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What's in a Name?

Shakespeare once proclaimed, "What's in a name? That which we call a rose by any other name would smell as sweet." But when it comes to trusts, a name makes all the difference in the world. Over the years, many specialized forms of trust vehicles have been developed to meet an ever increasing range of financial planning needs. Their popular names read like alphabet soup: GRITs, GRATs, GRUTs, QPRTs -- to name only a few. And unlike Shakespeare's rose, each is distinct and serves a different purpose. Choosing the right trust depends on the needs and goals of each individual. Here is a brief overview of the uses and features of some of the most common trusts:

Grantor Retained Income Trust (GRIT): Taxpayer places assets in an irrevocable trust, naming heirs as beneficiaries, while reserving a right to all income earned by the assets for a fixed term (typically 10 years). The IRS will tax the gift on a reduced basis and future appreciation in value will accrue to the beneficiaries of the trust. If taxpayer dies before the term of the trust expires, the property is included in the estate. Otherwise, at the expiration of the term the trust property will be distributed to the beneficiaries. Grantor Retained Annuity Trust (GRAT): Anything of value, other than a personal residence, can be placed in a trust which pays a fixed annual amount to the taxpayer for a specified number of years. GRATs are excellent tools for transferring income producing assets outside probate while reserving income streams during the taxpayer's lifetime. Grantor Retained Unitrust (GRUT): A GRUT is very similar to a GRAT, except that instead of paying a fixed dollar amount each year, a GRUT pays out a fixed percentage of the trust value. Consequently, GRUTs effectively protect income streams from inflation because, as the value of assets within the trust increases, the annual payout increases as well. Qualified Personal Residence Trust (QPRT): The QPRT is a specialized form of GRIT specifically designed to transfer a personal residence. Taxpayer places a home in an irrevocable trust, naming children as beneficiaries, and reserves a right of use for a set term (typically 10 years). Upon expiration of the term, the beneficiaries own income property, and taxpayer pays rent for the duration of the occupancy. The gift value is substantially discounted for tax purposes and future appreciation is diverted from taxpayer's estate.

GRITs, GRATs and GRUTs are designed to meet particular needs. Each can be used to minimize the tax consequences associated with wealth transfer. But by selecting the proper trust form, and there are many others, the needs of the taxpayer can also be addressed. Perhaps if Shakespeare had envisioned the complexities of our modern tax code and the value of a little well timed legal advice, he might not have been so quick to utter another timeless phrase: "First, let's kill all the lawyers!"

Issue 4

Recordkeeping for the 21st Century

The Internal Revenue Service has proposed regulations that would permit taxpayers to retain tax records via electronic imaging systems such as CD-ROM or computer diskettes. If adopted, Notice 96-6 would permit taxpayers, particularly companies, to greatly reduce the burden of document retention. The proposal pertains to all books and records kept under IRC section 6001 regarding income, excise, employment, estate and gift taxes.

Though no technical specifications were provided in the proposal, qualifying systems must create accurate and complete images of original documents adequately index, store preserve and retrieve imaged documents record when, where, how and by whom images were created include controls to prevent unauthorized alterations or deletions include adequate quality assurance programs and inspections provide support to taxpayers' books (i.e. cross references)

The proposed rules would subject taxpayers to periodic systems tests by IRS personnel to verify compliance. Further, taxpayers will be required to provide technical support to IRS personnel and may be subject to fines for failure to comply with regulations. However, if properly implemented and maintained, electronic images will significantly reduce the cost and frustration associated with tax record retention.

Issue 4

Congressional Support for Flat Tax Builds

The tax reform proposal championed by former republican presidential candidate Steve Forbes, received tacit endorsement last month from the National Commission on Economic Growth and Tax Reform. The 14-member commission, headed by Jack Kemp, issued a 24-page report that sharply criticized the existing tax system, but stopped short of proposing specific changes. Key recommendations of the report, characterized by one analyst as "mostly conceptual," included: adopting a single, low rate with a generous with a generous personal exemption eliminating existing biases against work, saving and investment requiring a two-thirds supermajority vote for congress to raise taxes

The report called for repeal of the current tax code in its entirety, claiming that the present system was "impossibly complex outrageously expensive, overly intrusive, economically destructive and manifestly unfair." Although the flat tax concept advocated by the commission may never be implemented, it seems increasingly certain that our current tax system, last substantially revised in 1988, will soon face overhaul once again.

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