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A spouse-bypass estate
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May 24, 2000: 9:22 a.m. ET
Here's how to leave assets to your child if you worry about spouse's savvy
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - You and your husband see eye-to-eye on most aspects of raising your kids -- whether it's what books they'll read or how many chores they'll do. But when it comes to what happens to them after you're gone, you're still from different planets.
So as you do your estate planning, if you're considering leaving a portion of your IRA or pension plan assets to your child, you may want to create a trust that is administered by someone other than your spouse, according to Mike Janko, executive director of the National Association of Financial and Estate Planning (NAFEP) in Salt Lake City.
"This is not an uncommon type of estate planning," Janko said. "There are lots of people with sizable retirement plans with a single child as beneficiary, or minors as beneficiaries."
Click here for estate planning definitions
In one case, a wife who has about $400,000 in IRA assets wanted to leave that money to her 18-month-old daughter. But she doesn't think her husband is good with money, and she doesn't want him in charge of the assets.
 Janko advises that the woman create a trust and name it as the beneficiary of the pension assets, instead of naming the daughter directly as the beneficiary.
By doing this, the wife can name someone other than the husband to control the assets upon her death. In addition, the daughter would pay a smaller income tax bill, according to Janko.
Naming a trustee
If your spouse hates dealing with finances or can't stick with a savings plan, it's understandable you'd be a little nervous about putting him or her in charge of the trust for your child.
Mismatched couples are common when it comes to money matters. (Click here to learn how to get your spouse to save.)
"There are lots of cases where someone names a trust as beneficiary because the husband (or spouse) is a bad money manager," Janko said.
So naming a trustee can be as simple as choosing a relative -- such as a brother or your mother -- or picking an attorney, a certified public accountant (CPA), or even a bank.
Upon your death, the trustee oversees the distribution of the assets to the child, which can be done in a variety of ways.
Your child could receive:
- A lump sum of the assets at age 21.
- A percentage of the assets beginning at age 21 and then the remainder at future intervals (for example, one-third of the assets at age 21, another third at 27, and the last third at 35).
- All of the income and principal as needed over his or her lifetime. In this case, the trustee would meet with the daughter to determine her financial needs.
Reducing the tax sting
Last, and perhaps most important, the wife can save her daughter from paying hefty income taxes by creating a trust and naming it as the beneficiary of her IRA.
Here's how it works: Upon the mother's death, the assets from the IRA would go into the trust based on the distribution schedule the mother chooses for her daughter. That allows the remaining assets to continue to grow in the IRA tax-deferred.
"If the child is the direct beneficiary, then all of the IRA assets go to the child upon the mother's death and are subject to income tax," Janko explained.
Distributions from pension plans, such as 401(k)s or IRAs, are taxed like ordinary income, so the wife's IRA money would be subject to the maximum income tax rate of 39.6 percent if it were to go directly to the daughter.
Meanwhile, the daughter would avoid paying estate taxes if the trust's total was below $675,000. That amount increases gradually to $1 million by 2006.
As with all such matters, experts suggest you seek out a good estate lawyer or planner, since laws can be complicated and can vary from state to state.
"These issues are extremely complicated," Janko said. 
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