SPECIAL

REPORT
The Estate Manual

Helping People
Control Their Wealth

December Issue of 2003

Taxation
I have with me two gods, Persuasion and Compulsion.
Themistocles (c. 528462 B. C.), Athenian statesman. On
demanding tribute from the people of Andros; the historian
Herodotus described it thus in his Histories, bk. 8: He had put
it to them that they would be unable to avoid paying, because
the Athenians had the support of two powerful deities, one
called Persuasion and the other Compulsion, and the Andrians
replied that Athens was lucky to have two such useful gods,
who were obviously responsible for her wealth and greatness;
unfortunately, however, they themselves, in their small and
inadequate land, had two utterly useless deities, who refused to
leave the island . . . and their names were Poverty and Inability.
With the support of these, no money would be forthcoming. (tr.
by Aubrey de Slincourt).

1The Columbia Dictionary of Quotations is licensed from Columbia

University Press. Copyright 1993 by Columbia University Press. All rights
reserved.

PREFACE

All trusts are not alike.

Few can be induced to labor exclusively for posterity;
and none will do it enthusiastically. Posterity has done
nothing for us; and theorize on it as we may, practically we
shall do very little for it, unless we are made to think we are
at the same time doing something for ourselves.
Abraham Lincoln (180965), U.S. president. Speech, 22 Feb.
1842, Washingtonian Temperance Society, Springfield, Ill.
(published in The Collected Works of Abraham Lincoln, vol. 1,
ed. by Roy P. Basler, 1953).2
Today, there is a growing awareness of trusts and its
importance as the centerpiece of estate planning. However,
emphasis seems to focus primarily on avoiding probatethat
insidious process which can decimate your estate when you
die. There is, however, so much more to consider. What
about the value of your life before your demise? Have you
given any thought of what can happen to all youve worked for
if the unforeseen happens?
Indeed, all trusts are not alike, nor are the end results
which you can achieve with them!
As understood by Lincolns quote, probate avoidance for
the sake of posterity is a poor motivation. It is in the so much
more to consider and the doing something for ourselves.
where we wish to focus your attention.
After digesting the information in this booklet, please feel
free to consult with the representative who made it available to
you. Through them, we will be pleased to offer whatever
assistance we can.

2The Columbia Dictionary of Quotations is licensed from Columbia

University Press. Copyright 1993 by Columbia University Press. All rights
reserved.

INTRODUCTION

Where are we going from here?

Todays environment economically is a harsh one. People
are working harder and harder against the forces opposed to
their welfare. The increasing numbers in divorce, suicide,
nervous breakdowns, and violence all reflect the individuals
struggle against oppression. It has become politically correct
to adopt the socialistic ideas for society which premise the
collective good greater than the individual. Under these
conditions all things are a public affair and anything private is
criminal or suspect at the very least.
Here is where you have to ask yourself if the decisions
concerning your assets, distributions, parental
responsibilities, retirement, career, or benevolence are matters
open to public scrutiny. If the answer is yes return this
report without proceeding further. If NO resonates deep in
your soul, than look at this information as a tool to put the
reigns of control tightly within your grip. Since control is a
private issue you cannot expect the statesman to set aside his
deities of Compulsion and Persuasion all you can hope for is
the ability (or plan) to properly respond with the deities Poverty
and Inability.
Though probate avoidance for the sake of posterity will
not motivate you, we must look at its obvious threat to
understand precisely your benefits. Therefore the breach
must be examined before the tools ability to repair can be
appreciated.
Careful planning can reduce or eliminate any tax bills,
ensure assets are structured properly, and insulate the estate
to ensure your family is provided for no matter what happens
to you.
The first prejudice to remove is that the wealthy who can
afford the best accounting and legal advice are those worthy of
cloning your affairs after.

Wealthy doesnt necessarily mean prepared

Heres an unfortunate soul whom youd expect to know
better but like so many of us didnt. The surviving family and
its lifestyle changed drastically, and so unnecessarily. Now, is
there really a great deal of difference between Joe Robbies
situation and yours, except possibly in the number of zeros?
Joe Robbie was a self-made millionaire. One of his most
treasured and beloved assets was the Miami Dolphins, one of
the most valuable franchises in professional sports.
When Joe Robbie died, he left an estate rich in assets but
poor in liquidity. After completion of the calculations, the
Robbie Estate owed more than $45 million in Federal Estate
Taxes. To pay this debt the family was forced to sell Joes
most prized assetsthe Miami Dolphins.
Who would think that a person so successful in running
multiple businesses could be so neglectful in other areas?
Unfortunately, most people do not like to plan for their own
demise. It is uncomfortable to think about things we would
rather not dwell upon. However, delaying estate planning can
be disastrous, if fate is unkind to us.
Todays 40 year old - (plus) - generation is the first to be
faced with estate tax situation of such magnitude. Parents
who have built businesses since World War II are starting to
die, leaving the largest transfer of wealth in history in the
form of assets which are not easily liquidated.
Many disasters, such as the Robbie situation, could have
been avoided if a proactive approach was taken by planning
for all phases of Mr. Robbies life. Planning is not only
painless but the proper approach will save your family a
bundle. The information in this booklet discusses the many
negative sides to life without the proper plan. There are
solution outlined as well, solutions that are applicable for
strategic estate planning in the 90s and beyond.

As long as you live and have breath in your body,

Do not sell yourself to anybody.
For it is better that your children should ask from you,
Then that you should look to the clean hands of your sons.
In all that you do retain control,
So that you will not put any stain upon your reputation.
When the days of your life reach their end,
At the time of your death distribute your property
THE WISDOM OF SIRACH 33:18-23

Look closely at the statistics

and you will find that , in probate, heirs often lose up
to 40% or more of their inheritance to statutory fees,
administrative costs, death taxes, unnecessary capital gains
taxes, and asset shrinkage from liquidation to pay debts which
other wise should be deferred. Even before death and probate,
there are potential problems arising out of business reverses,
capricious lawsuits and judgments; liens, foreclosures and
bankruptcy, all of which can be anticipated and avoided
through proper planning.
The steadily increasing tax burden is being felt by
everyone, even with supposed tax reform. Couple this with
the potential of company downsizing, plant closures, company
relocations or debilitating illnesses, and you find virtually all
American families facing an uncertain future. The upside,
there are solutions which can provide those things all families
seek to survive in todays hostile environment.

Peace of Mind
Security and privacy in your financial affairs
Benefits while youre alive
Continuing benefits to heirs for many generations
to come

If you feel that exposure to the hazards of life can not

happen to you, review the following table. You be the judge
whether you fall into any of the standard vulnerability
categories.

Are you vulnerable?

High risk occupation such as a teacher,
advisor, or professional
Health risk
Teenager learning to drive
Second marriage
Underinsured when hit with a judgment
Business or business venture is risky
Officer of corporation
Potential of family dispute
Involved in limited or general partnerships
Carry non-family passengers in automobile
Own rental property, airplane, motor home,
boat, classic car
Possibility of lien, levy or judgment

The solution: a Trust!

Trusts have been around for a long time, centuries in
fact, and its usage has varied throughout history. In some
periods, trusts were employed to insulate individual assets
from tyrannical governments. The Roman era was particularly
interesting as trusts enabled the worldly goods of Roman

soldiers, who were beginning to marry non Romans, to pass

wealth on to their spouses upon death.
In recent times, particularly in the United States, the
trust has been the overwhelming choice as the centerpiece of
estate planning for the super rich and elite, With the increase
of litigation, the need for finding ways to reduce certain tax
burdens, and the growth of second marriages the trust has
found its way into the average American family as a popular
method for estate preservation for personal and business
purposes.

What is a Trust?
A Trust is an agreement in which the Creator, Settlor,
Trustor or Grantor (all have the same meaning) transfers
property, real and or personal, to a trust, to be managed by
one or more Trustees on behalf of beneficiaries.
Not all trusts are alike. Basically there are two categories
of trusts. There are those which are known as ordinary or
statutory and those that are a result of private agreements
commonly referred to as Express Trusts. Express Trusts are
also called by many other names generally limited to a
particular function.
There is a significant difference between ordinary or
statutory trusts and Express3 Trusts when applied to estate
planning. The Express Trust has the most advantages for you,
your family, and your business. However, there are special
purpose trusts that have applications in certain situations.
Though these trusts may be considered as ordinary or
statutory trusts, their use in estate planning have merit
depending on specific needs.
Trusts created for specific needs are often referred to by
special names, names that often simply reflect the purpose for
which it is intended. The following is a list of some of these
trusts. The Express Trust and its several known-by names
An express trust is created by contract or agreement which directly and expressly
points out the person, property, and purposes of the trust. In re Burtons Estate, 289
N.W. 66, 68, 206 Minn. 516.

is also included. This booklet favors the Express Trust as the

leading instrument for estate planning, when it is structured
as an Amendable Irrevocable Express Trust.
There are literally hundreds of trusts. Here are a few:
Land Trust

Complex Trust

Charitable Trust

Private Trust

Pipe Dream Trust

Q-tip Trust

Testamentary Trust

Irrevocable Trust

Annuity Trust

Blind Trust

Childs Trust

Passive Trust

Alimony Trust

Contract Trust

Pure Trust

Sprinkling Trust

True Trust

Dry Trust

Active Trust

Accumulation Trust

Executory Trust

Unitrust

Insurance Trust

Short-term Trust

Inter Vivos Trust

Generation Skipping Trust

Simple Trust

A-B Living Trust

There are other legal structures which may serve similar

purposes as trusts, but generally do not provide the many
benefits offered by the Express Trust. These are:

Corporations
Agencies
Will substitutes
Executorships
Associations

Bailments
Equitable charge
Guardianships
Conservatorships
Receiverships

The trust is often classified at the time of creation as:

Inter vivos Trust:
A trust created during the creator,
grantor, or trustors lifetime.
Popular name is a Living Trust.
Testamentary Trust:
A Trust created after property
owners death, primarily established
by will. Another classification of
trust is specified by its special
characteristics:
Revocable:
The trustor may revoke the trust at
any time. It also means property
placed in the name of the trust may
be returned to its original owner.
Irrevocable:
The trustor has no authority to
revoke the trust. It also means
property placed in the name of the
trust shall remain in the name of
the trust until distributed in
accordance with its agreement.
Amendable Irrevocable: The trustor has no authority to
revoke the trust, though the
trustees can make amendments to
it. It also means property placed in
the name of the trust shall remain
in the name of the trust until the
trustees decide to make a
distribution to its beneficiaries, or
sells its assets. Referred to from
this point forward as the Contract
Trust.

The A-B Living Trust is the most popular trust entity

usually presented by attorneys and most recently by a myriad
of insurance firms. It is considered a will substitute or superwill that is unique in its design as a means to possibly avoid
Probate court and to reduce some federal estate taxes. Notice
the word reduce. With the proper trust, federal estate taxes
can be completely eliminated no matter what size the estate!
The A-B Living Trust has questionable applications where
estates are valued under $600,000.
The Contract Trust in comparison to the will and its
recent competition, the A-B Living Trust, offers the most
benefits for most families. The table that follows presents the
more common questions raised when comparing no will, the
will and A-B Living Trust to the Contract Trust.

WILL AND TRUST COMPARISON TABLE

No Trust
No Will

Will
Only

A-B/
Living Trust

Contract
Trust

Must there be Probate?

Yes

Yes

No

Can I reduce all Federal estate taxes

no matter how large the estate is?

No

No

Could be if
challenged
No

Absolutely

Is there privacy? (No Public record)

No

No

No

Yes

37%-100%

37%-100%

Some

None

Benefits business

No

No

No

Yes

Can I make sure my grandchildren

will receive my estate after my
children die, excluding spouses of
my children?

No

No

Yes

Yes

Leave assets to children from an

earlier marriage, cutting out my
present spouse?

No

No

Depends on the
state

Yes

Property used for loan collateral?

Yes

Yes

Yes

Yes

Can I retain control over my assets

while Im alive?

Yes

Yes

Yes

Yes

Insulates my assets from me?

No

No

No

Yes

Provides for someone to handle my

finances if I become disabled?

No

No

Yes

Yes

Can the estate be challenged by

outsiders?

Yes

Yes

Yes

No

Cost at death?

THE TRUTH ABOUT PROBATE

The Great American Take Away!

And then theres probate! Just about everyone has heard
about probate, but few really realize what it means to family
until its too late.
Probate is simply the legal process providing an orderly
method for paying bills and transferring ownership of property
in an estate at death. Probate can also mean managing the
financial affairs of minor children, or those with a special
need, requiring a conservatorship. The conservatorship is a
tedious process that is usually time consuming and
embarrassing to a family, and always unnecessary.
Whether there is a will or not, at death the process to
probate an estate is the same. The family will be prevented
from changing titles on property held in the decedents name
without a court order. This includes bank accounts, real
estate and investments. Many states always require a court
order because a will by itself is not enough authority to re-title
property or release account balances.

THE PROBATE PROCESS IS:

Simply obsolete!
A product of the horse and buggy days when it often took
months to locate and notify relatives and creditors, the probate
process was then and still slow and cumbersome. Back then
it didnt matter. In todays fast paced society a family becomes
impoverished when a sudden change in economic situations is
stalled or mired in bureaucratic morass waiting to be sorted
out by government officials. In California, for example, the
average probate takes two years, with some cases going on for
five years and even longer. There is even a probate on record
in its fourth decade!

Probate is devastatingly expensive and inflexible. Once

the process begins, the family loses control and the court
takes over. The probate process, with its inflexibility, costs,
and painstakingly slow process, usually causes all kinds of
unexpected and unnecessary problems for todays families,
and the estate pays the bill while the family silently cries out
in absolute horror, begging for relief and insulation from any
further destruction. But generally, theres more

THE PROBATE PROCESS TURNS

Emotional loss into financial nightmare!

Beware! The probate process with its maze of required
and complex steps dictated by law, strains even the brightest
family member chosen to serve as executor of the estate. Not
being experienced in these matters, the executor usually
subscribes to legal counsel which begins the first step in a
very expensive legal process. Listed below are just a few of the
steps which must be taken before any property of the deceased
can be distributed to heirs:
1. File Petition. A formal process usually prepared by
an attorney and submitted to the court to start
proceedings.
2. Publication. The Probate Court in most states will
require a formal notice of death published in a local
newspaper for several weeks or months before the first
hearing.
3. First hearing. Usually held six weeks to two months
after the filing of the petition. The following steps
occur at the hearing assuming the will is not contested
or any unusual circumstances are introduced:
F Will is validated

F
F
F
F

Executor/administrator appointed
Independent administration determined
Issues of unusual circumstances addressed
File opened, attorney appointed

4. Assets frozen / Inventory Estate. The estate assets

are usually frozen to enable an accurate inventory and
assessment, and the non-estate possessions are
identified. This means that heirs will not receive
inheritances, and property cannot be liquidated or
returned without court permission. Probating all
possessions and property requires compiling a list of
these, and obtaining appropriate appraisals for
presentation to the court, an extremely time
consuming and difficult procedure.
5. Family Living Allowance. A family living allowance
can be necessary especially when minor children or
special needs persons are involved. However, it must
be reasonable and approved by the court. Depending
on the outstanding debts of
the estate, or if a will is being contested, the court
could reduce or even deny any special request. Family
needs and interest of the heirs are not leading
priorities.
6. Presentation and payment of debts / claims and

taxes. Creditors have a specified time period to

submit claims against the estate. However, when
there are any disputes about a claim, additional
hearings may be ordered and the processing procedure
arbitrarily extended.
7. Closing of the estate and final distribution. Even

after the court is satisfied the legal process has served

its purpose (usually a minimum of a year or more), it
usually orders another publication announcing a final
hearing at close of the estate. At this hearing the
court reviews all paperwork and orders the estate to

pay its debts, claims, taxes, legal fees, executor fees,

probate fee, bonds, and appraisals. Notice the heirs
are not participants yet, but get to be observers as the
estate continues its depletion.
All fees require payment in cash! This requirement
often leads to a forced and untimely sale of estate
assets when liquidity of the estate is not available to
pay the immediate taxes (Miami Dolphins). Further
decimation of the estate can occur through
unnecessary sale of assets resulting in immediate
capital gains taxes, or low selling prices resulting from
distress sale conditions at fire side sale prices. Now,
at last after all the damage has been done, the lawyers
and the courts withdraw from the scene, the executor
is relieved of duty, and the remaining property,
however diminished, is finally distributed to the heirs!
8. Multiple probates. Probate can become an even
greater nightmare for families with property in
different states. This entire process, including all
expenses, is usually repeated in each state where the
real property is located. Each state has its own
probate laws with no coordination between individually
courts controlling the process.

THE REAL DEVASTATION OF PROBATE

As if there could be more!

The probate process is not merely expensive, but
unpredictable! This applies particularly to the expenditures
for filing court costs, appraisals, auctions, bonds, attorneys
and executors. There are, of course, additional extraordinary
statutory fee schedules which cannot be controlled by the
family. Each additional decision or transaction required by
law increases the total cost to the estate.
Notice that the legal process, not your family, has
control. Privacy is lost. Anyone may express an interest in the
contents of an estate, attracting claims which can be ruinously
expensive. Where the court takes charge of the situation, it
becomes impersonal, subject to conflicting interest, confusing,
unpredictable, and not the kind of experience a family
suffering death should be subjected to.
Probate delays are usually the rule. The probate process
is designed to follow the legal procedures exactly and allow no
deviations simply for the benefit of the heirs. In addition,
getting on the court calendar contributes to the total delays.
With each week that passes, the emotional pressure on the
family and the inherent delays take their toll as the estate
assets inevitably begin to deteriorate in value.
Stocks, bonds, real estate and other assets lose
substantial worth by sheer neglect and lack of attention. This
factor alone can have a disastrous effect on the estate.
The court will not directly communicate with a family,
requiring all communication to go through the attorney of
record, which in essence, is putting an outsider in the middle
of a familys once private and intimate affairs.
The probate process turns, once rational thinking
families, into emotionally reactive maniacs. The physical,
emotional, and financial affects are often long-lasting, tearing
families apart for generations.

THE CONSERVATORSHIP

Avoid it!

The probate court can also take control of your personal

and financial affairs if you become physically or mentally
incapacitated. This is a growing concern for millions of
Americans as statistics show were getting diseases that
incapacitate rather than kill. This particular problem is
another important issue facing Americans today.
Unless you plan properly, a conservatorship is a real
possibility. It can happen to any of us, at any time, and at any
age!
The conservatorship is a legal process created to protect
you and your property if you are unable to take care of your
own affairs. Once again, the court will step in and take
control away from the family, making financial decisions for
you and looking after your welfare.
Even a will cant help when you become incompetent
because assets that are still attached to you must be
protected. This complex, lengthy, cumbersome, and often
humiliating experience can all be avoided if you create the
right estate plan for yourself and your loved ones.

THE GUARDIANSHIP

Avoid it too!

Minor children face the same potential devastating

process and financial and emotional costs when there is an
unexpected death. Guardians for minor children and the
court often disagree over what is or what is not important for
the welfare of the child. For example, the guardian may feel it
is very important for the childs development to participate in
music or language lessons perhaps or attend certain social
functions. The court may determine such expenditures are
unnecessary, even frivolous.
In addition, all financial costs are paid from the childs
inheritance. Based on the unpredictability of circumstances,
inheritance of a child may be greatly reduced by the time its
received.

This is an issue often not looked at seriously, an issue

that can create devastating results. However, use of the
proper trust ensures assets are not tied-up or decimated by
the court, but rather expended on preserving the health and
welfare of the underage children.
No other method outside of the proper trust can bring
forth the parental certainty of life and its continuation into
your childs future.

Questionable

myths about probate.

Myth #1. I have a will, so my family wont have to go

through the suffering of probate when I die.
False. Having a will does not avoid probate. In fact, it is
a sure fire way to probate! A will is not in affect until it goes
through the probate process. Therefore if you have a will, you
are telling your family that you want them to go through
probate upon your death. When there are problems
establishing the validity of the will, or the will is contested
perhaps by unwanted heirs who believe they are entitled to
something, the estate begins to unravel.
Myth #2. My will has a trust in it, so it wont go through
probate.
False. Often it is thought a trust in a will means probate
is avoided. However, all wills, even those with trusts in them,
must go through probate. A trust used in this manner does
not become effective until after the will is probated.
Myth #3. I dont have a will, so there will be no need for
my family to go through probate when I die.
False. Even if you havent written a will, the state you
live in has one for you. Every state has enacted laws for
distribution of property if death occurs without a will.
Unfortunately, the results are often disastrous and far from
what the deceased had originally intended. It is still a
startling fact, there is no estate plan for the majority of
Americans who die.

Myth #4. I own everything jointly, so when I die all my

property will be immediately transferred without probate.
Be careful here! Joint ownership does not guarantee you
will avoid probate. In fact, usually it only postpones it, often
creating all kinds of unexpected problems.
For instance, assume joint ownership avoids probate
upon a death, transferring ownership to the survivor. But the
survivor doesnt add another joint owner. When the survivor
dies, the entire estate must process through probate before
ownership can be transferred to the designated heirs. Also, if
the joint owners die at the same time, the jointly owned
property would be probated before distribution to the heirs,
even if there is a will.
Joint ownership can also cause unintentional
disinheriting because when death of one of the joint owner
occurs, ownership interest automatically transfers to the
survivor. The intended heirs may no longer have any inherited
ownership interest in the property. Often this is a problem
when there are children from a previous marriage of the
deceased, or if the surviving spouse remarries and has
children with the new spouse.
Here is a disinheriting issue not thought of with joint
ownership. Even when there are no children, death means the
surviving spouses family (not the descendants) inherits the
estateeven though the property belonged equally to both
spouses.
Myth #5. Ill just give all of my assets to my children
before I die so there wont be anything left to probate.
True, there wont be any probate, but depending upon
the size of the gift, there could be a gift tax involved. Also,
when giving children any titled property, a substantial tax
problem could result, as well as exposing property to loss
through no fault of your own. It is not uncommon for an
unexpected problem incurred by the children to cause a forced
sale of property.
What if you decide you want the property back? Events
change in families, like everything else. The children could
even sell property against your wishes. If you happen to out
live your children, would property passed on to the heirs be

given back to you if you asked for it? You could possibly end
up in probate court, fighting to get your very own property
returned!
Sound complicated? Giving assets away may not be such
a simple solution. In most situations, this idea should be
completely avoided.
Myth #6. I have a power of attorney, so I dont need a
will or joint ownership to avoid probate.
False. Some people give a power of attorney to a family
member thinking it will allow transfer of property without
probate upon death, physical or mental incapacitation. A
power of attorney is automatically revoked at death or
incapacity, so its use is nullified. Even a durable power of
attorney which remains valid through incapacity, becomes
invalid at death. So in either event, a power of attorney
cannot be used to change titles after there has been a death.
Some powers of attorney will not work at all. Often
banking institutions and brokerage firms dont recognize a
power of attorney unless it is on their form, and they are
familiar with their clients needs.
In the same respect, a power of attorney could work too
well. I may well be very easy for someone to raid the estate.

Trusts in the United States

Rather than getting into the origination of trust I would
prefer to concentrate on their current relevance. Though they
have been around for a couple of millennium it is their
adaptation into our legal system thats pertinent for todays
estate planner.
The founding fathers began to use trusts as a tool to fight
the oppressive taxation of England. (which represents about
10% of current levels) It so permeated their ideology that our
government formation was structured in similar fashion.
Below are 5 legal definitions of constitution. In them you will
see the relevance of trust law.
1. A constitution is that body of rules and maxims in
accordance with which the powers of sovereignty are
habitually exercised, and its provisions are the rules of
conduct for the branches of the government which
exercise the sovereign power. State v. Griswold, 34
A. 1046, 1047, 67 Conn. 290, 33 L.R.A. 227.
2. The term constitutions implies an instrument of
permanent nature, and a constitution, unlike a
statute, is intended not merely to meet existing
conditions, but to govern the future, Houston County
v. Martin, 169 So. 13, 15, 232 Ala. 511.
3. The term constitution implies an instrument of a
permanent and abiding nature, and, while it contains
provision for revision, it indicates the will of the people
that the underlying principles upon which it rests, as
well as the substantial entirety of the instrument, shall
be of a like permanent and abiding nature. Livermore
v. Waite, 36 P. 424, 426, 102 Cal. 113, 25 L.R.A.
312.
4. The term constitution, as applied to government, is
the form or government instituted by the people in
their sovereign capacity, in which, first the principal
and fundamental laws are established. A constitution
is the supreme, permanent, and fixed will of the people

in their original, unlimited, and sovereign capacity,

and in it are determined the conditions, rights, and
duties of every individual of the community. Pheobe
v. Jay, 1 Ill. (Breese) 268, 271.
5. A constitution is the form of government created by
the hand of the people, in which certain first principles
of fundamental law are establish. The constitution is
certain and fixed; it contains the permanent will of the
people, and is the supreme law of the land ; it is
paramount to the power of the legislature, and can be
revoked or altered only by the authority that made it.
Vanhornes Lessee v. Dorrance, C.C.Pa., 2 U.S. 304,
2 Dall. 304, 308, 1 L.Ed. 391, Fed.Cas No.16,857.
The powers of sovereignty are inherent in the trustors,
grantors right to own property.(1) Part of the exercise of
this sovereignty are the rules governing its use. The
permanent nature govern the future.(2) It is the will of the
people that are its underlying principles.(3) Original,
unlimited, and sovereign capacity, plus the determination of
duties, rights, and conditions of every individual are the
perameters of trust.(4) It is the supreme law of the land or
property.(5) This is the essence of contract law and trust law.
The indentures of the document contain the will of its creator
and determine the rights, duties, and conditions for the
parties involved (the government) over the property involved.
Article 1 Sec. 10 of the Constitution guarantee a trust or any
contract legal validity. Lets look at the Constitution as a trust
document and then a few prominent examples of trust usage.
We the people(preamble)...Grantors declaration of
trust.
ArticlesPower and duties of parties involved.
Beneficiariesposterity or future generations.
The three elements required to have a trust in law are:
1. One to give property
Grantor
2. One to hold property for
Trustees/indentures

3. One who will one day receive it Beneficiary

Part of the security that can be found in a trust is that it
permeates our own identity as a nation. If the government
decides one day that trusts are getting away with more
benefits than that which is fair and move to limit the powers of
the trustees then they will simultaneously diminish their own
powers. Not very likely!
One of the more notable examples of a Pure or
Contract Trust is the Mesabi trust, which owns the
reserves of the famous Mesabi iron deposits. Mr.
Arnold Hoffman, then President of Mesabi Iron
Company, transferred assets of the company to a
Contract Trust, announcing in the Wall Street Journal
on March 14, 1961 that the Commissioner of the
Internal Revenue had ruled that the Trust would not
constitute an association of persons taxable as a
Corporation. Those shares of beneficial interest are
still traded today on the New York Stock Exchange.
Another familiar example is that used for the Kennedy
family estate. Joseph Kennedy, father of the John F.
and Robert Kennedy, established a Pure Trust to
conduct a business known as the Chicago
Merchandise Mart. It is reported that the family
maintains several other trust for estate tax purposes
as well. One such trust was reported with the caption:
Kennedy Divides Merchandise Mart, Chicago
Tribune, March 22, 1947.
A trust agreement in which Kennedys wife Rose, and a
long time friend and associate, John L. Lord, joined as
trustees of the trust and helped materially in
distribution ownership of this thirty million dollar
Merchandise Mart among members of this family.

 William Waldorf Astor, the hotel magnate, created a

fifty million dollar trust estate recorded on August 15,
1919 in New York. The establishment of this trust
saved his heirs several millions of dollars which would
have gone for probate fees and death taxes had the
estate been distributed by the court instead of the
trustees.
The Rockefeller family is known for using various
kinds of trusts as a means of maximizing privacy.
Before his death in 1937, John D. Rockefeller had
ensconced much of his fortunes into about 70 trusts
for his heirs. The vast holdings of individual and
group funds represent assets of more than a billion
dollars.
Nelson A. Rockefeller and his heirs are believed to have
reduced their personal holdings by creation of
still more trusts. It has been reported to one source
that there are well over 100 and perhaps 250
individual Rockefeller trusts by now. Many of these
are known to be Pure (Contract) Trusts, placing the
funds out of the reach of the high cost of probate while
maintaining absolute privacy and insulation from any
personal liabilities.
H.L. Hunt, the Texas billionaire, is reported to have
paid $75,000 for setting up the first Hunt Family Pure
Trust. Hunt then formed at least 25 additional trusts.
Some persons close to the Hunt family estimate there
may be as many as 200 Hunt family trusts now in
existence. The death of H.L. Hunt arranged their
affairs so the estate would increase generation after
generation, thus negating devastation due to the high
costs of probate and associated taxes.
Jimmy Carter, Ronald Reagan, and George Bush also
established blind (Contract) trusts. Jimmy Carter put

his peanut farm into such a trust before taking office.

The Ronald Reagan Trust set up in 1966 enabled him
to receive sizable tax advantages. In George Bushs
last quarter of office his Blind Trust was reported in
the media to have earned more than a million dollars.
Upon taking charge of the nations health care
concern, First lady Hillary Rodham-Clinton was
reported as placing her substantial health care holding
into a Blind (Pure) Trust to avoid a conflict of interest
issue. In addition, a recent San Francisco, newspaper
article touts Senator Diane Feinstein as the wealthiest
of senators, and reports that the income exposed to
the public was that of her husband, while her income
was safely tucked away in Blind Trusts, trust at
armslength from her personally.

The IRS position on trustsnothing special

Many trusts do have numerous tax advantages,
especially the Contract Trust. Even the IRS, strictly a
collection agency that sometimes strikes fear even in the
hearts of the strong-willed, recognizes the Contract Trust in its
IR Regulations. The agency also willingly admits there is
nothing sinister, evil, immoral or illegal about paying as little
as the law allows in income taxes. Filing taxes in a timely
manner, staying within the IR Code, refraining from areas that
may be questioned later or considered a gray area, is
certainly prudent practice.
Trusts are tax paying entities, and pay taxes on any
income retained just like an individual. However, unlike the
individual, but similar to a partnership or corporation, a trust
can distribute its income and would then be taxed only on any
remaining earnings.
It doesnt matter which IRS form is filed: an individual
(1040), corporation (1120), partnership (1065), or fiduciary
(1041). Any filing is subject to review by the IRS. Trusts are
not treated differently than any other business form.
Generally trusts are scrutinized less. Prudent business
practice simply means keeping accurate records with receipts
for all expenses. Proper bookkeeping and accounting is also
expected.
Keep in mind, when the IRS examines a fiduciary trust
tax return (1041), back-up documentation is expected to
support exemptions or deductions claimed as with any tax
paying entity. Having a record keeping system in place and
taking extra care in tracking expenses means smooth sailing
should the trust ever be challenged. Working with a tax
preparer that keeps abreast of the constant IR Code changes
and one that takes a pro-active strategic approach to tax
planning is the best bet since such an expert anticipates
problem areas while achieving the lowest tax liability allowable
by law.
The courts have ruled there is nothing wrong in
arranging ones affairs so as to keep the tax burden as low as

possible. It is done by rich and poor alike. Nobody owes any

public duty to pay more than the law demands. Taxes are an
enforceable contribution. If youre not filing a 1041 tax return,
you need to check into it today.

YOU MAY BE MORE VULNERABLE

to

Financial Ruin

than you think!

Most people today rarely consider the affects of a sudden

lawsuit or financial reversal which could cause them to lose a
home, life saving, or other valuable assets. Yet the realities
continue to be true it happens each and every day. To verify
this fact simply read the newspaper. Its not a pretty picture.
Families and individuals alike fail to protect their assets
correctly, if at all, or even so much as to plan for future
financial difficulties. Often they find themselves wiped out
with no warning, and many times from events not of their
making.
How does one prepare for financial disaster? Certainly by
being alert to the many possible sources of liability that may
be encountered no matter how honest, cautious or prudent
you may act. Here are a few:
A motor vehicle accident
An accident in or around your home or business
An accident or injury caused by someone else for
whom you are responsible such as an employee,
partner, subcontractor, or even a child or other family
member
Something that happens on the job
Inability to fulfill an important contract
Default on a lease, purchase agreement, or loan
Professional malpractice
Negligence in an unsuspecting act
Negligence as an officer or director of a corporation
Business debts for which you are personally
responsible
Tax claims: IRS doesnt like you

 Divorce or separation: your spouse doesnt like you

Frivolous lawsuits, liens or judgments legal
profession doesnt like you
Fines or other governmental levies such as hazardous
waste or environmental protection violation
assessments
Claim by a creditor
Problem caused by a partner in business
The list could go on forever. The point is no matter how
safe or secure your financial situation my appear today, you
can never be absolutely certain that the title to anything in
your own name will never be in jeopardy tomorrow. With the
right trust, you can place property in ownership which is more
secure than your own.
With trusts, assets which are exposed to liability on their
own account can be segregated from others thereby building a
liability shield for them. Safe assets separated or isolated
from Unsafe assets. The only requirement is that the trust
be activated before any claim against its assets occurs.
Remember, there may be more hazards to be avoided in
life than those which could arise out of probate after death.

THE CONTRACT TRUST

The Ultimate financial fortress

The purpose of an estate plan is to achieve the goals of its
principal with minimum exposure to potential loss of assets.
A successful estate plan will protect the estate against
inexperience or improvidence of the next line, diminishing
abilities of the present owner due to advancing years,
catastrophic or long term health care issues, and the impact of
unpredictable events such as bankruptcy or liability claims.
In these regards, the overall goal may be simply peace of mind.
In the eyes of the law, a trust is simply an individual with
the capacity to own property in its own right. The trust is an
artificial person or paper person, different than the former
natural owner, making it possible to limit the hazards and
exposures to which the natural person may be subject. With
this understanding it becomes possible to separate the hazard
of personal ownership from the advantages of control.
Here are some objectives for which trusts are often created:

A parent may wish to provide for the future care of a child,

but fears that the childs irresponsibility or immature
behavior could jeopardize the entire estate if he ultimately
gained control over it.
A person may wish to make permanent provisions for a
minor child in the event of his own premature death.
A person may wish to give interim benefits to specified
others, without depriving the intended ultimate heirs of
final control of the estate.
A person wishes to create a legacy that can pass from
generation to generation, allowing beneficiaries to use trust
gains without touching trust principal.
A person wishes to set up a trust specifically for the
education welfare needs of grandchildren.
A person wants to establish a new business and wants the
best liability protection and tax advantages.

 A person wants to make regular contributions to charitable

organizations.
A person wants to ensure that minor children are not
adversely financially affected in the event of premature
death of a parent.
A person wants to ensure that estate wealth stays in bloodlines.
A person wants to ensure continuance of the estate in the
event of the simultaneous death of spouses.
A person wants the best protection against loss of wealth
from catastrophic or long term nursing care.
A person wants to ensure that an ex-spouse is insulated
from the estate.
A person wants a humane pre-nuptial agreement.
A person wants to protect against an unexpected disaster
from a partnership or other joint relationship.
A person wants to avoid the problems inherent with joint
tenancy issues.
A person wants to separate safe assets from unsafe assets.
A person wants to disinherit an unwanted heir.
A person wants to ensure assets get to his children only in
the event of his death and the re-marriage of a spouse.
A parent wants to ensure that if his child should die before
him his grandchildren are taken care of by excluding
others.

THE CONTRACT TRUST AS A BUSINESS

Beats any other form

Today business owners are examining business assets
and affairs to determine whether their current business
structure meets short and long term growth needs. Results
often show it makes sense for the business to separate various
assets and liabilities into different companies. A Contract
Trust as a Business is often established to help achieve this
goal.
The Contract Business Trust is an excellent vehicle for
diversification of business holdings and separating personal
liabilities from those of the business. Similar to a corporation,
the trust limits the liability of those operating the business
from the hazards of that business. The business trust works
well for multiple businesses or in coordination with multiple
business structures. This strategy also introduces potential
income splitting possibilities.
The Contract Trust business operations can be located
anywhere in the U.S., or any other Anglo-Saxon jurisdiction.

THE BUSINESS TRUST

As distinguished from a corporation

The Business trust (a Contract Trust) operates similar to
a corporation, but can pass its profits as a conduit like a
partnership. The partnership and S Corp. are known in tax
vernacular as pass through entities. Meaning they have the
option of distributing their income before their tax obligation.
There are six characteristics that differentiate a business
trust organization from a corporation:
1.
2.
3.
4.

A
A
A
A

Corporation has centralized management

corporation has continuity of life (no termination date)
corporation can sell or transfer shares easily
corporation is a public operation

5. The shareholders are the owners, exercise control of Board

of Directors by election, meet to plan and promote a joint
enterprise for profit and receive share of profits in
accordance with distribution per share specified by Board of
Directors
6. The corporate shares are included in the estate upon death
of the holder
When a trust demonstrates fewer than three of these
qualifications in its operation, it avoids treatment as a
corporation by the Internal Revenue Service.
Formation of a Contract Trust is completed in such a
manner to ensure the corporate characteristic do not engage
the trust at any time in its organization or operation.

. . . About the Contract Trust

1.

2.

3.
4.

How much should I own before it makes sense for me

to have a trust? Its not always a matter of how much
you own, but what you consider of value that you want to
get to your chosen heirs. Proper planning can ensure
avoidance of probate, elimination of all estate taxes and
passage of assets to heirs exactly as you have chosen.
Is the Contract Trust known by other names? Many.
Pure Trust and Common Law Trust are two. Its
application as the centerpiece of estate planning is still the
same, however.
Isnt this type of trust expensive? The Contract Trust
costs about the same as other types of Trusts but has
considerably more benefits.
Are all trusts pretty much the same? Not at all. Most
trusts are designed to satisfy specific needs in an estate
plan. There are literally hundreds of different kinds of

THE MOST COMMONLY ASKED QUESTIONS

trusts. However, the Contract Trust has the most benefits
for you and your family.
5. Is the avoidance of probate the most significant issue I
should be concerned about? The avoidance of probate is
certainly an important issue, but not the highest priority
of concern. Long term catastrophic health care and the
insulation of your assets from predatory litigation are just
two categories most people are faced with, in which either
could decimate an estate, leaving nothing to probate.
6. Does the Contract Trust have application to business?
Yes. It separates personal liabilities from business
liabilities. It also insulates the principals from problems
similar to what was once expected when incorporating.
7. Does the trust prevent assets from being used for
borrowing? No. The trustee(s) can lend, borrow, buy,
sell, invest funds or manage the estate generally more
efficiently than yourself. Most financial institutions make
a requirement for real property to be taken out of trust for
purposes of financing. This temporary need is addressed
by the Contract Trust and is routine.
8. Are there tax advantages for the business person who
employs a Contract trust as a business entity?
Absolutely. In the past we also looked to corporations to
fulfill many of our tax saving measures. This is no longer
the case. The Contract Trust has exciting tax savings in
its favor that no other business form can match.
9. I am convinced the Contract Trust can be an
important part of my estate planning and business
operations. Why dont more CPAs and Attorneys
recommend the approach? Interesting question. It may
be many professionals are more concerned with fixing
the problem than preventing it. However, more
professionals are offering the Contract Trust as part of
their estate planning programs than ever before.
10. Who would be my beneficiaries? Your beneficiaries are
the people or organizations who will receive any
distributions from the trust, or all the assets should the
trust ever be dissolved. The Contract trust allows you to

11.

12.

13.

14.

15.

orchestrate your exact wishes and know without question

they will be carried out as you planned.
How do I know if I need more than one trust? Most
people consider more than one trust if there are different
kinds of assets to protect. No one trust provides absolute
liability protection. Separating safe assets from those
assets considered unsafe is a primary objective.
Additional trusts can improve the tax situation as well.
One of my children is irresponsible. How can I make
sure he doesnt deplete the estate by a foolish action?
The Contract Trust is the perfect legal instrument for
insulating family assets from certain beneficiaries and
potential depletion of the estate. Beneficiaries may receive
a distribution from the trust, but only upon the approval
of the Trustees. Therefore trustees could manage the
estate without subjugation to beneficiaries or outside
pressures or challenges.
What about someone with special needs? The Contract
Trust is an excellent planning tool when addressing the
special needs of someone who is physically, mentally or
developmentally disabled. A special needs person may be
entitled to government benefits (Supplemental Security
Income and/or Medicaid), now and in the future.
However, most of these benefits are only available to those
with minimal assets. If a parent was to leave a
substantial inheritance to this child, he would be
disqualified from receiving the government benefits which
may be crucial for his care. The Contract Trust allows the
child to be provided for in a way that suits you, while not
affecting the much needed government entitlements.
How do I find the right professional to draft my
Contract Trust? You need to find an expert that
specializes in estate planning, who understands Contract
Trusts, publishes them routinely, and understands the
many tax ramifications. The person who furnished this
booklet or a personal referral from someone who has had
a similar trust drafted is probably best.
How long does it take to get a trust set up? You will
find that most actions can be completed in about twenty

16.

17.

18.

19.

20.

21.

days, depending on how much customizing is required for

your specific trust. Once the trust is published, you are
carefully instructed on how the trust works, what to
expect, and how to maintain its life.
When is the right time to set up a trust? Right now,
while you are healthy and have no potential liability issues
pending such as lawsuits, liens or judgments. Avoid
placing your estate planning at the bottom of your priority
list instead of at the top. Procrastination is a costly
happening.
If I set up a trust, have I completed my estate
planning? Probably not. Depending on the size of your
estate, potential growth possibilities, and other pertinent
situations, you may need to examine your estate further.
If I get sued what happens to trust assets? Since you
do not personally own the assets placed into trust, and the
assets are held by the Board of Trustees, any litigation
against you has no affect on the trust assets, providing
the trust was established prior to any legal difficulties.
Can my creditors or those of the trustees or
beneficiaries gain access to the trust property? Trust
assets are never attachable for the personal obligations of
the trustor (you), trustees, beneficiaries, or managers.
What if I file for personal bankruptcy? In an
unexpected personal bankruptcy, trust assets are not
affected when personal assets are conveyed properly to
trust and the trust treated in accordance with all form and
substance requirements. Since legal and equitable title
are held by the Board of Trustee, only those assets still
attached to you are subject to personal bankruptcy
claims.
What about divorce? Fortunately the trust establishes a
safety net for both spouses should a divorce proceeding
occur. It is considered as todays most humane and fair
pre-nuptial or post-nuptial agreement. Since a divorce
action generally creates emotionally charged feelings, the
trust sits as a fortress from outsiders who may have
ulterior motives. Therefore, assets properly transferred to

the trust organization are not exposed as part of a

property settlement. Trusts have even been credited with
saving marriages, creating a need for intimate
communication by all parties. In addition, trusts usually
introduce stronger family ties and commitments by
establishing a much needed pro-active family plan for
the future.
22. What about the No. 1 issue facing an individual:
catastrophic or long-term nursing care? Most families
are unaware of the devastation that can occur from a
catastrophic or long-term nursing care need. Current life
expectancy charts show Americans are living longer but
getting diseases that incapacitate (often over years) rather
than kill. Costs for required care can run from $5,000 to
$10,000 or more per month, and families often find
themselves having personal assets attached or sold to
cover such costs. This kind of forced action can result in
taxes being assessed when there is premature and
unexpected liquidation of assets, or moneys are expended
foolishly to accommodate the Medicaid spend-down rule.
Sadly, statistics show that a family can become
impoverished in as little as 13 weeks of long-term health
care! Statistics also reveal that at least one in three
families will be affected by the ravages of this issue.
Becoming a victim can lead to a real and possible estate
ruination. Acceptance of the proper trust and its
attendant strategies will not only preserve all of its assets,
but virtually assures those assets will reach designated
individuals exactly as intended, without any outside
influence or interference.
23. If the Trustors die and their former assets are in a
Contract Trust, will the death introduce probate of
those assets even if valued in the millions? No! Assets
held in a Contract Trust are not part of anyones personal
estate, and therefore not subject to the probate process.
Your former estate will continue exactly as you intended.
24. Why do I need to set up a trust now? Can my spouse
set one up after I die? No. If there is no trust in
existence then, probate takes over by law and your spouse

wont have the right to do anything. Also, suppose you

both die at the same time? The right time to set up a trust
is never tomorrow!
25. The Contract Trust sounds almost too good to be true.
Surely theres something bad about it? We havent
found anything yet. Considering the many benefits of a
Contract Trust as compared to any other estate planning
form, you have to pay attention to details to ensure its
operation is in accordance with certain instructions, the
Contract Trust is well worth the minor inconveniences.

I LIKE THE CONTRACT TRUST CONCEPT.

What should be transferred to trust?

Almost any thing of value can be placed in trust. The
assets may be tangible, intangible, real or personal. Such
assets may be equipment, building, stocks, bonds, patents,
mutual funds, bank accounts, notes, furniture, partnership
interests, insurance, annuities, rental properties, paintings,
jewelry, antiques, collectibles, vehicles, boating or pleasure
vehicles. Yes, people have even established a trust to hold a
baseball trading card collection because of its estimated
appreciable value to them.
The process starts with an overall assessment of the
financial and estate planning goals, including an evaluation of
assets, likely appreciation, and current and future growth
strategies. This helps to evaluate the need for specialized
trusts. Multiple trusts may be determined based upon asset
valuation and any possible liability issues.
Selecting the right assets, and then implementing the
proper steps to transfer the properties to trust are critical
aspects in making a trust accomplish a viable part of an estate
plan.

How taxes and the trust affect a business

The form of a business can make a major difference in its

tax strategies. The business person continues in the hunt for
the best tax strategies to increase and preserve profitability.
The first consideration in any business, whether just
beginning or already in operation, is choosing the proper
business form. With the myriad of other factors to consider
for any business, it is the business form that influences
virtually every decision or will at least have some ongoing
affect on it. Since profitability is the bottom line, taxes the
business may be subject to remain a major focus of any
planned strategy.
Generally business plans will center around three types
of business organizations: sole proprietorship, partnership, or
corporation. Each has its place in any business. However, the
business trust is the fourth business form, and is often
mistakenly overlooked. The business trust, with similar
characteristics as a corporation, is distinctly unique since it
has many advantages over other forms.
Sole Proprietorship: The sole proprietorship is the most
common and simplest business organization. It generally
requires little or no capitalization. Simply declare you are in
business, and you are in business! Open a bank account to
separate business expenditures from personal, obtain a
license, and the business in underway. Income and expenses
for the business are simply displayed on the profit and loss
Schedule C of the personal 1040 Tax Return. Together with
other taxable incomes, the tax on income is determined. With
this type of organization for business, there are limited tax
breaks, assets are completely exposed, and the business
person is personally liable for everything that happens to the
enterprise.
Partnership: Forming a partnership is slightly more
complicated than a sole proprietorship. One complication is
that each partner look to the other for cooperation and each
principal is dependent upon the other for the operations
success. Financial failure by one partner can lead to ruination
of the entire business because liquidation may be called for.
Profits are divided in accordance with the partnership

agreement, each going to a partner for inclusion in the

individual 1040 Tax Returns. There are no tax breaks.
Deductible expenses are almost the same as those for a sole
proprietorship. Assets are exposed for both the business and
each of the partners. The 1065 Tax Form functions as a pass
through entity. All income and liabilities after expenses pass
through to the individual partners.
Corporation: Since the corporation is a public entity, its
rules and regulations are dictated by each State where the
business is incorporated. Depending on the type of
corporation, S or C, taxes are assessed accordingly. Tax
advantages of a corporation have been continually reduced
since 1986. In the past, corporations retained some limited
liability for its Directors. Today this is no longer the case. The
business person who looks to a corporation as a viable
business form should study such an entity carefully. With no
tax advantages and exposure of personal liabilities to entire
business, is it any wonder the rate of incorporation is in
decline. The business person is turning to the business trust
as the most dependable organization.
The Business Trust: The business trust is undoubtedly
the most durable entity for business. Its Board of Trustees is
insulated from any business liabilities; its beneficiaries (share
holders in a corporation) are also not held liable, yet can share
in any profit distributions declared by Trustees. Since the
business trust is private and confidential, it operates free of
the many loopholes which bind other business forms. Many
tax advantages come from income splitting, diversification of
profit distributions, and the application of certain deductible
expenses not available to other business forms.

THE RICH HAVE THE BEST TAX ADVICE

Why dont you?

The wealthy are usually well informed about tax law in
the United States, or at least hire professionals who are. And
once enlightened, arrange their financial affairs accordingly.
Most of the rich or super rich are in business for themselves.

Money is often protected through investments, trusts,

securities, insurance or annuities. Other strategies and
techniques do the rest for any moneys not protected. The rich
do indeed pay their taxes that is if they owe any! And
theres the catch: if they owe any!
It is important to remember, The difference between tax
avoidance and tax evasion is 20 years in Leavenworth. As
famous justice Learned hand wrote in a Supreme Court
opinion in 1947:
Over and over again courts have said that there is nothing sinister in so
arranging ones affairs as to keep taxes as low as possible. Everybody does so,
rich or poor; and all do right for nobody owes any public duty to pay more than the
law demands taxes are enforced exaction, not voluntary contributions. To demand
more in the name of moral is mere cant.

Business Expenses associated with the

Business Trust

The identification of expenses in pursuit of business have

always been a fascinating subject. Few in the private sector
and certainly no agency of government has really garnered the
complete knowledge of how this enormous blob works. A
complex set of IR Codes and Rulings is published periodically
and disseminated to anyone who wants them. Even the
Internal Revenue Service who is tasked with understanding it
all, admittedly are stumped much of the time. Yet, with all its
shortcomings, things get done. It is however, increasingly
disconcerting as there seems to be fewer answers to more
questions, and more reliance on professional help to sort out
growing confusion. The information in this section should
serve as a guide only. There is no substitute for a one-on-one
strategy meeting with a tax expert. To advise on such complex
matters.
The key to any successful tax strategy is record keeping.
Record keeping is not only writing down expenditures but
backing them up with proper documentation and receipts.
The rule of thumb: every dime spent in the pursuit of
business is deductible expense.

The next rule of thumb: If money is spent write it down.

And the most important rule of thumb: Get a receipt!
And if you need assistance ask for it!!

The Lexicon

of Business Expenses

The following list of business expenses is no where near a

complete list of deductibles available to a business. Such a
list is impossible to provide. There are more than 350
categories of deductions and literally hundreds of deductibles
within each category.
The Lexicon of Business Expenses that follows consist of
the most common. Many of these deductions are associated
with operating a business out of the home; others are
ordinary expenses found in most any business. This is only a
suggested list. It should be viewed primarily to assist the
reader in understanding the vastness of business deductions
available. Do not be alarmed if a particular deduction you are
personally aware of is not listed. Remember this is only a
guide and not intended as an all-inclusive detailed authority.

Lexicon of Business Expenses

1.

ADVERTISING. Literature, price lists, catalogs, display, and

classified ads in newspapers, magazines, radio, T.V., etc.

2.

BAD DEBTS. Any due and uncollectible, based on actual

expenses incurred. (For accrual method of accounting only).

3.

BANK CHARGES. Service fees and checking costs, including

check imprinting, overdraft protection, and any costs and
penalties from late charges and insufficient funds.

4.

BUSINESS GIFTS. Items given to any prospect, customer or

associate, up to $25 annually per recipient.

5.

CAR AND TRUCK EXPENSE. If only one car, use expense or

mileage method. If two or more, or if leasing, use expense
only. (Mileage method replaces all actual operating and fixed
expenses, including depreciation.) For personal auto,
subtract all receipts to trust for all reimbursable expenses.

6.

7.
8.

CLIENT ENTERTAINMENT. Extra activities such as catering

and special refreshments for birthday and anniversary
parties, ball games, sporting events, plays, movies, etc., used
in conjunction with business clients.

CONTINUING EDUCATION. All business related schooling and

educational costs. Product testing, research and development.
CONTRIBUTIONS. If provided for in Minutes or Indentures; available to
active income businesses.

9.

CONVENTIONS AND SEMINARS. Costs of attending or participating in

meetings and rallies.

10.

COMMISSIONS. Fees paid to others for transacting business, a

percentage paid to another responsible for a business transaction, or
bonuses paid to distributors.

11.

DEMONSTRATIONS AND TRAINING. Portion of groceries used for

business. Products used for demonstration purposes or self-used of
products for promotional purposes.

12.

DUES AND PUBLICATIONS. Newspaper and magazine subscriptions and

purchases from newsstands relative to business.

13.

EDUCATIONAL SUPPLIES. Books, records, tapes, and any materials used

for self-improvement pertaining to business.

14.

FIELD ACCOMMODATIONS. Other travel and lodging expenses, miniwarehouse costs for storage and distribution.

15.

FREIGHT. Handling charges, costs of shipments sent and received,

including gifts and special carrier delivery such as UPS, Parcel Post, and
Federal Express.

16.

INCENTIVES AND AWARDS. Pins, plaques, applicable product discounts,

rewards, costs of contests and prizesanything expended to generate
sales, including raffles, drawings and door prizes and other perks.

17.

INSURANCE. Business portion of homeowners insurance for casualty,

fire, theft, property damage, and liability. (Subject to home office
limitations). Business Trust can deduct life insurance, health insurance,
private pension plans and annuities.

18.

INTEREST. Business portion of home mortgage interest and interest on

business loans. (Subject to home office limitations.)

19.

LEGAL AND PROFESSIONAL SERVICES. Payment for services of all

kinds such as attorneys, accountants, business consultants, costs to
establish business trusts.

20.

OFFICE SUPPLIES. Stationary, pencils, pens, paper clips, envelopes, file

folders, erasers, order forms, bookkeeping and art supplies, computer
and printer paper, small equipment item such as pocket calculators,
staplers, paper punches, etc. Also diaries, ledgers, tablets, message pads,
etc.

21.

PARKING Meters, space fees, and lot costs for business purposes.

22.

POSTAGE. Stamps for all correspondence, newsletters, IRS audits,

Christmas cards, bills, and all costs of certified, registered and insured
mails.

23.

PRINTING. Reproduction of newsletters, fliers, brochures, business cards,

tickets, and all copier and fax costs.

24.

RENT. Applicable business rent, meeting rooms and trailers, and all lease
costs. (Subject to home office limitations).

25.

REPAIRS. Business portion of painting, flooring, resurfacing, concrete

fixing, new glass, hardware supplies, tools, grass seed, tree surgery, paint
rollers, business VCR and other office equipment. (Subject to home office
limitations).

26.

SALES EXPENSES. Business related meals, recreation, and

entertainment incurred outside the home on behalf of clients and yourself;
receipts submitted to trust for reimbursement.

27.

SAMPLES AND DISPLAYS. Service or Product displays or

demonstrations, including Brand X products, and new products used for
promotion and samples.

28.

SECURITY. Alarms (smoke detectors and fire alarms), padlocks,

electronic sensors, monitoring cameras, etc.

29.

STORAGE. Costs of warehouses, lockers, garages, dock fees and hanger

space for business purposes.

30.

SUPPLIES. Additional items such as linen, coffeemaker, cups, napkins,

papertowels, interior decorating items, special lights, blackboards, and
easels, whiteboards, visual aids, and usual office supplies.

31.

TAXES. Business portion of real estate taxes, sales and excise taxes. (Do
not include sales tax of inventory purchased if Purchases is gross
figures.) (Subject to home office limitations).

32.

TRAVEL. Traveling costs such as plane, train, taxi, and bus fare. Rental
cars, lodging, tour and guide fees, and special arrangements, to be
reimbursed when appropriate documentation submitted to business
entity.

33.

UTILITIES AND TELEPHONE. Business portions of natural gas and

electricity, heating oil, water sanitation. All telephone costs including
service charges, message units, long distance calls and pay phones.
(Utilities are subject to home office limitations).

34.

MISCELLANEOUS. Bridge fares, tolls, parking.

Other Deductions
35.

ACCOUNTING. Payments for bookkeeping and auditing services.

36.

ANSWERING SERVICE. Cost for telephone message services, in

home or outside.

37.

CLIENT CONTACT. Developing or maintaining communication with

clients or prospective clients by way of cards, notes, meals, etc.

38.

CONTRACT LABOR. Moneys paid to those with whom you contract

for various tasks, projects, services, etc.

39.

DEPRECIATION. Business furniture, autos, equipment, and

improvements depleted over useful lifetime, (Subject to home office
limitations).

40.

INTERVIEW EXPENSES. Individual personal review and selection,

hotel and travel expenses.

41.

LICENSE AND FEES. Costs of obtaining permits and licenses for

sale and use purposes.

42.

LOBBYING COSTS. Expenses incurred in advocating legislative,

executive, and judicial position to public servants and bodies in city,
county, state, and federal government.

43.

MARKET DEVELOPMENT. Cost of sales and performance

development in specific markets. New product research, application,
introduction, and implementation.

44.

PEST CONTROL. Cost of product and services pertaining to

controlling and eliminating rodents, insects, other vermin.

45.

PROPS AND MEDIA. Equipment, audio-visual devices, and supplies

needed to assist with business presentations.

46.

PROSPECTING. Costs associated with and pertaining to search for

new clients and personnel.

47.

PUBLICITY. General announcements of product, service, and

opportunity availability, receptions, donations, etc.

48.

REGISTRATION FEES. Costs of enrollment for continuing education,

fees for business fairs, other events, exhibitions for promotion of
business products and services.

49.

REFUNDS. Repayments or reimbursements made for products or

services rendered.

50.

SERVICES. Payments made to Independent Contractors for work

performed (1099) in the conduct of non-contract labor.

51.

WAGES. Payments for salaries and hired help for which payroll
taxes are paid and form W-2s are issued.

BUSINESS FORM COMPARISON TABLE

Sole
Proprietorship

Partnership
Genl
Limited

Corporation
S
C

Contract
Business Trust

Personal assets shielded

from business liabilities

No

No

No

No

No

Yes

Private

No

No

No

No

No

Yes

Flexible

Yes

No

Yes

Yes

Yes

Yes

Business assets shielded

from person liabilities

No

No

Yes

No

Yes

Yes

Can do business in any

Yes

Yes

Yes

No

No

Yes

state
Can give anonymity in
business dealings

No

No

No

No

No

Yes

Special tax advantages

No

No

Yes

Some

No

Yes

No annual State fees to

maintain

No

No

No

No

No

Yes

Business intact upon

death of principal

No

Yes

No

No

No

Yes

Avoids probate court,

fees, estate taxes

No

No

Yes

No

Yes

Yes

Pre-nuptial or postnuptial advantages

No

No

No

No

No

Yes

1.
2.
3.
4.
5.
6.

Only limited partners achieve limited liability. General partner is fully liable.
Stockholder liability limited to amount of investment.
S-corp. profits passed on to shareholders, bypassing SE taxes. However entity has other special IR rules which eliminate any
tax advantages.
C-corp. taxed on net profit prior to distribution of dividends. Shareholders taxed on dividends received. Sole shareholder is
double taxed.
Contractual business Entity (CBE) taxed only on net profit retained. CBE has option to distribute all profits and pay no tax
Applies to corporation assets only. Stocks owned by shareholder subject to probate.

Why doesnt everyone have a contract trust?

Most every one who is presented with the advantages of a Contract
Trust does! Even though trusts have been used for centuries, it has been
the Super Rich and Elite generally implementing trust strategies for tax
advantages, separation of liabilities, preservation of estate holdings, and
privacy. Such strategies allowed not only preservation of assets, but
created and asset growth plan as well.
Consider for just a moment the last time one of the Super Rich
revealed their secret for retaining wealth or passing on wealth without
probate no matter what size the estate? In fact, it probably has never
happened. Study any wealthy family. How much do you really know
about them, and in particular, about their vast holdings? The answer is
very little or nothing. Why? This elite club takes pleasure in not only
considering themselves exclusive, but pride themselves in obtaining and
using knowledge not typically available to the general public.
Note the April 3, 1994 Face the Nation television program where
one of the media participants stated that President and Mrs. Clinton had
over one million dollars in a blind trust. Until this disclosure, a little
known fact to most.
The greatest reason for apathy regarding estate planning is because
most Americans are simply focused on maintaining an ever-decreasing
standard of living while the average citizens feel they dont have the
time, money or proper advice to create a wealth acquisition and estate
preservation plan.
And lets not forget perhaps the hardest hit. Middle-income families,
small business owners and professionals are taking a beating. Weve all
heard the quotation, Necessity is the Mother of Invention. As a result of
the drain on the average Americans resources, the person on the street
continues to hope for new and effective methods to achieve the same
benefits as the super rich at an affordable cost. The Contract Trust may
not be a panacea, but it comes closest to it!

Where to start
There are numerous firms specializing in estate and tax planning,
some with attorneys either on staff or consulting with Contract Trust
experts. Such firms set up estates in passive entities for holding stocks,
bonds, artifacts, real property, or proactive business trust for operating
any enterprise. The person who gave you this booklet can help in
considering this option.

Finding the right checklist plan for full-service

estate planning organization

5 Make sure the provider understands you want the kind of trust that
eliminates all probate costs and estate taxes, no matter what size the
estate. Get the professionals acknowledgment and agreement to this
before moving on to other issues.
5 Request a trust that insulates your assets from any personal liabilities,
and protects from frivolous lawsuits, liens and judgments from any
personal actions attributable directly to you.
5 Ask the professional if they fully understand the Contract Trust, how
many they have published, and is the firm experienced at supporting
these entities, and for how long a period of time.
5 Ask the professional if he is experienced in 1041 taxes as well as the
1040. If the provider is not personally tax qualified, he may interact
with an appropriate tax group. If this is the case, be sure you are able
to discuss your plan with a tax professional from that group to
strategize your estate plan, prepare the 1041 return, and service any
audit requirements.
5 Ask your income tax preparer what tax return he files. You will want to
work with a professional who truly understand the 1041 tax return and
how it will apply to your current and future financial growth plans.
5 Ask how the professional charges for preparation of the Contract Trust.
Many professionals, particularly attorneys, charge by the hour, while
those specializing in estate planning will charge only for the trust
instrument and any special services they may furnish.

5 Ask about those additional charges. Be wary if there is a reluctance to

discuss all the costs associated with publishing the trust and servicing
it.
5 Ask if there are any costs associated with the initial planning
consultation. A trust specialist may spend an hour or two with you at
no charge to answer your general questions, and when there are
charges for more extensive interviews, these are generally waived when
a Contract Trust agreement is drafted.

Is my attorney aware or capable of setting up a

contract trust?

Should be, however, unless the attorney specializes in estate

planning, it will not be easy to find one versed in the Contract or Blind
Trust. If you get lucky, however, and find an experienced legal
professional, compare costs with other providers. Bear in mind, all trust
are not alike, that the business of probate is generally a major portion of
the legal professions source of income. Often it is not profitable for the
lawyer to curtail probate business. Lawyers are known to turn down
judgeships to remain probate processors because the reward is so great.
Attorney Leo Kornfield of New York wrote in Money Magazine on the
probate system stating the following points:
1. Attorneys make their money handling estates, not planning them.
2. Fees for handling estates often bear no relationship to the amount of
time spent by the attorney on behalf of the estate.
3. It is a lot easier to exact an enormous fee from a dead mans estate
than from a living client.
4. Handlings of moderate estates is mainly cut and dry with much of the
work done by the attorneys secretary, with problems being solved free
by clerks at the probate court. Very little of the attorneys own time is
involved.
5. Very seldom will an attorney spend more than 15 to 20 hours of his
own time handling a $100,000 estate.
6. Legal fees for relatively simple probate work have averaged out to over
$1,000 an hour in some instances.

7. Courts and bar associations rebuke attorney who try to change the
deplorable system.
A noted attorney once said, You can have a will instead of a trust, if you
are willing to pay the price!

In conclusion
There are a myriad of books, pamphlets, flyers, brochures,
notebooks, and a whole lot more published on the subject of trusts, but
ever so little covering the Contract Trust. The question that comes to
mind is why when there seems to be so many insurance firms, attorneys
and estate planners whom youd expect to be well versed in the subject.
This is especially puzzling when you realize estate planning is certainly
more than insurance, investments, and tax programs. With this in mind,
it is evident there is certainly more to life than simply preparation for the
avoidance of probate. What can you expect if you happen to live?
And as the reader has surmised from reviewing the material
presented in this booklet, the avoidance of probate only as an integral part
of asset preservation is certainly not the central issue. It is an important
one for sure, but not the highest priority we face in the ultimate estate
plan.
It is no secret this is a sue happy society we live in today. Predatory
litigation is poised in the shadows waiting to pounce on your every asset
for the slightest provocation. You dont have to do anything wrong to have
everything youve worked for decimated by actions of someone else. And
people are worried about probate? When you think about all the things in
life that can happen to you and everything you own, whats the big deal
about probate if you have nothing left to probate? Proper planning is the
issue and that plan should encompass the right trust to hold all of your
personal assets and to operate a business.

Bob Dylan 1985

I think of a hero as someone who

understands the degree of responsibility
that comes with his freedom.
This booklet doesnt pretend to cover the entire subject of the Contract
Trust and its benefits. However, the information should raise an
awareness of your options that there is a legal, safe, and fair way to
protect yourself, family, and intended heirs that has been available for you
to discover for a very long time.
Be a hero to yourself and family.
The Contract Trust is an excellent start.
The Beginning

Bob Dylan 1985

Taxes a future look

As stated earlier, the Trust files a 1041 tax form. Most people have
never heard of it or seen it so there is a copy following. There are a couple
of distinctions about a trust to add to your consideration when thinking of
the tax portion of your estate plan. There is the simple trust and the
complex version of the Contract trust. This distinction deals with the legal
method in which the trust can distribute its assets or income. The simple
trust must distribute any and all income annually to the beneficiaries.
This causes the trust to function like the partnership in that its a passthrough entity. Any and all tax consequence will fall on the beneficiaries.
The complex does not have this legal requirement and can distribute
annually or in any method it chooses including the simple method.
The IRS says the way to control you tax liability is to control you
deductions. The best and most efficient way to control your deductions
are on the 1041 tax form via the proper use of Trusts. Look on the form
in box (A) Simple and Complex as explained are good, Grantor type is not.
The tax advantages are for all Trust not considered Grantor type.

RECENT DEVELOPMENTS
There are two major legal developments that have effected the
operation of trust. In both cases potential areas of abuse have been
addressed by government.
1. Kennedy/Kassenbaum authored a bill that became law allowing for
criminal prosecution for Trustors or Settlors that fraudulently convey
property. For the most part this is a benign law in that the people who
truly have fraudulent intent are hardly measurable. The governments
concern is that the elderly were conveying their property into trust in
order to qualify for Medicare benefits. If you become aware of
impending, substantial, medical expense and then transfer all your
property to trust, you could qualify for the fraudulent intent. This law
allows the government to overturn any conveyance to trust within five
year of their conflict and their proof of fraud. Estate preservation is
not fraudulent intent. Planning before a crisis is still the best defense.
If you are elderly before you decide to convey property to trust you may
want to buy supplemental medical insurance for five years. This
would eliminate your exposure to this law. The elderly are not the sole
subject of this law in that terminal disease strikes at any age and
conveyance to avoid asset shrinkage from medical cost is an ageless
problem.

OVERTURNED
2. For decades the Trust contract has been an excellent vehicle for a
business structure. Because it could not qualify as a corporation or
partnership it settled into the definition of an Unincorporated
Business Organization. (UBO) Recently the treasury had a definition
put in the code (301.7701-4) that attempts to convert these
organizations into corporate (1120) or partnership (1065) filings. {a
fatal error} Though I believe an intelligent challenge to this code would
prevail I prefer to make the code mute by changing the Trust/Business
relationship. The government cannot dictate the type of business you
operate or the structure you must choose. Do whats best for you not
for them. Details can be addressed individually.