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A Tale of Two Families and Financial Planning

Learn how knowledge and action can save millions of dollars in taxes.

There are those people who are ignorant or choose to take no action and there are those people who understand the laws and take advantage of the tax-saving opportunities provided by them. The steps a family chooses to use when transferring assets makes a tremendous difference in the size of their estate taxes.

Section 2001 of the United States Tax Code defines how federal estate taxes work. It
mandates that estates which have assets in excess of $650,000 will pay taxes on that
excess at rates which begin at 37% and go as high as 55%. This is the set of laws which
impacts those who either don't understand them or do nothing about them.

The alternative set of laws is defined in Section 664. This section provides a variety of
opportunities that can protect estates of $1 million, $10 million, $100 million or more from
paying any federal taxes at all.

How these two sets of laws work - and the very different ways that they can impact wealthy
families - is well-illustrated by the stories of Joseph Robbie and Jacqueline Kennedy Onassis.

Fumbling the ball.

Joseph Robbie was a successful businessman, an attorney and an avid sports fan. He
combined his good business sense and his love for sports in his ownership of the Miami
Dolphins, one of the NFL's most successful teams. But in March, 1994, Financial Planning
magazine reported, "the year's biggest loser in the National Football League is the Robbie
Family, the former owner of the Miami Dolphins. Torn apart by family rift, general mismanage-
ment and estate taxes reportedly in excess of $45 million, the family was forced to sell the
team, one of the most valuable franchises in professional sports, at a bargain-basement price."

Robbie's estate was somewhat less than $100 million and almost 50% of it vanished in
federal estate taxes. It compelled his family to sell the Dolphins at a fraction of its value.
Strife and bitter resentments developed within the family because of the actions they had
to take to pay the taxes. The real tragedy is that it all could have been avoided.

"If that $45 million could have been paid with a life insurance check," concluded
Financial Planning, "it would have certainly changed the financial complexion of the
family's situation."

Smart and elegant planning?

Four months later, the death of Jacqueline Kennedy Onassis also generated articles about
her estate. But, in stark contrast to the Robbie Family's tale, the press told of Ms. Onassis'
wise and careful planning.

Fortune Magazine reported, "she left behind, to the rest of us, a model of smart estate
planning. At a very basic level, the fact that she had a will may be the most important lesson
of all. A surprising number of smart people don't make a will and that opens the door for the
government to have a potential field day. On a more sophisticated level, the Onassis will
makes smart use of estate planning vehicles like trusts to pass money on to heirs and charities
while reducing the bite from estate taxes."

Fortune summarized the terms of the Onassis will in a sidebar titled What Jackie did...and why
it was smart:

1 Left gifts of cash to friends and specified that the estate taxes be paid out of the rest of her
estate. That was smart because if the will does not direct the taxes be paid by the estate, the
value of a gift could be cut in half by the taxes due.

2 Specified exactly who would inherit each of her real estate properties. That was smart
because homes are laden with emotion and should be disposed of directly, not lumped
into total assets.

3 Put the bulk of her estate into a charitable lead trust. The trust gives money to charities for
24 years, then the rest goes to her grandchildren. That was smart ??because a charitable
lead trust is a good way to give money to heirs who don't need income immediately. The
donation to charity reduced the estate taxes.

4 Gave her personal property and letters to her children and requested that they respect her
wish for privacy. That was smart because when giving personal property, one should make
their wishes known but give the beneficiaries some flexibility.

Stark Contrast

While her estate exceeded $200 million, less that 3% of it was reportedly lost to federal estate
taxes. By contrast, the Robbie's lost $45 million from an estate which was half the size
of Ms. Onassis.

Fortune concluded its Onassis estate article, "One nice thing about writing a will and thinking
about your estate - it is a chance to leave a final word in black and white. You could see the
thought beyond the legal verbiage and that's what a last will and testament should ultimately
reflect. It's a rare look at how a good estate plan is done."

The Robbie articles conclude less happily. "Good planning can help contain and eliminate the
damage estate taxes cause" notes Financial Planning. "The ways of minimizing the effect of
estate taxes range from holding life insurance in an irrevocable trust to gifting out portions of
the estate to creating charitable trusts. Clients should realize that the tax collector is waiting to
make a big hit on an estate. In the case of the Robbie Family, being blindsided by estate
taxes meant fumbling away the team."

These stories end so differently for one simple reason: Jackie Onassis decided to use the
provisions of Section 664 to reduce her estate taxes to approximately 3%. Joseph Robbie
chose to take no action at all. His inaction allowed Section 2001 to tear his estate and
his family in two.

Two sets of laws. Two different stories. Which one will be in your family's future.
It's your choice.

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The Top 10 List

Of estate planning mistakes and why
you need to avoid them.

Smart people who've worked hard all of their lives to achieve financial success often
make dumb estate planning mistakes. Those mistakes can result in their families losing
over half of their assets when they pass between generations. They can destroy much
of a lifetime's work. And they can inflict a great deal of pain and heartache to the
people they love.

The irony is that most of the mistakes are easily avoided. With a little forethought, people
of average intellect can construct estate plans which perpetuate their estates for
generations. To do that, you and they have to avoid these traps:

1 Procrastination

Everybody has an estate plan. If you don't create one, on purpose, through carefully
drafted wills, trusts and other documents, then your state legislature will step in with a
plan of its own. This plan, called the laws of intestacy, dictates who will get your assets,
how they will get them and guarantees that you estate will pay the highest possible
estate taxes in the process.

If you're happy with your state legislature deciding who will receive your assets after
you're gone ... and especially if you want to pay the federal government the maximum
estate taxes, then no additional work on your part is required. But if you're not, then
you have to develop estate plans of your own and they have to be developed now.

2 The "I Love You" Will

Most people have very simple wills. They say that when one spouse dies, all of his/her
property goes to the surviving spouse and, when they're both gone, all of the property
goes to their children. Very straight forward. And, for people with modest estates,
these wills work fine.

For people with estates which exceed $1,200,000, however, these will create thousands
of dollars of unnecessary taxes. These simple wills waste an opportunity to keep up to
$600,000 of assets free of estate taxes. On a modest $2,000,000 estate, this single
error can cost $268,000.

The solution is to have provisions in your wills or living trust agreements which create a
bypass trust (also known as a credit-shelter trust) at the death of the first spouse.

3 Unbalanced Property Ownership

If each spouse owns substantially equal property, then bypass trusts can function neatly
to avoid estate taxes on up to $600,000 of assets. However, if one spouse owns millions
and the other spouse has only a small estate, the bypass trust's effect will be largely
wasted if the less affluent spouse dies first. To avoid that, spouses should consider
the benefits of balancing their property ownerships.

4 Property Transfers based on Non-Will provisions

Most people think that their wills control who will get what when they die. Surprisingly,
many assets are transferred based on provisions which can contradict but supersede
those of a will.

Bank accounts, certificates of deposit, retirement plans, IRAs, annuities, life insurance
policies, real estate and countless other assets are often not controlled by wills. In the
case of jointly-owned assets - bank accounts, stock accounts and real estate are often
owned this way - the surviving joint owner often becomes the sole owner of the assets.
And retirement plans, IRAs, annuities and life insurance proceeds transfer to named
beneficiaries, not necessarily to the people named in a will.

Property ownership forms and beneficiary designations need to be coordinated with
your will planning. If they aren't, your carefully drawn will can become meaningless
and the estate tax savings which it tried to create will be defeated.

5 Improperly-owned Life Insurance

Life insurance is often a significant part of many affluent estates. Many people own
life insurance because of the immediate liquidity it will provide and because they
understand that life insurance death benefits are tax free. They're only half right.

Life insurance death benefits are not subject to income tax. However, they are subject
to estate taxes if the policies are owned by the insured at his/her death. This can
destroy up to 60% of the policies' values.

A very wise way to avoid this is to have life insurance owned by an irrevocable trust.
While the needs of the surviving spouse need to be addressed, life insurance which
is intended to pass to future generations should clearly not be owned by the insured.

6 Trying to take it with them

There are only three ways to reduce estate taxes: spend the money, have a bypass
trust and give away while alive.

Affluent people, especially the self-made variety, often do a very poor job of either
spending it or giving it away. They got where they are, financially, by being "accumulators"
and they have a hard time with not continuing that lifetime habit.

While thrift is an admirable quality, too much of this goo d thing plays right into the
IRS' hands. They and Congress want you to have the biggest estate possible when
you die. They want your ignorance, procrastination and paranoia to stop you from
taking advantage of a whole range of laws which can result in your estate paying
zero taxes while you maintain your financial independence forever. The IRS collects
millions and millions of estate taxes every year which could have been legally avoided
from the estates of people who never quit being "accumulators".

7 Lack of Liquidity

Many affluent people create estates of great value which, at death, are very illiquid.
Holdings of real estate and family businesses often represent 90% or more of affluent
estates. But, if those estates are subject to taxes of over 50%, those assets often
have to be sold at fire-sale prices to pay them. Estate taxes are generally due within
nine months of death.

Forcing your family to choose between sacrificing a treasured asset or taking on an
enormous burden of debt to pay estate taxes is simply stupid. It is also totally avoidable.

8 Equal distribution to Heirs.

Most people have great love for all of their children and they want them to share equally
in their estates. An admirable intent, but "equal" is not the same thing as "equitable".

While dozens of examples exist, a common problem, often mishandled, is when a
person owns a business in which some of the children participate. Giving both
participating and non-participating children equal shares of the business is a near
guarantee for disaster. This blunder has destroyed more businesses and families
than probably any other estate planning mistake.

If you have a business, a farm or some other income-producing assets and some of
your children participate in its management, don't carve it up equally between all of
your children. Provide the business to your participating children and give your non-
participant children non-business assets. If this creates an unbalanced distribution,
consider creating additional assets through life insurance.

9 Saddling children with debt

The same kind of people who would blanch at a $500 Mastercard bill often leave their
children with a range of estate problems that can only be solved by millions of dollars
of new debt.

Illiquid but substantial estates often have to borrow great amounts of money to pay
estate taxes. Those borrowings can come from a bank or, in some cases, from the
Treasury, but they all require complete repayment of principal plus substantial interest.
Too often, the assets which triggered the tax - and the loan - can't generate
enough income to cover it.

Enormous debts are also created when children who participate in a family business
are compelled to buy-out their non-participating siblings' interests. This not only creates
great financial pressures but the process of negotiating a buyout can create much
acrimony. Many families have been destroyed by just such a challenge.

Life insurance is frequently the best solution to these financial problems. Too often,
however, affluent people and their advisors don't adequately explore this option
because of ignorance and misunderstanding.

10 "It's all been taken care of ..."

Good estate planning is never truly "done". As your circumstances change and
evolve over the years, your plans need to be kept current and apace with them.

Few attorneys call in their clients for an annual estate plan review. Fewer clients sit
down, annually, and take stock of their situation. But if they did - if you do - millions
of dollars can be saved and much heartache can be avoided.

Most people spend more time arranging a single vacation than they spend on estate
planning in their lifetime. If you're affluent, that's not smart. It's very smart, however,
to meet annually with your financial advisors and ensure that your plans are both
current and complete.

Here's a test to see if they are: will your current plans give what you have to whom
you want, when you want, in the way you want and do it all at the lowest possible
cost? If you answer "yes", then congratulations and we'll see you next year.

If not, then make an appointment now to fix this problem. No one can do it but you
and you may have a lot less time to solve it than you think. And if you're not sure
about that, go back and read item number one of this Top 10 list of estate planning
mistakes - the one about procrastination. And then grab the phone and call us
at 1-800-888-1423 x302

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Keeping It All In The Family

With Family Limited Partnerships

With estate tax rates beginning at 37% and rising quickly to an effective rate of 60%,
poorly planned estates can lose over half of everything they own to the government.
While no tax is due on the first $600,000 of property, the remainder is taxed very
heavily. And the tax has to be paid fast - within 9 months of a person's death.

The solution to that problem ... the way to keep property in your family and not let it
go to the government ... is by taking firm steps now to reduce estate taxes to the
smallest reasonable amount and then to develop a way to pay them.

One of the best ways to reduce estate taxes is for older family members to give
property to younger family members during their lifetimes. Property given away
during life won't be subject to an estate tax if the gifts are completed correctly.
The problem, however, is that the gift tax rates are identical to the estate tax
rates so if you give away a lot of property at one time, you may wind up paying
a gift tax that's as big as the estate tax. That may not be very smart.

It's very smart, however, to give away as much as you can without paying gift
taxes. And that can be quite a bit. First, you can give $10,000 every year to
as many people as you want. This is called an annual exclusion. If you're
married, your spouse can join in that gift and boost the tax-free amount to
$20,000 per person. Beyond that, you can also give a total amount of
$600,000 without any gift tax. This is called the lifetime exemption.

So, if you don't have a very large estate and if there are a number of people
you want to receive your assets, regular annual gifts and your use of the
lifetime exemption will probably solve your problem.

However, if your estate is fairly large, if it's growing quickly in value or if there
aren't a lot of people to whom you want to make gifts, you may not be able to
give it away faster than it grows. Or you may not want to give up either the
control or the income you receive from some of your assets. Some people with
$20 million dollar estates would be very nervous making a $100,000 gift because
they think that they just might need the money someday. Or they may have
assets which are worth a lot but don't generate much income - not enough to
both live on and make substantial gifts, too.

If you or someone in your family fit any of these categories, then you'll find our
discussion very helpful. You'll see how you can give away property but retain
control and enjoy its income. You'll see how you can turn low income property
into high income assets and generate income tax savings in the process. You'll
also discover how both your annual gift exclusions and your lifetime exemption
can be magnified ... in other words, how you can give away more than $10,000
per person per year and more than $650,000 ... all without paying gift taxes. In
other words, how you can make not just gifts, but Supergifts.

A Supergift is any kind of gift which allows you to retain control of and income
from the gifted property and where its transfer value - it's value for gift tax
purposes - is less than what it's worth in your estate.

Family Limited Partnerships, Residential Trust and Charitable Remainder Trusts
are some of the most powerful types. In this segment, we'll discuss Family Limited
Partnerships. We review Residential Trusts and Charitable Remainder Trusts in
other segments of our wealth-keeping series.

Now, when you read the word "trusts", you may have groaned a little. Well, take
heart. In plain English, we'll explain how a Family Limited Partnership can save
your family hundreds of thousands, maybe even millions of dollars in estate taxes.
What we'll discuss in the next few pages may make more difference to your family
and its wealth than anything else you've ever read. So, please read carefully.

Family Limited Partnership

A Family Limited Partnership is a legal entity formed under a state's limited
liability partnership law. Some states also permit the creation of limited liability
corporations and, in those states, it may be better to use a Family Limited
Liability Corporation. However, since both forms of organization can have the
same tax advantages, our discussion will focus on Family Limited Partnerships.

The Family Limited Partnership or - FLP for short - is simply a limited partnership
in which only members of the same family, a family trust or a wholly owned
corporation are members.

The FLP has two kinds of partners: general partners and limited partners. The
general partners really run the show: they have complete control over its assets,
they determine when assets are brought and sold, they manage the assets,
they even decide when and how much of the partnership's income will
be distributed.

The limited partners have no control over either the assets or the income of the
partnership. They also have no authority over the general partners - they can't
fire the general partners or replace them. Their authority is very limited and that's
one reason this kind of organization is called a limited partnership. It's also
called that because the liability of the limited partners is limited to their investment
in the partnership. In other words, the limited partners aren't liable for the
partnership's debts.

A Family Limited Partnership has two big gift and estate tax advantages. First, it
allows the donor to make a gift - get property out of his or her estate - and yet
control the asset and its income. Second, an FLP permits a donor to discount
the value of a gift for gift tax purposes - in other words, a donor might give away
property worth $1 million in his estate but its gift tax value might only be $600,000.
Let's look at a case to see how these benefits work.

The Baxter Case

Our clients, Harry and Catherine Baxter, have come to us once again for advice.
Harry's 74, Catherine's 72 and they have two children. They have a $5 million
estate that consist of some stocks, bonds, savings accounts and real estate.
The majority of their estate is a large farm. The Baxter's are solidly in a 55%
estate tax bracket and they want to reduce their potential taxes.

If Harry and Catherine do no gifting at all, if their assets grow at just 5% per year
and if they live for 15 years, their estate will double in value to $10 million. The
taxes on a $10 million estate - even assuming that they've created a Bypass
Trust, - are $4,618,000. That's about half their estate ... and that's very bad.

Well, let's give the Baxters another chance. Let's bring them back to life, run the
clock back 15 years and try it again. But this time, Harry and Catherine will give
their children a $2 million chunk of property. That gifted property, which will grow
in value to about $4 million in 15 years, will avoid an estate tax of about $2 million.

Now that's great for the children, but not so great for Harry and Catherine because
the gift produces a gift tax of $320,000, even after using up all of their lifetime
exemptions. And the Baxters have to pay it, right then and there.

Even worse, the property happens to be Harry's farm. He loves that place, he
built it from the ground up, and the idea of not running it anymore just about kills
him. In fact, it's so painful that he's just going to forget the whole thing and let
the kids figure out how to pay the taxes when he dies.

Here's a better way. Harry and Catherine form a Family Limited Partnership which
has 1 general partnership unit and 99 limited partnership units. Then, they
transfer the farm into the partnership and get all of those partnership units -
both the general unit and the limited units - in exchange. This is an income
tax free transfer. At this point, they don't own the farm but they own the
partnership which does.

So now they give away all of the limited partnership units - 99% of the
partnership and they keep the general partnership unit.

What have they accomplished? Well, they just moved $1,980,000 ... call it
$2 million ... out of their estate - $2 million that would have grown to $4 million
in 15 years. And, by doing that, they've just cut their estate tax bill by
$1,540,000. That's a pretty good start.

But they've done that without losing any control. As the FLP's general partners,
Harry and Catherine still run the farm. They still control the asset and the income
it generates. In fact, they even get to take a salary from the partnership for
managing it so they'll still enjoy some of the income which the farm produces.
And yet, 99% of the farm is out of their estate. This really is like having your
cake and eating it too. Now, you may be saying "Hey that's great ... but what
about the gift tax. Won't that wipe out a lot of the benefit?" Good question.

Valuation Discount: The Tax Saver

Remember that Harry and Catherine owned a $2 million farm. But they didn't
give the farm to the kids. First, they exchanged it for units of a Family Limited
Partnership and then they gave away the limited partnership units. Sure, the
limited partnership units represent 99% of the partnership's assets. But are
they worth $2 million?

The federal tax code says that gifts will be taxed based on their fair market
value on the date of their transfer and that "fair market value" is what a
knowledgeable buyer and a knowledgeable seller would exchange
for them.

The IRS says the gift's value is "the fair market value" determined by a
prudent buyer and seller, based on all relevant facts and reached in an
"arm's length transaction".

So, let's imagine that the Baxter children came to you one day after they were
given the limited partnership units and they offer them to you. What would you
pay for these units after you realized that:

• You'll have no control over the partnership or the assets in it.

• You'll have no control over or right to the income it produced.

• You'll have to pay income taxes on almost all of the partnership's income even
if the general partner didn't distribute any of it to you.

Are you ready to write the Baxter kids a check for $2 million?

Of course you aren't and neither is anyone else ... and even the IRS understands
that. That's why they allow an adjustment to the $2 million gift.

The precise amount of adjustment allowed will vary from case to case and it may
need to be determined by a professional appraiser. However, a 40% discount is
not uncommon. So, applying a 40% discount to this gift reduces its gift tax
value to $1,200,000.

Since Harry and Catherine haven't used any of their lifetime exemptions until now,
this gift doesn't trigger any gift tax.

Let's review. When Harry and Catherine made no gift, they had a $10 million
estate and their children lost over half of it to federal estate taxes. But, by
transferring the farm to the partnership and then giving 99% of the partnership
to the kids, the Baxters reduced their taxes by over $1.5 million which means
that the kids ended up with almost $7 million instead of $5.4 million. Do you
think it's worth a little work now to save that kind of money?

In our example, you saw how a piece of real estate could be placed in an FLP
but so can almost any other kind of asset, including stocks, bonds and many
family businesses.

Paying the Taxes

Even after this gift, the Baxters will have an estate tax of about $3 million.
Now that shouldn't be ignored - we should determine the most effective way
to pay it. When we look at all the alternatives, we'll probably conclude that life
insurance will be the most efficient and least costly way to pay the tax. Even
for people in their mid-70's life insurance will often cost about 30% less than
all of the other tax payment options.

We frequently recommend placing life insurance in an irrevocable trust because,
by doing that, we can keep the insurance free of both estate taxes and we can
also accomplish that result with a Family Limited Partnership. Here's how. Let's
assume that the partnership earns income of $100,000 every year - that's a
return of about 5% after-tax. It uses that income to fund a $3.1 million life
insurance policy on Harry and Catherine.

When Harry and Catherine die, their kids will get all of the money in the Bypass
Trust, all of the money in the FLP and all of the money in Harry and Catherine's
estate. The FLP owns the $2 million farm and over $3 million in cash - cash
which came from the insurance policy.

While they'll owe estate taxes on Harry and Catherine's estate, the insurance
provides enough cash to pay it and, because it was owned by the FLP, the
policy will be 100% income-tax free and 99% estate-tax free.

The net result is that even after paying the estate tax, the kids will wind up
with $8,022,000. $8,022,000 ... compare that to only $5.3 million without the
partnership and $6.9 million without life insurance. With life insurance in an
FLP, we'll be able to reduce the Baxter's net shrinkage to less than 20%.

Clearly, Family Limited Partnerships and Family Liability Corporations can
produce tremendous tax savings. To accomplish this, you need the help
of an experienced attorney, accountant, financial planner, insurance agent
and appraiser. With potentially millions of dollars in tax savings at stake,
you don't want to make an error that the IRS uses later to blow those
savings away.

But, if you create and operate a Family Limited Partnership correctly, it can
pass a very large share of your property on to your family, instead of letting
it go to Washington, DC. It's a very powerful estate-saving tool which you
should consider carefully.

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Would you like additional information on preserving your wealth?
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Sweet Charity

Why giving away an asset can sometimes
be the best wat to preserve it.

Federal estate tax rates begin at 37% and rise very quickly to an effective
rate of 60%. While no tax is due on the first $650,000 of property, the
remainder is taxed very heavily. And the tax has to be paid fast - within
9 months of a person's death. Poorly planned estates can lose over half
of everything they own to the government ... and it happens all too frequently.

The solution to that problem - the way to keep your property in your family and
not let it go to the government - is by taking firm steps now to reduce estate
taxes to the smallest reasonable amount and then to develop a way
to pay them.

Sometimes the best way to reduce your estate taxes and protect your assets
is to give them away to a charity. That may sound funny ... how can you
keep something by giving it away?

Let's imagine that your own a piece of property that's turned into a real pain
in the neck ... almost everyone does. Maybe the property's become hard to
manage - like an apartment house. Or maybe it's paying a very low return
compared to its value. Or you might have all of your eggs in one basket - one
kind of stock or one piece of real estate - and you want to diversify your
assets for the safety that provides.

You'd sell that asset in a minute if it wasn't for the capital gains tax. But, it's
gone up a lot in value ... you've probably had it for a long time ... and the
idea of losing up to a third of it in income tax just kills you. Is this starting to
sound familiar? If it is, here's a way out of that problem.

Trapped by leaking toilets

Let's visit Harry and Catherine Baxter. They're both in their early 70s and
they have a $5 million estate. They're in a 36% income tax bracket and a 55%
estate tax bracket. They want to start taking life a little easier, except they
can't. They're trapped by an apartment house which Catherine inherited
from her father 30 years ago.

The apartment house is worth $1 million dollars but its upkeep and
management takes an awful lot of their time. And with the costs of repair,
property taxes and other expenses, they don't really make very much
money from it ... only about $30,000 per year. "A 3% return and I have
to fix the toilets!" mutters Harry.

They'd sell the apartments in a minute but there's a catch. Since it was
only worth $100,000 when Catherine inherited it from her dad, if they
sell it they'll have to pay a capital gain tax on the $900,000 gain. Add
a 28% federal capital gain tax rate to maybe a 5% state income tax
rate and you have a tax of $300,000.

"$300,000!" said Catherine, "I'll take that place to my grave before I'll
give the IRS $300,000!" Catherine, as you can tell, does not like
to pay taxes.

Actually, she'd be better off if she did. Remember, they're only getting
$30,000 a year from the apartment house now. If the Baxter's just paid
the tax and reinvested the remaining $700,000 at, say, 8% - they'd get
$56,000 of income a year. But that doesn't matter ... Catherine just can't
stand paying $300,000 in taxes so she's not going to sell it. Looks like
poor Harry will still have to keep fixing the toilets.

Well, maybe not. In fact, there's a solution that eliminates all of the tax,
all of the headaches and leaves both the Baxters and their family
much better off financially.

The Charitable Remainder Trust

The solution is for the Baxters to establish a Charitable Remainder Trust.
Here's how that works. The Baxters establish a trust that has four parties:
the Trustmakers - that's them; the Trustee - they can be the trustees too;
the Income Beneficiaries - that's the Baxters again; and the Remainder
Beneficiaries - that's one or more of their favorite charities.

Once the trust is established, the Baxters transfer the apartment house to
it. And once it's in the trust, they sell the apartments for $1 million. Neither
they nor the trust pays any income tax on the gain.

Next, they invest the proceeds in a portfolio of stocks and bonds - a portfolio
which produces a return of 8% or about $80,000 per year. That's $50,000
more a year than they were getting from the apartments.

Every year the trust will pay $80,000 to the Baxters and they won't have to
lift a finger. And they won't have to pay a dime of capital gains tax, either.
In fact, assuming that the applicable federal interest rate is 7% when they
make their gift, they'll get a charitable deduction of about $351,000. Since
they're in a 36% tax bracket, that deduction will create up to $126,000 in
income tax savings. The exact amount of the deduction will depend on the
amount of the gift, the amount of income they keep, their ages and the
prevailing federal interest rate at the time of their gift.

So, here they'll be, with no capital gains tax, no more toilets to fix, $50,000
more income per year than they've ever had before and up to $126,000 in
income tax savings. So far, how does it sound?

"Well, OK," you say. "But what happens to the $1 million portfolio when
the Baxters die?"

That's easy. The $1 million will go to the charities that were named as the
Remainder Beneficiaries in the trust. The charities could be their college,
their church or even a local hospital, they just need to have
501(c)3 federal tax status.

The Wealth Replacement Trust

"Yes, but what about the kids?" you say. "If Harry and Catherine give away
their apartment house, won't the children be left out?"

We can take care of the children very neatly. In fact, they'll wind up in much
better shape if their parents give the apartments away to the charity than
if they keep them or sell them. Here's why.

If the children get the $1 million apartment house along with the rest of
their parent's estate, they'll pay an estate tax of $550,000 on the
apartment house by itself. That will leave them with only $450,000.

If Harry and Catherine sell the apartments and pay the $300,000 capital
gain tax, the kinds will eventually get the $700,000 portfolio but, after
paying $385,000 of estate taxes on it, they'll end up with only $315,000.

But if Harry and Catherine establish an Irrevocable Life Insurance Trust, at
the same time they created the Charitable Remainder Trust and have the
Insurance Trust buy a $1 million policy on their lives to replace the $1 million
apartment house which they put in the Charitable Trust, then the kids will
wind up getting $1 million in cash. And when they do, they won't pay a
dime in either income tax or estate tax.

The insurance policy isn't free. Since the Baxter's are in their early 70's,
they premium on a $1 million policy will be about $30,000 per year. But
the Baxters will also have an additional $50,000 per year in income and
tax savings of about $126,000. So, even they make the gifts to the trust
to pay the premiums, they'll still be way ahead.

If they sell the apartments and the children get the stock portfolio, they'll
only net $315,000. But if they get $1 million from an insurance trust, they
won't pay a dime of income tax or estate tax and they'll have a full
$1 million. In cash. Guess which choice the kids vote for?

Finally, if the Baxters either keep the property or sell it, their charity won't
get a dime. But if they put the apartments in the charitable trust, their
charity will get $1 million, just like the kids did. Again, no income tax and
no estate tax.

And the charity will probably name a new wing or building after them.
Baxter Hall ... has kind of a nice ring doesn't it.

The bottom line is that Charitable Remainder Trusts are one of the best
estate planning tools in existence. It's a tool where the donors win, their
families win and their charities win. So, if you're serious about keeping
money in your family ... if you don't want to send it to Washington, then
the Charitable Remainder Trust is an option which you have to consider.

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A look under the hood of life insurance firms.

Buying a tangible item, like an automobile, is tough enough There are
many manufacturers, and each one has several appealing models.
Each model has different features that can be purchased separately
or in option packages. Price comparisons between models and features
are complicated by rebates, dealer discounts and special financing.
Too often, I've made a buying decision on the basis of color, feel
and the wonderful way a new car smells.

Buying an intangible item, like life insurance, is tougher yet. For one
thing, life insurance policies don't come in Cherry Red or Continental
Blue. They're not soothing to touch, and they smell like a musty attic.

But of greater concern to customers is that not only are there many
insurers to choose from, but the newspaper headlines make it clear
that there are major differences in insurers.

Increasingly, consumers are looking for guidance in selecting insurer.
Although far from comprehensive, I've come up with basic rules that
serve as a starting point.

Rule #1--Understand the Basics

Life insurance is a complex financial product, but underlying this
complexity is a simple fact. The building blocks for all life insurance
are (1) investment return; (2) mortality experience; and
(3) expense management.

Another simple fact is that life insurance pricing reflects assumptions
about these elements. Not even the smartest pricing actuary knows
for sure what the financial markets will be doing in 30 years, how many
new insureds will still be alive then, and what will happen to home
office and field expenses in the interim.

And because life insurance pricing is based on assumptions about
the future investment results, mortality and expenses, it generally
contains conservative guarantees. However, to the extent that an
insurance company has better than guaranteed performance, its
higher investment return, lower mortality experience and improved
expense management may be passed on to the policyowner
Furthermore, the anticipated better-than-guaranteed results are
usually demonstrated to the prospective buyer on computer-generated
sales illustrations.

This takes us to a third basic fact. A key to selecting a life insurance
company with care is understanding the difference between premiums,
cash values and death benefits that are guaranteed vs. premiums,
cash values and death benefits that are merely anticipated.

Only when a buyer understands the difference between guaranteed
and anticipated results can he make a reasonable assessment of
life insurance sales illustrations.

Rule #2--Get the Facts

What it comes down to is performance. Until recently, the question about
performance was whether the insurer would perform as well or better than
it illustrated. In today's economic environment the question about
performance takes on a more ominous tone: Will the insurer be solvent
when the time comes for it to deliver on its obligations?

Short of taking up actuarial science as a hobby, how does the typical
consumer evaluate the likelihood that an insurer will perform
as illustrated?

One way is to look at past performance. Agents should be asked to
provide dividend histories of their companies. Although times change
and past performance doesn't always predict future performance, a
good track record suggests a corporate commitment to policyowners
that runs deeper than a desire for short-term gains.

Another way to evaluate performance is to look to the three major rating
agencies: A.M. Best's, Standard & Poors and Moody's.

A.M. Best's publishes detailed information about the investment return the
mortality experience and he expense management of most life insurers.
A+ (Superior) is Best's highest rating and is assigned only to those insurers
that have demonstrated the strongest ability to meet their obligations
to policyowners.

Standard & Poor's and Moody's also publish in-depth analysis of insurers.
Standard & Poor's assigns its highest AAA rating only to those insurers
that offer superior financial security on both an absolute and relative basis.
Moody's assigns its highest rating of Aaa only to those insurers whose
policy obligations carry the smallest degree of credit risk. Rule #3--Buy
From a Professional Life insurance is like most things worth knowing about;
the more you learn about it, the more you realize you don't know about it.
Most consumers will find it helpful to rely on the counsel of professional
insurance agents in choosing an insurer and selecting the right policy
for them.

One measure of an agent's professionalism is his or her willingness and
ability to answer hard questions about the difference between guaranteed
and anticipated results, and to provide information about the performance
of an insurer.

Another measure of an agent's professionalism is the agent's professional
designations. The CLU/ChFC designations mean that the agent has
completed courses and exams on such subjects as life insurance law,
investments and economics. They also mean that agents have pledged to
provide the same level of service to clients as they would provide to
themselves under similar circumstances.

It's not my intention to make anyone an expert on life insurance. Why? I
don't pretend to appreciate the difference between a carburetor and a
fuel injection system. But I do know to ask about gas mileage and test drive
performance. And, I know to look in Consumer Reports and Car & Driver for
invoice prices and expert analysis I think I'll have more satisfied clients if
they know what to look for under the hood of my product.

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Does it make sense to replace a life insurance policy?

If you already own an insurance policy, you should think twice before you
replace it. Why? In many situations, it may not be to your advantage
to do so.

When it comes to the question of dropping an in-force policy, there are
many factors you need to consider:

If your health status has changed over the years, you may no longer be
insurable at standard rates.

Your present policy usually will have a lower premium rate than is required
on a new policy of the same type (if for no other reason than you have
grown older) . You will have paid acquisition costs on two policies, although
you will end up owning only one.

Even if both your present and proposed policies pay "dividends," it may be
years before the new policy's dividends will equal those under your
present policy.

If you replace one cash value policy with another, the cash value of the new
policy may be relatively small for several years. In fact, the new policy's cash
value may never be as large as the originals.

You may be required to wait one or two years before the new policy passes
though the "contestable" period. During this time, the insurer may cancel the
contract or refuse to pay a claim if you made any mistaken or untrue
statements on your application.

Before you say "yes" to a policy swap, investigate your options carefully and
compare both policy costs and features. Different products are designed,
not only for different people, but for different situations.

Make sure you:

Read over your old policy and ask your agent for a detailed cost breakdown
of premiums, cash surrender value and death benefits. Request the same
information for the new policy you are considering. Compare the two.

Ask the agent who sold you the policy for a detailed explanation of why you
should keep it. Ask the agent who is urging you to purchase a new policy for
an equally explicit argument for why you should switch. Weigh both
arguments carefully.

A career agent offering a variety of products will be able to provide you with
a policy that best suits your individual situation. Look for an agent with special
professional qualifications. The agent who can best serve you will have
specialized education and training in life insurance, financial planning
and other related subjects.

If you decide to surrender or reduce the value of the policy you now own and
replace it with other insurance, be sure:

• to insist that the agent making the proposal put it in writing

• that you pass any required medical examination

• that your new policy is in force before you cancel the old one

Remember, in considering a policy switch or in making any life insurance
purchase, look for an experienced agent, who is licensed to sell insurance
and has specialized education and training in life insurance, financial planning
and other related subjects. An agent with these credentials will best serve you.

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How much life insurance do you need?

The main purpose of life insurance is to provide financial security for your
family. It helps to ensure that when you die, your family will have the financial
resources it needs to provide for your spouse, children, an elderly parent or
some other dependent. However, life insurance also may be used to meet a
variety of long-term financial planning goals. It can help provide educational
funds for your children or funds for your own retirement. The question that
most families and individuals have, then, is "How much life insurance do I
need?" The answer depends largely on your family's individual
circumstances.

There are no hard and fast rules for determining how much life insurance is
enough, because no two families have exactly the same needs. You may
be single, supporting no one but yourself. Or, you may be single, supporting
an elderly mother or father. You may have several children, but also two
incomes and considerable net worth. Or, you may have several children, be
dependent on one income and have few backup resources. Whatever your
situation, if you are providing financial support for people who are depending
on you, you need life insurance. However, there are several things to keep
in mind when you buy life insurance, since the proceeds can be used in a
variety of situations.

For example, proceeds can:

Provide ready cash for final expenses. These could include funeral costs,
medical expenses, probate fees and estate taxes.

Pay off outstanding debts--not only hospital bills, for example, but a
mortgage or an auto loan.

Provide replacement income in amounts necessary to Cover:

A readjustment period of two or three years after your death. Even if you
are a two-income family, it takes time to adjust to one paycheck instead of
two. If you were the sole breadwinner, with young children at home, your
spouse's need for a readjustment period is obvious.

The period while children under age 18 still are at home and dependent.
(Social Security benefits that may be available supply only part of your
family's income needs.)

The college years, when Social Security benefits for dependents come to
an end just as expenses grow.

The years between the time the youngest child becomes independent and
the time the surviving spouse reaches retirement age.

The period after the survivor retires and receives Social Security or a pension.

In general, determining how much life insurance you need means deducting
the sum total of the income that would be lost upon the insured's death from
the sum total of your family's ongoing financial need. It also means calculating
the impact of inflation and building in enough "extra" to counteract inflation's
effects. It may seem complicated, but it's an exercise that's well worth doing.
It's also one that you don't have to tackle alone. A life insurance agent or
licensed financial planner can help determine how much life insurance your
family will need over time, based on the extent of your financial responsibilities
and the kinds and amounts of your other resources.

It is possible that the solution to your insurance needs may entail using a
combination of several plans, and that combination may need to be
changed as your situation changes.

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The role of life insurance in estate planning

Imagine if the IRS ran an ad that said that you could pay your estate taxes
in advance at a 75% discount. Instead of paying the government two million
dollars at death due in estate taxes, you could pay them $50,000 a year
for the next 10 years. Should you die within the next 10 years, the balance
due would be forgiven. Your family would be free and clear of all estate
taxes. Would you be interested?

You could get the same results using a survivorship life insurance policy.
Let's say that you are 66 years old and your spouse is 60 years old. You
further diversify your assets by gifting $50,000 a year into an irrevocable
trust. The trust then uses the money to buy a survivorship life insurance
policy covering you and your spouse for two million dollars. Upon the death
of you and your spouse, the proceeds of two million dollars are received
income and estate tax tree. The money is then used to pay all estate taxes
owed, in this case two million dollars. Uncle Sam gets his money and your
family retains all of yours. This can only be achieved with life insurance. The
trust can also be creditor proof, divorce proof and generation skipping
tax proof.

We have many clients on Wall Street. They appreciated the leverage they
can achieve with a product as conservative as life insurance. To earn the
two million tax-free dollars that the life insurance provides, they would have
to earn eight million estate and income taxable dollars. Many of our clients
involved in real estate appreciate the liquidity of life insurance. If their family
had to sell real estate to pay the estate taxes due nine months after their
death, the chances are that the properties would be sold at a
considerable loss.

We have used this strategy for estates involved from three million to estates
valued at over 75 million dollars.

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Permanent & Term life insurance: The Difference

Life insurance goes by a lot of names, but it comes in two forms: permanent
and term. Understanding the difference can you buy the kind of insurance
that will best suit your family's needs.

Permanent insurance is protection that can be kept in force for as long as
you live. There are several types of permanent insurance, including whole life,
universal and variable life, and those that blend term and permanent insurance
to provide flexibility and adjustability. One important feature of all types of
permanent insurance is its "cash value," a sum that increases over the years
on a tax-deferred basis. Cash value has many uses. For example:

Using your policy as collateral, you can borrow from the company up to the
amount of your current cash value. If you die and the loan has not been
repaid, the amount owed plus interest will be deducted from he death
proceeds paid to your beneficiary.

If you miss paying a premium, the company can--with your authorization--draw
from the cash value to keep the policy in force.

If you wish to stop paying premiums, the accumulated cash value can be used
to fund a paid-up policy that provides a reduced level of protection or the policy
can be continued as term insurance for a specified period of time.

You can use the cash value to purchase an annuity that provides a guaranteed
monthly income for life.

You can give up the policy completely and the insurance company will pay you
the cash value. You pay taxes only if the cash value plus any policy dividends
you may have received exceed the sum of the premiums you have paid.

The traditional type of permanent insurance is the whole life policy. Both the face
amount (the death benefit) and the premium (the amount you pay for protection
each year) are fixed at the time you buy your policy and stay the same even as
you age. The cash value grows at a fixed rate of return specified in the policy.

Other types of permanent insurance allow policyholders increased flexibility
regarding premium payments and death benefits. Under most forms of universal
life insurance, for example, you can vary the amount and timing of premium
payments, subject to certain minimums. You also can increase or decrease the
death benefit more easily than under traditional whole life insurance. The
amount of cash value you earn reflects current interest rates, subject to minimums
guaranteed in the policy. Another type of permanent protection, variable life
insurance, provides death benefits and cash values that fluctuate according to
the investment experience of funds managed by the insurance company; however,
the policyholder decides where his or her dollars will be invested--in stocks,
bonds or money market funds. The amount of the cash value and the death
benefit reflects the performance of these investments. Thus, while policyholders
have the opportunity to obtain higher cash values and death benefits than with
more traditional policies, they also assume the risks of poor investment performance.

Policies which combine term and permanent insurance allow the flexibility of
tailoring a policy owner's current insurance needs and premium paying capacity.
They also offer the adjustability to make changes after a policy is issued.

Unlike permanent insurance, term insurance is written for a specific period of time,
for example, one year, five years or up to age 65. A term insurance policy pays a
benefit only if you die during the period covered by the policy. If you stop paying
premiums, the insurance stops.

Policies often may be renewed without taking a medica examination, usually up
to a maximum age of 65 or 70, but premiums increase at each renewal. Term
policies that are "convertible" may be exchanged for permanent insurance,
without taking a medica examination, but with a higher premium.

Under term insurance, there is no cash value, so you cannot take out a loan
on the policy, and there are no residual rights in the policy if it is canceled
However, if you are young, term insurance initially is cheaper than other types
of policies for the same amount of protection. Permanent insurance often is
recommended as the core of an insurance program, but term insurance may
be a useful supplement for young families needing large amounts of insurance
protection for a specific period of time. Permanent and term insurance are two
different products that fulfill a variety of personal needs. An experienced life
insurance agent can help you choose the best policy for your
individual situation.

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