MORE TRUST TYPES        info@truetrust.com


 Q-TIP TRUSTS - PROVIDE FOR SPOUSE AND CHILDREN
 
 If you're married, you should consider a Q-TIP trust.  The more
 assets you have, the more these trusts make sense.  At some major
 law firms that cater to the wealthy, over 90% of married clients
 have Q-TIPs.
 
 Q-TIPs are especially suitable for second marriages, where each
 spouse already has children.  Why?  Because a Q-TIP lets you
 provide for your spouse, defer taxes and dictate where your money
 will eventually wind up.
 
 Before explaining the Q-TIP acronym, let's look at a typical
 remarriage scenario.  Jim is a divorcee with two children.  He
 marries Sue, who also has children from a previous marriage.  When
 Jim plans his estate, should he leave his money to his kids or to
 Sue, his wife?  If he leaves his money to his children, Sue won't
 be provided for and estate taxes will be due upon Jim's death.  But
 if he leaves his money to Sue, Jim's money may ultimately wind up
 with her children, not his.
 
 HAVE IT AND USE IT - 
 The answer, as the Jims of this world are discovering, is to
 designate his assets as Q-TIP property.  The "Q" stands for
 "qualified," meaning that the assets will qualify for the marital
 deduction from estate taxes.  Q-TIP property is taxed after both
 spouses die, which can defer estate tax for many years.  The "TIP"
 stands for terminable interest property," meaning that Sue's
 interest in that property ends at her death.  She has no say as to
 where those assets wind up.
 
 In practice, Q-TIP property usually goes into a trust.  The income
 from the trust must go to the surviving spouse, for life. 
 (Otherwise, there would be no marital deduction, and estate tax
 would be due at the first death.)  At Sue's death, the estate tax
 will be due and the Q-TIP assets will go to whomever Him has
 designated.  Most likely, his money will go to his own children and
 grandchildren.
 
 Not just for second marriages.  Q-TIPs, though, are by no means
 limited to second marriages.  They are well suited to many
 situations.  For example:  
 
 * First marriages.  You may have a perfectly happy marriage with
 children that you both adore.  But you could die tomorrow.  If your
 assets go directly to your spouse, what happens if he or she
 remarries?  The wealth you earned, or the wealth you inherited from
 your own family, may wind up commingled with the assets of the new
 spouse.  Those assets may buy a new house for children you've never
 seen or pay for their tuition at an Ivy League college.
 
 That needn't happen if you have a Q-TIP.  Your assets could go into
 a trust, with all income payable to your spouse.  When your spouse
 dies, estate tax will be paid and the remainder will go to your own
 children.
 
 * Protection of surviving spouses.  Your spouse may not be
 comfortable handling large sums of cash if you're the one who has
 always handled the family's financial decisions.  There are lots of
 hustlers out there, from religious frauds to churning stockbrokers,
 and they're all looking for prey.  If you leave your money in a
 Q-TIP with a competent trustee, your surviving spouse will always
 have enough to live on, and your children can be sure they'll come
 into their legacy.
 
 * Relief of intra-family stress.  A Q-TIP can take the pressure off
 of your surviving spouse.  Children or stepchildren, new lovers or
 swindlers:  They can all be put off, with no hard feelings, if your
 widow or widower explains that the money is locked into a Q-TIP. 
 Q-TIPs can head off some potential family troubles, too.  Suppose
 your spouse favors one child over the other.  After you've gone, he
 or she has a club to hold over the one who always comes in second. 
 "You haven't called me since last money, your brother called me
 last week, so I'm going to leave everything to him."
 
 Unfortunately, such situations arise more often than people want to
 admit, especially when the surviving spouse falls victim to
 Alzheimer's disease or some other form of senile dementia.  You
 can't prevent disease or hard feelings, but you can at least rest
 easy, sure that each child will get a fair share.

 
 EMERGENCY CARE

 What happens if an emergency arises and the surviving spouse needs
 more money?  That depends on how the Q-TIP is designed.  Generally,
 the trustee can have the power to "invade the principal" in case of
 emergency and the trust will still qualify for the marital
 deduction.  However, if anyone but the surviving spouse has the
 power to receive part of the principal, the marital deduction will
 be lost.
 
 Observation:  In a recent Tax Court case, the Q-TIP deferral was
 lost because the trustee was allowed to use principal to benefit
 the surviving spouse's daughter, with the surviving spouse's
 consent.  The Tax Court found this violated the letter of the law. 
 So be very careful here, because the IRS will go after faulty
 Q-TIPs.
 
 As a practical matter, the intent of the Q-TIP is to provide assets
 for the trust's beneficiaries (for example, your children and
 grandchildren), so you don't want your surviving spouse to invade
 the principal too freely.  A typical solution is to give the
 trustee or co-trustees the discretion to invade the trust, if
 necessary.
 
 Recommendation:  If it's feasible, try to enlist a family member
 with good business sense as a co-trustee.  You may have a brother
 or sister or an in-law who's suitable, for example.  The other
 trustee might be a local bank.  If there's no family member who's
 suitable, the bank might be the sole trustee, but in many cases
 your widow will feel uncomfortable going to a strange banker, whom
 she might not know, and asking for money.
 
 Invading the principal.  What kinds of situations might arise that
 might merit an invasion of principal?
 
 * Medical and education expenses usually are permitted by the
 trustee.  Example:  One widow's older child left a junior college
 to attend Harvard the same year the younger child entered
 Stanford.  Total college costs:  over $50,000 a year.  The widow
 showed the college bills to her trustee, a banker, and received the
 money.
 
 * New Home.  Suppose the surviving spouse remarries someone who has
 five kids.  The new couple want a bigger house.  Does the trustee
 tap the principal to provide a down payment or money for home
 remodeling?  That's a tough call.  A trustee's prime role is to
 protect trust assets for the beneficiaries.  But those
 beneficiaries--the children of the spouse who died--may be better
 off if they can live in a bigger house.  However, a bunch of
 strangers will be living in a house provided by the decedent.
 
 There are no easy answers to such questions.  Nevertheless, you can
 help by making sure that all the family members understand the
 Q-TIP provisions.  They should know which assets are to go into the
 Q-TIP, what kind of income can be expected and the provisions for
 invading the principal.

 
 THE RULES - 

 If the idea of a Q-TIP appeals to you, what do you need to make it
 work?  An experienced attorney, a savvy executor and appropriate
 assets.
 
 Assets.  To establish a valid Q-TIP, the assets must produce
 income, because the surviving spouse must have an income interest. 
 The attorney drawing up your trust should know which assets make
 sense for Q-TIPs.  Some of the following qualify:
 
 * Residences raise questions, so a personal residence generally is
 left outright to the surviving spouse, rather than placed in a
 Q-TIP.
 
 * Interests in closely held business can go into Q-TIPs.  The
 profits from the business (possibly in the form of dividends to
 stockholders) can be distributed, according to the amount of the
 company held on the Q-TIP.  A possible catch is the trust's
 structure.  
 
 There is no problem placing "C corp" interests in a Q-TIP. 
 However, if the business is an "S corp," the Q-TIP trust must be
 structured so that it can be an S corp shareholder.  Only certain
 kinds of trusts are allowed to own shares in an S corp, so your
 attorney must set up a Q-TIP trust that is eligible.  (See Chapter
 11.)
 
 * Income-producing securities make excellent assets for Q-TIPs. 
 No-dividend growth stocks do not.
 
 * Unproductive assets, such as raw land and collectibles, generally
 won't work, unless the trustee is directed to sell them and raise
 cash.
 
 Caution:  Don't put a family heirloom into a Q-TIP with a provision
 against selling it.  Some states allow the surviving spouse to
 force the trustee to liquidate unproductive property to preserve
 Q-TIP status.  But don't count on state law to bail out an
 improperly drafted Q-TIP trust.
 
 Post-mortem tax planning.  Q-TIPs are usually testamentary trusts,
 established through your will or living trust.  Therefore, in
 addition to a good lawyer and proper asset selection, you need a
 savvy executor.  The reason:  The Q-TIP election is made after your
 death.  Your executor should elect Q-TIP status for
 income-producing property and avoid the election for assets that
 don't generate income.  An improper election can jeopardize Q-TIP
 status and lead to immediate estate-tax liability.
 
 To qualify for the marital deduction, your executor must make an
 irrevocable election on the estate-tax return, generally within
 nine months of your death.  In some cases, your executor may decide
 not to make a Q-TIP election, or to make a partial election,
 putting only some of the assets into the trust.
 
 Why would such a decision be made?  Generally, to reduce estate
 taxes.  One advantage of a Q-TIP is that estate taxes can be
 deferred from the first death to the second.  That can be a great
 help if your surviving spouse is relatively young and in good
 health, with a long life expectancy.  It's better to pay taxes
 later than sooner.  
 
 But if your surviving spouse is old or frail, the second death may
 seem imminent and the value of estate-tax deferral scant.  In that
 case, your executor may try to balance the estates and reduce the
 overall tax bill.
 
 Example:  A taxable estate of $4 million would owe nearly $1.6
 million in federal estate taxes while two $2 million estates would
 owe a total of less than $1.2 million, because larger estates face
 higher marginal tax rates.  Using a partial Q-TIP election to
 equalize estates, in this case, would save over $400,000.  So the
 Q-TIP rules give the executor a chance to do some post-mortem tax
 planning.  Be sure your executor is familiar with these options.
 
 The surviving spouse also may have a "limited power of appointment"
 over the Q-TIP assets.  Example:  Suppose the money in the trust is
 to go to your three children, after your surviving spouse dies. 
 Your surviving spouse may be able to allocate the inheritance,
 within a given range.  The child who has done very well financially
 may get a minimum share while the child who really needs the money
 may get more.
 
 While Q-TIPs allow for post-mortem planning, they don't have to
 involve "mortem" at all.  You can set up an "inter vivos" (living)
 Q-TIP.  Example:  Joanne recently sold her business and decided to
 go into a very speculative venture with the money she received. 
 She put her other assets into an irrevocable Q-TIP trust, where
 they won't be vulnerable in case the venture falls through. 
 Whatever happens, she knows that the trust will provide income to
 her husband and, ultimately, wealth to her children.  

 
 WHEN THE SECOND SPOUSE DIES

 A technical problem arises in most Q-TIPs.  Income may be paid
 annually, semi-annually, quarterly or more frequently.  Typically,
 when the second spouse dies, there is money in the trust that
 hasn't yet been paid out.  Who gets that money?  The heirs of the
 surviving spouse or the trust beneficiaries, who may not be one and
 the same?
 
 The IRS formerly said, in proposed regulations and letter rulings,
 that it was permissible to allow the trust beneficiaries
 (specifically, those named by the first-to-die) to collect this
 accrued income.  But, in the case of the Estate of Rose D. Howard,
 decided in 1988, the Tax Court ruled that the money must go to the
 estate of the second-to-die spouse.  If not, that spouse doesn't
 have the requisite income interest, and the unlimited marital
 deduction may be stripped away retroactively.
 
 Observation:  Having the marital deduction stripped away could be
 disastrous.  Your estate might face a huge bill for back taxes and
 interest.  Therefore, make sure that your trust specifies that the
 unpaid income goes to the estate of the surviving spouse, which
 will not necessarily benefit the Q-TIP trust beneficiaries.

 
 THE WAITING GAME - 

 Is there a drawback to a Q-TIP?  One possible hitch is that your
 surviving spouse must get all the trust income for the rest of his
 or her life, in order to qualify for the estate-tax deferral.  In a
 second marriage, you may have a considerably younger spouse, who
 may live for many years after your death.  For all those years,
 your children won't get anything.
 
 So you may not want to put all of your assets in a Q-TIP.  You
 might want to leave some money outright to your children.  You can
 leave up to $600,000 total to beneficiaries other than your spouse
 without incurring an estate-tax obligation.  Alternatively, you
 could give each child up to $10,000, each year, without incurring
 any gift tax.  Or, you could carry life insurance payable to your
 children at your death.  These strategies will give your children
 some money while they can still enjoy it.

 
 AGGRESSIVE APPROACHES - 

 Two pro-IRS rulings in Tax Court were recently overturned by
 federal Circuit Courts, indicating that Q-TIPs may become even more
 flexible.  These decisions refer to post-mortem estate planning: 
 deciding which assets will qualify for Q-TIP treatment must be
 elected by the estate's executor.  In some situations, it makes
 sense to make a partial election or to skip the Q-TIP election
 altogether.  If the age and health of the surviving spouse
 indicates that the estate tax deferral won't be very long, you may
 want to take the full tax hit right away.
 
 Example:  You're the executor of an estate in which shares in a
 closely held business are temporarily depressed.  You may want to
 pay estate tax now, while the value is down.
 
 Example:  Balancing the spouses' estates may be desired.  If you
 pay tax on two $1.5 million estates, the estate tax rate won't
 exceed 43%.  If you wait and pay all the estate tax later, you're
 moving assets into higher brackets, up to 55% on amounts over $3
 million.

 
 POTENTIAL - 

 The typical strategy is to set up a trust that's eligible for a
 Q-TIP election:  the surviving spouse is entitled to all the income
 from the trust assets, for some or all of the assets, if it's
 deemed appropriate.  The disclaimed assets may directed elsewhere,
 if a specific provision has been included in the trust creator's
 will.
 
 But what if the surviving spouse is not capable of making a
 tax-saving disclaimer or not willing to give up access to the trust
 assets?  Then, it would be better if the executor had this
 discretion.
 
 Consider the case of Willard Robertson.  Robertson set up several
 trusts, including two that could be Q-TIPed and a family trust for
 his descendants.  According to his will, any assets not covered by
 a Q-TIP election were to be redirected to the family trust.
 
 The Tax Court ruled this approach gave the executor too much
 power.  The amount passing to the surviving spouse could not be
 determined, at Robertson's death, because the executor had the
 power to shift assets from the marital trusts to the family trust. 
 Thus, the spouse was not entitled to all the income from the Q-TIP
 assets during her lifetime, as required--the executor could strip
 her of those assets.  With Q-TIP treatment denied, the estate tax
 was due immediately.  (Estate of Willard Robertson, 98 TC 678)

 
 TAXPAYERS SAFETY - 
 But the Tax Court's verdict in the Robertson case was overshadowed
 by the Fifth Circuit Court of Appeals, which reversed the Tax Court
 in the Clayton case, where the executor had similar powers. 
 (Estate of Arthur M. Clayton, Jr., 976 F2d 1486) The appeals court
 upheld a Q-TIP election for certain assets, chosen by the executor,
 even though the non-elected assets passed under the will to other
 trusts where the surviving spouse did not receive all the income.
 
 The Fifth Circuit noted that Congress left the Q-TIP election up to
 the executor, not the surviving spouse.  The court held that the
 executor was acting on Clayton's behalf, carrying out his wishes by
 making this partial Q-TIP election.
 
 In essence, the Fifth Circuit focused on the underlying economic
 reality.  The assets not chosen for Q-TIP status would be subject
 to estate tax right away while the Q-TIP assets would be taxed at
 the death of the surviving spouse.  That's what Congress intended,
 when it passed Q-TIP legislation, so the Court upheld the
 taxpayer's strategy.
 
 Observation:  If the Fifth Circuit's opinion in the Clayton case is
 followed by other courts, it can provide much greater flexibility
 in the use of partial Q-TIP elections.  Assets not elected to be in
 a Q-TIP can be moved to other trusts with other beneficiaries,
 besides the surviving spouse, and where the trustee has more
 discretion over the distribution or accumulation of trust income. 
 
 Caution:  The IRS may find a case to test this issue, in another
 appeals court, rather than acquiesce with the Clayton decision.

 
 SOLUTION - 
 In another recent Q-TIP case (Estate of George D. Ellingson, 964
 F2d 959), it was the Ninth Circuit that overturned the Tax Court. 
 Here, the trustees of the marital trust were directed to distribute
 the "entire net income" to the surviving spouse yet they were also
 authorized to accumulate income in the survivor's "best interests
 and welfare."
 
 Faced with this contradiction, the appeals court determined that
 Ellingson desired to set up a Q-Tip, which would require a full
 payout of income, but hedged his bets by permitting accumulation
 if Q-TIP status were not elected.  Further, if Q-TIP status were
 elected, it would be in the survivor's "best interest and welfare"
 to distribute all the income, because this would preserve the
 estate tax deferral.
 
 Observation:  If the marital deduction had been denied in this
 case, a family farm might have had to be sold in order to pay the
 estate tax.  This particular judge likely did not want to do this. 
 However, you can't always count on a court being so concerned with
 a taxpayer's well being, so trust documents should be screened for
 poor wording.
 
 In both taxpayer victories (Clayton and Ellingson), the appeals
 courts found a difference between the requirements for trust
 distributions, in case of a Q-TIP election, and the way assets may
 be distributed if there is no election.  Therefore, there is solid
 precedent for estate plans in which increased Q-TIP discretion is
 given to executors.  Nevertheless, such matters are complex so you
 should work with an attorney who specializes in estate planning.
 

 CAUTION - 
 If you're a business owner, your primary asset will be the shares
 of your corporation.  You can leave them to a Q-TIP trust, but you
 need to be careful how you do it.  In IRS Ltr. Ruling 9139001, the
 Service gave a vivid example of how not to mix a Q-TIP with a
 closely held business.
 
 Dave was the sole owner of ABC Co.  At his death, all shares of ABC
 went into a Q-TIP trust; his widow Emily was to get all the trust
 income.  At Emily's death, Dave's son Fred would inherit.
 
 According to Dave's will, the Q-TIP trust could sell the ABC shares
 only to Fred.  What's more, Dave's will stated that the sale would
 be at book value, which was effectively 20% below the stock's fair
 market value.
 
 In the meantime, Fred had the right to vote all the ABC stock. 
 ABC, though profitable, had not paid any dividends for several
 years.
 
 You can see where this left Emily.  The only way she could get
 income was through ABC dividends, yet the company was not paying
 any and was not likely to.  Fred, who controlled the company, had
 an interest in not paying dividends:  the retained earnings or
 reinvested capital would boost the value of ABC, which he would
 ultimately inherit.
 
 Emily could not force the trustee to sell the ABC stock and
 reinvest in income-producing assets.  Any sale had to have Fred's
 approval, and he was entitled to buy the shares at a 20% discount. 
 So the IRS disallowed the Q-TIP claim.  Emily, it ruled, really had
 no income interest in the trust.  What's more, Fred had a
 significant interest in the trust assets, even during Emily's
 lifetime.
 
 What was the consequence of the Q-TIP denial?  Estate tax was due
 immediately, upon Dave's death.  In such situations, the estate may
 be forced to sell all or part of the ABC shares, to raise the
 necessary cash.
 
 Observation:  Although the circumstances cited by the IRS may be
 rare, many Q-TIP trusts include closely held stock subject to a
 buy-sell agreement, often at a bargain price.  With this letter
 ruling, the IRS is saying that the buyout price must be at fair
 market value.  If not, the Q-TIP will be denied.
 
 Recommendation:  If Dave is concerned that Fred will not be able to
 pay the full market price for ABC Co., he could purchase a
 second-to-die life insurance policy, payable to Fred after Dave and
 Emily die.  This can provide the necessary cash.  To ensure the
 policy is fully funded, Dave could bequeath a separate amount (not
 Q-TIP property) to a life insurance trust, which would maintain the
 policy.
 
 In addition to a valid buy-sell agreement, a Q-TIP involving a
 closely held company must make some income provision for the
 surviving spouse.  She must receive dividends or the trust must be
 able to sell shares and reinvest in cash-flow vehicles.  Appointing
 an independent trustee or co-trustee will strengthen the surviving
 spouse's position.
 
 IN BRIEF:
 * Leaving property to your spouse will defer federal estate tax. 
 However, you'll lose ultimate power over the distribution of your
 assets.
 
 * Q-TIP trusts retain your marital deduction from estate tax and
 provide your surviving spouse with a lifetime income, yet they
 allow you to say where your wealth will wind up.
 
 * Q-TIPs are most commonly used in second marriages, where you want
 your assets to wind up with your own children.
 
 * Q-TIPs also are worthwhile in first marriages, to guard against
 problems that may arise if you die and your spouse remarries.
 
 * A Q-TIP trust also can protect your widow or widower from con
 artists and relieve the pressures of intra-family disputes after
 your death.
 
 * Q-TIP property should be income-producing.  If ineligible assets
 wind up in a Q-TIP, you could lose the marital deduction, forcing
 your estate to pay taxes immediately.
 
 * When setting up a Q-TIP, work with your executor and your trustee
 as well as your attorney.
 
 * Pick at least one trustee with whom your spouse will feel
 comfortable, in case principal has to be tapped for extraordinary
 expenses.
 
 * Sophisticated wealth transfer planning can provide for your
 children while your widow is still alive.
 
 * Recent court decisions indicate that you may be able to set up a
 Q-TIP trust so that the executor can decide, after your death,
 which assets will get Q-TIP treatment and where the other assets
 will wind up.
 
 * Be very careful when putting closely held stock into a Q-TIP
 trust; there may be a conflict between the surviving spouse, who
 wants current income, and your chosen successor, who may want to
 reinvest profits in the company.
 

 CREDIT SHELTER TRUSTS - How to pass on up to $1.2 million (and more)
 with no estate tax.
 
 The 1981 tax act established an estate-tax system that still exists
 today.  With lawmakers, as always, anxious to find sources of
 additional tax revenue, it's likely that estate taxes will go up
 sometime in the near future.  For now, though, savvy use of trusts
 can shelter up to $1.2 million from estate tax.  Here's how:
 
 Everyone is entitled to a $192,800 estate-tax credit--enough to
 exempt $600,000 in assets from estate tax.  Thus, if you die with
 less than $600,000 in assets, no estate tax will be due.  That
 doesn't mean $600,000 in cash.  After your death, your executor
 must add up all of your assets and file a tax return.  Those assets
 include the value of your house, your life insurance proceeds ((if
 you own the policy), your retirement plan, your investments, your
 business interests, your collectibles, etc.  Everything you own
 must be counted, whether you leave it via a will, a living trust,
 through joint tenancy or by other means.
 
 Assets over $600,000 are steeply taxed.  The tax kicks in at
 37%--if you have A $700,000 estate, you'll owe $37,000 on the
 excess $100,000.  From there, the tax escalates to 55%, with a
 special 5% surcharge on the tax due from estates valued at $10
 million to $21 million (see Table 1, page 102).
 
 In most cases, that tax is payable in full within nine months of
 your death.  If cash isn't readily available, your executor may
 have to sell real estate, stocks or other assets in a hurry to
 raise the money.  The rules and amounts are changing.  Check for 
 current laws and rules.
 

 SPOUSAL SHELTER - 
 
 One way to avoid this estate-tax bite is to leave assets to your
 spouse.  No matter how large, such bequests aren't taxed if your
 spouse is a U.S. citizen, thanks to an "unlimited marital
 deduction" from estate tax.  You can have a $1 million estate, even
 a $100 million estate:  If you leave everything to your spouse at
 your death, no estate tax will be due.  However, when your spouse
 dies, everything over $600,000 will be subject to estate tax.
 
 Example:  Robert and Linda have a total estate of $1 million.  This
 includes $500,000 in jointly owned assets, $300,000 in Robert's
 name and $200,000 in Linda's name.  Robert dies first.  At his
 death, the jointly owned property passes to Linda automatically. 
 Robert's will calls for his entire estate, all $300,000 worth, to
 go to Linda.  No estate tax is due.
 
 Now Linda has $1 million worth of assets.  She lives modestly and
 her assets appreciate in value until her death, some years later. 
 Her estate, which is left to her children from her marriage to
 Robert, totals $1.2 million.  Now, her children will owe around
 $235,000 in federal estate tax.  If you add state death taxes,
 probate fees, funeral costs and so on, the total might be close to
 $300,000.
 

 TAX BREAKS - 
 
 Robert and Linda could leave everything to their children with
 little or no estate tax, and you can do the same, if you follow
 this strategy:
 
 * Make sure that you and your spouse have roughly equal assets, up
 to the point where each has at least $600,000.  These assets should
 be held outright, not jointly.  If one spouse has significantly
 greater assets than the other, tax-free spousal gifts can be used
 to make sure each spouse has at least $600,000.
 
 Observation:  Jointly held property makes estate-tax avoidance
 difficult.  As you can see in the above example, either Robert or
 Linda would have $500,000 in assets, whichever one survives, plus
 his or her own assets.  Therefore, an estate tax on the second
 death will be hard to avoid.
 
 * Each spouse should have a will or a living trust stating that
 their estates, up to $600,000 worth of assets, should pass to
 children or grandchildren at their death.  No matter which spouse
 dies first up to $600,000 will go to future generations, sheltered
 by the estate-tax exemption.  The rest can be left to the other
 spouse, sheltered by the unlimited marital deduction.  Therefore,
 no estate tax will be due at the first death.
 
 * At the second death, when all the remaining assets are passed
 down, another $600,000 will be sheltered.  Thus, $1.2 million will
 escape estate tax, in addition to any assets given away through
 gifts.
 
 Some problems with this approach are obvious.  If you and your
 spouse have $800,000 worth of assets, for example, and $400,000
 passes to the children at the first death, the surviving spouse is
 left with only $400,000 worth of assets.  If you assume this
 includes the couple's principal residence, there may relatively
 little in liquid assets to provide income.  The surviving spouse
 may become dependent on the generosity of the children, who
 inherited $400,000, tax free.
 
 To solve this problem, each spouse can provide for the creation of
 a trust, to be established upon the death of the first spouse to
 die.  Into this trust might go all of the deceased's assets, except
 for the personal residence, up to a maximum of $600,000.  This
 trust is known by many names:  a family trust, non-marital trust,
 bypass trust, credit shelter trust and so on.  Whatever the name,
 the basic idea is that this trust will not qualify for the
 unlimited marital deduction.  It will be exposed to estate tax but,
 because the amount doesn't exceed $600,000, no estate tax will be
 due.
 
 Terms of this trust can vary, according to each family's
 circumstance.  But a "vanilla" approach would be to give the income
 to the surviving spouse, during his or her lifetime, and the assets
 to the children after the second death.  Thus, the surviving spouse
 will have income from the full estate, until death.
 
 Example:  Robert and Linda have restructured their assets so that
 each has $400,000 in his or her own name, with only their $200,000
 personal residence held jointly.  Each one has a will calling for
 the creation of a trust, to which his or her individually owned
 assets will be held.
 
 Now, when Robert dies, $400,000 goes into a credit shelter trust,
 paying lifetime income to Linda.  Thus, Linda will be able to live
 off $800,000 worth of assets while she owns a $200,000 house.  So
 she'll be well provided for.  At her death, the trust assets will
 go to the children, estate-tax-free.  Linda will leave her original
 $400,000 in assets, plus the $200,000 house, again free of estate
 tax.
 
 Observation:  It's possible that Linda's $600,000 estate will grow
 before her death, leading to an estate-tax obligation.  But, even
 if her estate grown to $700,000, the estate-tax bill will be a
 modest $37,000.  If she is well advised she can make lifetime gifts
 to her children or grandchildren, up to $10,000 per recipient per
 year.  This will avoid gift tax and reduce her exposure to estate
 tax.
 
 The importance of being equal.  Why does this strategy call for
 tax-free gifts between spouses to equalize estates, at least
 partially?  The spouse with fewer assets may die first.
 
 Example:  Bert and Lydia have $900,000 in assets, $800,000 in
 Bert's name and $100,000 in Lydia's.  Lydia dies first, leaving her
 $100,000 to a credit shelter trust.  No estate tax is due.  Robert
 dies a few years later, leaving an $800,000 estate.  Federal estate
 tax owed:  $75,000.  If Robert had given $200,000 to Linda, each
 could have had a credit shelter trust that would have escaped
 estate tax.
 
 Observation:  Of course, this strategy will work only if the
 wealthy spouse feels comfortable making large, no-strings gifts to
 his or her spouse.

 
 LARGE ESTATES - 
 
 With this basic strategy, couples with estates up to $1.2 million
 can pass their assets to their children with little or no estate
 tax.  But what about estates larger than $1.2 million?
 
 Assuming that your marriage is solid, you should use tax-free gifts
 to make sure that each spouse has at least $600,000 worth of
 assets.  Then, no matter which spouse dies first, $600,000 can be
 left to your children, in trust or outright, to take full advantage
 of the estate-tax exemption.  Thus, you'll be able to pass tax free
 $600,000 at each death.
 
 Beyond that, planning for large estates involves some judgment. 
 Suppose a couple has a total of $4 million.  If the first spouse to
 die leaves $600,000 to a credit shelter trust, leaving everything
 else to the other spouse, the surviving spouse may leave a $3.4
 million estate and a federal estate-tax bill of over $1.298
 million.
 
 Now, suppose, they had equalized their estates at $2 million apiece
 and each died with those assets.  The total estate tax would be
 $1.176 million.  The estate-tax saving would be $122,000.
 
 However, this equalization plan (each has $2 million) means that
 half of the taxes are paid now, rather than all of the taxes paid
 later.  What's better--paying $588,000 now and $588,000 later, or
 paying $1.298 million later?  There's no simple answer.
 
 If the surviving spouse lives for a long time and invests well, the
 $588,000 not paid up front may increase by more than enough to make
 up for extra estate tax.  Or a series of gifts may reduce the
 estate, and the ultimate estate-tax bill.
 
 Naturally, you shouldn't make such decisions by yourself,
 especially if you expect to have a multi-million-dollar estate. 
 Consult with a full range of advisors:  attorney, accountant and
 investment analyst.  As these examples illustrate, successful
 estate-tax planning can wind up saving your family hundreds of
 thousands of dollars.

 
 ACT NOW - 
 
 It's likely that someday--may be someday soon--the estate-tax
 exemption may be reduced from $600,000 to a lower amount, and the
 top estate tax rate may be increased from 55% to 60% or higher. 
 However the numbers change, the above strategy will work.  The idea
 is to take full advantage of the estate-tax exemption, whatever it
 may be, at each death.
 
 Observation:  The sooner you act, the greater the chance your
 estate plan will be "grandfathered" if tax laws change.  You should
 consult with an estate planning attorney as soon as possible after
 any change in tax law.
 

 REMOVING ASSETS PERMANENTLY - 
 
 One estate planning goal is to keep assets out of your taxable
 estate or the taxable estate of a family member.  One wrong word,
 though, can ruin all your estate planning and expense.
 
 Suppose, for example, you create a trust to provide lifetime income
 for your spouse, who's younger than you and probably will be the
 survivor.  You want to keep the trust assets out of your spouse's
 estate.  At her death, the assets will pass to your children or
 will stay in trust for the benefit of your children and
 grandchildren.
 
 Your spouse is worried that the trust income won't provide enough
 for her to live on comfortably.  She wants to be able to get to the
 principal if she needs more money.  Therefore, some provision is
 made for her to have access to the trust assets.
 
 Caution:  If the survivor's access to trust principal is made too
 broad, the IRS will consider the assets under her control and thus
 part of her taxable estate.
 
 The tax court's decision in the Estate of Norman Vissering case (96
 TC 749, 1991) illustrates what can happen.  Vissering's mother set
 up a trust to pay lifetime income to herself.  After her death, the
 trust was to pay lifetime to her son, Norman Vissering.  Other
 family members were also named as beneficiaries, eligible to
 receive trust distributions.  Norman Vissering was co-trustee,
 along with a bank.
 
 Many years after his mother's death, Norman Vissering developed
 Alzheimer's disease and was declared incapacitated.  He died a few
 months later.  The IRS asserted that the trust assets were part of
 his taxable estate.
 
 The case went to tax court, where the IRS pointed to the trust
 provision giving the trustee the authority to use the principal for
 the "continued comfort, support, maintenance or education" of the
 beneficiaries.  This provision, it contended, gave co-trustee
 Vissering a "general power of appointment," meaning control over
 the assets.  If this general power of appointment did indeed exist,
 the trust assets would be includible in his taxable estate.
 

 HEALTH, EDUCATION, SUPPORT, & MAINTENANCE - 
 
 Vissering's estate argued that the power of appointment was
 limited, not general.  The tax code specifically states that the
 power to invade the trust for a beneficiary's "health, education,
 support or maintenance" is a limited rather than a general power
 and thus does not result in inclusion.
 
 Result:  Vissering's estate lost solely because the word "comfort"
 was included in the trust.  "Comfort" goes beyond "health,
 education, support or maintenance."  In fact, the IRS has
 specifically stated that the words "comfort," "welfare" and
 "Happiness" result in broader powers and may result in inclusion.
 
 Essentially, the IRS has blessed four words--health, education,
 support and maintenance--for situations where the trust may need to
 be invaded.  Those words are safe harbors.  Any other words are
 invitations to disaster.  In this case, one word, "comfort,"
 resulted in inclusion and cost the estate $700,000 in estate tax
 that needn't have been paid.
 
 Observation:  In one recent letter ruling, the IRS added the word
 "care" to the terms conveying broader powers than permitted.  Such
 words as "catastrophe" and "emergency" also should be avoided.  In
 truth, none of these words adds very much to the powers implied by
 the acceptable health-education-support-maintenance.
 
 Because of the trust wording in this case, co-trustee Vissering
 could distribute the trust assets however he wanted for the comfort
 of beneficiaries.  Therefore, said the tax court, the assets were
 under his control and includible in his taxable estate.
 
 Observation:  Vissering was officially incapacitated and could make
 no distributions at the time of his death.  The court included the
 assets anyway because Vissering had not been removed as trustee and
 technically still retained the trustee's powers.
 
 Similarly, the fact that Vissering was co-trustee with a bank did
 not sway the court.  The bank was not an "adverse" party, with an
 interest in the trust assets opposed to Vissering's.
 
 Whenever a trust beneficiary is also a trustee, the danger of
 inclusion is present.  It may help to name a co-trustee with an
 adverse interest, such as another trust beneficiary.
 
 Even if a trust beneficiary is not a trustee, assets may be
 includible if the beneficiary can dismiss the trustee and name a
 replacement.  Ever since 1979 (revenue Ruling 79-353), the IRS has
 taken the position that broad discretionary powers will result in a
 general power of appointment when beneficiaries can unilaterally
 remove and substitute trustees.  (Irrevocable trusts in place
 before October 29, 1979, are grandfathered.)  That is, the
 beneficiary has control over the assets because he or she can
 appoint a friendly trustee.
 
 Often, the beneficiaries' ability to remove trustees may be their
 sole leverage in assuring that they receive quality service. 
 Therefore, if your estate planning calls for giving trust
 beneficiaries this leverage, you need to be sure the power of
 appointment is limited rather than broad.  Check the wording in
 existing trust documents and your will if any call for a
 testamentary trust to be created.

 
 BEYOND THE $10,000 LIMIT
 
 To save estate tax, you can give away assets before you die. 
 Everybody is allowed to give away $10,000 worth of assets per year,
 per recipient, while married couples can give away $20,000.  Larger
 gifts are subject to a gift tax.
 
 Maria Cristofani, though, found a way to shift $70,000 per year to
 her two children, free of gift tax, a tactic the tax court upheld. 
 Maria, a widow with two children, Frank and Lillian, established a
 trust.  At her death, the assets were to be split between the two
 children, who were twins.  At the time she created the trust, Frank
 and Lillian were 35 years old and in good health.
 
 Frank and Lillian's five children (Maria's grandchildren), aged 2
 through 11, were named secondary beneficiaries.  If either Frank or
 Lillian failed to outlive Maria by 120 days, that child's children
 would split his or her share.
 
 After setting up the trust, Maria transferred real estate valued at
 $70,000 to the trust in 1984, and again in 1985.  She did not file
 any gift tax returns.
 
 When Maria died, the IRS charged that $20,000 of the annual gifts
 could be excluded but the other $50,000 per year was subject to
 gift tax.
 
 According to the Cristofani estate, there were seven trust
 beneficiaries:  Frank and Lillian and the five grandchildren.  With
 seven beneficiaries, the $70,000 gifts incurred no gift tax.
 
 Under the terms of the trust, each beneficiary had a Crummey
 power.  After each contribution, the trustees (Frank and Lillian)
 were required to provide written notice to all seven
 beneficiaries.  Each beneficiary then had the right to withdraw up
 to $10,000 within 15 days.
 
 The IRS said that the grandchildren were not bona fide gift
 recipients because their right to the trust fund was too contingent
 to be recognized.  The tax court, though, held for the taxpayer
 because the children had the legal right to withdraw assets from
 the trust during the 15-day period.
 
 Observation:  While Frank and Lillian, the primary beneficiaries,
 were also the trustees, the secondary beneficiaries were all
 minors.  In order to exercise their withdrawal rights, the children
 could do so only through their guardians--their parents, including
 Frank and Lillian.
 
 Frank and Lillian therefore effectively controlled all the trust
 assets.  Maria was able to shift $140,000 worth of assets to her
 two children in two years, without owing gift tax.
 
 Multiple-beneficiary trusts can thus be used to expand the gift tax
 exclusion.  Make sure that all the formalities are observed, in
 terms of the withdrawal power, and that there is no prior agreement
 not to use the withdrawal power.
 
 Observation:  Cristofani trusts may be ideal for holding life
 insurance.  If you're buying a large insurance policy to cover your
 estate tax bill, the premiums may exceed the $10,000 or $20,000
 annual gift-tax exclusion.  With multiple beneficiaries, you may be
 entitled to multiple $10,000 exclusions.
 
 Moreover, Cristofani trust beneficiaries must have a real interest
 in the trust.  There must be at least a slight chance that the
 secondary beneficiaries could inherit the entire trust proceeds,
 giving them a reason not to exercise their Crummey withdrawal
 power.  The limits are changing.  Check current amounts.
 
 IN BRIEF:
 
 * Under current law, federal estate tax is levied on all the assets
 you own at your death, even those that bypass probate.
 
 * Everyone can transfer up to $600,000 worth of assets, free of
 federal estate tax.
 
 On estates over $600,000, federal tax rates are 37% to 55%.  States
 may impose additional taxes.
 
 * You can avoid federal estate tax by leaving all of your assets to
 your spouse.  Eventually, though, those assets will be subject to
 estate tax.
 
 * A better approach is for the first spouse to die to leave up to
 $600,000 to the children, taking advantage of the estate-tax
 exemption.
 
 * To provide for the surviving spouse, this bequest can be made to
 a trust that provides lifetime income to the survivor.  At the
 survivor's death, the assets pass to other beneficiaries, probably
 your children or grandchildren.
 
 * To keep trust assets out of a beneficiary's estate, the
 beneficiary should not be given access to trust funds except for
 what's necessary for "maintenance, education, support and health."
 
 * If you name secondary trust beneficiaries, and they have genuine
 access to trust funds, you may be able to increase tax-free
 transfers to trusts.

 
 RETAINED INTEREST TRUSTS - 

 Reduce your taxable estate with deferred gifts.
 
 If you're concerned about estate tax, you may want to make large
 gifts now to take full advantage of the $600,000 estate-tax
 exemption ($1.2 million for a married couple) while it still
 exists.  Otherwise, you run the risk that the exemption will be
 trimmed to $400,000, $300,000 or less.
 
 However, you may not want to part with $600,000 or $1.2 million
 worth of assets.  If that's the case, consider a split-interest
 gift:  You make a gift with strings attached.
 
 Typically, you'll make a gift to a trust with a fixed term.  The
 trust pays you income during the trust term.  After the trust ends,
 the principal goes to the beneficiaries.  Because the gift is
 deferred, you get a gift-tax discount.
 
 Example:  You hold a securities portfolio of $1 million, which you
 transfer to a trust.  The present value of the income stream you
 retain is $350,000.  Thus, you're making a $650,000 gift to the
 trust beneficiaries.
 
 That's true even if the securities in the portfolio increase to $2
 million or more, at the time of the transfer.
 

 GRATS AND GRUTS - 
 
 Setting up a retained interest trust involves choices.  The first
 decision you must make concerns the term of the trust.  The longer
 the term of the trust, the smaller the gift, for tax purposes. 
 However, you must outlive the trust to get the estate tax
 benefits.  Ten-year trusts are common.  If you have doubts about
 your health, shorter trusts are preferable.
 
 After choosing a trust term, you must decide whether to use a
 grantor retained annuity trust (GRAT) or a grantor retained
 unitrust (GRUT).  With a GRAT, you'll receive a fixed amount each
 year.  With a GRUT, you'll receive a fixed percentage of the trust
 assets each year.  Thus, GRUT payouts fluctuate with the potential
 of increasing or decreasing from year to year.
 
 * If you want to receive, say, $50,000 a year, use a GRAT.
 * If you prefer, say, 5% of the trust value very year, go with a
 GRUT.
 
 Next, you have to choose the level of income you want to receive. 
 The more you keep for yourself, the lower the gift, for tax
 purposes.  Gift taxes are set by the IRS interest rates in effect
 at the time of the transfer.  These rates change monthly to reflect
 current interest levels.
 
 Example:  You transfer $100,000 to a 10-year GRAT, retaining a
 $10,000 annual income interest.  The IRS Section 7520 interest rate
 at that time is 7%.  The value of your gift is under $30,000.
 
 However, if you were to retain an income interest of only $6,000
 per year, the value of the gift would be nearly $60,000.
 
 Observation:  GRATs provide stable income while GRUTs can offer
 inflation protection, if you're willing to bear some risk.  You
 should select the type of income you'd prefer.
 
 GRATs usually are more advantageous than, GRUTs as long as the
 annuity rate is higher than the IRS interest rate.  That will give
 you a high, fixed stream of income and a low gift tax bill.
 
 If you select a payout below the IRS interest rate, choose a GRUT,
 because your income likely will grow as the trust principal
 increases.  Again, your gift tax obligation will be reduced.
 
 Caution:  The major drawback to GRATs and GRUTs is that trust
 assets need to be income-producing.  Shares in a closely held
 business may not work unless the business throws off sufficient
 cash flow.
 

 INTEREST RATES AND EFFECTS - 
 
 Low interest rates increase the appeal of GRATs and GRUTs. 
 Interest rates play a key role in determining the present value of
 your retained interest.  The IRS publishes a Section 7520 rate each
 month, roughly equal to 120% of the yield on intermediate-term
 Treasury securities.  This interest rate, in conjunction with the
 term of the income stream, is used to calculate the present value
 of the income stream you'll receive.
 
 If treasuries pay more than 10%, as they did a few years ago,
 receiving $70,000 a year from a $1 million GRAT would be no big
 deal.  The principal likely would grow, and the trust beneficiaries
 can expect to receive a healthy sum down the line.  Thus you'd
 incur a hefty gift tax.
 
 Today, with Treasuries paying closer to 5%, receiving that $70,000
 a year is much more meaningful.  That $1 million fund likely will
 shrink, or the trustee will have to take risks to make it grow.  So
 the present value of the income stream is greater, the value of the
 remainder interest is small and gift tax is lower.
 
 There are thus sizable gift tax advantages to transferring assets
 in a 5% climate, rather than in a 10% climate.
 
 Today, you could transfer a $1 million portfolio, lock in a $70,000
 annual income and owe gift tax on less than half of that amount. 
 In a 10% world, your gift tax on an identical trust would be nearly
 60% of the assets transferred.
 
 Observation:  The calculation is a bit different but the principle
 is the same for a GRUT.  The more income you'll receive, the longer
 the time frame and the lower the interest-rate climate, the lower
 the value of the taxable gift.
 
 What happens if you die before the trust term expires?  All of the
 trust assets will be included in your taxable estate.
 
 Recommendation:  For the best results, avoid long-term trusts. 
 Choose a time period you're likely to outlive.
 
 IN BRIEF:
 
 * You may want to reduce your taxable estate by making gifts to
 family members, but you also may not want to give up assets right
 away.  If so, you can give assets to a trust and retain the right
 to receive income from the trust, for a given time period.
 
 * Such a deferred gift gives you an income stream as well as a
 smaller gift tax obligation.
 
 * The longer the deferral and the more income you'll receive, the
 lower the gift tax obligation.
 
 * Grantor retained annuity trusts (GRATs) pay a fixed amount of
 income while grantor retained unitrusts (GRUTs) pay a fixed
 percentage of trust assets.
 
 * In a low-interest rate environment, transfers to retained
 interest trusts generate lower gift tax consequences.
 
 * If you die before the trust term expires, the assets will be
 included in your taxable estate, so you should pick a trust term
 you're likely to outlive.

 
 PERSONAL RESIDENCE TRUSTS - 

 Cut estate taxes by giving away your house.
 
 Qualified personal residence trusts (QPRTs) allow you to remove
 your house from your taxable estate with little gift tax
 obligation.  Plus, a properly structured QPRT can reduce income tax
 as well.
 
 Observation:  If you own a valuable home, you can wind up ahead by
 hundreds of thousands of dollars.
 
 With a QPRT, you create a trust and transfer a house to it, naming
 yourself as trustee.  The house can be your primary residence or a
 vacation home.  In fact, you can have two QPRTs, as long as one is
 for your principal residence.  During the trust term, the trust can
 hold only the one residence, plus some cash needed for
 house-related purposes.
 
 Just as in a GRAT or a GRUT, you, as grantor, retain an interest
 after the transfer to the trust.  Usually that interest is the
 ability to live in or use the house for a certain time period. 
 Common trust terms are 10 and 15 years.  
 
 Observation:  QPRTs, unlike GRATs and GRUTs, don't generate a
 stream of income during the trust term.
 
 At the end of the trust term, the house passes to the trust
 beneficiaries, usually your children, so you're making a gift. 
 Because it's a deferred gift, the taxable gift may be a fraction of
 current value.

 
 RETURNING OWNERSHIP - 
 
 QPRTs frequently contain a contingent reversionary interest:  If
 you die before the trust term ends, the house returns to your
 estate.  This increases the value of your retained interest and
 thus reduces the amount of the taxable gift to the trust
 beneficiaries.
 
 Example:  George, aged 50, sets up a QPRT when the interest rate
 used to value such gifts is 7%.  (This rate is published monthly by
 the IRS, based on current interest rates.)  He retains a 10-year
 interest in the house plus a reversionary interest.
 
 If the house is worth $400,000, the taxable gift would be only
 $186,000.
 
 Observation:  If a QPRT holds a house subject to a mortgage, each
 subsequent payment builds equity in the house and thus will be
 deemed a taxable gift.  Thus, debt-free houses are best for QPRTs.
 
 After making this transfer, George gets to live in the house for 10
 years.  When the term ends, the house will pass to his children. 
 He has moved a $400,000 asset (which may then be worth $500,000 or
 $600,000 or more) out of his estate, at a $186,000 gift-tax cost.
 
 The term of the trust should be selected with care.  A relatively
 young person can choose a long term and substantially reduce the
 gift tax while sheltering many years of potential appreciation.  On
 the other hand, a 80-year old can include a reversionary interest,
 which reduces the gift, even with a three year trust, as long as he
 outlives the term.  IRS regulations dictate that the trust remains
 in effect, even if the grantor moves into a nursing home.
 
 Thus, you should choose the longest term you reasonably can expect
 to outlive.  The longer the term, the smaller the taxable gift. 
 However, if you don't outlive the trust, and there's a reversion,
 the house goes back to the estate and the gift-tax savings is
 lost.  You haven't gained anything but you haven't lost anything,
 either.
 
 Observation:  You can offset this risk by purchasing an insurance
 policy on your own life.  This policy might be for the term of the
 trust, with the death benefit equal to the anticipated tax savings.

 
 SPLIT OWNERSHIP - 
 
 Another way to reduce the risk is for you and your spouse to each
 set up a OPRT with part of the house.  Or, you each could create a
 QPRT with a different house.  Chances are, at least one of you will
 outlive the trust term and at least some tax benefits will be
 enjoyed.
 
 What if your property is owned jointly?  You might transfer it to
 the younger, healthier spouse, who can transfer the house to a
 QPRT.  Yet another option is to have the remainder interest go to
 the grantor's spouse if the grantor dies during the term of the
 trust.  Again, this reduces the value of the taxable gift.
 
 If you want to sell the house, a QPRT can make the sale and buy
 another as long as the replacement is acquired within two years. 
 Caution:  A house in a QPRT can't be mortgaged to raise can in case
 of an emergency.
 
 When the trust term ends, you may be reluctant to move out of your
 home.  If that's the case, you can stay there, paying rent to the
 new owners (probably your children).  The rental payments will get
 more money out of your estate.
 
 Observation:  The IRS has approved prior arrangements to lease the
 house to the grantor, after the term ends, as long as a fair market
 rent will be paid.  However, QPRTs should be considered only if
 you're on good terms with your beneficiaries, so you'll be able to
 rent the house, if desired.
 
 If you don't want to pay rent, you can give the house to the trust
 yet give your spouse a life estate (the right to stay in the
 house), after the trust term.  That will your spouse (and,
 presumably, you) lifetime use of the house with no rent and no loss
 of control.
 
 Recommendation:  Vacation homes often work better than principal
 residences in QPRTs, because you won't be as concerned over the
 long-term fate of the house.  Often, you might be happy with a deal
 that allows you to use a vacation house for another 10 or 15 years,
 then give the house to your children.
 
 CAPITAL GAINS - 
 
 Capital gains can be a problem with a QPRT.  Suppose, when George
 transfers his $400,000 house to a QPRT, he has a basis of
 $100,000.  At the end of the trust term, when it passes to his
 children, its value is $600,000.
 
 George stays in the house, paying rent, until his death.  At that
 point, the house is valued at $800,000, and his children sell the
 house for that price.
 
 Thus, George has transferred an $800,000 asset to the next
 generation while incurring a gift tax of $186,000.  This knocks
 more than $600,000 from his client's taxable estate and saves over
 $300,000, in a 50% estate tax bracket.
 
 However, George's $100,000 tax basis in the house is passed on to
 the trust beneficiaries.  When his children sell the house for
 $800,000, they'll have a $700,000 taxable gain.  Assuming a 28% tax
 rate on long-term capital gains, the kids will owe almost
 $200,000.  Thus, the total tax savings is reduced to just over
 $100,000.
 
 Recommendation:  Just before the trust term ends, George could buy
 the house back for fair market value, then $600,000.  As long as
 George buys back the house for fair market value, no income tax
 will be due.
 
 Observation:  George now has a $600,000 house back in his estate
 but he has moved out the $600,000 purchase price, so it's a wash. 
 What's the advantage?  George has regained ownership of the house. 
 If he holds onto the house until his death, his heirs will inherit
 with a step-up in basis.  They can sell the house and owe no
 capital gains tax.  This strategy reduces income tax as well as
 estate tax.
 
 Suppose George doesn't have $600,000 to buy back the house.  He can
 buy the house with an installment sale, paying with a note.  To
 avoid an IRS challenge, he must show that it's a real note, backed
 by real assets, and that all payments are made on schedule.
 
 Recommendation:  QPRTs are such a great tax shelter they may be
 outlawed by Washington, but trusts created before legislation is
 proposed will likely be grandfathered.  So act soon if a QPRT is
 appropriate for you.  Moreover, the sooner you set up the trust and
 start the clock ticking, the better your chance of outliving the
 trust.
 
 IN BRIEF:
 
 * A qualified personal residence trust allows you to remove a home
 from your taxable estate with relatively slight gift tax
 consequences.
 
 * QPRTs can be used for principal residences or for vacation homes.
 
 * To use a QPRT, you transfer a house to a trust for a certain time
 period, retaining the right to live there.
 
 * At the end of the trust term, the house reverts to your
 beneficiaries, typically your children.
 
 * The longer the trust term, the lower the gift tax you'll incur,
 as a percentage of the house's value.
 
 * At the end of the trust term, if you want to stay in the house,
 you can pay rent to the new owners.
 
 * Another option is to buy back the house from the trust, paying a
 fair price.
 
 * If you buy back the trust and hold in until your death, all the
 housing appreciation will escape capital gains tax.

 
 S CORPORATION TRUSTS - 
 
 If you own a small business, you may have elected S corporation
 status.  S corporations avoid the corporate income tax; they also
 avoid such tax problems as unreasonable compensation and excess
 accumulative earnings.
 
 To qualify for S. corporation status, you must meet and maintain
 certain standards.  For example, an S corporation can have no more
 than 35 shareholders, all of whom are citizens or residents of the
 U.S.  S. corporation shareholders must be individuals, estates or
 certain qualifying trusts.  If a corporation fails to meet any of
 these conditions, it will lose its S status and owe corporate
 income tax.
 
 Some of these conditions are not hard to comply with.  However, if
 your S corporation is your family's major asset--which usually is
 the case--you may want some of your shares held in trust.  Then,
 you need to be certain you use the "right" kind of trust.
 
 Here are the only trusts that are eligible to be S corporation
 shareholders:
 
 1.  Grantor trusts.  The person who creates a trust is known as the
 grantor; if the grantor retains control over a revocable trust, and
 retains the income, the trust is known as a grantor trust.  Such
 trusts have no tax liability.  Instead, all the taxes are the
 responsibility of the grantor.  Such trusts are eligible to own S
 corporation shares, so you can transfer S corporation stock to a
 revocable living trust.
 
 Observation:  To retain S corporation eligibility, you, as grantor,
 must control all the income from all the assets in the trust.
 
 Grantor retained annuity trusts (GRATs) and grantor retained
 unitrusts (GRUTs) are eligible S corporation shareholders because
 the grantor retains a right to all of the trust's income.
 
 However, GRATs and GRUTs aren't always appropriate S corporation
 shareholders:
 
 * If the grantor dies before the trust terminates, the shares are
 thrown back into his or her taxable estate.
 
 * GRATs and GRUTs have a commitment to distribute a certain amount
 of income each year, which places an obligation on the S
 corporation to distribute cash.
 
 * Distributions made to the GRAT grantor must be matched for each
 one of the S corporation shareholders, which may be a financial
 strain on the company.
 
 2.  "Section 678" trusts.  Section 678 of the Internal Revenue Code
 permits trust income to be shifted to another person.  That other
 person, the "income beneficiary," owes all the tax on trust income
 so the trust is merely a pass-through vehicle, just like a grantor
 trust.
 
 Section 678 trusts may be used by a parent who wants to pass income
 to a child, while the grantor retains control of the trust assets. 
 Another common application:  these trusts often are used to pass
 assets to a surviving spouse, giving the survivor income as well as
 the right to direct the ultimate disposition of trust assets. 
 Section 678 trusts are eligible S corporation shareholders, so you
 can use them to pass S corporation stock to your spouse.
 
 3.  Qualified subchapter S trusts (QSSTs).  One problem with the
 Section 678 trust is that the beneficiaries can freely invade the
 trust principal.  In some cases, though, you want to place
 restrictions on trust beneficiaries--children can't get their hands
 on trust assets until they reach a certain age, for example.
 
 That's where a QSST comes in.  As the name suggests, these trusts
 are eligible S corporation shareholders, but they still permit the
 grantor to put strings on the assets placed in trust.
 
 In order to qualify as a QSST:
 
 * The trust can have only one current income beneficiary.
 
 * That income beneficiary must be the only one who can receive
 trust assets, and the assets must be distributed to him when the
 trust terminates.
 
 * The income beneficiary's interest must end if he dies while the
 trust still exists.  (In other words, his estate can't inherit the
 interest.)
 
 * The income beneficiary must elect QSST status.
 
 Observation:  You can transfer nonvoting S corporation stock to a
 QSST, retaining voting stock and thus control of the business.
 
 A QSST can also serve as a Q-TIP trust.  Thus, you can use a QSST
 to leave your S corporation shares to a surviving spouse for her
 lifetime, defer estate tax with the unlimited marital deduction,
 and direct the stock to the ultimate beneficiaries you choose.
 
 4.  Testamentary trusts.  As opposed to a living trust, created
 while the grantor is still alive, a testamentary trust is created
 in a will.  If you leave your S corporation stock to a testamentary
 trust, the shares must be transferred to an eligible shareholder
 within 60 days.  However, complications will arise if you leave S
 corporation stock to a testamentary trust with multiple
 beneficiaries with an ineligible beneficiary.  So plan carefully.
 
 5.  Successor trusts.  When the grantor or the income beneficiary
 of an eligible S corporation trust dies, a successor will step into
 his shoes.  Again, this "successor trust" must not have an
 ineligible beneficiary.  Depending on the circumstances, the
 trustee has from 60 days to two years to transfer the stock to
 eligible shareholders.  It helps if the original trust has separate
 S corporation share certificates, for the trustee to divide among
 several eligible shareholders.
 
 Observation:  Trusts are basic estate planning tools.  S
 corporation owners need to be able to use trusts, but they must
 proceed with caution.  Working with a knowledgeable attorney is
 essential.
 
 IN BRIEF:
 
 * S corporations enjoy several tax advantages but corporations must
 meet several criteria in order to qualify.
 
 * Among those criteria, only certain types of trusts can hold S
 corporation shares.
 
 * Owners of S corporations may want to use trusts in order to pass
 the company to family members, defer and save estate tax and
 provide protection to family members who need it.
 
 * S corporation owners can use trusts to reach these goals, but
 they must proceed with caution.

 
 GENERATION-SKIPPING TRUSTS (GST) - 

 Enjoy double shelter from estate tax.
 
 If your parents have been successful enough to build a sizable
 estate, chances are that you have substantial assets, too.  In that
 case, passing along an inheritance can be extremely taxing.
 
 Example:  Joe Smith dies and leaves his widow Susan with a $2.5
 million estate, including a house, insurance proceeds, pension
 fund, shares in a family business and other assets.  Susan dies and
 leaves everything to Joe, Jr., and Mary, her two children.  After
 estate tax, about $1.6 million will be left.
 
 But that $1.6 million will be added onto all of Joe, Jr.'s, and
 Mary's other assets.  By the time they die, their assets might be
 so great that they're in a 50% or 55% estate tax bracket (or even a
 higher one, if taxes are raised in the interim).  Assuming a 50%
 bracket, only $800,000 will be left for the grandchildren, out of
 the grandparents' $2.5 million estate.
 
 To reduce the tax bite, Susan could leave her $2.5 million directly
 to her grandchildren.  Then, only one estate tax would be due, and
 the grandchildren would net about $1.6 million instead of
 $800,000.  However, this strategy poses two problems:
 
 * Joe, Jr., and Mary, who are doing all right now, might run into
 financial difficulties and need the money.
 
 * Inheritances left to family members more than one generation down
 the line may be subject to a "generation-skipping tax."  If so, an
 extra 55% GST would be due at Susan's death, reducing her estate to
 around f$720,000.

 
 MILLION-DOLLAR LOOPHOLES - 
 
 Fortunately, there is a $1 million exemption to the GST ($2 million
 for married couples).  Using this exemption will help solve both
 problems.
 
 Example:  In her will, Susan leaves $1 million to two trusts, one
 for each of her children.  The money actually is left to her
 grandchildren, although her children may be entitled to a lifetime
 income.  This income, plus the $600,000 they'll inherit (her $1.6
 million after-tax estate minus the $1 million left to the two
 trusts) will help them ride out any future financial storms.
 
 Observation:  Your will or trust documents should state that estate
 tax will be paid out of your residuary estate so you won't waste
 your GST exemption.
 
 The $1 million left to the grandchildren won't be subject to estate
 tax at Susan's death or at the deaths of Joe, Jr., and Mary.  The
 grandchildren will get the entire $1 million, plus any asset
 appreciation or undistributed income.
 
 Observation:  You also can use your $1 million GST exemption with a
 lifetime gift, setting up an irrevocable trust and naming your
 child as trustee, with grandchildren as co-trustees or successor
 trustees.  Your children and grandchildren also can be
 beneficiaries.  In case of an emergency, the trustee can distribute
 or loan funds to the beneficiaries.
 
 Such trusts can be structured to last through your lifetime and
 your children's lifetime until the last of your grandchildren dies,
 when the assets will pass to your great-grandchildren.  Thus, the
 trust can provide decades of asset protection and wealth-building,
 along with estate tax avoidance.

 
 APPRECIATION - 
 
 For all that time, the trustee can invest the funds in growth
 stocks, municipal bonds, life insurance other vehicles.  Even if
 the $1 million eventually grown to $2 million, $5 million $10
 million at the time of your death, no GST will be due, as long as
 the original gift was covered by the GST exemption.
 
 If you use your $1 million GST exclusion while you're alive, you
 must irrevocably elect this exclusion on a gift tax return, after
 the property transfer.  If you make a gift to your grandchildren
 and don't allocate your GST exclusion, all the assets that pass to
 your grandchildren at your death (including any appreciation) will
 be subject to the 55% GST.
 
 You can set up a GST trust as a Q-TIP trust.  After your death,
 your surviving spouse gets a lifetime income and a limited right to
 the trust assets.  Estate tax (on your estate) will be deferred
 until your survivor's death.  Then the trust fund will pass to your
 children and grandchildren without another round of estate tax.
 
 Or, you could leave $600,000 worth of GST exemption to a credit
 shelter trust, for your children and grandchildren.  This trust
 will avoid both estate tax and GST.  The other $400,000 of GST
 exemption can be allocated to a Q-TIP trust.

 
 INVESTING - 
 
 If you give money to a GST trust during your lifetime, what's the
 best way for the trustee to invest?
 
 * Municipal bonds are a conservative way to increase assets
 steadily, tax-free.
 
 * Growth stocks are more volatile but the long-term returns should
 be much higher.  As long as the stocks don't pay significant
 dividends and you hold trading down, the annual tax bill won't be
 great.
 
 * Life insurance can cover one spouse or both.  The death benefit
 will be tax-free while tax-free loans and withdrawals from the cash
 value can provide emergency funds.
 
 If the insured person or persons dies relatively soon, life
 insurance will have a greater payoff than stocks or bonds.  After
 20 or 25 years, though, stocks or bonds likely will generate a
 higher return.
 
 Recommendation:  A mix of munis, growth stocks and life insurance
 can generate trust fund growth under any circumstances.
 
 IN BRIEF:
 
 * If you inherit money from your parents, and you already have
 substantial assets of your own, your parents' assets may be reduced
 by two rounds of estate tax.
 
 * To avoid this problem, you can leave money directly to your
 grandchildren, but there's a 55% generation-skipping tax on such
 transfers.
 
 * Fortunately, each person gets a $1 million exemption from the
 generation-skipping tax.
 
 * Therefore, you can leave up to $1 million in generation-skipping
 trusts and so can your spouse.
 
 * Such trusts can be structured to pay income to your children, if
 necessary, and eventually distribute assets to grandchildren or
 great-grandchildren, with no reduction for estate tax.
 
 * Although there's a $1 million limit to the amount that's exempt
 from the generation-skipping tax, all future appreciation also will
 avoid that tax.
 
 * For security, assets distributed to a generation-skipping trust
 can be divided among municipal bonds, growth stocks and live
 insurance.

 
 ASSET PROTECTION TRUSTS (APT) - 

 Move your wealth beyond the reach of the U.S. judicial system.
 
 U.S. courts are continually recognizing new "rights" for plaintiffs
 at the expense of people trying to hold onto their wealth.  Anyone
 with substantial assets, professionals and business owners in
 particular, may be vulnerable to large judgments.  Liability
 insurance and incorporation are still necessary but they're not
 guaranteed to protect your personal wealth.
 
 In response, offshore asset protection trusts (APTs) have been
 created to provide increased asset protection.  With an APT, your
 assets are held in a trust set up outside the reach of the U.S.
 judicial system.  A creditor must prevail in a foreign court before
 he can get his hands on those assets.
 
 Observation:  In some overseas jurisdictions, you can retain
 control and enjoy the benefits of trust assets, even while they're
 protected.  That's not possible with a domestic trust.
 
 A favorite APT jurisdiction is the Isle of Man, a British
 Commonwealth located in the Irish Sea.  Many Americans like to use
 Manx trusts because of the location, the language, the political
 and economic stability.  Other APT havens include the Bahamas,
 Belize, British Virgins, Caymans, Cyprus, Gibraltar and Turks and
 Caicos.

 
 SELECTING SITUS FOR ADDED SAFETY - 
 
 However, many asset protection experts prefer the cook Islands, in
 the South Pacific.  The Cook Islands International Trust Act
 prohibits the enforcement of foreign judgments.  Litigants are
 forced to bring actions all over again, in a Cook Islands court.
 
 In the Cook Islands, therefore, judgments issued by U.S. courts
 aren't automatically recognized, as they are in most of the world. 
 Instead, a claimant must hire an attorney who practices in the Cook
 Islands and that attorney must be paid, win or lose; no contingency
 fees are permitted there.  In court, the burden of proof rests on
 the creditor, who must satisfy a criminal standard (beyond a
 reasonable doubt) in order to prevail.
 
 The Cook Islands law also addresses the issue of "fraudulent
 conveyance."  If you transfer assets merely to put them out of the
 reach of creditors, the transaction will be considered fraud and
 disregarded.  The same outcome generally results if you transfer
 assets merely to thwart potential creditors--the visitor who's sure
 to sue you next week for the broken hip suffered while tripping on
 your dog's bone and falling down on your steps.
 
 Fraudulent conveyance is less likely to be a problem if you use an
 APT as a vaccine rather than a cure.  Establish a trust and shift
 assets while you have no major claims or likely claims pending.  If
 you shift assets in 1994 and your visitor stumbles in 1999, it will
 be hard to make the case that assets were transferred to thwart
 future bone trippers.
 
 Observation:  In the Cook Islands, if a trust has been in place for
 a year before an action is brought, the transfer is not considered
 fraudulent.

 
 LIMITING THE TARGET - 
 
 Most people, though, aren't so prescient as to shift assets years
 in advance.  Often, transfers are made with creditors nipping at
 their heels.  In these situations, avoiding a fraudulent conveyance
 claim is more difficult.
 
 Recommendations:  You should stay solvent, at least on paper, while
 moving the most tempting assets out of easy reach.
 
 Establishing an APT won't allow you to cheat or maim your fellows
 with impunity.  Instead, the idea is to reduce your financial
 profile you present to would-be claimants.
 
 Many lawyers lower their sights when they discover anything foreign
 is involved.  To press a suit successfully, a plaintiff must
 overcome so many barriers, with no certainty of success, that
 frivolous suits will be abandoned while the playing field is
 leveled for serious actions.  Settlements may be reasonable instead
 of ridiculous.
 
 APTs aren't for everyone.  The price tag is high and shopping
 around for discounts isn't recommended; you want a lawyer who knows
 how the game is played.
 
 Typically, the process starts by creating a family limited
 partnership.  You and your spouse might control a 1% general
 partnership interest as well as a 99% limited partnership
 interest.  Then, your most attractive, most liquid personal assets
 are transferred into this partnership.
 
 You and your spouse can transfer the limited partnership interests
 to your kids and possibly other relatives.  You can avoid gift tax
 by using the annual exclusion ($20,000 worth of assets per married
 couple per recipient per year) or you can eat into your
 $600,000-per-person estate tax exemption if they choose.  The
 entire 99% limited partnership interest can be given away, if
 desired.

 
 CONTROL - 
 
 Giving away 99%  of your assets to your son-in-law may not be your
 idea of great planning, but don't worry.  As long as those assets
 are held as limited partnership interests, the owner has no
 control.  You and your spouse, as is reduced to 1%.  You decide
 whether or not to make cash distributions to ship.  The limited
 partners are purely passive participants.
 
 But the limited partners own those assets.  Not only is that
 another obstacle for creditors to clear, it can reduce your estate
 tax obligation.
 
 Observation:  The estate planning purpose might persuade a judge
 that the entire transaction had a reason other than thwarting
 creditors.
 
 For extra protection, the 99% limited partnership interest
 (regardless of ownership) can be transferred to an offshore APT. 
 Transferred on paper, at least.  Your brokerage account, for
 example, still stays in New York or San Francisco or wherever.  You
 may have a hard time convincing a court that the fourplex apartment
 you own near Chicago is held in the Cook Islands, but you can
 borrow against your equity and move the cash into the trust.
 
 For creating the limited partnership and the APT, you'll probably
 pay a lawyer around $15,000, plus another couple of thousand a year
 to compensate the local trustee.  The trustee should be someone
 with no U.S. connections, out of reach of the U.S. judicial system.
 
 Recommendation:  Your APT documents should prevent the trustee from
 doing anything major with your assets (e.g., stealing them) without
 your permission.
 
 If you're considering an offshore trust, don't expect tax
 shelter--these trusts are designed to be "tax-neutral."  However,
 assets in an APT can pass to your heirs without going through
 probate.
 
 In General, offshore APTs make sense for people with over $500,000
 in personal wealth to protect.  The more you're worth and the
 greater the hazards you face, the more an APT can make sense. 
 However, your legal position probably will be stronger if you keep
 some money in your own name, within reach of creditors, rather than
 move everything overseas.
 
 IN BRIEF:
 
 * Increasingly, Americans who have managed to accumulate any wealth
 find their assets threatened by capricious court decisions.
 
 * In an effort to provide extra protection, you can establish a
 trust outside the U.S., in a jurisdiction where the courts are not
 so favorable to plaintiffs.
 
 * Asset protection trusts are most effective if they're set up
 before you're involved in a dispute even threatened with a dispute.
 
 * When you set up an APT, you can keep your assets in the U.S.,
 under your control, even the trust paperwork is offshore.
 
 * In most cases, the first step in the APT process is to create a
 family limited partnership and transfer assets to it, after which
 the partnership interests are moved into an APT.  
 
 * These legal maneuvering will cost at least $15,000, so it makes
 sense only if you have substantial assets to preserve.
 
 * Once you have an APT in place, and your assets are out of easy
 reach, claimants' lawyers may not pursue frivolous actions against
 you while meritorious complaints may be settled on reasonable
 terms.

 
 INVESTMENT TRUSTS - 

 Some trusts earn while they protect.
 
 For most of this report, we have discussed trusts that serve as
 vehicles to protect your assets and pass them on to your heirs. 
 They are cozy arrangements between you, your family and your
 lawyer.  However, there is another class of trust--investment
 trusts.  These are investment opportunities, made available to
 hundreds or even thousands of potential shareholders.  Such trusts
 may be divided into units and offered to the investing public, like
 stock in a publicity traded company.
 
 Still, at their roots, these trust offer the same essential benefit
 that the other trusts we've discussed provide:  They protect a
 portion of your assets from tax collectors.  Trusts aren't subject
 to the corporate income tax; therefore, a successful venture may
 have more money to pass through to investors, who are called
 unit-holders rather than shareholders.
  
 Investment trusts offer many of the same advantages as publicly
 traded corporations.  Units can be brought for modest amounts of
 money and sold with relative ease.  Tax reporting is simple.  In
 addition, unit-holders aren't exposed to liability from business
 operations.  Therefore, investment trusts have become popular in
 recent years.  Here are some of the major types:

 
 REAL ESTATE INVESTMENT TRUSTS (REITSs) - 
 
 REITs are companies committed to real estate; shares trade like
 common stocks, giving investors a passive, low-cost, liquid play on
 real estate.  REITs owe no corporate tax as long as they pass on
 95% of their net income to investors every year.  As a result,
 REITs often have large amounts of cash flow to pay out to
 shareholders.
 
 Although there are mortgage REITs and hybrids, the excitement in
 the 1990s has centered on equity REITs, which own properties.  From
 October 1990 to October 1993, the equity REIT index gained 73%,
 reaching an all-time high, before backing off a bit by year-end.
 
 One reason REITs were such strong performers is the yield they
 offer.  Ever since late 1990, interest rates have plunged and
 investors have backed off from low-yielding CDs, money market
 funds, T-bills, etc.  Instead, they turned to higher-paying
 alternatives, such as REITs.  In 1994, equity REITs were yielding
 nearly 7% on average, which was much higher than many other types
 of investments.
 
 Not only do REITs offer high yields, they have tax advantages,
 which were enhanced by the 1993 tax act.  Because of their
 structure, equity REITs can pass through deductions such as
 depreciation and interest as well as cash flow.  Thus, some REIT
 distributions are partially tax sheltered.
 
 As is the case with all real estate shelters, the taxes investors
 avoid today must be paid tomorrow.  If you buy ABC REIT at $14 per
 share and receive a $1 dividend, fully sheltered, your basis drops
 from $14 to $13 per share.  Ultimately, your basis will drop to
 $12, $11 and so on.  If you eventually sell at $15, you might have
 a taxable gain of $4 per share ($15 minus $11) rather than $1 per
 share ($15 minus the $14 purchase price).
 
 This can be an excellent arrangement if you're in a high tax
 bracket.  On untaxed distributions, you avoid paying taxes at rates
 up to 39.6%.  Not only are taxes on those distributions deferred,
 when they're ultimately paid they'll probably be long-term capital
 gains, now taxed no higher than 28%.
 
 Observation:  REIT investments are one of the few means still
 available for converting ordinary income to capital gain.
 
 The 1993 tax law contained another blessing for REITs.  For
 decades, they have been subject to the "five or fewer" rule:  No
 fewer than five individuals can own more than 50% of a REIT's
 shares.  The idea is to keep rich families from putting real estate
 into a REIT, exempt from corporate income tax.
 
 Over the years, foreign pension funds and domestic mutual funds
 were exempt from this rule.  Domestic pension funds, though, were
 not excluded.  The 1993 tax bill leveled the playing field.  Thus,
 the demand for REITs from domestic pension funds has increased,
 putting upward pressure on prices.
 
 What are the risks?  REITs have become bond proxies, and they
 soared when interest rates swooned.  But if inflation picks up and
 interest rates increase, REIT shares might tumble, even if the
 underlying real estate is unaffected.  REITs are
 interest-sensitive, reacting more to movements in the stock market
 than in the real estate market.
 
 If REITs appeal to you, you need to choose specific issues in which
 to invest.  Recommendation:  Analyze equity REITs as you'd analyze
 any equity investment.  Look at the management team, the line of
 business and the operational structure.  The current dividend yield
 is far less important than a REIT's potential for raising future
 dividends.
 
 Some analysts favor apartment REITs because so few apartments are
 being built in the 1990s while demand from renters is increasing. 
 Others like health care REITs, especially those focusing on
 long-term care.  With increasing emphasis on health care cost
 control, it makes sense to move patients from an acute-care
 hospital costing $1,200 a day to a nursing home bed costing $600
 per day.
 
 Shopping center REITs--probably the most plentiful--have their
 adherents, too.  Shopping centers generally weren't as overbuilt as
 office or apartments in the 1980s.  Moreover, shopping center
 leases usually call for tenants (retailers) to pay some kind of
 overage if sales increase.  If inflation picks up, which would hurt
 REITs, shopping centers would have built-in lease escalators as an
 offset.
 
 But it isn't enough to focus on apartments, say, or shopping
 centers.  Within each category there will be sinners and losers. 
 Proper analysis requires a close look at a REIT's finances, the
 soundness of its properties and dozens of other details.
 
 If you are reluctant pick individual REITs, you can use mutual
 funds.  By investing in such mutual funds, you can invest in
 liquid, professionally managed real estate investments without
 having to analyze individual issues.

 
 ROYALTY TRUSTS - 
 
 A royalty trust usually is created by an energy company, which
 assigns the royalties on specific oil and gas properties to a
 trust.  Then, trust units are sold to investors.  The units may
 trade like common stock.
 
 unit-holders are entitled to royalties--sales proceeds minus all
 production costs.  The trust pays no corporate income tax so the
 tax obligation flows through to investors.  Meanwhile, depletion
 and other deductions also flow through, reducing the personal
 income tax that's due.
 
 Often royalty trusts generate extremely high income.  However, when
 the oil and gas run out, that's it.  There's nothing left to sell,
 no return of principal.
 
 In 1993, energy companies found a way to spice up royalty trusts: 
 they added Section 29 properties.
 
 For years, Section 29 of the Internal Revenue Code provided some
 prime tax shelter opportunities.  Section 29 provided tax credits
 for certain types of nonconventional energy sources, including
 natural gas produced from tight sands, Devonian shale and coal-bed
 methane.  The more energy produced and sold, the greater the tax
 credits.
 
 Observation:  These credits could be used against your regular
 income tax; there are none of the income limits that often come
 into play with some other tax credits.
 
 To get these credits, thousands of nonconventional wells were
 drilled after Section 29 was enacted in 1980.  For those who found
 the right kind of energy, up to 10 years' worth of credits were
 available.  Thus, wells drilled in the late 1980s and early 1990s
 can produce tax credits as well as gas for many years to come. 
 Unfortunately, the Section 29 expired at the end of 1992 and were
 not renewed.
 
 CAUTION - 

 Too Much of a Good Thing.  As you might expect, most of the
 drilling was done by natural gas companies.  Such companies had as
 many tax deductions as they have income.  Others had such slight
 tax obligation, they couldn't use all their credits.  Thus, many of
 these credits were being wasted.  So they spun off their Section 29
 credits to royalty trusts.
 
 When you add Section 29 tax credits to a standard royalty trust,
 you get an even better tax deal for investors.  That was the case
 with the Williams Coal Seam Gas Royalty Trust, launched in 1992. 
 Williams Cos., which owned 144.5 billion cubic feet of Section 29
 gas, sold nearly 6 million units to investors, keeping almost 4
 million units for itself.
 
 The initial offering price was $20 per unit.  Trading on the New
 York Stock Exchange, the price shot up to $29 and retreated to
 around $25, in 1994.  The cash payout then was over $2 per unit, a
 yield of around 8%.  Thanks to the depletion allowance, that
 distribution will be largely untaxed.
 
 What's more, each unit generates around $2 worth of tax credits. 
 If you buy 1,000 units, for example, for $25,000, you get to reduce
 your federal income tax liability by $2,000.  That's an addition to
 the tax-sheltered cash flow.  Altogether, the after-tax yield on
 these units is over 15%
 
 Williams Coal Seam isn't the only trust in the sea.  Eastern
 American Energy, Burlington Resources and Torch Energy Advisors all
 have similar Section 29 royalty trusts, also trading on the NYSE. 
 They all offer liquidity, cash flow and tax shelter similar to the
 Williams trust.
 
 Of course, you don't get 15% returns without a catch or two. 
 First, as is, the case with any royalty trust, your assets are
 literally depleting with each barrel of oil or cubic foot of
 natural gas that's produced or sold.  That's why you're entitled to
 depletion deductions.
 
 Moreover, you're accepting operating risks when you invest in a
 royalty trust.  If prices rise, your income will increase--but your
 cash flow can run dry if prices fall.  Plus, as production falls,
 you'll receive fewer tax credits, because those credits are tied to
 the amount of gas produced.
 
 There's no free lunch and there's no safe 15% return in a 3%
 world.  But, as long as you realize you're investing in a depleting
 asset, Section 29 royalty trusts are among the top tax shelters
 available.

 
 UNIT INVESTMENT TRUSTS - 
 
 These trusts, also called unit trusts, can hold almost any type of
 security.  The securities are bought with the proceeds of the
 initial offering and held for a certain time period.  There's
 generally no buying or selling, after the initial purchase, so
 management costs are low.
 
 However, if you buy units in the trust, you can sell if you wish,
 either to the trust sponsor or to another investor.
 
 Although some unit trusts hold stocks, few investors want to own an
 unmanaged stock portfolio.  Therefore, most unit trusts hold bonds.
 
 The advantage to owning a bond unit trust, in addition to low
 management cost, is simplicity.  The trust buys a portfolio of
 bonds and holds on until maturity.  Investors collect the same
 amount of interest until the bonds are called or redeemed, at which
 time principal is returned.  As long as investors don't sell
 prematurely, they'll receive a fixed income with virtually no risk
 of principal.
 
 OBSERVATION:  Some unit trusts hold taxable bonds, but those
 holding tax-exempt bonds are far more common.
 
 If you had bought unit trusts in the late 1970s or early 1980s, you
 had a great deal.  You might have locked in 10% or 12%, tax-exempt,
 and enjoyed that high yield until call or maturity, while other
 bond yields fell in later years.  However, with current bond yields
 at their lowest point in decades, unit investment trusts aren't
 nearly so attractive.  Other investment trusts offer a greater
 potential yield to shareholders.
 
 IN BRIEF
 
 * Some investment vehicles are also called trusts.  Shares in the
 trusts, which are sold to investors called unit-holders, offer many
 of the advantages as publicly traded stock.
 
 * Real estate investment trusts (REITs) invest unit-holders' money
 in real estate.  REITs are required to distribute 95% of their
 annual profits to unit-holders, making REITs attractive
 investments.  
 
 * Some experts prefer REITs that hold apartment properties.  Others
 recommend shopping center REITs.
 
 * Royalty trusts offer unit-holders a portion of the profits derived
 from oil and gas properties.  The problem:  When the energy runs
 out, the royalties cease, and principal investments are not
 returned to unit-holders.
 
 * Unit investment trusts can hold almost any kind of security,
 although most specialize in bonds.  At present, these trusts have
 lost much of their luster because the rate of return on bonds is
 low.

 
 MULTIPLE TRUSTS - 

 When two (or three, or many more) trusts are better than one.
 
 Each of the trusts described in this report is a powerful tool when
 properly created and used in the right circumstances.  Sometimes,
 the results can be even better if several trusts are combined in
 one financial strategy.
 
 Example:  Len is a 68-year-old business owner,  He has three
 children, ages 35 to 44, from his first marriage, which ended in
 divorce.  Len's second wife, Carrie, is 55--just over 10 years
 older than Len, Jr., Len's oldest child.  Carrie has two children
 from her first marriage.  Len expects to die before Carrie, and to
 leave an estate worth $2 million.  A traditional estate planning
 strategy might have Len:
 
 * Create a revocable trust and transfer assets into the trust so
 that they will avoid probate.
 
 * Leave $600,000 to his children, in a credit shelter trust, to
 fully use his estate-tax exemption.
 
 * Leave the remaining $1.4 million to Carrie, avoiding estate tax. 
 However, at Carrie's death, she can leave that $1.4 million--Len's
 $1.4 million--to her own children, so Len's children would receive
 nothing beyond that first $600,000.  So Len changes his strategy
 somewhat:
 
 * Instead of leaving $1.4 million to Carrie, he leaves $1.4 million
 to a Q-TIP trust.  With a Q-TIP, Carrie gets the income from the
 $1.4 million as long as she lives.  (In some circumstances, the
 trustee may let her dip into trust principal, as well.)  But, at
 her death, the trust funds go where Len has directed them:  to his
 children.  Therefore, he is certain that his money will wind up
 where he wants it.
 
 Moreover, if the Q-TIP is drawn up properly, that $1.4 million will
 qualify for the unlimited marital deduction.  No estate tax will be
 due until Carrie's death, when the money will pass to Len's
 children.
 
 OVERVIEW -
 
 Len's family situation still poses problems, though.  Carrie, his
 second wife, is 55, 10 years older than Len, Jr.  If both Carrie
 and Junior live to their life expectancies, Carrie will die just a
 few years before Junior.  Junior won't have much time to enjoy his
 share of the $1.4 million, even though he and his siblings are the
 Q-TIP beneficiaries.
 
 Len buys two life insurance policies, making his children the
 beneficiaries of both.  One is the second-to-die policy that most
 married couples can use to cover estate tax.  When both Len and
 Carrie die, Len's three children will receive enough life insurance
 proceeds to cover the tax payments on the Q-TIP trust's assets.  In
 addition, Len takes out a single-life policy on his life.  At Len's
 death, his three children will receive $1 million right away. 
 Thus, they won't have to go through life waiting for Carrie to die
 to get their inheritance.
 
 Both policies are held in life insurance trusts to avoid estate tax
 on the proceeds.  To avoid confusion, Len sets up a separate trust
 for each policy. 
 
 Buying two large insurance policies is expensive.  After paying for
 all the life insurance, Len figures he'll have only $1.2 million
 left for the Q-TIP trust, not $1.4 million.  But Len figures it's
 worth it for the peace of mind.  After his death, Carrie will be
 well provided for, living off the income of the $600,000 credit
 shelter trust and the $1.2 million Q-TIP trust.
 
 The result of all Len's planning:
 
 * His children will have an immediate, tax-free $1 million at his
 death.
 
 * His widow will have lifetime income from a $1.8 million estate
 ($600,000 in the credit-shelter trust, $1.2 million in the Q-TIP
 trust).
 
 * The entire $1.8 million will eventually go to Len's three
 children.
 
 * No one in the family will be out-of-pocket to pay any estate tax,
 thanks to good planning and the second-to-die life insurance policy
 proceeds held by a life insurance trust.
 
 An alternative:  Len could combine a charitable remainder trust
 with a life insurance trust.  With a charitable remainder trust, as
 explained earlier, he would give away assets to a charity, receive
 the income from those assets for his and Carrie's lifetimes, and
 set up a life insurance trust to buy a policy on his life to
 replace some or all of his children's foregone inheritance.

 
 MULTIPLE TRUSTS - 
 
 Don't think you have to stop at one trust.  Depending on your
 individual situation, you may be better off using two or more. 
 Just be sure that you're working with a knowledgeable, experienced
 and reputable attorney--and that you fully understand all the
 implications of your actions.
              info@truetrust.com