Giving and minimising taxes?

May 6, 2006 9:50 AM

Setting up a financial trust for Maw?

My mother has tremendous problems handling money. Or, to be more specific, holding onto it.

I left the US in 1998, and every year since I've given her $10K for a Christmas gift and every year in it's all gone in two months or less. She work(ed) as a Health Care Aide, earning about $18K but recently lost her position.

Upon investigation of her affairs I found she's only got about $4K in cash, and she's not even certain about that. Her and I disagree about money, so she's probably inflating this a little.

In the past every time I tried to get her to save there was a lot of hollering (not from my direction mind you) so I just gave up and let her enjoy herself. Now's she's got a problem, but there are pluses: the house is fully paid for, she lives in my very small hometown where almost everything is within walking distance, she already receives a small Social Security cheque and I'm liquid.

I don't mind giving her a little more than the $10K I'd previously been passing her way, but would like to do this in a more controlled manner and hopefully minimise my taxes.

From Business School I know a little about trusts, and believe that I could establish a one with her as the beneficiary, but can I do this in such a manner that I can control the assets while all revenue and hence tax obligations on the income stream will accrue to her? Also, should she pass away before me I'd like to regain control of the capital. Is such a vehicle possible?

I have no problem about setting up a trust for her, and capitalising with a couple hundred thousand, and know from my own portfolio that I can easily earn a dividend stream of ten percent or more on the securities if I pick and trade them, but how do I go about this? What type of professional will help me do this as cheaply as possible?

If it matters I live in London and Maws in the United States. I'm just not sure what to ask for, roughly how much it would cost to establish & run, where it's best located, if it's possible to regain control of the assets later, or even if I"m better off just dumping this money into my own brokerage account and taking the hit on income taxes myself.

Thanks much!

posted by Mutant to work & money (5 comments total)

Way to complicated for me, and I bet other posters. This does seem to be one of those cases where a good trust attorney is almost indispensible. There are just to many issues of tax, your specific objectives, generating income and finding a reasonable manner of managing her use of the money. Good Luck.
posted by rmhsinc at 12:42 PM on May 6, 2006

Ouch, this is complicated. And IANAL, and you should talk to one! That said...

From what I understand, you can make a trust for her for life, and so long as it's irrevocable (so long as you have no rights to its assets for your own use or for your creditors) during her lifetime it's not considered a grantor trust (i.e. you're not considered to have any ownership of the property). You can attach other restrictions without adverse tax concequences though, like it can pay out to her once a month instead of all at once, and you can control how much is paid out to her and when - just so long as you're not allowed to access the assets of the trust for your own use (or at least not without someone who has interests adverse to yours giving the OK...maybe...). In this way, tax accruing on the property is paid out of the trust assets themselves, and not by you, and you don't have further gift tax concequences if the assets in the trust should happen to grow.

However, if you retain significant control, you can *make* it a grantor trust (called an "intentionally defective grantor trust" or IDGT), which gives you the added benefit of being able to pay taxes on any property you put into the trust, essentially making an additional gift to her of your payments of taxes, without that being charged against your lifetime exemption from $1 million for gifts (so you can give her a tad over the current $12k per year that you can pass free of any tax concequences for yourself - but you will be taxed on growth if you put assets in that are likely to grow).

This all assumes that you're a US citizen (or resident, making you a "US person") and that the assets we're talking about are considered US source - so money in banks in the US, stock in US corporations, that sort of thing. The rules about what is and isn't US sourced are complex and sometimes lead to surprising results - you should be very careful.

Talk to a lawyer! Besides, if you're in the fortunate position of having money to give your mom, you should think about setting up trusts to deminish your own future estate. Annual gifting within your annual exclusion amount ($12k) and using an IDGT are relatively painless, but small, ways of going about this.

If you put more than your annual exclusion amount in the trust at once (your idea of funding it with $200k), be careful that you don't have the trust set up so that your mom has immediate rights to enjoyment thereof, or you'll decrease your lifetime exemption for gift tax purposes. Maybe you can give her "Crummey" withdrawal rights, so that she only has actual access to a smaller amount per year, which avoids an adverse gift tax result for you... but there are again complex rules (example: "5 and 5" - she can only have access to $5k or 5% of the trust per year or else there are adverse tax concequences) governing this.

Also, the fact that a lot of what you own is probably in the UK will complicate things if you want to give UK based assets and/or if you're not a "US person."

Hopefully I've given you some things to think about and discuss with your lawyer, when you see him/her. I'm sure one or more things I've written here is innaccurate, so don't count on this as advice - just some talking points if your lawyer doesn't bring any of this stuff up. Also, I'll note that I haven't mentioned any of the UK tax concequences you might have, nor have I talked much about non-tax issues - and you'll want to discuss those with your lawyer as well.

Also, be wary of the US PFIC rules - they're very harsh rules in the US tax system people in the US who hold interests in companies that themselves hold passive investments abroad. You don't want your trust to be subject to these rules.

Best of luck!
posted by lorrer at 3:43 PM on May 6, 2006

If you do your banking at a large bank, it's very likely that they have people who work in international stuff like this, and they would be very willing to help you out. Much of the work would probably be done by someone in an office in the States, with the client-contact done on the other side of the pond.
posted by MrZero at 3:45 PM on May 6, 2006

(I'll note that I'm currently studying for my International Estate Planning exam... your question allowed a lovely combination of feeling like I'm procrastinating while actually reviewing for class. Hurray!)
posted by lorrer at 3:49 PM on May 6, 2006

You might want to consider helping her set up a reverse mortgage on the house, one that would generate a stream of monthly payments.

As for your requirements for a trust, while I'm not a lawyer, my wife and I recently used an estate lawyer ("family law") for ourt will, which involved (contingent) trusts. I believe that what you want to do is in fact quite possible. I suggest contacting a lawyer who specializes in trusts, in the United States (best would in the same state as Maw lives, since state law is controlling, not federal law; you might want to look for someone located in the largest city in that state.)
posted by WestCoaster at 6:00 PM on May 6, 2006