If your estate exceeds $1.35M ($675K if single), you should be taking advantage of the right to give your children and/or grandchildren the $10,000/year the law allows. Many of you are not, or if you are, you may be using the wrong method. Let me explain by using a case scenario:

John and Martha are a married couple, ages 60 and 65, with a $2M estate. Their estate is growing at 4% and their life expectancy is 24 years. In 24 years their estate will grow to $5.1M. The estate tax on the death of the last spouse will be $1,412,000 (based on the $1M exemption at year 2006.) John and Martha NEED TO GIVE TO THEIR CHILDREN IN ORDER TO REDUCE THE TAX FROM $1,412,000 TO SOME LESSER NUMBER!

John and Martha are hesitant to give because they "may need the funds in the future" and they are concerned that their children will frivolously spend the money.

IT IS POSSIBLE FOR JOHN AND MARTHA TO GIVE ASSETS TO THE CHILDREN AND STILL KEEP CONTROL AND INCOME.

John and Martha should give annual gifts to their children IN A CHILDREN'S TRUST. They can choose to name themselves as manager/trustee of the trust. They can also name the other spouse as the beneficiary. The result is funds out of the estate with no loss of income or control.

John and Martha have two children. If John and Martha establish a fund OUTSIDE OF A CHILDREN’S TRUST with both of them giving $10,000/year to each of their children, that is $40,000/yr. If they give to their fund each year from now until their life expectancy of 24 years, they will have given $960,000 IN CASH. However, with a compound interest of 7%, the children's FUND WILL HAVE GROWN TO $2.5 MILLION!

THEN, if we assume that John and Martha's children will outlive them by 30 years, by the time their children die, with a compound interest of 7%, this fund will continue to grow from $2.5 million to $19 million (resulting in tax of $10M)!

John and Martha's purpose in giving was to reduce their own estate but they did not realize that the end result would increase their children's estate! The solution is to create a CHILDREN'S TRUST and give to the children IN TRUST.

By giving to their children through a CHILDREN'S TRUST, John and Martha can save their estate $1.4 million in tax AND save their grandchildren nearly $10 million in tax!

Other reasons for John and Martha to give IN TRUST are:

They cannot lose these assets to divorce.

The assets cannot be lost even to bankruptcy!

By this scenario, you can see that you may give funds to your children's trusts, still KEEP CONTROL as the trustee, if you like, and yet remove the assets from your estate! If you are a married couple, you may arrange these trusts to still KEEP THE INCOME as well!

The above example illustrates a married couple, but the concept applies to single people as well as married couples.