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WILLS, TRUSTS AND PROBATE - SOME PLANNING OPTIONS AND SOME MYTHS
(Tuesday, June 12, 8:15-9:15 a.m.)



TONY LASCALA :

I'm Tony LaScala from Illinois Benedictine College. Our co~moderator today is Barbara Hollmann, the women's athletic director from the University of Montana. We would like to welcome you early in the morning, especially Andy out there. We felt that Dick Oshins who was our speaker, gave such an informative and entertaining session that we ought to bring him back. We had a great deal of very positive comments.

Thank you very much Tony. You forgot to tell them I also am a notary public. Last year at our session I covered some of the methods of a state pack savings through value minimizing devices. Basically, the concept was tax evaporation through value manipulation. Since we pay estate tax and gift tax on the fair market value of what we own, we can reduce taxes by value minimizing techniques. Basically, what we try to exploit is the concept of fair market value, which is a willing buyer and willing seller concept. What would a willing buyer pay to a willing seller? Both people knowing the facts? Now the cases have held that the willing buyer and willing seller "hypothetically are people to be treated as strangers. Therefore we can manuever even within the family unit to save tax economies. That makes no sense from a tax policy standpoint, but yet we can still do this. For example, let's assume that I have a corporation worth one million dollars. The day before death I transferred to my wife 49 percent of the corporation. There is no transfer tax. why? This is due to a concept called the unlimited marital deducation. That means that I can give to my spouse as much as I want without paying a tax on transferring that property. Let's assume, also in that corporation, that I give to my children two percent of that corporation and I die. Now the two percent transfer is not subject to tax. Why? This is because Congress gives me an annual exclusion for gifts of $10,000 per donee. Congress enacted that and moved the threshold limit from $3,000 to $10,000 a few years ago to encourage gift giving. If my wife joins in. we can give $20,000 per donee. Let's assume I die. What's in my estate? Well, 49 percent of that corporation.

I mentioned to you it was a one million dollar corporation. What is the value that's in my estate?

Well, the first thing we take a look at is that I am a minority shareholder. If you look at this concept and you assume the willing buyer and willing seller are strangers, you could see what I refer to as stock- holder impudence. I. with my 49 percent, cannot influence corporate policy and strategies. I can't dictate what the salaries are going to be or anything like that. Certainly, 49 percent is worth way less than 50 percent and far less than 51 percent. So. I get a discount in valuing the 49 percent. I get a discount from the prorated fair market value. This is for two purposes. One, the minority interest and two, lack of marketability. What is lack of marketability? Lack of marketability says that there is no market for this closely-held stock. If I owned several shares of stock that is traded publicly, certainly that is easier to sell. So now I have 40 percent. Again. it is not valued at 49 percent of that corporation. It is subject to a large discount and might be worth maybe half of that, because nobody in their right mind would pay 49 percent of a valuable corporation for 49 percent interest. At my death I give my 49 percent to my wife in a trust. We are going to be speaking about trusts later and the design of trusts. But, I give it to her in a trust and I can even make her the trustee. Now she dies. What's in her estate? She controls 98 percent of that corporation. We don't look at her control as a trustee. We look at her control merely on that willing buyer and willing seller concept and she owns 49 percent. Therefore. she owns a minority interest. Now at her death, she gives 49 percent to our grandchildren and we can start that generation skipping allover. We can make my son the trustee for my grandchildren and give him effective control. He will own 49 percent perhaps and be trustee overtwo percent, or vice versa. and he can control that business. We are paying very little in the way of transfer tax. Is it legitimate? You bet it is. It certainly is legitimate and this is the kind of tax planning that we do all of the time in my practice.

The United States Supreme Court has even said that you have a right to minimize and take whatever routes you want to minimize your taxes. It is my duty to recommend to you if you are my client. the methods Dick talked about estate planning and inflationarv economv last vear. This year we are ~oin~ to ~o into wills and trusts, probate, some planning options and some myths. Dick is a senior partner in the Las Vegas firm of Oshins, Singer, Segal, Murphy, and Morris. He specializes in tax and state planning with substantial emphasis on planning for closely-held businesses. He has gotten his education allover the world. I should say allover the United States. He has gone to the east coast where he got his J.D. degree from St. John's School of Law in 1966. He has an M.B.A. from the University of California at Berkeley. He has a Masters Degree in taxation with honors from George Washington University. He has also studied state planning and business planning at the Harvard Law School. So you can see he has been around. He has been in Las Vegas now for about 12 years. Prior to coming to Nevada, Mr. Oshins served as a Law Clerk for the United States Court of Claims in Washington, D.C. He is an attorney advisor in the Office of the Tax Legislative Council, U.S. Treasury Department in Washington, D.C. That office reviews and assists in the development of tax regulations, rulings and other tax matters. He takes part in the presentation of the Treasury Department's recommendation for federal tax legislation before Congressional tax committees. Dick was formerly chairman of the Continuing Legal Education Committee and the Chairman of the Tax Committee of the State Bar of Nevada. He is a past president of the Southern Nevada Estate Council, and he has also lectured extensively on tax in state planning matters and is the author of many articles and publications. He is also on the editorial advisory board of the Community Property Journal. Recently, Mr. Oshins served as a chairman of the state planning and an inflationary economy and trust. Major tax savings have occurred through his state planning seminars presented by the New York Law Journal. He was also a featured speaker for the Practicing Law Institute Seminar on Tax Planning for closely-held corporations and spoke on valuations at the Southern Federal Tax Institute. I would like to present Dick Oshins to you and to remind you that he'll be speaking to the wives at 11:00 this morning, or 2:00 I should say this afternoon. I think it would be very wise for those of you who have your spouses with you to be there. You both have to know what you are doing. Not enough of us know. Dick Oshins.

RICHARD OSHINS : by which you can save the taxes. That is just an overall on what we covered last year and we got into some more exotic type of planning. I wanted to give you that as a little bit of a background because what I want to do now is move on to the type of things that you are going to be dealing with in your own lives. They are a lot more relevant. Last year's was not qu1te as relevant. I think it's probably more productive if you ask me questions as we go. So just raise your hand. I'll acknowledge you and then maybe we can trade off comments. I think it is important that you follow what I am dealing with today. Again, I think virtually everyone of you are candidates for trusts.

I want to talk a little bit about probate process and that sort of thing. The major part of my law practice is devoted to estate planning. I find that clients may spend $2,000 a year, maybe have a forty year expectancy of earning money which we call the accumulation aspect of estate planning, and they spend hardly any hours, maybe a couple on the average, in the estate preservation aspects. When you take a look at the estate tax tables and you have that in the handout, you'll find that the first dollar taxed by the present law is taxed at the 34 percent bracket. If I didn't make that gift and I didn't cut the value, and I have another $100.000 taxed in my estate, I will be paying a minimum of $34.000 on that $100,000 that should not have been taxed in my estate. Let me give you an example. Let's assume I have a $650.000 estate. or let's change that a little bit. I have $325.000 and my wife has $325,000. That's what our estate is except for one othe~ asset; life insurance. There is $200,000 worth of life insurance on my life. In our examples today, we are going to assume that the husband dies first. It works exactly the same if the wife dies first. I am also going to assume two minor children in dealing with the example. If that estate, $325,000 for me and $325,000 for my wife, plus $200,000 of life insurance, and I die first and it is an unplanned estate, I give all of my property to my wife. If she survives me or if she doesn't, it goes to my children. With an unplanned estate, the total tax, if we both die this year, will be $191,000, with just one basic trust. If I create a trust and put the life insurance in the trust and I pay my share to that trust, there will be zero tax. Why? This is because I'm taxed from a fair market value of what Iowned at the time of my death. If I don't own the life insurance, it is owned by a third party, the trust, and it will not be taxed in my estate if done properly. Further, let's look at my wife's estate. If I give her the $325,000, now she has $650,000. I can die with $325,000 and there is no tax. After that, we move into that 34 percent bracket. In addition, if she receives the life insurance, she is going to be taxed on that life insurance. So by the use of a very basic trust, I can remove my $325,000 plus the $200,000 of life insurance from her estate and give her all of the use of the property that's in that trust. There will be no estate tax when she dies or when I die. There is a savings of $191,000. Now if I give it to her in a trust, is she going to have the same use of that property? My answer to you is she will have more. And, we are going to get into the design of trusts a little bit later on.

One of my professors, Professor James Kassner, who is the Dean of the Law School at Harvard, said in a state planning class, I would rather receive property in trust than receive it outright. I am going to try and show you that it's more beneficial to receive it in trust than with outright ownership. Basically, the format today is I'd like to go through the objectives of estate planning and deal a little bit with misconceptions about probate and just lay the groundwork and maybe give you some planning hints. Then I would like to go into the use of trusts, and trusts go a long way and solve, in my opinion, everyone of those objectives of estate planning. Then, if we have time, I would like to deal a little bit with fund raising and offer you some suggestions that I have seen in my practice from advising various charities on how to obtain funds to their programs. The first objective of estate planning is effective and efficient ownership of all family properties. Very, very significant is title. How is title held? I think the greatest mistake in the estate plans that I see is the amateur estate plan. This is where property is placed in joint tenancy between the spouses. I have seen situations where the property is held in joint tenancy and is a long will with multiple trusts in it. The problem is that the trust does not operate on the joint tenancy property. Joint tenancy passes by operation of law outside of the probate scheme, so that long drawn trust which was probably a fairly expensive undertaking does you no good. You can't do the tax planning and you can't solve a lot of the problems that we would like to solve through the use of trusts.

Why is property put in joint tenancy? Well typically, we're told we want to avoid this horrible thing called probate. We are going to talk a little bit about probate in a few minutes. Secondly, the properties are put into joint tenancy because what you have done is you have purchased a house and you have run into this real estate agent who automatically puts it in joint tenancy. If you ask the real estate agent or the title officer why is it in joint tenancy, their answer is simple. We do it all of the time. The car dealer, who spoke very little English, was from the country where the car was born. It was an imported car. He was explaining to me the advantages of joint tenancy and that my car should be placed in joint tenancy and we see it all of the time. Attorneys do it. I've lectured to title officers trying to explain to them that they have made a very significant legal decision when they put your home in joint tenancy. If your home is going to be taxed because of their joint tenancy, you are going to be paying at least $.34 on the dollar for that home ~o pass. I have it in the handouts. There is no need to look at comparisons between joint tenancy, wills with trusts, funded revocable trusts, and non funded revocable trusts, and what they do. A very simple revocable trust can avoid probate without theattended tax problems inherent in joint tenancy. It increases taxes substantially if you hold property in joint tenancy. What happens, and we have seen it many times, is that property is put in joint tenancy with a child. What happens there is if the pa~ent passes away and that child is not of the age of majority, the p.operty is passed to a child who cannot legally deal with that asset. Again, a multitude of problems arise just to avoid that terrible thing called probate. Objective two. A plan is needed for transmission of property by gift, by trust and by will. by which you can save the taxes. That is just an overall on what we covered last year and we got into some more exotic type of planning. I wanted to give you that as a little bit of a background because what I want to do now is move on to the type of things that you are going to be dealing with in your own lives. They are a lot more relevant. Last year's was not qu1te as relevant. I think it's probably more productive if you ask me questions as we go. So just raise your hand. I'll acknowledge you and then maybe we can trade off comments. I think it is important that you follow what I am dealing with today. Again, I think virtually everyone of you are candidates for trusts.

I want to talk a little bit about probate process and that sort of thing. The major part of my law practice is devoted to estate planning. I find that clients may spend $2,000 a year, maybe have a forty year expectancy of earning money which we call the accumulation aspect of estate planning, and they spend hardly any hours, maybe a couple on the average, in the estate preservation aspects. When you take a look at the estate tax tables and you have that in the handout, you'll find that the first dollar taxed by the present law is taxed at the 34 percent bracket. If I didn't make that gift and I didn't cut the value, and I have another $100.000 taxed in my estate, I will be paying a minimum of $34.000 on that $100,000 that should not have been taxed in my estate. Let me give you an example. Let's assume I have a $650.000 estate. or let's change that a little bit. I have $325.000 and my wife has $325,000. That's what our estate is except for one othe~ asset; life insurance. There is $200,000 worth of life insurance on my life. In our examples today, we are going to assume that the husband dies first. It works exactly the same if the wife dies first. I am also going to assume two minor children in dealing with the example. If that estate, $325,000 for me and $325,000 for my wife, plus $200,000 of life insurance, and I die first and it is an unplanned estate, I give all of my property to my wife. If she survives me or if she doesn't, it goes to my children. With an unplanned estate, the total tax, if we both die this year, will be $191,000, with just one basic trust. If I create a trust and put the life insurance in the trust and I pay my share to that trust, there will be zero tax. Why? This is because I'm taxed from a fair market value of what Iowned at the time of my death. If I don't own the life insurance, it is owned by a third party, the trust, and it will not be taxed in my estate if done properly. Further, let's look at my wife's estate. If I give her the $325,000, now she has $650,000. I can die with $325,000 and there is no tax. After that, we move into that 34 percent bracket. In addition, if she receives the life insurance, she is going to be taxed on that life insurance. So by the use of a very basic trust, I can remove my $325,000 plus the $200,000 of life insurance from her estate and give her all of the use of the property that's in that trust. There will be no estate tax when she dies or when I die. There is a savings of $191,000. Now if I give it to her in a trust, is she going to have the same use of that property? My answer to you is she will have more. And, we are going to get into the design of trusts a little bit later on.

One of my professors, Professor James Kassner, who is the Dean of the Law School at Harvard, said in a state planning class, I would rather receive property in trust than receive it outright. I am going to try and show you that it's more beneficial to receive it in trust than with outright ownership. Basically, the format today is I'd like to go through the objectives of estate planning and deal a little bit with misconceptions about probate and just lay the groundwork and maybe give you some planning hints. Then I would like to go into the use of trusts, and trusts go a long way and solve, in my opinion, everyone of those objectives of estate planning. Then, if we have time, I would like to deal a little bit with fund raising and offer you some suggestions that I have seen in my practice from advising various charities on how to obtain funds to their programs. The first objective of estate planning is effective and efficient ownership of all family properties. Very, very significant is title. How is title held? I think the greatest mistake in the estate plans that I see is the amateur estate plan. This is where property is placed in joint tenancy between the spouses. I have seen situations where the property is held in joint tenancy and is a long will with multiple trusts in it. The problem is that the trust does not operate on the joint tenancy property. Joint tenancy passes by operation of law outside of the probate scheme, so that long drawn trust which was probably a fairly expensive undertaking does you no good. You can't do the tax planning and you can't solve a lot of the problems that we would like to solve through the use of trusts.

Why is property put in joint tenancy? Well typically, we're told we want to avoid this horrible thing called probate. We are going to talk a little bit about probate in a few minutes. Secondly, the properties are put into joint tenancy because what you have done is you have purchased a house and you have run into this real estate agent who automatically puts it in joint tenancy. If you ask the real estate agent or the title officer why is it in joint tenancy, their answer is simple. We do it all of the time. The car dealer, who spoke very little English, was from the country where the car was born. It was an imported car. He was explaining to me the advantages of joint tenancy and that my car should be placed in joint tenancy and we see it all of the time. Attorneys do it. I've lectured to title officers trying to explain to them that they have made a very significant legal decision when they put your home in joint tenancy. If your home is going to be taxed because of their joint tenancy, you are going to be paying at least $.34 on the dollar for that home ~o pass. I have it in the handouts. There is no need to look at comparisons between joint tenancy, wills with trusts, funded revocable trusts, and non funded revocable trusts, and what they do. A very simple revocable trust can avoid probate without theattended tax problems inherent in joint tenancy. It increases taxes substantially if you hold property in joint tenancy. What happens, and we have seen it many times, is that property is put in joint tenancy with a child. What happens there is if the pa~ent passes away and that child is not of the age of majority, the p.operty is passed to a child who cannot legally deal with that asset. Again, a multitude of problems arise just to avoid that terrible thing called probate. Objective two. A plan is needed for transmission of property by gift, by trust and by will.

Flexibility is very important and when we deal with trusts, I am going to show you how trusts can be a lot more flexible than owning property outright. However, we don't know what is going to happen and what the future holds for our loved ones. In other words, I have seen wills drafted that are just too tight and they were never intended to be that way. For example, a will 15-20 years ago gave to my wife $1,000 a month. That was a heck of a lot of money then. Now, she just might be able to get by with her social securityand in 10 or 15 years, will have a lot of problems. Why not say, wife can have it for her health, education, or maintenance and for support. Give that power to either the wife or independent trustee and now you know she is protected. But we see a lack of flexibility by using specific amounts, and when we get to the use of trust, we will talk about powers of appointment. Powers of appointment also adds to flexibility.

What is a trust? That is the estate planning term which I think confuses us the most. Many clients believe that a trust automatically involves a bank or other tight fisted trustee whose principle goal is to prevent the trust beneficiaries from having the enjoyment of the property which they believe is rightfully theirs. Basically, a trust is an arrangement where one person, called the trustee, holds property and manages the property for the benefit of another person. However, the beneficiary and the trustee can both be the same person. It's a simple concept but it has a myriad of applications and we are going to look at some of those applications in a little bit. But in my opinion, the trust is the cornerstone of estate and family planning. You should think very seriously about it for the future.

What is probate? Well much has been written about avoiding probate. A man named Dacy in 1964 wrote a book called, "How to Avoid Probate." It was a best seller. In fact, that year it was the best selling book of the year. That book is a lousy form of a revocable trust. It entails no tax planning at all or very, very little tax planning. You avoid probate, but you inherit a lot of problems much more serious than the probate process. A friend of mine, in response to Mr. Dacy perhaps, wrote an article for the Miami Tax Institute which is the largest estate planning institute in the United States. His article was entitled:'The Advantages of Probate." There are many significant advantages of probate. For example, let's look at a real life situation. I had a client who owns pieces of several hotels in Las Vegas. His father was on his death bed approximately ten years ago and had the property in a revocable trust. Why in a revocable trust? "To avoid probate." This client was in the 70 percent bracket for income tax purposes and estate tax purposes. We got rid of the revocable trust and we ran the property through probate. That enabled us to take the $15,000 approximately of income that was being generated by the father's estate and put it into the probate estate. The probate estate is a separate taxpayer. It has it's own taxable year, not much unlike a corporation. The income was taxed with an exemption and it was also taxed in the low brackets of the estate. We were able to pay maybe $2,000 a year on taxes rather than the $10,500 that my client would have paid and we had the ability to save in excess of $8,000 in taxes. We kept that probate open for a period of about five years. My client would call me periodically. I knew when he was going to cocktail parties. Why? He'd say, "what's taking you so long to close that estate?" Myanswer was, "whenever you want to close it, we'll close it. Do you need any money? Because we can get some money out." He says, "remember that tax shelter that we have, this is a heck of a tax shelter. We are saving you on that income about $8,500 a year." He nods, and then we are OK until the next cocktail party. A client in the 70 percent bracket who is going to be saving $8,500 for a five-year period would have to earn about $150,000 to net out the tax savings that we save. We were trying to think of ways to keep the estate open. In fact, we went on audit and we fought it for two years on a $620 item. We lost and I charged $1,500, my time to fight that, but it kept the estate open for two years, so we saved $17,000 in taxes while fighting that $620. It's a heck of a deal, if you understand it. There are many tax saving abilities if you keep the probate estate open.

Let's look at it from my aspects as an attorney. When do I get paid? I get paid at the close of probate. If I am selfish, I want to close that estate as soon as I possibly can. Well there are five basic phases of the probate process, and they vary in significance from state to state. But basically, it's about the same. The first step is admission of the will to probate. That's a rather routine situation. What we do is we appoint the various fiduciaries. We want to appoint the executor, guardians for the children and that sort of thing. Will contests are quite rare, and if there is going to be a contest, you are going to have a contest no matter what happens. The second step is inventorying and valuing the assets. Let's assume that we were not going through a probate. We've got to do that anyway. Why? We have to report what those assets are and their value for federal estate tax purposes. So that kind of step we can't avoid and we are not going to avoid costs of doing that, either going through probate or not going through probate.

Another step and one of the primary functions of the executor is the payment of debts. That is often a routine type of thing. In fact, I recommend that we open a probate just so we can start the statute of limitations running on debts even if we don't have a probate estate. We have had a situation in the office where wife one dies. The property was supposed to go into a trust for husband and child. Husband just takes the property and treats it as joint tenancy, never having opened the probate. Four years later the daughter comes into the office and says, "what can I do? Dad just died and wife two is getting all of the property." Well, the probate was still open. The statute of limitations had not run because there was no probate started, so we started the probate. We had the daughter sue the probate estate and she received a large portion of the estate. If the probate had been opened, it would have started the statute of limitations on the creditors running. The daughter would not have been able to come in and get the assets.

The fourth phase is determination of tax liability. Again, this is a major part of the planning pro- cess upon death of somebody. We have to do that if the property goes through probate or does not go through probate, because even joint tenancy property is subject to tax for federal estate tax purposes.

After the four functions we have another menial task, and that is the distribution in accordance with the will. So what we have basically is three menial tasks which are not very expensive and two tasks which we have to do either way. So, ti you are going to be paid to get these tasks done, you might as well utilize the probate process for income tax planning. If you don't like probate it is important to avoid probate. Then utilize the revocable trust, qon't utilize joint tenancy.

The third objective is to have adequate and available money to meet known and reasonably anticipated future needs, particularly on the death of the breadwinner. The primary method is life insurance. Life insurance is purchased for basically two purposes. One is state creation and two is state preservation. One thing that we see quite often is mortgage insurance. If you have ever purchased a house you will recognize that you receive letters in the mail trying to sell you mortgage insurance. I would recommend that you do some shopping at this time. First of all, mortgage insurance is sold basically on emotion. It is an expensive type of decreasing term insurance. Why is it expensive? Who do you think is going to be paying for all of that advertising? But it is an easy sale. Because somebody buys a house and they get this letter and they say, what is going to happen if you as the breadwinner die, your family will not be protected. Again, it is purchased with emotion and I suggest that you shop around and get somewhat of a comparable decrease in term policy ti it is that important to buy mortgage insurance. Further, I would not necessarily utilize that mortgage insurance to payoff the mortgage. I see quite often 5 percent, 5~ percent mortgages floating out there. We don't want to get the money and payoff the mortgage, we are better off putting that money into something that is yielding 10 percent, 11 percent, 12 percent pocketing the difference. Further, if you are going to be buying insurance, why buy it and have it tied to something else where it is going to be in your estate. Utilize it the better way. Put it into an irrevocable life insurance trust.

The fourth objective is management. That is ongoing management of the properties. We may not need that for our spouses, but we certainly have to think about it for our children. The fifth objective is the minimization of taxes and death costs without the frustration of the nontax objectives. Let's move onto the use of trusts. I mentioned to you earlier that I would rather receive property outright than receive it in a trust. I think it is rare the client who should not consider the use of trusts in some capacity even ti it is only for contingencies. New let's look at a couple of the nontax objectives. Why would a husband or a wife who's basic objective is to leave everything to the survivor consider using a trust, when taxes are not a consideration. It's a relatively small es~ate. Well, first might be property management. The surviving spouse or the children might be either incapable of management or legally unable to manage that property. For example, my wife might be insulated from business management through my enti,e life. I have been making all of those decisions. I am going to be telling the spouses this afternoon to learn a little bit about decision making processes. See who you can turn to. She may have been insulated from property management and at the time of my death, that is not the time that she should start learning how to manage property. Now, she can ask for help, that is often an answer. Well can't you help her? My answer to that is we can help her, but the initiative is on the surviving spouse and all too often, she is not able to make the decision as to when she should come to me. She may not want to bother me. She may not want to incur the fees to ask the questions. So the initiative is on that spouse and she may not take that initiative. A second reason is to limit the surviving spouses power of disposition over the assets. For example, I may not want my wife to be able to give the property that I worked for to her next husband rather than my children. There might be dtiferent secondary beneficiaries. In other words, you might have children from prior marriages, or no children. Now what would you have if the survivor's family wins the pot? Probate avoids that the death of the survivor is another reason that you might want to conside a trust.

How about minors? Now unlike the case where there is a surviving spouse and you have an alternative of leaving the property outright or not, with minor children all there is is a choice of fiduciary relation- ships. We have a guardianship on one hand, which is expensive. You have to go to court and you lost that flexibility that I think is very important. The other thing is a trust which can be tailor made for you.

If you have the guardianship the kids get the property when they attain majority. In most states, it's the age of 18. They may turn those assets into liquid assets. You have got to be very, very careful with that. Are the amounts too small to justify a trust? Well with life insurance, I don't think that the amounts will be too small. Even with a $100,000 policy the question isn't is the amount too small. The question is, is the amount too small to justify the expenditure for the remote possibility that my children are going to be orphans. If you really look and you don't weigh the cost factor, you should have a trust. For example, let's assume I have those two children, one is 10 and the other is 20, and I have only $100,000. Now I die and I leave the property outright to them 50/50. Did I treat them fairly? No, I didn't treat them fairly. The typical equality that parents seek is not an equal division at the moment of death, but an equal division at the time the children are raised and ready to go their separate ways.

For example, the children are la and 20. If I give the 20-year old $50,000, he or she is probably almost through college and now is ready to go his separate way with quite a lot of money. This is much more than most of us had when we were about 20 years old. The child who is 10 years old is unable to do that. He has got to use that money to get to the age of 20, and he is going to spend most of it in just growing up. Where we thought we treated them equally, we really didn't. I recommend that we put it into a pot and have the trustee give to these children as much of the income or principle as you determine is best for them. At the age of 23, when both children are through college, then you ought to split that money. Now you have treated them equally. Sure you could pay the older child. He or she may have special needs. For instance, he or she may have orthopedic needs or something like that. Let's use that money and give the trustee the authority to utilize the money just like you would do if you were around and you were doling out the money. I would also like to continue the trust past the age of 18. In fact, I suggest that you continue it for life. Now, please take a look at page 10 of your handout where it says maximum benefit trust. Let's see what I can give to my wife in trust and keep it out of my estate. I basically can give my wife full control over all of my property when I die, just like she has now while I am alive.

But what can I give to my wife in trust and keep it out of her estate? The first thing is that I can give her all of the income for her life. Second, I can give her the right to get money, limited by an ascertainable standard for her health, her education, her maintenance, and her support. Maintenance and support are so broad that she can virtually dip into that pot and get as much as she wants, because later on you'll see she can also be the trustee. My kids aren't going to object. But let me give you another thing we can give them. We can give them the right to withdraw the greater of 5 percent or $5,000 per year on a noncumulative basis. So if I put into a trust $500,000, my wife can withdraw the greater of 5 percent or $5,000. With five percent being $25,000, she can jerk that out without any estate tax problems. once she jerks it out, it is now hers and she is going to be paying tax on it when she dies but she has that flexibility. I don't think she needs it because the terms support and maintenance are sufficient but if it improves her comfort, maybe we will give it to her.

The next thing that we can give her is a special power of appointment. That is the right to give that property to anybody in the world with four exceptions. She cannot give it to herself. Why should she want to give it to herself? She can give it to herself under condition one, two or three. She can't give it to her estate. She doesn't have to give it to her estate. She can give it to any of the beneficiaries. Why go through the estate? She can't give it to her creditors or the creditors of her estate. That is one of the reasons why my kids aren't going to yell about what she takes out as support maintenance. Why? She can change her mind and cut the kids out. That way, my wife knows that on Thanksgiving, Christmas and that sort of thing, she is going to have an invitation to dinner. Her power of appointment is also a power of disappointment. Since she can't give it to her creditors or the creditors of her estate, the use of the trust gives me more family protection. Why? The creditors can't get into that trust. So if my wife gets sued, or if she gets married, that property is insulated in a trust. If my child and I give the property to my child in trust, and my child is sued, those creditors can't get it. That spouse can't get it. When we see the statistics where one out of two people in the United States are getting divorced and I have two children, I have got to figure statistically one of them is going to get divorced. Why put that property up? I can't do that. I can't protect that child if I give that child the property outright. I can if I give it to the child in a trust, and that child can be the trustee.

Now with the power of appointment, you don't have to give all those bundles outright. In other words, if I give the property to my wife and I say she can give it to anybody except herself, her estate, her creditors, or the creditors of her estate, that may also include that next spouse. He may be a bum.

My mother-in-law would then be a two-time loser. If she gave that, and I don't want her to do that, so I limit it. I say she can issue it to our trust outright and if one of my kids is a doctor and has tax problems, she can bypass that child. If one of my kids gets into drugs, she can put it into a trust and continue it, or she can change what we did. Now I don't have to give her all of those rights, but I can do that. Isn't that mntamount to outright ownership. What rights in property would you want that are not in that trust? I submit to you that you have more rights in the trust than outright. Now, with that kind of trust, we have got a problem. I don't have that kind of trust. Why? We have been talking about some estate tax savings, but a tax that is very near and dear to us is the income tax.

If my wife leaves for me $250,000, not a very large amount, and I get the income from that and that income is earning the income of 10 percent, I am going to be paying tax of $12,500 on that income. What she can do is put it into a discretionary trust and that is in the handout. If she puts that property into a discretionary trust, what we do is have the trustee pay to my survivor so much of the income and principle as you determine is appropriate. You can also pay to my children or my grandchildren, so what that trust is going to do is send my kids to college. One of my clients is a touring golf pro whose daughter is going to Stanford, which has a $15,000 tuition. He has got to earn a lot of money, doesn't he? He has got to earn $30,000 to go and pay that tuition, by putting that property into a trust. The trust can send the child to college at the child's bracket, which is certainly lower than his bracket.

What do you have to give up to get the tax advantage? You've got to give. You cannot have the right to get the income because if you have a right to get the income, you are going to be taxed on the income.

Now you are going to say~'wait a minute, you told me before that I can control that property.'. Myanswer is that we do have multiple trustees. My wife passes away and leaves that $250,000 in trust and says,'~usband you are the trustee and you can do whatever you wish with the property and managing that property. II But your closest friend, your law partner or whomever you pick, can be the co-trustee for one purpose, distribution purposes, and that friend of mine or law partner or whatever, is going to make distributions the way I want. I am not really concerned. However, if you are concerned, what can we do? We can give you a right to fire that friend and hire a different friend. Are you giving up anything? I submit to you the answer to that question is absolutely not, and you are getting all of the advantages.

You are getting the income tax advantage. You are getting the estate tax savings by having that property run through without being taxed to either the husband or the wife. You are talking about $325,000 Which can throw off a lot of income.

Now, What happens if I'm worth more than $325,000? A concept called the unlimited marital deduction came into play several years ago. The unlimited marital deduction permits me, by giving property to my spouse, to get a deduction from my estate. So, if I have $1,000,000 and I die with $1,000,000, I make a gift to my wife of everything in excess of $325,000. Why don't I want to give her all of my property? When I give her that property, it is going to be taxed on her estate. So if I give her the entire $1,000,000, she is going to pay estate tax on $1,000,000. If I give her the excess or $675,000, that is all she pays taxes on, and I insulate the rest from being taxed. Now, another interesting concept came into play at the same time as the unlimited marital deduction and that is a Q-tip. A Q-tip is what we all used to think of as a cotton swab. When you are doing estate planning, you don't. A Q-tip is a qualified terminable interest property trust. What that enables you to do is give the property to the surviving spouse, get a deduction so you pay zero estate taxes and then at the death of the surviving spouse, you can determine who gets the property. In death, I don't want my wife to have the ability to give that to the next husband. I would rather pay some taxes on it and be assured that my kids get the property. But through the use of the Q-tip vehicle, you can get the deduction and the tax deferment until the second dies and then transfer that property to the surviving spouse. Make sure that you determine, transfer the property from the surviving spouse down to the children, trust for the children or whatever where you kept the use of 100 percent of the property free of taxes until the second spouse dies. I don't have time to go on to charitable giving. I think we have about a minute or two. If there are any questions from the audience, I would like to entertain them now. If anybody has some questions and they want to grab me, I am going to be here for the next couple of days. Please feel free to just grab me or call me in my room. I will be happy to have some dialogue with you. I thank you very much.

BARBARA HOLLMANN :

Thank you Dick for some very timely and important comments and advice on a subject that I think too many of us think we can make decisions and take action next year. It's time that we all think about that and make some decisions about our future financial planning. So, thank you very much Dick for those comments. He will be available for questions. If any of you have any questions you would like to ask him right now, feel free to ask. Thank you for your attention. I am glad we finally got the room cooled off. I was beginning to think we had taken that move to hell already. It was just a warm room. Thank you and we will move on to stress management and time management at 9:15.