Re: AVOID ESTATE TAXES

From: Jeff Salisbury <jeff.salisbury@xmission.com>
Subject: Re: AVOID ESTATE TAXES
Date: Fri, 24 Dec 1999 11:05:47 -0700

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BOB FORD wrote:
> 
> I recently read an article on avoiding
> estate taxes.  It suggested creating a
> note (IOU)  to your children as a way
> to avoid estate taxes.  For example
> if your estate was $1,000,000 it said
> that you could create a note to your
> children that was payable on your
> death.  If you had two children the
> note could be for $500,000. It is claimed
> that would make the value of your
> estate Zero.
> 
> Anyone know if this will work?
> 
> BOB FORD
> BOB_FORD@COMPUSREVE.COM

Bob,

First let me say I concur with the comments that Rich and Chen wrote. 
There has to be some valid contractual consideration for both parties
for anything transfer like this to work.

However, there is a tried and true technique vaguely similar in concept
to what you describe.  It is called a "private annuity".  It works
something like this.  If you have some asset or money you wish to go to
your heirs, you can in effect sell it to your heirs in return for an
annuity income stream.  This income stream must be based on your
expected life-time and an IRS designated interest rate.  Your heirs are
then contractually obligated to produce enough income (usually from the
asset they received) to pay you the annuity income for life.  Here's
where it shines for estate planning purposes.

1. Suppose a month after you setup this private annuity you were hit by
a truck and killed.  Your heirs own the asset free and clear of all
estate taxes even though the total of the annuity payments made to you
may not even come close to the value of the asset.  The contract is for
life, not for a specific total of the annuity payments.

2. Suppose you die decades later and the asset you transferred has
increased in value many times.  Even though this asset has increased in
value by ten times it is already out of your estate and will not be hit
by estate taxes.

So, to summarize, this technique works best when:

1. You have an asset you want to transfer to your heirs.

2. You are willing to give up the asset in return for an life-time
annuity income stream.

3. The asset is capable of producing enough income to fulfill the
annuity income stream obligation.  This requirement is usually easier to
fulfill than you may think.

4. As a bonus, the private annuity can be used to defer capital gains
taxes.  I'll talk about this in reply to your posting about capital
gains.

Jeff

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