Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ASK QUESTIONS WHEN PLANNING GUARDIANSHIP
(6/16/02)

Last week I discussed some of the issues you need consider and the decisions you need to make in identifying and naming a guardian for your child or children. I'd like to conclude this line of inquiry by addressing just a few more points.

Are There Any Other Issues I Need to Be Concerned About?

One major factor overlooked by almost all estate planners, even those who properly address all of the other issues in your estate plan, including how to compensate your children's guardian, is how to resolve the tax consequences of the decisions you make.

Whatever amount of money you decide should be paid to your child's or children's guardian will probably wind up being taxable income. The guardian is being paid for providing a service and this a taxable activity. At the same time, not all of the expenses incurred by the guardian on your child's behalf will be deductible. Certain expenses can be deducted on the guardian's tax return, such as fees he or she incurs in managing the children's assets. Other expenses, however, will not be deductible, such as the inherent expenses of raising a family. This means you are adding to your guardian's taxable income (and the taxes he or she will have to pay), while not providing a means for the guardian to meet this increased tax expense.

Unfortunately, the Internal Revenue Service doesn't provide you or your prospective child's guardian with clear answers on what is and is not deductible. For example, the personal representative of your estate or the trustee of your trust might argue that the funds paid to the guardian are deductible as an expense of the estate or trust administration. If this claim is challenged by the IRS, however, it is unlikely that the estate or trust will prevail.

Another option open to your personal representative or trustee is to argue that the guardian's compensation is a qualified deductible distribution under Subchapter J of the Internal Revenue Code on the theory that the guardian is actually being paid on behalf of the minor child. This argument might prevail, but if it does, the income paid to the guardian will have to be reported on the minor child's income tax return and the child will not be able to claim any offsetting deductions since these payments are non-deductible personal expenses. Of course, if the child's tax bracket is low enough, this inability to claim deductions may be de minimus.

How Do I Establish A Fair Compensation Plan?

This is a difficult question to answer and really depends on the individual guardian. Just how well off is the guardian in his (or her) own right? If the guardian is of independent means and doesn't object to spending his money raising your children, the question of compensation becomes insignificant.

If, on the other hand, the guardian has limited financial means of his own, he is probably going to look to you to supplement his available funds, especially if he is going to incur significant expense in making arrangements to care for your child.

How much will your child (or children) need? If, for example, your son suffers from learning disabilities, he may need special tutoring or training. In this case, you will probably want to designate a specific amount to be used for this purpose so the guardian can fulfill his duty and meet your son's needs.

Who do you want to make the decisions on the amount of compensation to be paid to your child's guardian? Many clients set up a trust for the benefit of their minor children and leave it to the trustee to decide how much the guardian should receive. This can work, but it can also fail miserably if the guardian and trustee don't see eye-to-eye. Rather than put the trustee in the position of keeper of the vault, you should make this decision in advance. Decide how much and how the guardian should be compensated, then provide for these funds to be paid directly to the guardian without requiring your trustee or anyone else to intervene in the process. I guarantee you that everyone will be happier with this result, especially the guardian and trustee. No one likes being put in the middle if they don't need to be there.

Don't Put Off Your Guardianship Decisions.

The loss of a parent is always a traumatic event. If you haven't properly planned for the care and rearing of your child after you are gone, you have seriously compounded the problems your child will encounter once you are gone. If you ignore or delay this decision now, it could have serious consequences for your child later.

Shifting Gears to an Unrelated Tax Issue

Usually I don't mix two topics in the same column, but this is important enough that I thought I should include it this week.

Do You Need to Amend Your 2001 Income Tax Return?

You might want to consider amending your 2001 tax return to take advantage of a recent IRS rule change. Did you know you can elect to treat any asset owned on January 1, 2001 as if it was sold for its fair market value on that date and then immediately repurchased at the same value. If you realize a capital gain on this transaction, you have to report it, but you cannot claim a loss. I know, this sounds like a one way street heading in the government's direction, but there's a pot of gold at the end of the rainbow.

Let's say you have a large capital loss you are not going to be able to deduct since capital losses are limited to $3,000 per year. Let's also say you have some investment property that has been fully depreciated. You sell both properties, use the losses from the sale of the first to offset the gain from the sale of the second and then begin depreciating the properties all over again based on their current fair market values.

Obviously, this strategy won't work for everyone, but I thought it was worth passing on.

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