By: A.J. Cook

Estate taxes start at $600,000. For people worth more, planning can cut taxes. The recipe might include direct gifts or gifts in trust. In either case the donor must make a complete gift -- cutting all strings of ownership. Generally, if a person retains the income or control over the asset, the transfer won't save taxes.

First, here are a few rules. After expenses and deductions, estate taxes can run up to 55 percent of almost everything a person worked for on earth. The estate pays taxes from assets that might otherwise pass to children or grandchildren. Spouses receive everything tax-free and the estate gets a $600,000 exclusion to give tax-free to others. Gifts are subject to estate tax rates and share its $600,000 exclusion. An exemption of $10,000 per donee per year is allowed. Gifts over this amount eat into the gift and estate tax exclusion.

Different rules apply for state gift and inheritance taxes. Check with a tax specialist where you live.

Gifts are a major estate planning tool. They can be made outright to the donee or into a trust. If to a trust, the $10,000 exemption is available only if the instrument includes certain complicated provisions.

Trusts may be worth the inconvenience. They give the donor the opportunity, in the trust instrument, to direct who gets the income, who uses the assets, and when the trust ends. Trusts are tricky. Esther Marshall set up a trust that directed the bank trustee to pay her the income. When she died the IRS included the trust assets in her estate because she continued to receive the income.

The moral: Keeping the income from a gift is a grave error.

Many elderly parents think it will save estate taxes to give their homes to their children. Some don't realize estates under $600,000 don't pay death taxes. Others want to continue living there after the gift. This usually doesn't save taxes because parents frequently treat the property as if they still own it.

Emil Linderme, Sr. deeded his Shaker Heights, Ohio home to his three sons. He continued to pay the taxes and insurance and lived there without paying rent until he died, eight years later. The IRS included the house in his estate.

The moral: Be it ever so humble, there's no better place for a tax break than a complete gift.

Sylvia Roemer transferred the title to her Tucson home to her daughter, Elizabeth, and both of them continued to live there. Elizabeth started paying the maintenance and property taxes. Sylvia called her the "landlord." The mother even asked permission of her daughter before inviting friends over.

When Sylvia died, the IRS included the home in her estate saying the gift was incomplete. The agency claimed the two had agreed the mother could live there until she died. The court ruled against the IRS. It said they did not agree.

The Planning Tip: The Roemer case can give us some comfort but don't depend on it entirely. You should pay a fair market rental and your child should pay the insurance, repairs, maintenance and property taxes. For a gift of a home to be effective, like for any other gift, transfer the title and treat the property as if the donee owns it.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.

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Released 05-08-95