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Leaving a legacy to your grandchildren

Jeffrey Apps and Tracy Tutag

In the past, most people believed that hard work would create the opportunities for their children to have a better life. After all, that was the American way.Today, many parents and grandparents feel that members of the younger generation will have a much tougher time establishing themselves. The cost of a college education seems to be skyrocketing, while the career choices available to even the highest-ranked college graduates seem more limited.Here’s where a generous grandparent can often help. Perhaps you have accumulated a substantial amount of money during your lifetime, some of which you would like to pass along to your grandchildren. If this is the case, keep in mind that Uncle Sam has made it difficult for you to give your family a leg up on life by imposing a complicated system of transfer taxes – estate tax, gift tax and generation-skipping tax – that could limit the amount of your money actually going to your children and grandchildren.Estate and gift taxes may be assessed on property transfers. A generation-skipping tax may be imposed whenever property is transferred to a person two or more generations younger than the donor, i.e., from grandparent to grandchild.Outright giftsIf you simply want to give money to your grandchildren, you can avoid gift taxes by limiting gifts to $12,000 annually per recipient ($24,000 if gifts come from you and your spouse). You are also entitled to a lifetime credit known as the unified tax credit, which effectively credits $1 million (per individual in 2002) of transfers subject to gift or estate taxes. The unified credit can be used throughout your lifetime to offset gift and estate taxes. The taxable estate includes all assets owned at death as well as certain properties that were transferred as gifts during an individual’s lifetime. Keep in mind, however, that if you make an outright gift, your grandchild will be free immediately to do with it as he or she pleases.Create a trustYou can put more restrictions on gifted money by creating a trust. The tax-free $12,000 you can give each year will be held and invested until your grandchild reaches a designated age. Special provisions in the trust are required to receive the benefits of this gift-tax exclusion.As your grandchild grows, any investment returns accumulating in the trust are not considered part of your gift. So, by investing this money wisely, a substantial legacy can be created for your grandchild.The irrevocable life insurance trustMany estate-planning experts view the irrevocable life insurance trust as one of the most efficient ways to leverage gifted monies. After you create a trust for your grandchild, it purchases a life insurance policy on your life, using your annual gift to pay the premium. Because a premium payment may provide many times its value in life insurance coverage, the potential value of your grandchild’s trust may be increased instantly 10- to 50-fold.The policy values accumulating in the trust can grow tax-deferred until distributions are taken or the policy is surrendered. Policy values may be able to be accessed income-tax-free by the trustee using policy loans. (Tax-free status of policy loans depends upon various factors, including keeping the policy in force. Policy loans will reduce the cash value and death benefit.) And, generally, by naming your grandchild as beneficiary, he or she may receive substantial tax-free insurance benefits at your death. All tax information is based upon our general understanding of current federal tax rules and is not intended as tax or legal advice. The trust you create for your grandchildren must be carefully drafted so that your gifts are handled according to your wishes and the law. The guidance of an attorney and tax adviser who specializes in estate planning is recommended.If you are interested in establishing an insurance trust for a family member, there is more you should know. Please consult your legal and financial professionals.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors LLC and offer annuity and insurance products through an insurance brokerage affiliate, AXA Network LLC, and its subsidiaries. Tutag and Apps can be contacted at 926-6911 or tracy.tutag@axa-advisors.com.Vail Daily, Vail Colorado CO


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