This is the second in a series of letters designed to assist clients in understanding and planning around the Federal estate tax. In our first letter, last Fall, the Abercrombies discovered that their estate, including life insurance and retirement benefits, was large enough for them to be concerned about estate taxes. They promptly had their Wills revised to take best advantage of the estate tax laws. Call us if you want another copy of the Fall 1988 letter.

This second letter jumps ten years ahead in the life of the Abercrombies and demonstrates the benefits to be gained from annual gifts to a trust for children. You will see how a little advance planning saves the Abercrombie family hundreds of thousands of dollars in taxes.

Mr. and Mrs. Abercrombie are now in their mid-fifties. They have three children ranging in age from sixteen to twenty-four: Bill, Carla, and David. Their estate is valued at approximately $3 million. This is more wealth than they need to maintain their enjoyable but not extravagant standard of living. They want their wealth to pass eventually to their children (in equal shares), but at the same time want their children to "make it on their own."

The Abercrombies' accountant has told them that the eventual tax on their estate will be about $1 million, and has suggested that they could "leak" $20,000 per year out of their estate to each child and avoid estate tax on the amounts given.

The Abercrombies like the idea of saving estate taxes, but are concerned that a $20,000 annual gift to each child might sap their children's motivation. This valid concern has kept them for several years from beginning any kind of organized program of gifts.

The accountant persists, finally prevailing upon the Abercrombies to meet with him and their lawyer to discuss a program of gifts. The lawyer and the accountant talk separately before the conference, and decide to recommend the use of a trust for annual gifts, to save estate taxes while at the same time avoiding the effect that direct gifts might have on the children's motivation.

The lawyer and the accountant succeed in persuading Mr. and Mrs. Abercrombie to establish such a trust. The Abercrombies will give $20,000 per year to the trust on behalf of each child. The gifts may be of cash or of other property such as stocks, bonds, or real estate. The trustee may make distributions for each child's education or support as he sees fit. Half the balance of each child's share is to be distributed when the child reaches the age of 35, and the balance at age 40.

At the end of the eighth year of the Abercrombie trust, it has a balance approaching $650,000, built up by the annual gifts and by income earned on the trust funds. At this point, the Abercrombies may pat themselves on the back as their efforts to date have already saved their family more than $300,000 in estate taxes.

The Abercrombie trust is a device which can be useful in many families. If you would like to review this and other estate tax planning possibilities with us, feel free to call the attorney with whom you work, or Larry Ghilarducci, Alan Macpherson, Al Falk or Eileen Peterson of our Tacoma office.