Question: Please answer some questions about the short-term trust method of giving funds to children: Can such a trust be established in a mutual fund? If so, could additional amounts be placed in the fund each year? How would one determine how much is to be returned to the parent when the trust is terminated ?
Answer: You're talking about what is generally called a "Clifford" trust, after the Supreme Court decision of 1940 in the case of Helvering v. Clifford that provided the guidelines.
It is also known as a "reversionary" trust, because the principal reverts to the grantor at the end of the term, and as an "inter vivos" trust because it is established while the grantor is alive, as opposed to a "testamentary" trust that comes into existence after death.
You can use shares in a mutual fund as the principal or "corpus" of the trust. Almost any asset qualifies, such as cash, stocks, bonds or real estate.
You could place additional amounts in the trust after it is established, but it would complicate record-keeping. More importantly, you might not be able to reap the tax benefit of the trust arrangement on the later deposits.
To qualify for favorable tax treatment-(that is, taxation of income to the beneficiary rather than to the grantor), the trust must run for at least 10 years and a day.
Assets added when the trust has a shorter life than that remaining would have to be segregated; the income from those assets would be taxable to you (the grantor) rather than to your children (the beneficiaries).
At the termination of the trust, you would get back the precise number of fund shares originally placed in the trust (regardless of changes in dollar value) plus the number of shares representing accumulated capital gains distributions during the life of the trust.
Capital gains are not considered income, but rather accruals to the principal. So they stay with the principal, and are reportable as income by the grantor.
Caution: This is a quick and much simplified explanation of a very complex subject. If you are contemplating the establishment of a trust, you should not attempt it without an attorney, preferably one who specializes in trust work.
In addition to the complexities of the trust itself, there are matters of income, estate and gift taxes that should be clearly understood before you proceed further. Consult an expert; you need a good deal more information than I can provide in this column.
Q: Will the fact that one child is a joint tenant with a parent complicate proceedings after death of the parent, whose will stipulates that all children are to share alike?
A: That depends on what you mean by "complicate." It won't make the will any more difficult to administer.
But the property in which the child is a joint tenant will go directly to that child, and its value will not be counted in the assets of the estate for equal distribution to all your children (although it is likely to be included for estate tax purposes).
You can specify a distribution of estate assets that will take into account the passage of jointly owned assets outside the will, and compensate the other children accordingly. This requires rather complicated instructions in your will, but a qualified estate attorney should be able to take care of it properly.
Q: In your tax guide series last winter you said that a separately identified fee for financial counseling in connection with a divorce is deductible on an income tax return. I can find nothing on this subject in the tax books. Can you please cite your source ?
A: You have to go to two different sources to get the complete story. On page 23 of IRS Publication 550 ("Investment Income and Expenses") you will find the authority for claiming the cost of investment advice as an itemized deduction.
Then go to page 11 of IRS Publication 504 ("Tax Information for Divorced or Separated Individuals"). There you will see the authority for an attorney handling a divorce case to allocate his fee between "tax" and "nontax" matters. The IRS then says, "The portion of the fee charged for tax advice is deductible."
My use of the term "financial counseling" may have been too broad. But most financial counseling for people going through a divorce relates either to investments or to tax matters, so I think the two sources quoted will support a valid deduciton.