Family Financial Planning - The Best Tax Shelter

Year-round financial planning can help move your family toward its financial goals. An attorney or financial advisor has many strategies that may assist you in accumulating wealth, preserving it from loss through current and future taxation, and transmitting it to the younger generation of your family. Permanent tax savings, deferring taxes, and making certain types of gifts are all potential financial strategies, but they must be tailored to your specific family situation, and some may have significant disadvantages as well. Nevertheless, effective family financial planning can be the best tax shelter.

A primary financial strategy is to achieve permanent tax savings where possible, and to defer other taxes to future years when the expected rate would be lower. Permanent savings on income tax include reduction or elimination of the minimum tax on tax preferences. You should also consider taking steps to reduce the estate tax your family would have to pay upon your death by transferring some of your property now to a family member whose future estate will be below $1,000,000 at death. You can defer income taxes by accelerating deductions and deferring income or by utilizing the marital deduction. Be aware that this type of deferral will cause a tax upon your spouse’s death. The end result of any of these strategies will be a shelter, but you will not run the risks inherent in the notorious “tax shelters” promoted so vigorously in prior years.

Another important way to reduce the total taxes paid by your family as a whole is to give property within the family before your death. This strategy may yield substantial income and estate tax savings, depending on how you structure your gift. Currently, a donor may give $11,000, and gifts may be split between spouses. Family financial planning in this category also includes non-gifts such as paying a child’s tuition directly to the school.

What, when and how much a parent should give to a child during the parent’s lifetime is a matter of individual judgment, tax considerations notwithstanding. You must consider carefully whether your own financial condition might worsen in future years. Most parents want to have becoming financially dependent on a child. This fear is reflected in the saying, “One parent can take care of ten children, but ten children cannot take care of one parent.”

In addition, you must be aware of some disadvantages that may arise concerning family gift giving. For income tax purposes, the IRS considers a gift to be “unearned” income. In 2002, the unearned income above $750 of a child under age 14 is taxed at the parents’ marginal tax rate, which will most likely be higher than the child’s. Potential “basis” and “step-up basis” issues should also be addressed with your financial advisor.

Whether you are planning to make a gift or are writing your will, you should also be aware of the generation-skipping transfer tax. This is levied at the highest estate and gift tax rate, currently 50%, on certain transfers to those below the first generation (that is, the generation following your own children). Currently there is a $1,100,000 exemption per transferor, or gift-giver. Careful planning is necessary to minimize or eliminate such taxes.

You and your family will benefit from a comprehensive financial approach that offers you the most effective strategies and addresses your specific needs. It is important that such planning be done year-round, not just near April 15th. With effective planning, your family can become the best tax shelter and tax saving opportunity you can find.