1
LAW AND ECONOMICS Providing for your children's education One of the most common complaints we hear is that a doctor is short of cash because he has to provide for his children's education. If the doctor has a successful practice, it is difficult to be sympathetic to his position. It merely means that he didn't plan far enough ahead even though the educa- tional expense surely was not un- expected. Paying with after-tax dollars is the most expensive way to provide for your children's education. A much better way is to set up a trust for the children long before they are ready for their coUege or professional schooling. Many doctors have discovered the Clifford Trust, a device whereby they place a piece of rental property in a trust fund. During the ten-year period of the trust, the income is paid to the beneficiaries of the trust, usually the doctor's children. At the end of the ten-year period the proper- ty in the trust reverts back to the doctor. This is a classic Clifford Trust. In recent years, the Internal Reve- nue Service has attacked a number of Clifford Trusts set up for the owner- ship of medical ,and dental buildings. It would be questionable to set up a Clifford Trust for a dental building at this time, unless the doctor's prac- tice is incorporated. None of the IRS attacks on Clifford Trusts related to situations where the practice was in- corporated. Incorporation provides a three-sided relationship whereby the tenant is the corporation, not the doctor who has created the trust. On the other hand, if the practice is incorporated, I would see no reason not to proceed with a well-prepared Clifford Trust for a dental building. The only draw- back to this trust of a dental building is that the beneficiaries get the depre- ciation; therefore, obviously, it would not be to the doctor's advantage to create a Clifford Trust for a dental building if the depreciation exceeds or is close to the rent. The doctor has to balance the rental income that would go to the children against the depreciation that he would lose during the ten-year period of the trust. Sometimes, we hear that the doctor cannot put a building into a Clifford Trust if there is a mortgage on the building. This is not true. The doctor could create a Clifford Trust for the building, even though he continues to pay the principle and interest on the mortgage. The doctor may wish to consider a different form of Clifford Trust, with the principle being bonds instead of a building. Let's assume that he owns $30,000 of US government bonds paying 8% interest. This provides him with an income of $2,400 per year, which is taxable to him up to the 70% bracket. He actually has little net re- turn on this investment. If he would put these bonds into a Clifford Trust, the earnings on the bonds would be Continued on page 224
