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A look at ways to reduce what will go to taxes and probate

Keeping property out of the hands of tax collectors and probate courts can be a mind-boggling exercise in futility -- or so it seems. State laws differ not only in how property is conveyed to children, grandchildren, and other heirs but in the taxes they claim -- after the federal tax collectors are satisfied. Generally, these are a few of the options available.

* Gifts before death cost least -- no federal gift taxes if yearly amounts do not exceed $3,000 to each donor and no state taxes in most states. Also, under- Larger gifts can also reduce taxes in many cases unless made within three years of death.

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* Joint ownership of property is considered by some to be a "poor man's will." Joint ownership with children can be risky if the children should be involved in an accident or mismanage their finances. Joint ownership, even between spouses married for the first time, leave open the ownership of assets in case both should be killed in a common catastrophe.

* Trusts can be a useful legal device but are unlikely to reduce estate and inheritance taxes for a single individual. The well-known tax-saving trust can reduce estate taxes substantially for a couple if it is drawn while both are living. The tax-saving trust avoids a second estate tax on about half of a couple's property at the second death.

The living trust transfers a couple's or individual's assets into a trust before death. The trustee manages the property for the owner(s) while they live and distributes the property to heirs at death. The main benefit from using a living trust is the avoidance of probate, with its attendant public display of assets and expenses and its court delays. Two costs are associated with a living trust which must be weighed against benefits. The living trust must be drawn in legal terms -- usually by an attorney. Second, the trustee will normally earn a fee for managing the assets. If the trustee is a family member or friend willing to function without a fee, this cost can be avoided. In some states you can function as trustee -- in other words, you manage your own trust.

Numerous other special trust can be drawn to reserve income from assets during one's lifetime with provisions that assets become the property of the heir at one's death. These function as selective and individual trusts similar to overall living trusts.

* Finally, a will controls the conveyance of property from a decedent to an heir through probate court. In certain states this process may very well be the simplest and least expensive.

Inheritance taxes are determined by the laws of the state where the decedent lived and owned property. Since inheritance taxes are levied on the heir according to that person's relationship to the decedent, substantial savings can be affected if an heir's position can be upgraded -- by adult adoption in some states.

Conveying property and minimizing estate and inheritance taxes are not simple , do-it-yourself tasks for people with considerable wealth. Lawyers in almost every community specialize in estate planning and property conveyance. Now that the American Bar Association permits lawyers to advertise, displays of these specialties in Yellow Pages and in periodicals circulating in a community allows you to pick one or several and talk with them about your problems. Be wary of references to lawyers from financial institutions, as they may be special friends who feed business back to them.

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