ESTATE PLANNING ESSENTIALS

1. ESTATE PLANNING ESSENTIALS The Right Way and the Wrong Way of Leaving Money to Your Children (And Others)

2. Introduction • There are professions that help you make money. The job of an estate planning attorney is to help you leave your money (and other assets) to your children, grandchildren and other heirs. • There are two sides of estate planning: The “money” side and the “family” side. • The money side focuses on leaving more of your wealth to your family with less going to the IRS. Very boring stuff. I’m falling asleep in mid-sentence just thinking about this. • The “family” side focuses on leaving your children an inheritance in a manner that does not leave a legacy of chaos and conflict. Now it gets exciting -- because we are talking about the family killing each other over the inheritance!

3. Introduction (cont.) • The 95% Rule – 95% of the solution to any family inheritance problem is recognizing the problem in the first place. • There is no class on “Family Inheritance Problem Recognition” in law school. The only school that teaches this is the School of Hard Knocks -- from seeing the kind of problems that arise after the parents have die and and their children divide the inheritance.

4. What You DON’T Want from Your Inheritance Plan • 1. An Inheritance Plan that cause harm to the family relationships. • 2. An Inheritance Plan that does not protect the “family money” for your child…and from your child’s problems. • 3. An Inheritance Plan that allows your surviving spouse to lose ownership and control of the “family money”. • 4. An Inheritance Plan that your children may decline to carry out. • 5. An Inheritance Plan that puts your children and property through the probate court process.

5. Should You Tell Your Children About Your Inheritance Plan? • Of course! Next slide, please! • But first, a bit of exposition. You should tell your children about your inheritance plans because: 1. Your children are already thinking about their inheritance. 2. Your children may think they are getting more than you think they deserve. 3. Your children need to know about the role they will play after you are gone.

6. Goal No. 1: Don’t Allow Your Inheritance Plan to Do Harm to Your Family • No. 1 Rule: Treat your children fairly in your Inheritance Plan. • No. 2 Rule: You will have screwed up your family forever if you violate Rule No. 1.

7. How To Accidentally Use Your Inheritance Plan to Screw Up Your Family • You die with a child owing you money. • You fail to equalize lifetime gifts to your children. • You leave only one of your children as “The Boss” of the Inheritance Plan. • You leave one property to one child and another property to another child. • You make one child the “money manager” for another child’s inheritance share.

8. How to Intentionally Use Your Inheritance Plan to Screw Up Your Family • Punish your successful child’s success, and reward your dingbat child’s failure.

9. Goal No. 2Don’t Let Your Inheritance Plan Give Your Children A Shot to Blow the Dough • Two very obvious statements that you’ve never thought about before: • When you die, you no longer own your money and property. • When you die, your children own what used to be your money and property. • So what? So now the money and property you acquired after a lifetime of effort is now subject to the winds of your childrens’ fates.

10. What Kinds of Fates? • Addiction • Financial immaturity • Divorce • Remarriage • Disability • Income tax problems • Bankruptcy • Creditors • Lawsuits • Professional malpractice actions • Crazy Cults • Mandatory tithing to religious entity • Accidents with insufficient (or no) insurance • Medical bills

11. Protecting Your Child’s Inheritance with (drum roll…) A PROTECTION TRUST! • The PT is not a separate plan outside your Inheritance Plan. It is a part of your Inheritance Plan. • The PT builds a “castle wall” around your child’s inheritance. • The PT protects your child’s inheritance from risks of loss. • The PT can be guaranteed protection…or no protection whatsover!

12. Four (Count ‘em…four!) Types of Protection Trusts • The Revocable Protection Trust – sometimes called the “Transparent Trust” because it’s like having no protection at all. • The Self-Directed Irrevocable Protection Trust • The Third-Party Irrevocable Protection Trust • The Discretionary Protection Trust

13. “Transparent Trust” • It’s like a Living Trust for your child’s inherited assets. • Your child is the owner, manager and beneficiary of all assets. • Your child has complete freedom over the assets in the TT. • So what good is it? It’s still pretty good because: • a. Helps maintain separate property status of inheritance. • b. Prevents your child from spending money on a separate property inheritance trust.

14. Self-Directed Irrevocable Protection Trust • Your child can only use the inheritance for the purposes set forth by you in your Living Trust. • You give your child as much…or as little…freedom with the assets as you want. • Your child is the manager and beneficiary of the inherited assets. • Who is looking over your child’s shoulder to make sure the inheritance is being used properly? • When your child dies, the inheritance goes to the “back-up beneficiaries”…like your grandchildren.

15. Third Party Irrevocable Protection Trust • Someone else other than your child is in charge of your child’s inheritance. • Why tie your child’s hands with his/her own inheritance? Because you are abjectly concerned your child will blow the dough. • Who is the third-party to be the manager of your child’s inheritance? If you can help it, never let your “normal” child be the inheritance manager for your “trust child”. • Shall this IPT last for the rest of your child’s life?

16. The Discretionary Protection Trust • The “Neutron Bomb” of Estate Planning. • You appoint a third-party to manage your child’s inheritance…who has the COMPLETE AUTHORITY to decide to pay out to your child…OR NOT PAY OUT ANYTHING to your child. • Why use this Trust? One word…CREDITORS!

17. Goal No. 3Making Sure Your Inheritance Plan Will Be Carried Out • You will appoint, most likely, your children to carry out your inheritance instructions. • Will your children do it your way…or their way? • You can have the greatest Inheritance Plan in the world. But if its not carried out the way you want after you die, it might as well be a cocktail napkin. Examples of deviation: • “My money is family money…so your money is family money.” • “That’s Dad’s wish…that’s not my wish.” • “Too many grandchildren.” • Legal obligation to carry the instructions out your way? Of course! But…so what? You’re dead! What can you do about it? • Preventing your children from deviating from your inheritance instructions

18. Goal No. 4Protecting Your Surviving Spouse • Protecting the assets FOR your SS…and FROM your SS. • FOR your SS = Protecting your SS’s ownership and control of the family money. • FROM your SS = Preventing your SS from leaving your children’s inheritance to a “newfound friend”.

19. Protecting Your SS’s Control of the Family Money • Protect from who? • The “Last Caretaker” • Your Children who are grasping for an “early inheritance”. • Ways that your children can convince your SS to part with the family money now…instead of having to wait for your SS to die. • Solution: Special provisions in your Living Trust!

20. Protecting the Family Money From Your SS • You can leave it to your SS, but will your SS leave it to your children? • Red Flag Alert! Remarriage means that the new spouse may end up with it all! • How can you be certain that your SS will not deviate the family money from the bloodline? • Solution: Bypass your Spouse • Solution: The Marital Trust

21. Sub-Goal: Preventing Conflict Between Your Second Spouse and the Children from Your First Marriage • If you hate your second spouse, leave him/her in a situation where your “First Children” have to wait for your “Second Spouse” to die before inheriting the family money. • Several conflicts: • 1. Income vs. Growth • 2. “You’re Spending Our Money.” • 3. “We Don’t Want to Wait.” • 4. “Get Out of Our House.” Solution: The Colin Powell/John Wayne approach to estate planning: Terminate the economic connection!

22. How Much Inheritance…Is Too Much Inheritance? • Do you have a child whose main job is waiting for you to die? • Are your children spending their inheritance – and you’re not dead yet? • Have you spoiled your child with all his/her worldly needs, and your permissiveness has lead to an inability (or unwillingness) to lead a conventional lifestyle? • Does your child march to the beat of a different drummer who believes work is something that you do – but that’s just not for him/her? • Do you love your child, but you just don’t love what he/she does and you don’t want the inheritance to maintain that lifestyle?

23. Solution: The Incentive Inheritance Plan • Two types of Incentive Plans 1. The Conditional Incentive Plan. 2. The Unconditional Incentive Plan.

24. Conditional Incentive Plan • The plan that is the stuff of movies. • Your child meets a certain condition and a third party “money manager” gives him all or portions of his/her inheritance • Why you love this plan – because you control your child’s behavior and conduct from “Beyond the Grave”. • Why I don’t love this plan – It’s the “carrot and stick” plan that will not work.

25. The Unconditional Inheritance Plan • A true incentive plan. • This is a plan that says to your child, “This is all you are going to get. If you want more, then you need to find a way to get more, such as getting and keeping a steady job!”

26. Conclusion • In the Inheritance Arena, the family side is just as important as the money side. • In the Inheritance Arena, you don’t know what you don’t know. The only way to learn about the inheritance problems and conflicts that arise is by someone bringing them to your attention. Some smart guy like me! • After you have been made aware of these problems, you can put the appropriate plan in place to prevent them from arising in the first place.