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RomanceandTrust

An Educational Tale

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Romance and Trust From The Art of Passing the Buck

By Charles Arthur

Part I Imagine a gentleman in love with a lady. Not just any gentleman, this man has had a very successful business career and amassed a substantial net worth. Unfortunately, his personal life has yet to match the success of his career as attested to by child support and alimony payments to two ex-wives. The lady, never married, provides well enough for herself but has not achieved anywhere near the success the gentleman has. Their relationship has reached the point that they have discussed marriage, at least in the abstract. Given his history, and the financial disparity between the couple, his friends (and his attorney) have strongly advised a prenuptial contract. The memory of two divorces has inclined him to agree. When he raised the idea (once again, only in the abstract) the lady gave him a very different perspective. She said that she saw a prenuptial agreement as a way to sabotage the relationship by agreeing in advance what to do when it failed. Reflecting on what had gone wrong in his previous relationships, and why, he could see a certain wisdom to her argument. Besides, he knew that if she married him it would not be for his money. Of course, a friend reminded him that he had “known” the same thing about wife number two, right up to the acrimonious battle in divorce court. As talk of marriage became less and less abstract, the issue of a prenuptial agreement loomed larger and larger as a potential showstopper. It finally reached a point that the couple decided to seek counsel from a third party and scheduled time to talk with a mutual friend, a minister. During the conversation with the minister, they got to the real issue behind their feelings about the prenuptial agreement. It came down to a matter of trust. Did he really trust her and her motives? Did she really trust him to do right by her? As they discussed the matter of trust, the minister realized that he might have a solution to the dilemma. He related that his congregation had recently received a large gift from a trust set up by one of the members. Could a trust possibly provide an alternative to the prenuptial agreement that they could both live with? When they both agreed to explore the possibility, the minister found the phone number of the member whose trust had made the gift to the church. After the minister called the

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member and explained the situation, the member agreed that a trust offered an excellent solution to the problem and gave the minister the name and phone number of his trust specialist. Before they left the minister’s office, the couple had talked with the trust specialist on the phone. She agreed that a trust could provide an answer to each of their needs in this situation, and then informed them of the costs in both time and money necessary to properly set up a trust. They readily agreed it would be a worthwhile investment and set an appointment to meet with her. She also got their email addresses so she could send them information to study before their meeting. At their meeting the trust specialist explained that a trust works by having a person give away his or her property and possessions to a board of trustees to be held in trust for named beneficiaries. In some cases, if the couple wants to be involved in trust administration, they can use some of the assets. Hence the gentleman would have nothing the lady could take in case of a divorce, but he would not lose the use of the property and possessions. The lady would still have what she had brought to the marriage and, under the community property laws, a claim to half of what the couple made during their marriage, but nothing more. Both readily agreed that this was fair and made at least as much sense as a prenuptial agreement. So, they got down to business with the specialist inquiring as to what the gentleman really wanted to do with his money as well as what obligations he had. While listening carefully and asking questions that could have only come from years of experience the specialist made pages of notes. She then asked the lady what she wanted from the relationship and some questions about her finances, and took more notes. When they had concluded the interviews the specialist said that she could see that the couple really did love each other and that she looked forward to helping them achieve their goals. Explaining that she needed time to digest the information and draw up a plan, she offered the suggestion that they get back together the following week and they agreed. During the second meeting the trust specialist laid out a plan that proposed a management trust and under it five different business trusts:

• The gentleman would set up two trusts, one for each of his to his ex-wives, to make the alimony payments.

• He would set up a third trust to provide for the child support payments and college expenses for his children.

• He would set up a fourth trust to hold his premarriage assets. • The lady would also set up a trust to hold her premarriage assets.

After numerous questions and answers and extensive discussion, the couple requested two weeks to think about the proposal and decide exactly how they wanted to proceed. The trust specialist agreed that would probably be wise and set an appointment. Before

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they left she told them to begin giving serious consideration as to whom they would want to have as trustees and as the trust protector(s). The following week the gentleman had his divorce attorney contact both of his ex-wives’ lawyers and explain what he proposed to do regarding the alimony payments, child support and college expenses. Once the ex-wives’ lawyers understood that having the money in a trust guaranteed the alimony payments would continue no matter what happened to the gentleman, they had no problem getting approval from their clients. Of course, the same applied to the idea of a trust to provide child support and college expenses. By the time of the third meeting the couple had agreed that they would basically follow the trust specialist’s proposal. However they wanted a few minor modifications. Instead of a single trust for all three of the gentleman’s children, he wanted to set up a trust for each of them. Once his first ex-wife had understood what he wanted to do, she had asked if she could also put something into the trust for her children. When ex-wife number two heard this she insisted that she also wanted to put something in the trust for her child. In order to simplify matters they all agreed to set up a trust for each child. The trust specialist recommended that they set these trusts up as asset trusts under the ex-wives business trusts. These trusts would not only provide child support and college expenses, they would assure each child had a proper financial foundation for his or her life. In addition to giving the gentleman a certain peace of mind on the subject, the lady felt that by encouraging him to be generous in doing this she could reassure the children that she wasn’t after their inheritance. They also wanted another trust set up as their family trust; the gentleman had offered to fund the trust with $250,000 as one of his wedding presents to his wife to be. They told the trust specialist that working together on how he would give away his money had drawn the two of them closer together as she saw more of his generosity and he saw more of her support. Having heard their ideas she agreed that they made a lot of sense. She then explained what it would take in the way of time and effort to put each of the trusts together. Given the amount of work involved, she estimated six to nine months before they would complete the documents, especially given the extent of the gentleman’s holdings. He promised to have his staff make it a priority to assist on the matter. After all the couple had already scheduled their friend, the minister, and his church’s chapel for a day in just under eight months for the wedding. Part II As the owner of three businesses, the gentleman (we’ll call him Ed) did not believe in putting all of his eggs in one basket. Also, his study of the materials given him by the

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trust specialist (we’ll call her Teri) had convinced him of the value of having more than one or two trusts, given that you could afford to set them up properly, which he could. Therefore he had decided that he would set up seven trusts, one for each of his three children, one for each of his two ex-wives (Anne and Diane), one for his premarriage assets and one as a family trust with his new wife. His fiancée, Mary, would also set up one for her premarriage assets. After spending a few hours filling out a questionnaire for each trust he wanted to set up, the gentleman met with the trust specialist and they discussed the answers he provided and determined the purpose of each trust. That information would come in handy in choosing the people to be involved in the trust. Obviously Ed would be the settlor and the beneficiaries would vary by trust. This left the key positions of trustees and protector for each trust to be filled. Teri explained the importance of having at least one adverse trustee on each trust to make it a legitimate trust. She also explained that she had a handful of people working with her, serving as trustees on family trusts, and would be available to work as trustees on any trusts she helped the lady and gentleman establish. Not being related to the settlor, they qualified as adverse trustees. Since he would probably also want people he knew working as trustees on the trusts, she would work to train them to properly to handle trust administration. They agreed each trust would have at least one trustee chosen by Ed and one experienced trustee. One of the trustees working with Teri happened to stop by the office just as the meeting ended. Teri introduced him as Tony and explained that the young man had started working as trustee on a trust set up by a friend of his, and had so impressed her that she had invited him to work on one other trust. He explained that he was working on an MBA and enjoyed the trust work as it gave him an education into building wealth that surpassed what he could get in the classroom. His personality clicked with Ed’s and, after a discussion with Teri, they all agreed that the young man would work as the adverse trustee on some of the trusts set up by the gentleman. After further conversation, Ed realized he might not want the young man as the adverse trustee on the trust for his premarriage assets or his new family trust, as that could create a conflict of interest should he want to hire Tony to help run one or more of his businesses. Teri assured him she could provide another qualified adverse trustee for each of those two trusts. Over the next two weeks Ed managed to find the people to serve as trustees on each of the trusts. He filled the trustee positions on his children’s trusts by approaching their godparents. The older son’s godfather, an insurance agent, the daughter’s godmother, a realtor, and the younger son’s godfather, a small business owner, each agreed to serve on their respective godchild’s trust. He let each of the ex-wives pick their own trustee. For his own trusts Ed decided he needed three trustees. As first trustee he would use Tony, the young man he had met at Teri’s office. A friend of his from college, whom he

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had done business with over the years, would also serve as a trustee. Finally, a young lady, who also worked with Teri, would serve as the adverse trustee. Having the trustees in place, he was ready to find protectors for the trusts. Anne, his first wife suggested that he use her attorney as the protector on her trust and the trusts for each of her children. Knowing the attorney to be both competent and a worthy opponent of anyone who would challenge the trust, Ed readily agreed. On hearing about this, Diane, his second wife suggested her attorney for her trust and her son’s trust. Once again, Ed agreed. As protector on his own trusts he chose an attorney who had served him well as corporate counsel over the years. Meanwhile, Mary had also met with Teri regarding the trust for her premarriage assets. She agreed it made sense to have the same young lady as adverse trustee on her trust as would serve on the family trust that she and her husband-to-be were setting up, and selected an uncle to serve as the second trustee. An old friend of hers who worked in arbitration agreed to serve as protector on her trust. With the cast assembled, it was time to draft the actual indentures for the trusts. While this could have come first, Mary and Ed agreed with Teri that it would be worth letting the trustees and the protectors join the process. This would give everyone a fuller understanding of what the trust they served on was about and why it existed. It also helped them better understand their particular roles. Obviously the couple hoped their trust would grow over time, but of all the trusts the new family trust proved the simplest to set up. The entire res consisted of $250,000 cash to start the trust. The beneficiaries were the husband and wife-to-be, his children and the state park system. Ed and his children had spent many happy hours camping in some of the state parks, and by naming the state parks as a beneficiary, it made it impossible for a court to change the trust without the presence of the state’s Attorney General representing the people. Since it involved so few assets and so few people, Mary’s trust took next to the least amount of time to set up. She basically deeded her equity in her condo to the trust. According to the indenture any money from renting the condo would go first to her to pay the mortgage. Any profits from the rent would go to pay the expenses of the trust and to the beneficiaries. As settlor, Mary named her husband-to-be and herself and a favorite charity, a group of public libraries, as the beneficiaries. (By naming the public libraries, the people became a beneficiary and it never hurts to have the attorney general on your side if someone challenges your trust in court.) Her car went into an asset trust, along with TCUs from the main trust; this provided income for the asset trust to pay for the maintenance, insurance and eventual replacement of the car. Jewelry, artwork and other valuables went into a second asset trust with sufficient TCUs to cover the insurance. While each of Ed’s ex-wives had kept the house at the time of the divorce, his attorney (he could afford the best) had made sure he kept a 50% financial interest in each house. Each ex-wife got her house in her trust in exchange for TCUs, which were divided among

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the children’s trusts. Ed also put sufficient stocks and bonds into each of the ex-wives’ trusts to insure payments at least equal to their alimony payments. Each child’s trust received enough in the way of stocks and bonds to insure that the beneficial payments to the child (via the mother as the adult guardian) would meet or exceed the gentleman’s child support payments, as well as cover the expenses of running the trust. As part of his financial planning for putting his children through college the gentleman had purchased a condo near a college on each child’s first birthday. His thinking was that, by buying the condo with a 15-year mortgage, it would be paid off by the time the child graduated from high school, and could be used to get a loan to help pay for the child’s education and/or provide the child a place to live while in college. Each child’s trust had an asset trust to hold the condo the gentleman had purchased for that child with a stipulation in the indenture that money from the condo (all of which had positive cash flow) would go the child’s main trust to be held to pay for educational expenses. In order to insure a close working relationship between his children (who really loved each other, even when their mothers did not get along), the gentleman had each of the children’s trust issue 15% of its TCUs to each of the other siblings’ trusts. This would give the children a vested interest in the success of their siblings. Since the gentleman had put a fair of amount of his personal stock from his corporations into the various trusts, he had done so with the stipulation that the trusts assign the chairman of the board of each respective corporation their proxies. This allowed him to distribute some of his wealth to his children and ex-wives without giving them control of his companies. (Had he had the proxies assigned to himself, he would have been seen as the owner of the stock for tax purposes under Internal revenue Code 675(4)(A).) Having worked with his people to determine how to move his premarriage assets into a trust, and setting up all of the other trusts had given the gentleman some ideas as to how to use his own trust to help his businesses. Part III While setting up the trust that he and Mary had agreed to use in lieu of a pre-nuptial agreement, Ed had realized the value of using trusts in estate planning and assuring his children’s futures. He also realized that he could use trusts to improve the bottom line for his businesses. The most obvious example involved the company cars. His companies provided company cars for over a dozen field reps and top executives. While the companies had the money to purchase the cars outright, they realized far greater tax breaks by leasing the cars and writing off the lease payments. In fact, it was enough of an advantage that Ron, Ed’s accountant, promised to shoot Ed if he ever bought a car again.

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After a conversation between Ed, Ron and Teri, Ed had Teri draw up the paperwork for trusts to buy the cars and then lease them back to his companies. They agreed to not have more than two or three cars in each trust in order to limit the exposure to liability in case of an accident. (The car Ted Kennedy was driving at Chapaquidick was owned by a trust that owned just one other car. The Kennedy family owned nothing and was not sued.) It turned out that the best way for Ed to do this was for the trusts to actually be business trusts under the three holding trusts he had set up for his children. This meant that a portion of the money Ed’s companies were writing off on taxes would go to help pay for his children’s educations. Ed also made similar arrangements for major office equipment (e.g., expensive copiers), as well as other equipment for his businesses. While doing this, Ed realized that he had stumbled upon the solution to a problem he had with one of his businesses. He and one of his top engineers had come up with a new way to manufacture one of their products. It involved a unique way of using three different pieces of equipment together. This resulted in cutting the time of manufacturing almost in half and cutting the expense by about a third. Obviously this would give Ed’s company a real edge in a competitive market. The problem was that he knew at least one of the three vendors he would buy the equipment from would let his competitors know what Ed had bought. Eventually a smart competitor would put one and one and one together and figure out what Ed was doing (or, to use the technical term, reverse engineer the process). The epiphany that helped Ed solve his problem came when he realized that each of his three children would have a trust buying one of the three pieces of equipment and then leasing it to his company. By having the equipment bought by three separate “companies” (i.e., the trusts using D.B.A.s) and delivered to three separate addresses he could maintain a very high level of confidentiality. After all, no trustee could tell anyone to whom the trust had leased the equipment. Given his faster turn around on orders and his very competitive pricing using the new process, Ed’s company got enough new business that it needed to expand into a new facility. During a discussion with Ron they talked about the advantages of buying versus leasing. Ron asked why not do both? Put together a trust to buy the building, and then have the company lease it from the trust. By doing this, the business got the tax advantages of the lease, while the trust realized the appreciation of the property and profits from the lease payments. Meanwhile, another of Ed’s businesses had a slightly different problem. It owned all of its equipment, but needed to spend more money on research and development. The company was asset rich but cash poor and Ed felt that this could harm its ability to stay innovative and competitive. Ron suggested that Ed offer to let the trusts buy the equipment and lease it back to the company. This would give the company the cash it needed and a nice set of tax write-offs, while the profit from the leases would once again go to his children’s trusts.

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Obviously all of the above depended on the trustees of his children’s trusts working with Ed to make this happen. Fortunately, they knew Ed to be an exceptional businessman and agreed that any venture he undertook would be a good investment. On a more personal business matter, Ed and Mary decided to buy a new home. While Ed’s businesses were doing well enough that he could afford to pay cash for the house they wanted, you can imagine Ron’s reaction to that (it probably involved a reference to his .357). Ed talked with the trustees on the trust he had established prior to the wedding and explained that he wanted to borrow money from the trust to buy the house. They agreed to loan him the money at a rate equal to the average of the best rates he could get from any other three established lenders. This eliminated questions regarding the legitimacy of the loan. He and Mary got the interest write-off on his taxes, and the trust realized the profit from the loan. Part IV Not everyone has had the positive experiences with trusts that Ed and Mary have had. Ed found this out when they were at a party and ran into Rick, an old friend of Ed’s and, like Ed, a successful, self-made businessman. Rick was somewhat surprised when Ed introduced Mary as his fiancée. Later in the evening Rick had the opportunity to talk with Ed while Mary wasn’t there. Rick expressed the same concern that many of Ed’s other friends had voiced, specifically about needing a prenuptial agreement. Ed explained that he and Mary had discussed it and decided that a trust offered a better alternative. The trust protected him and his assets without subconsciously setting the marriage up to fail by saying what would happen when it did. Ed did not expect Rick’s response saying that he had tried trusts before and would not go there again. Ed asked why his friend was so negative about them? Rick said it was a long story, but if Ed wanted to get together for lunch some time in the next week or so he would be happy to share it. The following week the two gentlemen met for lunch and Rick told the tale of his misadventures with trusts. Rick was in the right place at the right time during the dot com boom and sold one of his companies for $3.5 million. Our fortunate entrepreneur knew he needed to manage the money properly, but wasn’t sure exactly how to do it. He remembered a friend from college had come from old money and occasionally mentioned his “fund.” One day during his junior year Rick asked about the “fund.” His friend said that he was not at liberty to give details, but that it was from a family trust and that was the way that the truly wealthy handled their money and estates. So Rick decided that, with his newfound wealth, he needed a trust.

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Not knowing any more than that about trusts, he decided to ask his lawyer what he should do. Of course his lawyer was more than happy to draw up a statutory trust, even though he had no experience with trusts. Having done some research over martinis with a banker buddy, the lawyer drafted an indenture and named the bank as trustee. He also named himself as protector for a tidy annual fee. Rick cut to the chase by saying that things could have turned out a lot worse if his accountant had not spotted some serious problems while working on Rick’s tax return. The accountant said that he was not an expert in trusts, but the way the lawyer had set things up the money would obviously be gone within ten years. Fortunately for Rick the lawyer did not even know enough to make the trust irrevocable otherwise our almost bamboozled millionaire would not have gotten out of it so easily. As it was his accountant had to reassure him he would lose less by paying the extra taxes when he revoked the trust than he would lose to the bank and attorney as fees. Realizing that he needed to know more about trusts, Rick did what any self respecting dot commer would do. He Googled trusts. Adding the phrase “estate planning” narrowed the results from almost 30 million to just under 5 million. After a few weeks of reading through what looked to be the most promising pages on the net, Rick decided to order a do-it-yourself kit from a company in the mid-west. Not only did they promise to help him with any questions he might have, they also guaranteed he could save tens of thousands of dollars in taxes. Rick spent a great deal of the next three months going through the documentation that he received. He got a real education about the income tax system, the IRS and the Federal Reserve. He even picked up a few concepts regarding trusts and how to use his to avoid taxes. Once he felt he had absorbed enough information, he set about writing his trust indenture. It went reasonably well at first. He had a few questions and the company that sold him the kit was able to answer these over the phone. As he got further into the process, his questions became more technical, and it took slightly longer to get answers. Rick figured this was understandable, and was willing to wait for the best person to answer his questions. However, Rick called with a question about the rights of the beneficiaries one day and did not get his answer within a day or two as he expected. When he called back to find out what was happening the receptionist seemed to want to dodge his questions about why it was taking so long to get an answer. This left Rick feeling uneasy enough that he decided to Google the company to see if he could find out what was happening. It didn’t take but a few minutes for Rick to discover the reason he had not gotten an answer was that the gentleman he had been working with was now in Federal custody for selling illegal tax avoidance schemes. Reading the article on the net more closely he saw where the IRS had also confiscated the company’s computers and records in order to go after the company’s clients. Our slightly panicked friend called his accountant, explained what had happened and heeded his advice to return all of the material to the company with a letter explaining that

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he found the process of writing an indenture to be too much and requesting a refund. Of course he sent it certified mail. Given his experiences with trusts, Rick said that he decided to manage his money by working with another buddy from college who had become a financial planner / insurance agent / stockbroker, and to have his accountant set up an IRA. Ed said that he understood Rick’s choices given his history with trusts, but went on to say that the truly wealthy do use trusts to manage and preserve their wealth. He explained how his businesses leased equipment from his children’s trusts, thereby getting the tax breaks from the lease while the profits from the lease went to help pay for the children’s education. Then he told Rick how his trust had loaned him the money to buy the home he and Mary would live in. Rick asked if Ed didn’t have enough cash to buy the house? Ed assured him that he did, but that the trustees saw the loan on the house as a sound investment providing for the beneficiaries including the soon to be newlyweds. Of course the couple would also get the tax deduction for the interest on their home loan. These were just two examples of how the wealthy use trusts to increase their wealth. Rick said that he would like to meet the person who helped Ed and Mary set up their trusts. Ed told him that he would have Teri, his trust specialist, give Rick a call and that she would be happy to meet with Rick and his accountant. Part V Ed and Mary had dinner one evening with two of their favorite people, her cousin, Will and his fiancée, Marlene. Both Ed and Will were successful, self-made businessmen. Both were on their third marriage. Each had three children from prior marriages. Over the main course Ed and Will found themselves discussing their children, the schools they went to and what colleges they hoped the children might go to. That, of course, brought up how they wanted to provide for their children’s futures. Ed, now experienced with estate planning, explained how he had set up trusts for his children that provided for child support at present, would pay for college when the time came, and after that would provide a financial base for each of his offspring as they made their way in life. Mary added that they had also set up their own trusts as a preferable alternative to a prenuptial agreement. Will and Marlene expressed an interest in learning more about trust so the following day Ed had a three-way phone call introducing Teri, his trust specialist, and Will. Teri agreed to meet with Will and Marlene the following week. At the meeting the three of them discussed what Will and Marlene wanted to achieve in their lives and how a trust or group of trusts could help. Although Teri explained that because of the oath of privacy that was part of each trust she could not discuss the details of any of the trusts, she did acknowledge Ed and Mary’s use of trusts. Having such an

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example of the benefits of trusts, the couple readily agreed to have Teri work with them to set up their own trusts. Like Ed, Will wanted to set up a trust for each of his three children. Unlike Will he ran into a few more complications. In Will’s opinion his first wife had never really taken proper care of their two children. He suspected that at least a considerable fraction of the money he sent for child support went to support her personal habits. But, as hard as he tried to get custody, the court always sided with the mother. He saw the trusts as a way to, among other things, assure that his children benefited from the money meant for them. However, he and his first wife would have to agree to any change in the court ordered child support settlement, and she made it patently clear that she would not agree to what Will proposed. Assessing what it would cost in both time and money to get the court order changed without his ex’s consent, Will decided it would be cheaper to simply “bribe” her to agree by almost doubling his alimony payment to her. After discussing the situation with Teri, he decided not to set up a trust for his first wife or have her listed as a beneficiary on any of the trusts, since he only had to pay alimony for another three years when their second child turned 18. Their oldest child, a daughter, was turning 18 in just a few months. When Will informed his daughter of the arrangement she told him that she did not want a trust; she wanted all of the money on her 18th birthday so she could move to New York and pursue a career in acting. Will tried to explain that the money would pay for her to move out and go to college, or even an accredited acting school but, even after he loosened the clause he planned to put in the trust requiring her to graduate from college by age 24 or “forfeit 20% of the money in the trust to a scholarship fund for someone who will appreciate it, ” she was still upset and refused to talk to him. His second wife, Karen, had remarried and her husband, Jim, loved her son but never got along well with Will. The stepfather saw the father as a rival for the son’s affection and Will, being much more successful financially, could buy much more for the boy. This compounded jealousy with resentment. Without any input from her husband, Will’s ex-wife would have probably welcomed the idea of a trust for her son. However, Jim insisted that Will had some ulterior motive and that she should not agree to the modification of the child support terms. Will knew Jim well enough to know that he would twist anything Will tried to say and use it “prove” how this was not what was best for the boy. He finally decided that he would simply have to confront the problem head-on and asked Jim if he knew a good accountant that he trusted? Jim said that he had a friend who was “good with numbers and as honest as any bean counter ever was.” Will asked Jim to find out how much his friend would charge for four hours of his time to consult on this.

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Two days later Jim called Will and told him that it would cost $500 for a consultation. In response, Will said that he would send Jim a $500 money order made out to the accountant along with the actual wording of the child support settlement and the clause dealing with the son as a beneficiary of the proposed trust. All he wanted was for Jim to have a qualified third party examine the documents and tell Jim what the bottom line was on each. It came as no surprise to Will that Jim’s friend found the trust much more generous. After all, having the experience with his first wife’s handling of child support, he had had his lawyer fight for much lower child support in the settlement with his second wife. But, in what he saw as fairness to the boy, Will had spent as much on his son as he had saved in child support. Jim’s reaction on the other hand, did surprise Will. He accused Will of trying to buy the boy’s love and of “rubbing it in our faces how much money you have.” After an almost sleepless night Will finally realized the problem and the solution became obvious. He called Jim and invited him and Karen to meet him for lunch that Saturday when he knew that their son would be away on a YMCA ski trip that Will had given him as a birthday present. Lunch started not with appetizers, but with an apology from Will. He explained that he understood Jim’s resentment and how it looked like he was trying to buy his son’s affection. He also explained how and why he had his attorney fight for lower child support and how it felt it only fair to spend as much on his son as on his two other children. Acknowledging Karen as a much more concerned and responsible parent than his first wife, he admitted that she should have had the money to spend on their son. Then he went on to thank Jim for his part in raising their son and to recognize his concern for the boy’s well being. Having said all of that, he then asked Jim if he would be a trustee on the boy’s trust so that their son would know that what he received came from both of his fathers? Jim asked for time to think about it. After two days of discussion with Karen, Jim decided to accept Will’s offer. He called Will, thanked him for his offer to become a trustee, and invited him to dinner with the family so he could help explain to their son how the trust would work. Part VI It became obvious to Teri fairly early on in her conversations with Marlene that, although the young lady appeared pleasant and attractive, she would benefit from serious help in managing her affairs. Marlene had recently inherited a substantial sum and Will had kept her from doing anything foolish with it. He had discussed this matter with Teri and asked what they could do in setting up Marlene’s trust to make sure that she would not lose her inheritance. After discussing the situation with both of them, Teri said that Marlene needed to choose a first trustee that had both business savvy and impeccable character. It took our perplexed heiress a couple of days but she decided to ask her uncle, Dave, to act as first

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trustee. Although only a few years older than her, her mother’s younger brother had done quite well in his business. When Marlene told Teri about her uncle and that he had greed to act as first trustee, the trust specialist reacted by saying she thought Dave would make a good trustee and that they would need at least one other non-relative as an adverse trustee. She then set up a meeting with Marlene and Dave. At the meeting Teri very frankly discussed the concerns that she and Will shared about Marlene’s inheritance and how neither of them wanted to see it mismanaged. Dave said that he would do his best to help his favorite niece and asked Teri what that might look like? Drawing on her knowledge gained from setting up numerous trusts, Teri answered that it would depend on what Marlene wanted to accomplish with the money. Marlene told them that with the income from her job and with her marriage to Will she had not planned to use the money for herself, but she would like to give it to people or organizations she felt deserved to receive it because of the good they were doing. Her uncle asked if she wanted to just give it all away at once or if she would rather have it invested and then have the interest available to donate. The niece said she would get greater satisfaction from making ongoing donations and gifts from the interest. She also said that eventually she and Will would like to have a family and it would be nice to leave something for their child or children. Having determined what the grantor of the trust really wanted, the trust specialist brought up the subject of taxes. Teri explained that the courts have held creation of a trust to lessen tax liability is legal if the transfer of the property is permanent and made in good faith. Therefore, by placing her inheritance into a trust (i.e., giving it away), Marlene would no longer have the tax liability for the income generated by the assets. If she kept control of the inheritance she could be treated as the owner of those assets for tax purposes. However, Internal Revenue Code § 674(b) does allow certain exceptions, including:

q Power to apply income to support of a dependent. The income, but not the corpus, may go to the support of a dependent of the grantor without causing the grantor to be treated as owner of the trust for tax purposes.

q Power to allocate among charitable beneficiaries. If a portion of the income is irrevocably designated to go to charitable contributions (as defined in the code), then the grantor may decide the exact distribution of such funds without being considered the owner of the trust for tax purposes.

q Power to distribute corpus. The grantor may distribute the actual corpus of the trust to the beneficiaries of the trust without being considered the owner of the trust for tax purposes.

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q Power to withhold income temporarily. The trust will eventually have to distribute any income withheld from a beneficiary to that beneficiary, but may withhold it for a period of time for the purpose of increasing the corpus without the part withheld being considered the property of the grantor.

q Power to withhold income during disability of a beneficiary. This power also applies to beneficiaries under age 21. This would allow the trust corpus to grow until such time as the beneficiary could use the money without the grantor being held liable for the taxes as the owner of the amount withheld.

q Power to allocate between corpus and income. Having a power to allocate receipts and disbursements as between corpus and income, even though expressed in broad language does not mean the grantor owns the property of the trust for tax purposes.

Given this particular settlor’s lack of business experience, and her general disinterest in the subject, Teri believed that it might serve Marlene better in this case if the indenture did not reserve all of these powers to her. The trust specialist also noted that by giving these powers to the trustee(s) the heiress would no longer have the tax liability. She went on to explain that the trustees would get a small percentage of what the trust disbursed as part of their compensation, and therefore had an incentive to maintain and even grow the trust. Dave, not knowing about trusts, found the information very enlightening. He noted that by withholding at least a portion of the income the trust could build the corpus to the point that it would, in a few years, have a substantial amount for the couple’s child or children, while at the same time still giving some away each year. His business mind also grasped the advantage of the ability to grow the corpus by properly allocating the receipts and disbursements. All three agreed it made sense to give the trustees the powers to manage the business and cash flow aspects of the trust. This took a burden off of Marlene and freed her to decide how the disbursable cash of the trust would be allocated among the charitable beneficiaries, the one thing she had really wanted to do and the one power she would keep. Conclusion No, they didn’t live happily ever after; this is the real world. However, Ed and Mary, and their friends who they introduced to Teri, did fare better than the average person. And while they did not live happily ever after, their legacies and family fortunes did. For more information on Trusts, please visit http://passingbucks.com and order The Art of Passing the Buck, Volume I; Secrets of Wills and Trusts Revealed.