Wills May Turn Your Heirs Gray! Think about who distributes the money: a network of  accountants, lawyers, appraisers, administrators, trustees, executors and…the courts.

When do you get the money?

1. ‘After’ everyone else gets theirs
2. ‘After’ all debts and obligations, which may be amortized well into the future, are paid and ‘pre-paid’.
3. When the administrators, lawyers, executors and courts ‘SAY’ they are finished running up the bill, or when there is nothing left.
4. State laws allow creditors to make claims within 4 months to a year.
5. Federal Tax forms must be filed within 9 months of death.
6. IRS may take another year or more to audit.

But Wills are Safe and Accepted!

“One estate expert alleged that 35% of all wills are broken every year”

• Business Week June 3, 1972

“The law of wills: The legal expression or declaration of a person’s mind or wishes as to the disposition of his property to be performed or take effect after his death.”

Definitions of ‘Trust’

#1. “A trust is one of several juridical devices whereby one person is enabled to deal with property for the benefit of another person” and “A right of property, real or personal, held by one party for the benefit of another.” Restatement of the Law of Trusts, 2^nd

#2. “A ‘Living Trust Agreement’ is not an organization.  It is, in fact, an agency where the owner of value delivers them to the agent for the purpose of complying with the agreement.  Possession changes hands, ownership does not.  Where the owner of things of value delivers them to an agent, the agent becomes a bailee to carry out the terms of the agreement." THE KEY TO FAMILY SECURITY Harry Morgan Phipps, page 35 American Law Association, 1974

#3. When you hear the term ‘trust’ you should immediately identify this term with a ‘statutory agreement of trust’. “A unilateral agreement of trust, between grantors as opposed to a contract of trust, which is established in accordance with various state statutes, and is therefore subject to subsequent legislation.” First America Research, Member Syllabus 1986

#4. IRS on Ordinary Trusts: “In general, the term “Trust” as used in the Internal Revenue Code refers to an arrangement created by a will or by an inter-vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.   Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement.  However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the IRC if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them.  Generally speaking, an arrangement is to vest in trustees responsibility for the protection and conservation of property for the beneficiaries who cannot share in the discharge of the responsibility and, therefore, are not associates in a joint enterprise for the  conduct of business for profit.” IRR sect. 301.7701-4(a)

Testamentary Trusts – Death Traps !

1. Come into existence by operation of a will
2. Do not avoid probate
3. Terms must be approved by trustee and Probate Court
4. Possession transfers from the court to the trustee (usually a bequest to your lawyer!)

Key Characteristics of ‘Statutory’ Grantor Trust

• ‘Grantor’
• Conditional Use (not ownership)
• Split Title
• Beneficiaries not ‘associated’ in a ‘Joint Enterprise’ but passively receive the ‘grant’.

Split Title

• Legal Title  (Use & Control)
• Equitable Title (Beneficial Ownership)

The Four Types of Trusts

(1) Statutory Types

• Are not   contracts
• Are gifts (‘grantor’)
• Are regulated by state law
• Are creatures of equity
• Must split title
• Has Beneficiaries
• Treated by the Restatement of Trusts Act
• Two Basic Types:   Intervivos/Living Trusts and Testamentary Trusts

Three Common Law Types

(2)    Partnership Type

• Beneficiaries have some control over trustees which equates to the corporate double tax
• Associates and a joint business purpose
• Some privacy and tax advantages possible, offset by government curiosity and equity governance

(3)    Associated Type 

• Cert. Holders have  both a joint interest in the corpus and joint control over the trustees.
• Trustees essentially managing agents.
• All the trappings of a corporation and will be taxed as such.

(4)   Business Contract Organization (Pure Trust)

• No Associates
• No Joint Business Interest/Beneficiaries have no ownership
• Trustees hold ‘fee simple’ title to corpus
• Certificates not ‘Freely Transferable’
• No ‘Continuity of Life’
• No ‘Centralized Management’
• Limited Liability
• Absolute privacy
• Total freedom from equity & statutory constraints
• Total escape from estate, gift & inheritance taxes
• Free from government regulatory restraints
• Asset protection – unequaled

Senate Subcommittee investigating Nelson Rockefeller before his appointment as vice-president notes for the record: “Due to the complexity and lack of legal means necessary under law to secure in-depth records of the Rockefeller estate, nor having the powers to abridge the right of contract, we must assume that the $218,000,000 figure is accurate.”

What Makes This Machine Tick

1. Meeting of the Minds – Contract
2. Supported by Lawful Consideration
3. Beneficiaries share no ‘Joint Interest’
4. No Free Transferability of Interests
5. Established for a Legitimate Business Purpose
6. Trustees hold ‘Fee Simple’ title to assets
7. No continuity of life
8. No Centralized Management
9. Not created from, or subject to, statutory authority.

Three Primary Ways to Transfer Assets & Create Possible Tax Liabilities

Gift, Sale, Exchange

Estate Tax

An excise on the transfer of property which results from death.

If you die a ‘Pauper’, Estate Tax is a moot point.

Capital Gains

IRC:   The measure of the gain of an exchange is the difference between the adjusted cost basis of the property transferred and the FMV of the property received. No gain or loss is recognized until the cost basis is recovered. FMV cannot  be determined in any  forum other than a voluntary sale.

Where Do We Fit?

26 USC 7701 (a)(9), (10), (26) & (31) > Sec. 7701. Definitions > (A)When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof. 

1. United States.  The term “United States” when used in a geographic sense includes only the states and the District of Columbia.
2. State. The term “state” shall be construed to include the District of Columbia…
3. Trade or Business.  The term “Trade or Business” includes the performance of the functions of a public office.
4. Foreign Estate or Trust.  The terms “foreign estate or trust” mean an estate or trust…the income of which from sources without the United States which is not effectively connected  with the conduct of a trade or business within the United States, is not includable in gross income under subtitle A.