The Ideal Estate and Asset Protection Plan for the Successful Family

“The Family Zaibatsu”

This Preventive Law Study was written by:  John Goodson, Colleen Manley and Christine Goodson Forakis.

Summary

1.      Family “Zaibatsu.”

1.1    History.
The Japanese word zaibatsu means literally "wealth group." These groups were powerful industrial or financial combines in Japan that associated together for security and success roughly between 1868-1912. They were an amalgamation of sometimes hundreds of businesses controlled by a holding company owned by a single family. One of the major zaibatsu with a name you may recognize was (and is) Mitsubishi. This concept is similar to the systems of inter-protecting fortresses that the Japanese have historically used in their military ventures.

1.2    Application to Tax, Estate and Asset Protection Planning. The “Ideal Estate Plan” for the successful family is structured as a “Family Zaibatsu” whereby the family is protected from: (1) estate taxes on death; (2) substantial income and capital gains taxes during a family member’s lifetime; (3) inter-family hassles and lawsuits; (4) probate court involvement on death and disability; (5) predatory creditors, as well as malpractice and other lawsuits; and (6) seizure by the creditors of your children and grandchildren after it has been distributed to them, including divorced spouses, and in-laws. At the same time, you are able to keep control until you die or are disabled, and designate agents to handle your medical and other emergencies when you are unable to.

1.3    The Safest Asset Protection Uses The “Tried and True.” Our studies and experience have revealed that natural patterns exist for the formation of the family structures. These natural patterns may be compared with the winning formations of a professional football team. Some patterns work and some do not. For example, some football teams develop a pattern like the T-formation that works consistently over a long period.

1.3.1    We intend to show a formation that we have used consistently for successful American families. We recommend that other families use this “Family Zaibatsu” formation for their family investments and for their professional and business endeavors.

1.3.2    The legal Zaibatsu is like an erector set. As your family begins building wealth, you will use only a few components of the erector set. As your estate becomes more complex, the other units will be placed in the pattern as the size and complexity warrants. This article indicates the symptoms that trigger each one of the elements to be placed in the legal Zaibatsu pattern.

2.      Minimum Legal Structures and Moves For the Successful Family.

2.1    Basic Emergency Legal/Medical Documents. The first move that we recommend in structuring your family is to ensure that you (and your spouse) in each instance have the following basic emergency legal/medical documents. These include:

2.1.1    A Durable General Power of Attorney to provide authority for someone in the family to sign legal documents for you if you are disabled, missing, or away;

2.1.2    A Durable Medical Power of Attorney to provide legally enforceable instructions when someone is in the hospital and unable to direct the medical team themselves;

2.1.3    A Living Will to provide legally enforceable instructions on how to handle the situation when a person is irrevocably dying, severely brain damaged, brain dead, or in a persistent vegetative state;

2.1.4    A Last Will and Testament that, in this Zaibatsu arrangement, primarily designates a person to act as guardian, conservator, or personal representative for you and the children if it becomes necessary to appoint these fiduciaries and which ensures that any leftover assets that are not otherwise accounted for pour over into the family Revocable Trust for management;

2.1.5    A HIPAA Authorization that authorizes your family members and agents to have access to your documents and the medical information of disabled Trustees when emergencies occur; and

2.1.6    A Durable Mental Health Care Power of Attorney to allow your fiduciaries to take care of you if you become mentally ill.

2.2    Documents Effective in All States. These documents should be prepared in such a way that they will be effective not only in every State of the United States but also in other countries, should either spouse decide to travel abroad. The biggest error of estate planning is drafting documents to cover the statutes of one state but not to comprehensively cover the statutes of all other states.

2.3    Other Protective Documents. To add to the effectiveness of these basic emergency documents, we want our clients to (1) carry wallet information cards that disclose where these documents are located, (2) fill out a form that is left with their attorney indicating the place where their important documents and information are located, and (3) be sure they have medical authorizations to allow persons other than the parents to handle the medical emergencies of all the minor children in the family.

2.4    Basic Emergency Medical/Legal Documents for Young Adult Children. Many times, we think that our young adult children do not need protective legal documents because it will be a long time before they will need them. Not so. Too many times we have encountered instances where young adult children have experienced accidents, the parents have not had these basic emergency/legal documents, and the whole family endured unnecessary emotional strain, extra litigation and other expenses, and catastrophic delays.

2.5    Basic Emergency Medical/Legal Documents for Parents. If you do not have the six basic legal emergency documents that you have for yourself in place for your parents, you may be in a situation of having to unnecessarily go to court to have a special guardian or conservator appointed for your parents. The failure of your parents to have the basic emergency documents will greatly effect you and your siblings adversely. We recommend, therefore, that you show your parents the basic emergency/legal medical documents that you have, explain why you have them, and encourage them to have the same documentation drawn up.

2.6    Wealthy Parents’ Generation-Skipping Revocable Trust. If you (or your spouse) anticipate any inheritances of any size from your parents, encourage them to create generation-skipping Revocable Trusts and to place all of their assets in these trusts so that you will not be hit over the head with extra assets that will be subject to your possible creditors and estate taxes.

2.6.1    We recommend that your parents set up in their trusts a generation-skipping arrangement whereby you and your spouse will receive income and principal as you need it and have those assets encompassed within the trust protected from creditors and estate taxes when you die. Doing so will enable you to have the proverbial cake and eat it too. You have the grazing rights on your inheritance from your parents without the exposure to estate tax losses or predator creditors. When you and/or your spouse dies, the assets in these generation skipping trusts will then go to your children without estate taxes.

2.7    Revocable Living Family Fortress Dynasty Trust. Read any newspaper and you will see all of the seminars and ads for the conventional Revocable Living Trusts. These trusts cost anywhere from $300 to $2,000. However, many times these documents contain mistakes that are costly to fix. We regularly review documents of other attorneys and grade them from the perspective of “Preventive Law.” We have yet to find another law firm’s trust that completely passes our high standards. Preventive Law entails thinking ahead like a master chess champion and anticipating every likely “checkmate” to your family or business and avoiding them by advance preparation. Good management is never having any surprises!

2.7.1    We structure what we call a Revocable Family Fortress Dynasty Trust. It has the usual ABQD provisions that provide that, on the death of one of the spouses, the surviving spouse has the direct or indirect right to use all of the assets to provide for his or her needs until death. If these ABQD provisions are properly structured, no estate taxes will be assessed on the death of the first spouse because of the unlimited marital deduction and the estate tax exemption, which the trust incorporates. On the death of the second spouse, no estate taxes will be assessed up to $4 million¹ (We say $4 million but actually the total net worth of assets in both the ABQD subtrusts could be higher because, after the first death the appreciation in the descendant’s trust—the B Trust—is not subject to estate taxes on the death of the second spouse. So theoretically, if properly invested the assets in the B Trust could be worth $1 billion with the assets in the A and Q Trusts only $2 million, and not be taxed at the time of the second death).

2.7.2    In the Revocable Family Fortress Dynasty Trust, after both spouses die, the assets are placed into a what is essentially a protective fortress. The trustees receive instructions from the parents in the form of a Statement of Wishes that indicates when and how they want the trustees to distribute the income and principal to the children and grandchildren to carry out the values and standards of the family. The trustees receive the right under the spendthrift/discretionary distribution provisions to give the children more or less as circumstances prevail. During the lives of the children and the grandchildren, however, neither the creditors nor the potentially greedy spouses of the children and grandchildren are able to encroach into the trust. The Revocable Family Fortress Dynasty Trust is set up with a series of co-trustees and successor co-trustees like the Indian tribes of the West, whereby if a chief was killed, another chief immediately would spring into battle so that there was always a successor chief, or in the case of the trust, a successor trustee will carry on the instructions of the grantor. These provisions allow maximum flexibility and fine tuning by you as the circumstances of each of your children and grandchildren requires.

2.7.3    The trust also has built-in generation-skipping exemption provisions to avoid estate taxes on the death of the children for up to $2 million of inheritance.

2.8    All Toys in the Toy Box. One of the biggest mistakes that we have found in families throughout the United States is the failure to “fully fund the Revocable Trust” (i.e., putting all of the toys in the toy box before death). Funding the Trust means re-titling the assets so that the Trust is the new owner and you are the Trustee. Every asset under your ownership and control must be owned by the Revocable Trust before death or disability². You want all of the toys in the toy box so that it will not be necessary to hire an attorney to find the toys and to use the probate court to place the toys into the toy box at a later date.

2.9    The Family Squabble Prevention Documents. We have designed three documents that we want every family to use to encourage harmony and to prevent hassles and lawsuits by and among the family and among the businesses operated by the family.

2.9.1    Integrity Agreement. One of these harmony documents is the Integrity Agreement for Preventing and Resolving Dissension. This document is a progressive alternative dispute resolution agreement that everybody in the family signs and that is incorporated into all of the legal documents of the family. The document requires family members to resolve their differences with one another in the following order: communicate in person, communicate in writing, negotiate, meditate, and arbitrate. Never going to court keeps the dispute process confidential within the family—sort of like having your own court system within the family. We have used the Integrity Agreement for over 15 years and have found it to be 100% effective in avoiding unnecessary squabbles and court fights among family members. Although the legal community may not like it, it keeps attorneys from charging you high fees to solve something that you may empower yourselves to do.

2.9.2.     Confidentiality Agreement. Another harmony document that we developed and use is the Inter-Organization/Family Confidentially and Non-Disclosure Agreement. The members of the family and family business want to be able to communicate openly and completely without the fear of having secrets, private matters, and family dirty laundry communicated outside the family. The Confidentiality Agreement requires all family members to maintain secrecy and privacy and prevents bad mouthing outside the family or business. It is enforceable without court action through the Integrity Agreement. It also ensures that an in-law in a divorce action will not use private family information as a wedge to obtain a higher settlement in a divorce case against one of your children.

2.9.3.     Post-Marriage Agreement. A third harmony document is the Post-Marriage Agreement. The Post-Marriage Agreement allows the spouses to determine the optimum arrangement for their assets on their death or divorce so that they have the “best of both worlds.” For example, in a community property state, you want an agreement that provides that all of the assets are community property at the time of death to avoid future capital gains taxes. If you divorce, you naturally want an agreement that provides that the separate property of the husband and wife remain the separate property of the husband and wife at the time of the divorce.

2.9.3.1.    The Post-Marriage Agreement accomplishes this arrangement, cleans up any loose ends that were not provided for in the Pre-Marriage Agreement, and serves as a substitute Pre-Marriage Agreement if no such agreement was entered into before the marriage. Our legal laboratory experiments proved to us that when the spouses have a written agreement—a Pre-Marriage Agreement or a Post-Marriage Agreement—between them as to major factors of what is going to happen on death, disability, and divorce, there is less likelihood of divorce or disharmony in the future.

3.      Additional Structures and Moves When the Family’s Wealth Increases.

3.1.    Irrevocable Family Fortress Dynasty Trust. When the fair market value net-worth of your estate exceeds $4 million for a married couple, or $2 million for a single person, you will want to have an Irrevocable Family Fortress Dynasty Trust. When you calculate the fair market value net-worth, you must include the life insurance policies on the lives of the husband and wife as part of the net-worth on death that will be subject to estate tax. Consequently, families with retirement plans and life insurance exceeding the $4 million/$2 million exemption amount warrants the Irrevocable Family Fortress Dynasty Trust.

3.1.1.     Spendthrift Provisions. The Irrevocable Family Fortress Dynasty Trust is set up with the same discretionary spendthrift provisions as the Revocable Family Fortress Dynasty Trust and provides for your children and grandchildren as long as they live. Actually, in both the Revocable Family Fortress Dynasty Trust and the Irrevocable Family Fortress Dynasty Trust, you provide for more descendants than your children and grandchildren. If the assets remain in the trust until your grandchildren die, you have provided for the next two generations because the grandchildren will have used the money of the trust to raise their children and grandchildren. What a great feeling it is to know that what you have acquired during your lifetime will ensure the security and success of your bloodline for generations.

3.1.2.     Life Insurance. One of the first assets we recommend placing in the Irrevocable Family Fortress Dynasty Trust is all of the life insurance for the family and the children. Generally, as a “rule of thumb,” we like to see enough life insurance for the family to have a fund from which the income and other liquid investments will replace the family’s income, pay the debts of the family, and provide for the children’s education. We want enough insurance on the stay-at-home spouse so that the main bread-earner may elect not to work for a year to spend time with the children or to pursue other interests -- usually about $200,000 to $500,000 of insurance. Generally, we want at least $100,000.00 of insurance on each of the children to ensure their insurability with a right built into the life insurance policy for the children to purchase more insurance at later ages without the necessity of proving insurability.

3.1.3.     Gifting of Limited Partnership Interests. In the Irrevocable Family Fortress Dynasty Trust, we also recommend placing limited partnership ownership percentages of (1) your family limited partnership, (2) your Family Commercial LLC (taxed as a C Corp), and possibly, (3) the percentages of family limited liability companies to prevent estate taxes on the appreciation of the percentage ownership of these businesses and investments that are owned outside the family’s estate in the Irrevocable Family Fortress Dynasty Trusts.

3.1.4.     Last to Die Life Insurance. If your estate were ever subject to estate taxes because of size, you also will want to have a last-to-die life insurance policy, which is a very economical type of policy to cover the estate taxes. This balancing or teeter-tottering ensures that there is enough life insurance to pay any estate taxes to match the increases in wealth. Using life insurance to pay estate taxes is the cheapest way to pay estate taxes.

3.1.5.     Liquid Asset Management Account. In most instances, the Irrevocable Family Fortress Dynasty Trust has a liquid asset management account with a stock brokerage firm. The account provides writing and “street name” account privileges to allow the accumulation of liquid assets in the irrevocable trust. With the liquid asset management account and the life insurance, an unusual phenomenon exists. We have the choice of investing extra monies by over funding life insurance policies where the increases in cash value are tax free or of the choice of leaving the cash in stocks and bond investments. Each year, the trustees of the trust will make a choice whether to make an investment in the life insurance policies or the stocks and bonds to provide the highest after-tax yield and to move back and forth as the economics change.

3.1.6.     Availability of Assets. The Irrevocable Family Fortress Dynasty Trust provides emergency money that you may borrow with careful documentation. It also provides what we call a personal pension plan because the accumulations in the cash values in the life insurance and the accumulations in the liquid asset management account may be borrowed back tax free for the retirement of the husband and wife. The debts created by these loans are beneficial because they place a “creditor’s screen” on the assets of the husband and wife to protect those assets against outside creditors and detailed malpractice claims.

3.1.7.     Protection from Taxes and Creditors. Every asset in the Irrevocable Family Fortress Dynasty Trust is protected from your estate taxes, malpractice claims, and other creditors. These moves must be made before you are sued for malpractice or after you are sued for malpractice with careful supervision by your attorney.

3.1.8.     Use of Additional Irrevocable Family Fortress Dynasty Trusts. When you have grandchildren and great grandchildren, you will want to set up separate Irrevocable Family Fortress Dynasty Trusts for each generation. These trusts will increase the number of gifts that you may give tax free each year to relatives and allow your children, who may be developing themselves into estate tax exposure, to gift down to these Family Fortress Dynasty Trusts of the lower generations.

4.       Uniform Gift to Minor Accounts. One of the details that we have seen that is needed in estates with minor children is having uniform gift to minor accounts set up in advance for the minor children with persons other than the parents as custodians of those accounts. These accounts are used as a receptacle for processing money advantageously for the benefit of the minor children. Distributions may be taken out of the Irrevocable Family Fortress Dynasty Trust to take advantage of the minimal tax brackets of the children without the funds going directly to the children. The custodians of the uniform gift to minor accounts may then return money to reinvest it in the Irrevocable Family Fortress Dynasty Trust, which in turn will reinvest it in the family partnerships or the family limited liability companies as may be appropriate. The uniform gift to minor custodians also are available to sign notices of gifts to minor children as may be required for tax purpose to substantiate the so-called “crummy” provisions of the Irrevocable Trusts.

5.      The Professional Limited Liability Company. We recommend that every professional (whether a doctor, lawyer, CPA, etc.) have a Professional Limited Liability Company set up to be taxed as a C Corporation (unless the person has a Capstone Pillbox LLC being taxed as a C Corp - see below). We use a Limited Liability Company because that type of entity provides greater asset protection features. We set up the company to be taxed as a C Corporation because the government allows C Corporations to enjoy certain fringe benefits that sole proprietors and S Corporations do not enjoy³ (i.e., the fringe benefits of medical insurance, disability insurance, umbrella liability insurance, and retirement plans of various types that allow 100% tax deductions on those expenditures).

Another reason for having the professional corporation is to protect against liability incurred when employees of the professional corporation experience an accident, such as the receptionist running her car into a bus load of brain surgeons on her way to make a deposit at the bank. Without the professional corporation, the liability for such an accident would be charged against the family’s entire estate that has not been gifted to the Irrevocable Family Fortress Dynasty Trust.

6.      Family Limited Partnerships for Investments. As a family begins to put aside extra money for investments, we recommend that the family set up a family limited partnership to hold these investments. The advantages of the Family Limited Partnership to the family are: (1) the assets in the family partnership are protected from creditor lawsuits; (2) the family partnership permits discounted gifts to be made to family members of lesser generations, allowing the husband and wife to gift $36,000 of value to each child and still have the gift treated within an annual $24,000 gift tax exclusion of the husband and wife; (3) the partnership may allow estate taxes to be deferred or paid over fourteen years instead of within nine months of death; and (4) the investments are centralized in one place to increase the likelihood of more advantageous bulk rate commercial dealings.

The investments that we recommend placing in the limited partnership include:

• A liquid asset management account with check writing and street name privileges to use as a structure for a diversified stock, bond, and security portfolio.
• Equipment that may be leased to the professional corporation.
• Office buildings that may be leased to the professional corporation.
• Real estate ventures. The safest way to invest in real estate is to go into a joint venture with one of the best local builders by offering to joint venture land banking for that builder where you put up 50% for the acquisition of land and the builder puts up 50% for a return of at least 15% compounded. If you put up 50% to 80% for the acquisition, you want a compounded, annually-guaranteed return of 20%.
• Investments in carefully selected second mortgages with wrap-around arrangements for the underlying first mortgage so that the borrower pays one payment to an escrow to facilitate accounting and foreclosure. The return on this arrangement will be at least 15%. This arrangement also provides the opportunity to foreclose upon choice property with an investment of 60% to 70% of the appraised value.
• A family farm or a ranch. We encourage wealthy families to purchase a farm or a ranch for ultimate family security for themselves or in conjunction with other families where you have a live-in care cropper manager of the facility. Having a family farm or ranch ensures in the case of war or adversity, that a place always exists for the family to go and for the family members to learn how to grow food and raise animals if all else fails.

These investments allow the family to expand its horizons beyond a medical office to keep up with the outside world and to enhance the opportunities for the family.

7.      Limited Liability Companies to Cage Dangerous Assets. If you own any investments that are what we call “dangerous investments” (e.g., a building that could catch on fire, explode, or allow someone to fall down the stairs and break their back; a farm where someone could fall into the well or be run over by a tractor; or a joint venture with a contractor where someone could be injured), the dangerous investments should be placed in a limited liability company. The limited liability company is a new legal structure that protects the assets from creditors from within and creditors from without. For example, if an injured party files a lawsuit involving the farm, the building, or the construction project, the injured party will be able to levy only on the assets of the building, farm, or construction project and not on the other assets belonging to the family.

7.1.     The limited liability company is owned by the limited partnership (and possibly also by the Irrevocable Family Fortress Dynasty Trust). If the investment—such as the building—appreciates faster than the other assets in the limited partnership, you want 99% of the limited liability company owned in the next generation by the Irrevocable Family Fortress Dynasty Trust and only 1% owned by the family partnership. If the reverse is true, you want 99% of the limited liability company owned by the limited partnership and 1% owned by the Irrevocable Family Fortress Dynasty Trust. By having a separate limited liability company for each dangerous asset, you prevent the so-called domino effect where a lawsuit involving one asset spills over to the others. You also provide an opportunity for the manager of the limited liability company to be given a percentage ownership in the limited liability company in return for loyal service, thereby providing an incentive.

8.      Capstone Pillbox LLC. (for more detailed information see our Capstone Pillbox Preventive Law Study.)The family limited partnership needs at least two partners in order to legally be a partnership. One of these partners may be a LLC that may be mostly (but not entirely⁴) owned by the clients’ Revocable Family Fortress Dynasty Trust. This is normally set up to be taxed as a C Corporation, unless the family already has a company taxed as a C Corporation. Having one entity taxed as a C Corp and one as a Disregarded Entity gives the CPA choices when advising the client’s family, much like a "Salt River Project Irrigation Supervisor" -- diverting income among the various family entities so as to place the income where it will be in the lowest tax brackets.

9.       Family Commercial LLC. This is a separate LLC set up with 10% voting membership interest and 90% non-voting membership interest for general commercial endeavors with a C Corporation status. All 90% of the LLC’s non-voting membership interests and 5% of the 10% allotment of voting membership interest would be owned by your Irrevocable Family Fortress Dynasty Trust. The balance of the 5% allocated voting membership interest, or 50% of the voting membership interest, would be owned by the Revocable Family Fortress Dynasty Trust (or possibly the family's Limited Partnership).

9.1.     Because the Family Commercial LLC is not more than 50% owned by the family, it will be treated as a separate corporation for tax purposes and qualify for the so-called surtax exemption, which is a low tax bracket for the first $100,000 of income in the corporation. Presumably, you personally will be in an income tax bracket of more than 50% so it will be refreshing to have income accumulating within the Family Commercial LLC at a 15% tax rate on the first $50,000 and an advantageous tax rate on the next $50,000 of income.

9.2.     The Family Commercial LLC also allows additional fringe benefits for family members without requiring matching fringe benefits for the employees of the professional corporation. The husband and wife, and other members of the family, may be officers of the Family Commercial LLC, allowing expense-paid tax deductible meetings among the family members at various advantageous locations. The Family Commercial LLC will provide various goods and services for your professional corporation and possibly other professional corporations, such as accounts receivable factoring, office cleaning, administration services, acquiring and sub-leasing space, handling pick-up and deliveries, bookkeeping services, and management services. If you were a doctor or other professional, using this business entity would remove the details and headaches of administration and management from your office so that you may focus on your professional practice without having your practice involved in all of this extra “stuff.

9.3.     The Family Commercial LLC also may serve as the manager for the limited liability companies and the limited partnership and receive management fees for managing these endeavors. Doing so allows the pulling away of high bracket income and transforms it into low bracket income within the Family Commercial LLC. The Family Commercial LLC allows the family members to set up a retirement plan for the family members working in the family corporation that may be highly advantageous.

10.    Retirement Plans. The retirement plans that may be set up with a professional corporation and with the Family Commercial LLC (taxed as a C Corp) are both good and bad. The advantages of the government-approved retirement plans include deferring income taxes when there is extra income within the family by placing monies in the retirement plans tax free, avoiding the current income taxes and having these funds temporarily protected from income and capital gains taxes on the accumulations within the plan and protected from predator creditors of the family while they accumulate within government-sponsored retirement plans (e.g., pension plans, profit sharing plans, 401K plans, and IRA Keogh plans).

10.1.    Another advantage of retirement plans is that they provide income for the husband and wife for as long as they live and for as long as the monies do not run out from the retirement plan.

10.2.    Now for the bad news. With a wealthy family, the retirement plans are subject to 70% to 90% combined income and estate taxes, and possibly, excess accumulation taxes when both spouses die. We have found that the best solution for handling the retirement plan “meltdown,” when both participating spouses die, is to begin taking money out of the retirement plan as fast as possible on retirement and use the extra money from the retirement distributions to purchase additional low cost last-to-die life insurance on the lives of the husband and wife in the Irrevocable Family Fortress Dynasty Trust, to replace the lost monies when the pension plan melts down.

10.3.    To make the arrangements even sweeter for the family, we recommend that instead of allowing 70% to 90% of the assets in the pension plan from going to the United States government in taxes, a contingent beneficiary of the retirement plan be designated as a Family Foundation, which is set up as a component fund of a community foundation in the name of the family (the John and Sue Biggiver Foundation) where the family retains a say as to where the income on the funds in the foundation go each year.

11.    The Charitable Remainder Unitrust as an Additional Retirement Plan. As time passes, some of the assets in the limited partnership may appreciate in value and are subject to large capital gains taxes when they are sold. When this situation occurs, an opportunity exists to set up another retirement plan for you—a Charitable Remainder Unitrust, which has decided advantages for the family.

11.1.    Before the appreciated asset is sold, it will be taken out of whatever structure it is in and transferred to a Charitable Remainder Unitrust. This move avoids capital gains taxes that occur when the property is later sold by the Charitable Remainder Unitrust to the prospective buyer. The transfer to the Charitable Remainder Unitrust results in a charitable income tax reduction based on IRS tax tables with larger deductions for older clients and lesser deductions for younger clients. You and your spouse will receive up to a 10% return per year on the monies and property placed in the Charitable Remainder Unitrust as a retirement plan. On your death, there will be no estate taxes, and whatever is left over will be transferred tax free to your Family Foundation.

11.2.    The Charitable Remainder Unitrust allows your family to avoid capital gains taxes, reduce income taxes, provide for retirement as long as you live, and put the property in your Family Foundation under the same type of control that the Rockefeller’s exercise with the Rockefeller Foundation.

12.    Family Foundations Set Up as a Component Fund of a Community Foundation. We recommend that a family foundation, set up as a component fund of a community foundation, be used as the receptacle for the remainder left over in the retirement plan, the Charitable Remainder Unitrust, and any unannuitized deferred annuities on your death.

12.1.    A well set up Family Foundation allows the family to have a significant say so (in the same manner the Rockefeller Family has a say so on the Rockefeller Foundation) over the charitable distributions and the investments within the Family Foundation through the children and grandchildren’s lives and for the lives of all generations of the family now and henceforth, all in your name.

12.2.    The family members enjoy indirect “benefits” from the income being distributed from the foundation by them to their churches, schools, hospitals, boy scout troops, girl scout troops, colleges, universities, and favorite charities. In fact, we call these foundations Mini-Rockefeller Foundations because the family enjoys the same sensations that wealthy families in the United States have felt when they deal with the distribution of charitable funds and achieve power and prestige through the use of those funds.

12.3.    The family foundation also may be used as a receptacle for what we call “pre-paid tithing.” If you are giving $5,000 to charity, why not take $5,000 in stock that has appreciated and give it to your Family Foundation, sell the stock, and use the $5,000 of proceeds to invest at 10%. Henceforth, now and forever, pay out the $5,000 to the charities that you had previously supported. What you win with this arrangement, without any loss in cash flow, is capital gains tax and estate tax avoidance. At the same time, you enjoy the use of a $50,000 charitable deduction this year which provides about $25,000 in cash back to the family in the year of the charitable gift. Wow! This is truly a 1+1=11 transaction.

13.    Qualified Personal Residence Trust. Many families have large expensive homes that are appreciating in value. Normally, this is a great delight to the family. However, the realization that, when you both die the appreciated value of the home will be severely eroded by taxes, possibly taxed at a rate as high as 55%, will depress you quickly.

13.1.   This realization takes all the fun out of owning an expensive home unless you utilize the technique of the Qualified Personal Residence Trust (“QPRT”).

13.2.   The QPRT allows you to set up a trust where you enjoy the home for a term of 20 to 25 years. After the expiration of the term, the home reverts to the ownership of your Irrevocable Family Fortress Dynasty Trust for the benefit of your children. At this point, you pay no estate taxes on the home upon death. Until the termination point, you have substantially no interference with the use of your home for equity loans, roll-overs into another home or, after age 55, $125,000 capital gain avoidance on a residence sale. Life insurance may be used as a hedge against the possibility that both husband and wife will die before the term of the QPRT expires and results in unanticipated estate taxes.

13.3.   What do you do after the children own the home at the termination of the trust? You have several advantageous options. The best option is to lease the home from your children and reduce the ultimate estate taxes on your estate with each of the rental payments. You can smile inside with each payment, knowing that your wonderful home will go down to the children’s generation without having to pay 55% of its value to the federal government in estate taxes.

14.    Statement of Wishes to Document Family Values Over Generations. When you begin estate planning, we encourage you as a family to start thinking about the values and traditions that you want to maintain in your family. Both your Revocable and Irrevocable Family Fortress Dynasty Trusts will incorporate into their operations your Statements of Wishes that you document from time to time— now and forever.

14.1.   You, through the Statement of Wishes, are provided the opportunity to give instructions to the trustees on how you want your children and grandchildren provided for like the owner of a business thinks of what bonuses he or she may give to his or her officers and employees to stimulate them to promote the corporate culture.

14.2.    In our opinion, one of the greatest shortcomings of our civilization is that we are spending so much time, effort, and thought in promoting our businesses with mission statements, strategic plans, annual objectives, budgets, value statements, image statements, and critical success factors. At the same time, however, we are not expending like energy on our family structures.

14.3.    The Statement of Wishes allows you to write the future that you want for the family members of your bloodline and their spouses. You may create any future you want by giving incentives or providing dis-incentives for your children, grandchildren, and future generations with these instructions to the trustees.

14.4.    In all of our trusts, we have what we call trust protector provisions where the protector and one other key person in the estate planning documents join with the protector as a means to enforce any abuse of the Statement of Wishes by the trustees of your trusts. If you want your children to receive an education, provide for such in the Statement of Wishes and ask the trustees to pay for the education and to give bonuses to the children who excel. If you do not want the children to smoke, drink, or take drugs, provide that all benefits are taken away or reduced if any beneficiary partakes of these indulgences.

You now have the opportunity to create or not to create a successful family dynasty for your family. We encourage you to invest time to understand more about estate and business planning and preventive law. If you accept and learn about each of the structures and moves described in the “Family Zaibatsu,” you will save millions of dollars and ensure the survival of your family with security, harmony, and success.

As with preventative medicine, once you have fully healed the person coming for care, regular check ups ensure continued good health. So is it with preventive law, estate, and business planning care. We want you to enthusiastically embrace the structuring process in creating a Zaibatsu for your family and commit to the periodic reviews that are necessary to maintain and make adjustments with a fast changing situation of your family members, finances, economics, tax changes, and fateful occurrences.

Enjoy this process as a new game of life.

¹Warning: The dollar figures provided in this handout are valid for 2007 only. There is an increasing estate tax exemption under the Economic Growth and Tax Relief Reconciliation Act of 2001. However, there is increasing uncertainty over how much we as attorneys can rely on the current law’s rising estate tax exemptions in planning for our clients.

²This is somewhat of an oversimplification, since, for instance, retirement plans should have multiple beneficiary designations, only one of which would be the revocable trust. Also, in more complex estates, the ownership of assets may be transferred to other entities, such as the irrevocable trust.

³S Corporations now have some of these features, but not to the same extent as C Corporations.

⁴See In re Ashley Albright, No. 01-11367 (Bkrptc.D.Col. 04/04/2003). It might be possible to have the clients’ revocable trust own 100% of the capstone pillbox LLC if another person or entity had economic rights (as opposed to ownership rights) to the LLC.

For additional information, please call (602) 252-5110.

For additional Preventive Law Studies, visit our website: www.goodsonmanleyforakis.com

DISCLAIMER