Sunday, January 30, 2011

Passing Along Property thru Trusts

The Tulloch brothers -- One day will run the Darnell L Williams Foundation


I am not a lawyer but I have 6 college credits in trust law. I still remember the words of my professor at Robert Morris University in 1975. He said, “Darnell, we have to follow the law in this country but remember, possession is nine tenths of the law. If you have it or control it, it is up to the other person to take it away from you. ” I never forgot these words and over the years, it saved me a lot of money. So when I bought something, most of the time, (when I was not acting out of stupid love impulses) I kept that real or personal property in my name. Over the years, you would be surprised how many lawyers (working for me or against me) tried to trick me out of my stuff.

While my children were growing up, I set up trust for them to save for college, their college living expenses, and many other things. My oldest daughter used her money to go to college. She used the remainder of her trust money with her husband to buy their first home. I put this money away for her when she was 6 months old. By using trust, x-wives (x-husbands if you had them) or others could not get at the money. The tax man could not touch the money in most cases either. After I die, my foundation which is another form of trust will pass upon my death to my descendents without probate of my Will.

A trust can be as complicated as a Corporate Structure. It can also be as simple as a title on a savings account. Many people don’t understand the principle behind a trust because they don’t understand the concept of owning property. Keep in mind, the United States was created using English Law.

The “trust law” developed in England at the time of the Crusades, during the 12th and 13th centuries.

At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence, often to pay and receive feudal dues. To achieve this, he would convey ownership of his lands to an acquaintance, on the understanding that the ownership would be conveyed back on his return. However, Crusaders would often return to find the legal owners' refusal to hand over the property.

Unfortunately for the Crusader, English law did not recognize his claim. As far as the courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could do what was "just" and "equitable", and had the power to decide a case according to his conscience. At this time, the principle of equity was born.

The Lord Chancellor would consider it unjust that the legal owner could deny the claims of the Crusader (the "true" owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor's court (the Court of Chancery) would continually recognize the claim of a returning Crusader. The legal owner would hold the land for the benefit of the original owner, and would be compelled to convey it back to him when requested. The Crusader was the "beneficiary" and the friend the "trustee". The term use of land was coined, and in time developed into what we now know as a trust.

Property of any sort may be held on trust, but growth assets are more commonly placed into trust (for tax and estate planning benefits). My children’s college money was held in trust from birth to the time they had to use it. The uses of trusts are many and varied. Trusts may be created during a person's life (usually by a trust instrument like with my children) or after death in a will. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee's creditors), making it "bankruptcy remote", and leading to its use in pensions, mutual funds, and asset securitization.

Trusts may be created by the expressed intentions of a “person (settlor) passing assets to another person” called an express trusts or they may be created by operation of law (resulting trusts).

Typically a trust is created by one of the following:

a written trust document created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or "living trust");
an oral declaration;
the will of a decedent, usually called a testamentary trust; or
a court order (for example in family proceedings).
In some jurisdictions certain types of assets may not be the subject of a trust without a written document.

Common purposes for trusts include:

Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families this alone makes use of trusts ideal.
Spendthrift Protection. A spendthrift clause in a trust prohibits transfers of a beneficiary's interest in the trust. In some jurisdictions, all income interests are automatically given limited spendthrift protection meaning that they cannot be transferred by a beneficiary or reached by his creditors unless a provision is inserted in the trust document allowing such transfers. If there is no provision allowing the beneficiary to transfer his interest, it can be reached by a creditor that furnished necessities such as;

(A) food, clothing, shelter, or medicine;

(B) in suits to enforce child support or alimony; to collect a federal tax lien;

(C) to the extent of income beyond that reasonably needed by the beneficiary for support and education;

(D) and by creditors who have a judgment against the beneficiary who can levy upon 10 percent of the income due.

There is no spendthrift protection where the trustor is also the beneficiary.

Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.

Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).

Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle. We talked about the unit trust in previous blogs.

Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.

Remuneration Trusts. Trusts for the benefit of directors, companies, or employee families and dependents.

Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in their structure.

Asset Protection. The principle of "asset protection" is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset protection is legal and (arguably) moral, while some asset protection is illegal and/or (arguably) immoral.

Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. For example, I accumulated thousands of dollars over 20 to 25 years with the tax penalty going to the children instead of to me. Since they had no income most of the time, taxes were greatly diminished.

Tax Evasion. In contrast to tax avoidance, tax evasion is the illegal concealment of income from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to preserve anonymity, and they divorce the settlor and individual beneficiaries from ownership of the assets. This use is particularly common across borders—a trustee in one country is not necessarily bound to report income to the tax authorities of another. This issue has been addressed by various initiatives of the OECD.

Money Laundering. The same attributes of trusts which attract legitimate asset protectors also attract money launderers. Many of the techniques of asset protection, particularly layering, are techniques of money-laundering also, and innocent trustees such as bank trust companies can become involved in money-laundering in the belief that they are furthering a legitimate asset protection exercise, often without raising suspicion. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly affected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee. Same goes for bank and brokerage accounts held in joint name.

Monday, January 24, 2011

What is a Will?

You have no money or property. You have no husband but you have children age 5 and 7. You walk out in the street and got killed by a drunk driver. Who has the right to sue on behalf of your children? This is why you better have a Will!
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A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death.
An estate is the net worth of a person at any point in time. It is the sum of a person's assets.
Assets is defined as the legal rights, interests and entitlements to property of any kind Minus all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person.
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Depending on the context, the term Asset is real estate or personal estate. Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. Real estate cannot be removed or moved to another location.

Personal property may be classified in a variety of ways. Tangible personal property refers to any type of property that can generally be moved (i.e., it is not attached to real property or land), touched or felt. These generally include items such as furniture, clothing, jewelry, art, writings, or household goods. In some cases, there can be formal title documents that show the ownership and transfer rights of that property after a person's death (for example, motor vehicles, boats, etc.) In many cases, tangible personal property will not be "titled" in an owner's name and is presumed to be whatever property he or she was in possession of at the time of his or her death.

Intangible personal property or "intangibles" refers to personal property that cannot actually be moved, touched or felt, but instead represents something of value such as service warrantee rights, stocks, bonds, and trade secrets, copyrights, patents, trademarks including the right to sue.

Accountants also distinguish personal property from real property because personal property can be depreciated faster than improvements (while land is not depreciable at all). It is an owner's right to get tax benefits for chattel, and there are businesses that specialize in appraising personal property, or chattel.

The distinction between these types of property is significant for a variety of reasons. Usually one's rights on real property are more enforceable than one's rights on personal property. The statutes of limitations or prescriptive periods are usually shorter when dealing with personal or movable property. Real property rights are usually enforceable for a much longer period of time and in most jurisdictions real estate and immovables are registered in government-sanctioned land registers such as county court houses. In some jurisdictions, rights (such as a lien or other security interest) can be registered against personal or movable property.

In the common law it is possible to place a mortgage upon real property. Such mortgage requires payment or the owner of the mortgage can seek foreclosure. Personal property can often be secured with similar kind of device, variously called a chattel mortgage, trust receipt, or security interest. In the United States, Article 9 of the Uniform Commercial Code governs the creation and enforcement of security interests in most (but not all) types of personal property. There is no similar institution to the mortgage in the civil law.

Liens on real rights follow the property along with the ownership. In the common law a lien also remains on the property and it is not extinguished by selling the property.

Many jurisdictions levy a personal property tax, an annual tax on the privilege of owning or possessing personal property within the boundaries of the jurisdiction. Automobile and boat registration fees are a subset of this tax. Most household goods are exempt as long as they are kept or used within the household; the tax usually becomes a problem when the taxing authority discovers that expensive personal property like art is being regularly stored outside of the household.

The distinction between tangible and intangible personal property is also significant in some of the jurisdictions which impose sales taxes.

In the strictest sense, a "will" has historically been limited to real property while "testament" applies only to dispositions of personal property (thus giving rise to the popular title of the document as "Last Will and Testament"), though this distinction is seldom observed today. A will may also create a testamentary trust that is effective only after the death of the testator.

Do not confuse a "Will" with a "Power of Attorney." Wills are executed after you die. Power of Attorney is executed while the testator is still alive and it dies when the testator dies.

How is Darnell’s Portfolio Doing?

This year the stock market is starting off well. The Dow is up 3.56% from January 1 to the close of January 27, 2011. For the first time since 2008, the Dow is betting my portfolio. In the same period my portfolio is up 1.45%. For the past 24 months, my portfolio is up 80.02%. My target is to achieve 100% at 36 month or 3 years.

I may not make it because the bond market is now fully valued and BBB to B rated Bonds are giving between 6% and 8% interest. Many of my bonds that were bought in 2008 and 2009 will be maturing in 2011. I will have to reinvest in bonds that have a lower rate of return. That my push my 100% return target out to 48 months or 4 years.




Thursday, January 20, 2011

So Your Family Has Legal Trouble!






I am not a lawyer but I do have 12 college credits in Business Law. My objective here is to give you enough information so that you can bring your basic legal problems to an attorney before it is too late. Also, by arming you with basic information about Wills and Trust, you will better be able to tell an attorney what you need and how to proceed with your own personal problems. The cost of your legal services will be far cheaper than if you went into a law office ignorant of your needs.
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Most people claim that they do not have any money so setting up a Will or a Trust does not matter.
What happens if you get up from your computer and go across the street to talk to a friend? Some drunk driver comes down the road at 100 miles an hours, runs you over before you can figure out that you are dead. Who has the right to sue their insurance company or them for money for your funeral, your Brother John or Sister Sue?
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You are the last person among your brothers and sisters to die. You have no children. You promised your favorite Granddaughter that she can have your very lovely China set that she has been taken care of for you for the last 50 years. You die without a Will. Another Grandchild decides that she should have the China and many other things that you have. You can’t stand the woman and you have not seen her since she was 12 years old. She sues to get your stuff. What do you think will happen in court?
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You promised the woman who has been taken care of you for the last 20 years, your dinner plates. She always loved them and took care of your home and asked for nothing else in return. You died and your next of kin who you had nothing to do with for decades was notified. She came to your kin and asked for the dishes. Your next of kin told her that you paid her for the services that she performed for you and slammed the door in her face, changed the locks, and went about their business. How is your long trusted friend going to get your dishes?
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You have this large track of land handed down to you from several generations ago. You told your grandson that when you die, he can have the land. Once dead, he takes over. But your son, his uncle, claims that he should have the land. He takes your grandson to court. The court finds that this land should have been settled legally 7 generations ago and you legally did not own the land. What do you think the court is going to do about this?
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You have been given 5 months to live. You are already druged for the pain. Your husband created a Will for the both of you before he died 20 years ago. Your daughter who is “holier than thou” is taking care of you and has a lawyer draw up another Will for you. Not being in your right mind, you sign the new Will. The sister has a grudge against two of the three brothers and had the lawyer design the Will to legally cut them out of any inheritance. She places the third brother in the family home free of charge. She does not probate the Will and drops everything just after your death. The brother in the home is forced to move away and leaves the home vacant. Should you have used a Trust as well as written a Will? What legal steps should the other members of the family have taken?
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In my life time, I have seen all these things happen. In every case, it destroyed the family. Here is the reason why I am bringing you information about Wills and Trust.

Below are several videos about Estate Planning and the attorney's that can help you.


Next we are going to start looking at terms that will help you talk to your attorney so that both of you can reach the objective that you want.

Saturday, January 15, 2011

Junk Bonds and Abbas Mahmood


Abbas Mahmood from Mombasa, Kenya loves Junk Bonds as well as I do. He writes financial articles in English and Swahili. Below is what he has to say about Non-investment Grade Bonds.

“In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.


Global issue of high-yield bonds more than doubled in 2003 to nearly $146 billion in securities issued from less than $63 billion in 2002, although this is still less than the record of $150 billion in 1998. Issue is disproportionately centered in the United States, although issuers in Europe, Asia and South Africa have recently turned to high-yield debt in connection with refinancings and acquisitions. In 2006, European companies issued over €31 billion of high-yield bonds.[1] 2010 is set to be a record year for European Junk Bond issuance, with as much as €50bn expected.


The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, and taxation adjustment risk. Interest rate risk refers to the risk of the market value of a bond changing in value due to changes in the structure or level of interest rates or credit spreads or risk premiums. The credit risk of a high-yield bond refers to the probability and probable loss upon a credit event (i.e., the obligor defaults on scheduled payments or files for bankruptcy, or the bond is restructured), or a credit quality change is issued by a rating agency including Fitch, Moody's, or Standard & Poors.


A credit rating agency attempts to describe the risk with a credit rating such as AAA. In North America, the five major agencies are Standard and Poor's, Moody's, Fitch Ratings, Dominion Bond Rating Service and A.M. Best. Bonds in other countries may be rated by US rating agencies or by local credit rating agencies. Rating scales vary; the most popular scale uses (in order of increasing risk) ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, with the additional rating D for debt already in arrears. Government bonds and bonds issued by government sponsored enterprises (GSE's) are often considered to be in a zero-risk category above AAA; and categories like AA and A may sometimes be split into finer subdivisions like "AA−" or "AA+".
Bonds rated BBB− and higher are called investment grade bonds. Bonds rated lower than investment grade on their date of issue are called speculative grade bonds, derisively referred to as "junk" bonds.

The lower-rated debt typically offers a higher yield, making speculative bonds attractive investment vehicles for certain types of financial portfolios and strategies. Many pension funds and other investors (banks, insurance companies), however, are prohibited in their by-laws from investing in bonds which have ratings below a particular level. As a result, the lower-rated securities have a different investor base than investment-grade bonds.


The value of speculative bonds is affected to a higher degree than investment grade bonds by the possibility of default. For example, in a recession interest rates may drop, and the drop in interest rates tends to increase the value of investment grade bonds; however, a recession tends to increase the possibility of default in speculative-grade bonds.


The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "fallen angels".


The investment banker Michael Milken realized that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organizing the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time.


In 2005, over 80% of the principal amount of high-yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.

In emerging markets, such as China and Vietnam, bonds have become increasingly important as term financing options, since access to traditional bank credits has always been proved to be limited, especially if borrowers are non-state corporates. The corporate bond market has been developing in line with the general trend of capital market, and equity market in particular.
High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.


How is Darnell Doing?


In the first two weeks of 2011, my portfolio has only increased .8% and over the past 23 months, increased 79.85%. The stock market has increased 1.59% in the last two weeks. So the stock market measured by the Dow is a head of me .79%. The Bull Bond Market is starting to get old while the stock market is starting to inflate. I expect the stock market to outperform my portfolio slightly in 2011.

Who is Reading my Blog?


From highest to lowest from December 16, 2010 to January 14, 2011, the countries are as follows;


1. United States
2. Slovenia
3. Russia
4. South Korea
5. Germany
6. Sweden
7. Croatia
8. Hungary
9. Poland
10. Singapore

Sunday, January 9, 2011

Investing in Umbrella Funds


Let me give my European and African readers some information about their investment schemes. An umbrella fund is an investment term used to describe a collective investment scheme which is a single legal entity but has several distinct sub-funds which in effect are traded as individual investment funds. It is similar to an open-ended mutual fund in the United States, while a sociedad de inversión de capital fijo or société d'investissement à capital fixe (SICAF) is similar to a closed-end fund. As in the case of other open-end collective investment schemes such as contractual funds, the investor is in principle entitled at all times to request the redemption of his units and payment of the redemption amount in cash.


The umbrella fund structure makes it cheaper for investors to move from one sub-fund to another and save the investment manager costs relating to regulatory duplication.
This type of arrangement originated in the European investment management industry, most notably with the SICAV (an open ended collective investment). The SICAV model was copied for the UK OEIC and offshore fund models. A SICAV is an open-ended collective investment scheme common in Western Europe especially Luxembourg, Switzerland, Italy, Spain, Belgium and France. SICAVs are increasingly being cross-border marketed in the European Union (EU) under the UCITS directive. Throughout Europe approximately €6.8 trillion are invested in collective investments. Of these funds about 76% are UCITS.


As I have found out, it is very hard to invest in investments in European and African Countries without investing in stock certificates. In the future, UCITS will make it easier world wide to invest in many European and African Managed Funds.
Who has been looking at the Blog; top 10 by country.
1. US
2. Slovenia
3. South Korea
4. Russia
5. Germany
6. Croatia
7. France
8. Hungary
9. Poland
10. Sweden