Focus 580; Personal Finance

Good morning and welcome to focus 580. This is our telephone talk program Money's David Inge and we're glad to have you here this morning as we wrap up our week. We are also pleased to have with us once again David Scinto he's president CEO strategic Capital Bank and Trust. He is on the program every month. It's always a Friday and the 10 o'clock hour and we talk about personal finance the way we do this is how he begins and has a few comments to make. And then if you have questions about that or anything else that has to do with money management investing financial planning. I know that he will be hit and do his best to help you out. So that's what we'll do here we'll get things started by saying Good morning and welcome back. Well thanks very much David and as always it's a genuine pleasure to be with you. I'd like to take this opportunity to wish you David the wonderful staff as well as of course all of the friends and listeners of W. while a very joyous healthy and prosperous holiday season. Well it is obviously the holiday season even though it's darn cold out there David and gift giving I think is on people's minds so I thought I would spend a few minutes visiting

about some of the ways of charitable giving. Some of the financial advantages of charitable giving. Of course our country is truly blessed by a citizen re which is very charitable minded. Literally millions of Americans make charitable donations to their places of worship for example on a weekly basis scores of millions of others of us donate to public charities such as the United Way. You could name a thousand in the Salvation Army. Many of us for example support our all maters such as the University of Illinois through the foundation even w i l l the College of Law you name it there's a thousand different ways to support private and public charities. So the opportunities are just really very vast At the same time. We are seeing some of the well let's call it the wealthiest Americans such as Bill Gates and Ted Turner literally donating billions of dollars to charitable causes and much to their credit they are challenging other super wealthy Americans and

corporations to enhance their charitable giving as well. I believe Ted Turner really stepped to the forefront first where he committed approximately two billion dollars of his personal and corporate fortune to various charitable causes. Well the billion dollar gift frankly is out of my league. DAVID So perhaps. Well you and maybe Ed keys are could get together and dip into your deep pockets and ante up a few million or billion for for charity. But before we get to the charities of our choice let's understand some very simple tax rules about charitable giving and examine some ways to make your charitable dollars really go further. First of all. If you donate cash to a charity and when I refer to a charity I'm really referring to a charity that has a tax exempt status. These are typically charities that have a 5 a 1 c 3 designation. Well if we're going to donate cash to such a charity you will receive an itemized tax deduction for the amount of the calf's cash gift.

So if you gift $5000 $1 or $100 whatever number as long as it's a tax exempt organization you're going to be able to take an itemized deduction on your tax return. Now the amount of your tax deduction may be limited however and when you gift cash the limitation is 50 percent of your adjusted gross income. Now adjusted gross income is the very last number on the last line of page 1 of your 10 40 tax return it's often referred to as a G.I. adjusted gross income. Let me give you an example of how this works. Let's say your adjusted gross income. With your spouse's $80000. So that's the last line on page 1 of your tax return. Your tax deduction for giving cash to a charity would be limited to 50 percent of your adjusted gross income or 50 percent of $80000. And at least today

my mathematics says that's $40000. So you would be able in that year to essentially itemize $40000 as an itemized deduction on your tax return. Now if you gave more than $40000 of cash when I refer to cash checks securities whatever to charity the additional amount over that $40000 would be carried forward to the next tax year and to your next tax return. And then it would be itemized on that return next year. So just because you give checks or cash in excess of 50 percent of your adjusted gross income you don't lose that itemized deduction. It's simply that you can only use up to 50 percent of it. And then you take the rest of it and you carry it forward to the following years. Now many people choose to gift appreciated stock or appreciated mutual funds to the charity of their choice. Unfortunately with the way the market has performed the last few months a lot of that

appreciation that might have existed for five six months ago has disappeared by our very eyes. But of course that's another day another story. But if you do choose to gift appreciated stock in such a case the itemized deduction is really limited to 30 percent of your adjusted gross income. So again in our example if we were married filing jointly we had $80000 of adjusted gross income. We would multiply that 80000 times 30 percent 30 percent of 80000 is $24000 and we could take an itemized deduction for $24000 if we gifted appreciated stock or appreciated mutual funds for example or other appreciated securities to charities or a charity of our choice. And of course when we gift and appreciated stock we don't have to pay the capital gains tax on that appreciation. It disappears because we're really not selling that stock had we sold the

stock and recognized again then we would have been assessed a capital gains tax typically about 20 percent for the most part. But that just simply disappears. So there are two advantages. One obviously is you're doing something charitable something else touristic. Making those charitable contributions and at the same time getting a tax deduction and being able to itemize the fair market value of that appreciated stock and at the same time you're not paying capital gains tax. So that's really a win win win situation. So if you're going to over the next couple of weeks make additional charitable contributions to one or more charities. Consider the possibility of looking at gifting appreciated stock. Now of course there are other more complicated methods of giving which are often referred to in the financial planning area as playing and giving when planned giving really often takes place over a series of years and it's the art of planning your

charitable contributions to provide maximum benefits not only for yourself and your family and the organizations you choose but also taking advantage of the tax ramifications of your plan giving. And of course there are many ways that your philanthropic giving can blend with your own financial needs and tax planning. For example some people opt for something called life income gifts and this type of gift allows you or the beneficiary of your choice to enjoy income now. With the benefits passing to the charity in the future so you could actually gift assets today to a charity but receive an income benefit for the rest of your life or for someone else perhaps a beneficiary and then at your death the asset or the principal ends up with the trust you would receive of course an immediate income tax deduction for the value of the charitable portion of your gift. And these are often called life income arrangements and they typically include remainder trusts something called Charitable

Gift annuities and even something called pooled income funds. Another vehicle is something called a charitable lead trust. This vehicle provides income to a charity today for a period of years determined by you the donor or in other words your gifting assets into a charity today. The charity has the use of those assets in other words they can derive the income from those assets and at the end of a specified term the trust principle along with perhaps its appreciated value is distributed to your beneficiaries named by you and these typically would be family. So these are non charitable beneficiaries and this gift form provides tax benefits for both you the donor nor as well as the beneficiaries. And of course you allow the charity the use of those funds for a series of years again everybody wins. Life insurance is also a typical investment or charitable vehicle. It can be gifted in this

gift form you may name the charity for example is the beneficiary. So at your death the death proceeds from the life insurance policy passed directly to the named beneficiary. In some cases you may have a paid up life insurance policy where essentially you no longer have to place funds or pay premium dollars into this life insurance policy. In other words the policy carries itself and you may end up giving this policy directly to a charity. And then you would claim an income tax deduction on what is referred to as the present value of the policy. Real estate may be another choice is not necessarily just gifting cash gifting securities or gifting life insurance. Some people gift real estate. Maybe it's that summer home. Maybe it's a vacation home maybe it's a farm or commercial real estate piece of property maybe it's vacant land. The choices are are innumerable. But again that's another method

of gifting if you are going to gift real estate to a charity directly. Obviously the charity is much happier if you already have a buyer for that real estate. Generally the charity doesn't want to hang on to that real estate. So typically what occurs is you would gift a piece of real estate into that charity. And that's by deed and almost simultaneously once it's received the charity would then deed it to the ultimate buyer. Those dollars of course would end up in the charity you would receive a tax deduction for the fair market value of that real estate which frankly would be the price the third party buyer would be paying. In this particular case. So there's lots of things to think about. It's a great time of year to consider charitable giving and David I'd be happy to answer questions about charitable giving of course or other financial planning areas as well. All right. Our guest David Scinto he's president CEO of Strategic Capital Bank and Trust Company. He's with us every month on the show. It's always on a Friday and we

talk about personal finance money management and as Dave said if you have any questions about the topic that he's been talking about or anything else that has to do with investing financial planning money management give us a call here in Champaign Urbana 3 3 3 9 4 5 5. Also we have that toll free line. So if it would be a long distance call for you we'll save you some money. You can use the toll free line calls on us. 800 2 2 2 9 4 5 5. Just probably again as if people need this kind of reminder but it's probably a good idea to remind people anything that they are thinking about doing that will effect their tax status for this year. You have until the end of the month. After that you're into the next year too late IRA contribution charitable contribution what anything if you're doing this for tax purposes. But now's the time. Absolutely now is the time. With the exception of an IRA contribution you can still do that up to the time you file next year. Yeah but gifting. So if you're going to gift to the Renesas in a college education fund which unfortunately is not tax exempt but is

clearly a charity desperately in need of funds. You can still make that gift this year. You probably will not get an itemized tax deduction for it. And speaking of gifting rules remember if you are gifting to family you can gift up to $10000 to as many people as you want whether they're related or not. So Dad could gift $10000 to four children. Mom could give $10000 to four children so each of those children could end up with $20000. It's not subject to tax it's not subject to gift tax. When those children reinvest those proceeds put them in a CD put them in stock and generate income or dividends then the income or the dividends are subject to tax. It's good you corrected me I misspoke. I want to make sure the people got that your heard Dave when he said it because he said it right IRA contributions. You can do that up until the filing deadline next year. But other stuff other stuff other stuff. You bet. We have a caller on a cell phone. We'll get right to them on the line for you. Hello morning.

Yes my love your little lecture it's always so informative but I. If a question specific to the category of people with special needs it or attention deficit an impulse of about I have a son and a husband in that category and I'm trying to figure out what's the best strategy to deal with that reality so that there is some money put away and future and all that other good stuff. So are you telling me that you have a husband and a son who are spenders. Yeah except even more impulsive than most. More impulsive. Yes because they have attention deficit hyperactivity disorder. Yes well when their meds aren't working in their brain and they'll do things that aren't wise choices play Chile. Well I'm sure this is not an easy question and I really don't have a lot of experience in just off the top of my head. Obviously these kinds of folks shouldn't be curing one a lot of cash or to a lot of credit cards with them. That's true.

So have you been able to sort of limit that effectively now after everything's been banged up to the limit and are on again management plan. But my thing is is like I've heard that sometimes what you do for children is have a trust where they can't ever really get to the. Yeah but all but you can only live off the dividends or something like that like you can walk it up so they can like blow the whole wad. Well that is true you can certainly set up a trust and that type of trust would be an irrevocable trust. Its heir revokable and you would actually be parting with dollars placing them inside a trust and then the trust language would explain exactly how those dollars could come out pertaining to some kind of identifiable standard. So for example maybe the beneficiary of that trust your son could be utilizing only the income or the dividends from that trust and in terms of invading principal the principal could only be invaded by the

trustee. You may be the trustee or you may be have a corporate trustee and could only be invaded according to an identifiable standard for education health and welfare so that there is some type of identifiable standard in which the trustee can rely on. We for making specific distributions for the benefit of the beneficiary. I can typically in that type of trust there is additional language which is drafted that the income in the dividends do not need to be paid directly to the beneficiary. They they can be paid directly to the vendor or who provides the services to another relative to a third party guardian to another individual. So who then takes that money and pays the bills on behalf of this particular beneficiary. So it could be a management program for paying whatever living expenses or other things are necessary.

Absolutely guys this is a very special kind of trust. There are several attorneys in Champaign are you calling from our area what are you calling for in Champaign-Urbana I'm OK. Coming in from Dewey and Fisher when Kay for one shot just so your audience knows that I can believe it. It's getting nasty out there but in any event there are a number of very qualified attorneys in Champaign County who are familiar with this kind of trust. It's not exactly what's called a special needs trust but it's very close and there is the Syfy statutory language which would be incorporated into such a trust. Would this work also for grandparents because they've told me they have a trust for our kids college education but I don't think they're doing anything based on the reality of my son's you know need. Well certainly your grandparents could set up a trust they would be the grand tours of the trust. You could even be the beneficiaries during their I'm sorry the

trustees during their lifetime. You could be the trustee you could be the successor trustee. And again this same kind of language could be incorporated in the trust. And your grandparents certainly could set something up like this. And there may even be a way of doing this where they would be placing assets inside this trust. And because of the gift and Federal estate exemptions that exist for each of them six hundred seventy five thousand dollars each for ID that were set up correctly there may not even be any gift or gift tax consequences with such a trust. You know they live out of state I don't know if state laws change how that works or. Well they could they could establish a trust under the laws of the state of Illinois. Oh they can sure they could. Oh I got you. Oh I'm learning a lot today. OK well thank you so much for speaking to that I appreciate that information. Right and again I just urge you that if you are going to go down that road you would need to retain corporate counsel and competent counsel who are

familiar with these kinds of trusts and again there are many people in the champagne County who are familiar with these kinds of trusts. OK thank you so much. All right thank you for the call we'll continue the next person is here in Champagne local in line number one. Hello. Yes thank you for taking my call. I was curious on the Snow's comments on the relationship between the reduction or elimination of death. Taxes in the future and its correlation to the amount of dollars flowing into charities. I thought for the future. Well you know that's a very interesting question. But charities were very very concerned over the last several years that if we eliminated death taxes or reduced income tax rates that less money would pour into charities that was a major concern because the theory was that a great deal of the motivation for charitable giving. Why are the tax advantages of charitable giving right now probably one of the foremost authorities on charitable

giving in the country is a person who is at the U of I foundation that's Bill Sturdevant bill is one of the major people in the country. Lectures all over the country has produced many books seminars just brilliant on charitable giving. And Bill is pretty well conclusively demonstrated that that is only one motivation. For charitable giving in tax tax considerations is not even the major motivation in fact I think of the 10 major motivations. It's somewhere down between 5 and 10 on the list and what indeed does happen in spite of lower income tax brackets over the last 15 years in spite of increasing a state tax exemption equivalence. So less money is really being taxed at the state level. More in more money is pouring into charities and in fact it's not only arithmetically increasing it's almost geometrically increasing in a number of situations. And maybe that's because of the large amounts

of wealth that have been created in America over the last five or 10 years as a result of the stock market. Although some of it may be dissipating quickly the last few months but in actuality charities are are taking in record amounts of money so it is really not had an impact to date. Now whether the total elimination of a state taxes would have some impact. Probably yes but I don't think a lot because again the motivation for charitable giving goes far beyond the tax issues my opening discussion of course was saying look if you are going to give to charity you want to support that charity. Let's do it intelligently. Let's at least look at a tax advantage way of doing it. But your question is really a very good one and I think Bill Sturdevant at the U.S. Foundation who is one of the directors of planned giving and then just a very important cog in that whole program really put it best that people really give for reasons other than taxation. They really give because they they sense a you want to leave a legacy and really support something that is

important to them. Absolutely. OK well thanks for taking my call. All right. We are at our midpoint here in this part of focus 580. It's our monthly show on personal finance. Our guest is David central He's president and CEO of Strategic Capital Bank and Trust and for a long time he's been doing the show with us coming by every month. We discuss different sorts of financial topics. But the idea is that you shouldn't. Feel that you have to limit yourself to whatever the introductory topic was. If you have other kinds of questions about financial planning about investing you want to talk about mutual funds. You're thinking about sending your kids to college. Your retirement. Anything like that. I know that Dave will do his best to help you out and all you have to do is call us here in Champaign Urbana 3 3 3 9 4 5 5. Also we have that toll free line that's good anywhere that you can hear us that is 800 to 2 2 9 4 5 5.

David I want to jump in and talk about another area that is often misunderstood and a nother opportunity for charitable giving which I think makes an awful lot of sense I've talked about this in the past but I want to highlight it again and that is we have lots of people in America who have large amounts of money in IRA programs for one k programs profit sharing plans pension plans mainly because they worked a long time and they simply invested year after year after year. The University of Illinois there's a good number of people with large amounts of money for example in for a three B plans. They're all basically the same thing. People put in money into these plans got an upfront tax deduction for doing that. This money grew tax deferred and then the point is that when one retires and needs cash to enjoy the fruits of their labor they start taking money out of these IRA programs pension programs etc. and pay current income tax on them. However it can very possibly happen. Let's just take someone who has a

$500000 or a million dollar IRA account. It's not that unusual anymore and that person dies and the beneficiary of that Ira let's say is the surviving spouse if the surviving spouse is living at the moment that the surviving spouse receives those IRA proceeds in sort of what's called a rollover situation. There is no estate tax consequences. There are no income tax consequences. But let's take the example where there is no surviving spouse and this million dollar IRA is suddenly left for the benefit of the children. So we have a child who is the beneficiary. Well first of all any of these tax deferred assets that are existing at an individual's death do not pass directly to a charity or to a surviving spouse are subject to both federal and state tax and federal income tax. So someone let's say who has an estate of 2 million dollars. And of

that 2 million dollars. A million dollars of it is in an IRA. Now that's not probably you ride today but maybe it's you right tomorrow. Let's just take that example and a two million dollar estate and we start thinking about the level of federal a state tax on that estate. Those marginal dollars start to be taxed at about 50 cents on the dollar. Imagine that. And indeed they go all the way up to 55 percent of 3 million dollars. So we could have a situation where someone leaves a very large sum in an IRA and 50 percent of those proceeds could be well they disappear. They go to that bottomless pit in Washington D.C. 50 cents on the dollar. So now our million dollar IRA has $500000 to be distributed to the child who is the beneficiary. And it's very possible if the child takes this money and they have no choice but taking this money out right well that $500000 is going to now be subject to

income tax because those IRA proceeds were never subject to income tax and that income tax rate would be thirty nine point six call it 40 percent 40 percent of the remaining $500000 is $200000. So let's see 500000 went for a state tax 200000 went for income tax fully 70 percent of these IRA proceeds which had been gathered and carefully shielded over many many years 70 cents of every dollar ends up in the coffers of the government 30 percent goes to the child. What's the bottom line. The IRAs the pension funds those are wonderful vehicles to leave to charities because if ultimately after your spouse passes away and you only are having children or someone else who has announced not spouse left is the beneficiary.

70 cents could whistle to the government where if you made the charity or a series of charities the beneficiary 100 percent of your money ends up with a charity. So the choice is yours. Would you rather have the government distribute your IRA or would you rather distribute your IRA and that's how I explain it to my clients. At our firm and overwhelmingly a large number of them say well this would be ridiculous to have 70 cents on the dollar go to the government and only 30 cents to my kids. Let's leave a dollar to charity and I think my kids maybe can get along without the 30 cents. Or maybe I will buy and the inexpensive life insurance policy that they can own outright. We can gift them the premiums and they can still get their 30 percent but it's almost unconscionable to see these large amounts of money just end up being in taxes that would just be an unconscionable situation. Bottom line. Ira's pension funds any kinds of tax deferred instruments

make wonderful vehicles for charitable giving. At the second death of the spouses because then they get start to get hammered with income tax and estate tax not first death. If you leave a surviving spouse by law then that beneficiary has to be your spouse unless he or she has signed off on the paperwork. But then when the spouse dies its second death. That's the time to make the contingent beneficiary of the IRA a series of charities you can do that in a number of ways and I'll come back to that. I know we have phone calls waiting for oh I just wanted to bring up that topic. Other questions are welcome. If you have some investment or a financial planning concern I know that Dave would be happy to talk with you and try to help you out give you some advice in Champaign-Urbana 3 3 3 9 4 5 5 and anywhere you can hear us toll free 800 to 2 2 9 4 5 5. The caller here Next up is Aurora line for Hello.

Yes hi good morning. Good morning and Season's Greetings again to everyone. And I had two questions. One I got 11. Pieces of stocks through a spin off and their NCI and S. are and they will now want me to decide whether I should dispose of them because they will not keep the 11 pieces of stock as such they want me to buy $2000 worth of more stock to add to that or dispose of the 11 shares I have. Well you have 11 shares individually do you actually have the share certificates. No. Now I do know that. So they're held at the company and yet the entry form. Yes well you could request those certificate those 11 shares. Yeah they would send you the 11 shares

and you could just hold them for that matter. Alternatively what's happened here is that companies don't like to deal with small shareholders. Yes I understand that right away. You bet because it's it's expensive they have to send you all the paperwork and all of these proxies and all of this business so they're going to be cutting down a lot of trees just to send you paperwork for your 11 shares. Yes. So they want you to round up to a round lot of shares perhaps as much as 100 shares at least 50 shares whatever. 2000 it's over two thousand two thousand dollars. You are under no compunction no legal basis for having to do that. There's no requirement no you can just say send me my 11 shares and I'll continue to be a shareholder thank you very much. Really. Absolutely. I have to beg ignorance I did not read the paperwork I do not have time these days for that kind of reading. I just can't. Well it's pretty difficult to read through that material anyway take a Philadelphia lawyer to figure it out. Bottom line is you can call them up or send them a letter and say send me my 11 shares thank you very much. Really.

Absolutely. Next question you had a second question. My second question is this we evidently have a new president. What can we expect. Him and differences are sameness. As for CLINTON Well what can we expect from a Republican president. You know I'm really not in the speculation business but oh ok. But I listen just probably the same speech you heard and I think it's going to be difficult to accomplish a lot early in the game so I think the next few months. I don't think there's going to be a lot accomplished. I think the real question that will be interesting is to see what kind of tax package if any gets through the hill. You'll remember that one of the hallmarks of the Bush campaign was to eliminate estate taxes. So it'll be very interesting to see what I hear from my colleagues friends accountants planners some of my friends in Washington D.C. They tell me that probably the best thing that people could hope for in the state planning front is to increase

the amount of assets that will eventually be exempt if you will from federal estate taxes in the year 2006 were supposed to make that number up to a million dollars. So if your estate was a million dollars or less including all of your assets life insurance IRAs everything property then your state would not be subject to a state tax. Bush of course wants to eliminate. A state tax is in totality regardless of the size of your estate. And what I'm hearing is that that number that million dollar number may go up some maybe two to three million dollars that seems to be a compromise position that's being valid about. But I think it's going to be tough the next few months to see what if anything and David's a lot more talented in that area too. Pontificate and talk about that than I am but it certainly could be fun to watch isn't it. I don't know it's according to how your finances. Thank you very much. Thanks for the call. Just real quick. It has been said

Give me a hard time once by saying it that the number of states in this country that end up having to pay taxes are relatively small because as you say you can have honest I'm not sure what the number is now 675. So we're talking about going to a million so let's put let's say supposing that we said fight was it was we said five million dollars you could have an estate of five million dollars and not paying taxes then how many estates would stay in this country would still be paying 1 percent 1 percent 1 percent. Let's go to Urbana for another caller here line one. Hello is that me. Yes I have. Another question about a plan when I die and my children are going to have and hair. Money from my IRA. I heard that they didn't have to take it Ryan said. They could take it and comment.

The sad truth and that is true. So right so that would help with the taxes that they would have to pay. It may if your children want to take it in increments. There is no requirement that the children take it in increments typically in most IRA situations. Children will have the opportunity to take it at least over a five year period of time so that the first year they take one fifth the next year one fourth one third one half one over one. So if if you have three or four beneficiaries I have three you have three. All of the children have to agree as to the format of taking that money. If one of the children insists on taking cash the other ones can't take it over five years. All right so it's important to discuss this with your children and explain to them that they would be ahead somewhere way way down the road when you're no longer here. That if there are IRA proceeds remaining bad they would have to take a careful look at their income tax situation to see what would be the most intelligent way to

take that money. OK. So but typically it would be over a five year period of time five years. To stretch it out. Well it depends there are certain cases where with a husband wife situation and monies have not come out of an IRA. Children may be able to take it over their life expectancy. Then how do you arrange that. Well it depends upon the age of the I or a individual and it also depends upon whether or not that individual is already accessing IRA proceeds that the children know whether the person who owns the IRA is already accessing IRA proceeds taking minimum distributions out of their IRA. That would be right. So in your particular case the way you are set up Currently you would at least be able to utilize the 5 year rule which would for most people especially with 3 children is more than adequate but the kids will still be taxed at their highest marginal rate but not so much maybe or maybe not.

Depends if they take all their other income and then they layer this amount on top of it. So this amount your IRA monies really are taxed at the Children's highest marginal rate. When the children start taking it maybe they're in a 28 percent tax bracket maybe thirty one thirty six thirty nine point six. Maybe those rates are going to change. So whatever it is at that time your job is just to stay healthy and enjoy your money. OK well thank you. All right thank you. Let's go to Champagne Lie number two. Hi how are you this morning. Good thanks. But you know a situation where estate tax will become an issue and the goal of the parents is to maximize the amount of money that goes to the children that if they do not want to contribute to what's the best strategy for seeing that the government gets the least amount of you know states where there are a number of strategies if you really have a very substantial asset base today one strategy simply is to give the maximum allowable exemption amount away

today. Here's an example. It's a family of 5 million dollars they're very comfortable they have other monies coming in. They have other income properties. Each of the spouses husband give six hundred seventy five thousand dollars to children today. The other spouse give six hundred seventy five thousand dollars maybe outright or maybe in trust. So you have now used up your exemption amount under the law. You don't have to wait until you die to use up that exemption amount. And that's six hundred seventy five thousand dollars now appreciates in your kids States not in your states. This makes a lot of sense where you know you have an asset that is going to be rapidly appreciating. That's one technique. There are many other techniques we've talked in the past about a technique called The Family limited partnership where you essentially convey assets into a family limited partnership you are the general partners. You control the assets in that partnership. You even can derive all the income from the assets in that partnership.

But the children become partners in this enterprise and each year you convey them units or partnership interests in this enterprise. They are limited partners. They really have absolutely no control no voting control. And as a result even though you convey $10000 a year of units to them or your wife conveys an additional 10000 that's $20000 of units to a child because that child really can't do anything with those units. They're not really worth $20000. So as a result of that. One can take a minority discount and you may be able to gift 30 thousand dollars of units each year to each of these kids instead of 20000 thereby increasing and taking advantage of the $10000 tax free rule each year. Follow that. OK that that's a choice making beneficiaries of charities. That's a choice. OK purchasing Last to Die life insurance policies and making the children the owners of those

policies. And so they have proceeds at second death to pay estate taxes. That's a choice. Setting up something called AB trusts inside your own estate plan and using generation skipping language. That's a choice. There's all kinds of moves on the checker board when it really means is sitting down with a financial planner who really knows his or her business in concert with a good estate planning lawyer to really plan things out. OK. If I do have a little bit of time for two things and number one. 10000 a year tax free gift does that count against the currently 675 state. Absolutely not OK. That's in addition to the 675. OK good. The second thing the way things are set up now as I understand it from my my parents be the beneficiary in the situation. They have their money essentially in a certain kind of investment by raising some tax

some tax someone taxing but that what they have done is take out an insurance policy that will help to pay for any estate tax that works so long as that insurance does not pass through their estate. That's very important which means either your the owner of the policy or it's in a special trust referred to as an irrevocable insurance trust or crummy trust which then means that it won't pass through their estates at second death. Right and that's the situation. OK that sounds like a decent plan sounds like a decent plan. Thank you. Well Ron thank you for the call. Let's continue. We'll go next I think to a caller in Chicago a line for Hello. Hello. Yes yes. I've got kind of a curious question. I hear ads and the radio for the bar on the bonnets and they never events make it but I will. They're both government issues they're prickly the same thing. By his side but one pays six and a half percent the

other one is for. Well I don't think if pushed the i bonds the government. I'm not really certain I'd have to really think through that because the difference is simply the inflationary risk which comes back in terms of additional principle that's built into the bond. I think probably a lot of it has to do with just familiarity. It's just easier to push that and people are more familiar with that form of investment Well there's a big difference in the way the payout and those I think the ease up dance floor and I used to drop the ice from 7.4 to 6.5 November 1st which isn't a bad rate. Texas state tax free if you can hold them for 30 years. No question about it you only can make of your cash in the 4 or 5 years. That's the problem. You gotta hold them a minimum of five years so you're subject to some interest rate risk. Right now the only thing I've got that same Same with and C isn't. The National Cash Register that AT&T bought out

it may be I thought she said NCI NCR this is NC are ya. Yes I don't they own that develop that barcode system that you see everywhere. Perhaps I'm not familiar with all of their technologies but probably this move isn't that the old film laboratories It's a spin off yes. It's just part of it that yes complete thing you have that stock is way down to your own Lucent. Yes I do. Oughtta hang on you're loose and I heard from afar and I never never suggest anything but I have heard a lot of rumors on the street that Lucent may be a takeover candidate. Nokia the sprint. A country in Finland and they can craft their raps that that's really something about whether they are the biggest cell phone manufacturer in the world. They are Ericsson Nokia and mortar all I care. But Lucent was up to $78 and I think now it's dropped almost

50 a little less than 15 years and I guess I was talking to a friend of mine who worked for Lucent who had a very very large position in his pension fund and wanted to retire and watched it get well not have to but Seventy eight percent. Yeah that's called not being properly diversified. He had too much in one way too much. One basket bat. OK thank you thank you. We'll go here to Urbana for somebody else line one. Hello. Yes do you mind turning to the theoretical side of you know inheritance tax. I don't mind turning to would you go ahead. There are a lot of rather bad press lately the best tax terminology but actually it's rather. The least burdensome taxes we think if you write with it will have to be up front with the income tax to make up for the

shortfall in federal taxes. Well that presumes of course that tax revenues don't continue to expand. Wright also presumes that our government will continue to spend at least the second item of that I would secretly agree D I don't think the government ever is going to where the government of course we just have a voracious appetite for spending. I think a more important consideration and I would agree with most people that we should increase the exemption because a million dollars isn't what it was when that exemption was no it's not inflation adjusted you're absolutely right. Five million for me I think wouldn't be bad. But if it is not there at all isn't there a certain having happened here what happened in England in the last two centuries ago in our last century we are a vast accumulations of money we're all assembled and actually you arrive at a hereditary plutocracy. You know.

Put any limits on the King family consists of the right high level. And unfortunately at least in England that's a rather theri plutocracy wasn't very productive. They tended to just wait there. And the accumulation Well that may be although in this country I think if you look at some of the wealthiest people in this country I would disagree in the sense that they are some of the most entrepreneurial and have made some of the greatest technological advances but I'm not disagreeing with you totally Theoretically it sounds like a very interesting conversation but I'm not sure that I can think about it here and it's not probably exactly what we ought to be visiting about here but you certainly raise I think important philosophical issues. I think what you generally see a little bit is much more to the point and I certainly agree with the hands on approach I want to do exactly the same thing I'd like to see my nieces get as much as I can give them. But steps are great charitable endeavors. The Rockefeller instantly you know. Because that's

exactly how many of them are really giving their children but they wouldn't have the incentive. Do they agree with you again. Absolutely. When were I appreciate the comments of the caller we're at a point we were I'm sorry to say going to have to stop and we because we've used our time and we have a couple of people we cannot take. However today will be back next month and we'll do it again in the meantime by the way for personal finance advice and information. Tune into the program sound money we have it Saturday mornings at 10:00 here on AM 580 they discuss various financial investing topics and there also is the possibility to call in and ask questions on the show. So that is another resource for you you might check that out. And thank you. Well David it's been a genuine pleasure and I just sincerely hope David that it's not very long in the future where you're going to have this gigantic estate tax issue and that you're going to come around to thinking that five million dollars isn't so bad. I think right now I mean dollars isn't so bad if I had it I'd probably be really excited

about it. Then we could talk about how I would invest it very very much for being here.