Distribuions which everyone seems to have forgotten about. You may not agree, but you should cetainly know something about them before paying your lawyer by the hour to knock them.
Education before meeeting with your lawyer is the key to keeping costs down AND getting what you want from him. How do you know what you want? Whether you get this from legal forms preprinted, doing your own drafting, reading text or posts, it's gotta be better than letting your lawyer steer you with his personal prejudices. His job is to draft forms, NOT make your personal family decisions based on HIS preferrences.
A good point is the lack of good information regarding legacy (GST) trusts available, and the stock question from your lawyer "At what age do you want to distribute your money to your children? 25? 30? 40?" You respond, "Gee I don't know, what is best?" . He says, "well how about 1/3 at several ages, allowing him to mature into his inheritance" (if he doesn't mature he gets the money anyway). Your spouse says "Somewhere I heard that there are tax advantages to skipping generations while sprinkling income to everyone." Your lawyer's answer to this is "Why do you want to control from the grave? Don't you think they are competent to invest and manage their financial affairs themselves?".
So down the tubes goes 37% to 55% of each generation's estate THEY could pass on to their heirs, forcing them to make the same decisions you're now stuck with and pay the IRS because your lawyer wanted to draft more trusts for your kids.
Instead of "control from the grave" the lawyer should point out all the advantages to trust ownership (divorce, bankruptcy, creditors, ability to own property for heirs' benefits or make loans...on and on, let alone escape future FET taxes). How many trusts out there distibute at age 40 ( or even immediately) instead of continuing for the benefit of your children, grandchildren, great GC, and save at least $.4 mil in taxes on every $mil of growth at each generation?
The point is (besides MY advocacy) be informed of the alternatives.
Another bone of contention I have is all the advice about rolling pensions, Keoghs, 401ks etc. into IRAs to spread the tax liability out as far as possible (tax free -actually deferred- compounding they call it). Our congress passed Lump Sum Distribution laws to promote the use of pensions 40 years ago and no one seems to even attempt to see whether there are tax advantages to 5 or 10 year averaging anymore. The assumption is that tax deferred compounding is better than anything. Well, with Tax Managed Index Funds that step-up in value at death and are only subject to LTCG rates on the growth % should you need to liberate the funds, "out of pension tax free compounding" is virtually a reality. Almost like a Roth, but with tremendous tax leverage on the conversion.
A couple of added benefits are removing the prepaid taxes from the double taxation in your estate (don't even mention the illusionary, miniscule deduction for this), ability to put the funds in your living trust, and escaping possibly even higher tax brackets of your heirs.
Now, LSDs are not for everyone, but did your estate/retirement/tax/pension/investment advisor even suggest that crunching the numbers might reveal a possibility for tax savings? So where do you get more information about this, from your IRA Fund? your friendly annuity salesman? a lawyer or CPA? forget it, they have already dismissed it.
Beyond that, did it occur to anyone that maybe even paying current taxes (on a tax-bracket controlled payout schedule) on your IRA, coupled with a GSTrust, might save your heirs MORE in estate taxes and future income taxes than the basic A-B credit shelter trust?
Anyway, try to find some positive information on either of the above subjects from your tax advisors. Texts on retirement barely mention either approach. Actually they insist that multiple Form 4972s are prohibited, neglecting to account for the Code changing on this subject over 10 years ago. The only reliable source I have been able to find for this item is CCH Tax Management. You can toll the IRS on multiple LSDs and about 1/2 the responses will be positive and 1/2 negative. If you have LSDs from 2 employers it could cut your LSD taxes in half and your CPA will erroneously say the IRS catagorically prohibits this---WRONG.
Another perspecive on this (just considering one 401k). You can LSD a $140,000 401K for about $22,000, or 16%, or you can pay 28% - 31% ordinary tax rates on the annual payouts of an IRA. A $300K LSD costs about $68K in taxes, or 22.6% AND you get the $68K of taxes out of your estate for a potential reduction of FET of .37 X $38K = $14K, reducing the effective average tax rate to about 18%. A $600K 401k would cost $168K in LSD taxes, or about 27%, and reduce your FET by $62K or more, which reduces the effective taxes on the liberation to, at most, about 16%. Obviously you wouldn't do this if you were in the 15% ordinary tax bracket, but it would REALLY make sense if you were already at 31% and the mandatory IRA or 401k payouts might push you into the 36% bracket and your taxable estate was already beyond your exemption. Or to put it another way; if you could convert a $600K IRA into a Roth for 16%, rather than your ordinary tax bracket, would you do it?
By the way,even if you are already taking mandatory annual payments you can still do a LSD on what's left. The best parts of this tax savings will dissappear after 1999, and it is not available if you have rolled any part of it into an IRA. And, it takes great care if there is more than just one "plan" even in force.
Well I got those off my chest. I hope someone gets the point that if you don't educate yourself you'll never know what's out there that your lawyer, CPA, or other advisor has lost track of. Ed
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