BORELLI CASE

PERSONAL INFORMATION AND BACKGROUND

Louie and Kathleen Borelli have been married for over 50 years and live on a ranch outside of Reno, Nevada. They have enjoyed a comfortable retirement for 20 years, living off the wealth created through Louies company, Borelli Casinos.

Sadly, last month, Louie was diagnosed with a terminal illness and is only expected to live another 12 to 18 months. Louie and Kathleen feel a sense of urgency around planning for the distribution of their estate to ensure that they minimize estate taxes and maximize the value of what will be left to their heirs.

Louie and Kathleen have two children, Jerry and Sal, who have continued their fathers legacy by working in the family business. Jerry serves as the CEO of the publicly traded organization, while Sal is a floor manager at the property in Las Vegas. Jerry currently lives with his girlfriend Irene in the penthouse suite at the casino in Reno. He does not have any children. Sal and his wife reside in Las Vegas and have a 22-year old daughter named Emily.

Last year, Louie confessed to Kathleen that about 20 years ago, he had an affair with another woman that resulted in the birth of a daughter named Ava. Ava works as a cocktail waitress in one of the companys casinos, and Louie has been secretly sending money to help with her financial situation.

NameRelationshipAgeOccupationHealthCommentsLouieHusband78RetiredTerminally Ill KathleenWife75RetiredExcellent JerrySon50CEO, Borellis CasinosExcellent SalSon47Casino Floor ManagerExcellentMarried, one childEmilyGranddaughter (Sal's Child)22Just graduated from collegeExcellentGetting married this summerAvaNon-marital child (Louie's child with another woman)20Cocktail waitressExcellentRelies on Louie for support

GOALS AND OBJECTIVES

1. Louie and Kathleen want to ensure the efficient transfer of their estate to their heirs.

2. Louie wants to make sure that Ava is not disinherited at his death.

3. Louie and Kathleen would like to give $20,000 in cash to Emily to help fund her wedding.

4. Louie and Kathleen would like to give their shares in XYZ Company to their neighbor whose child was recently killed in a car accident.

5. Louie and Kathleen would like to continue to support the nonprofit research organization that is looking for a cure for Louies disease, while maximizing their income tax deduction. They have set aside $175,000 in a savings account for this purpose.

INCOME TAX INFORMATION

Louie and Kathleen had an adjusted gross income of $185,000 last year and anticipate it will be the same this year. They made a $100,000 cash charitable contribution this year to the nonprofit research organization trying to find a cure to Louies disease. They are in the 28% marginal federal tax bracket for the current year.

ESTATE PLANNING INFORMATION

Louie and Kathleen live in a community-property state. Louie and Kathleens current wills leave all their assets to each other at their deaths. Jerry is the named executor in both wills. After Louie was diagnosed as terminally ill, he and Kathleen met with their attorney to discuss drafting new estate planning documents. The attorney has proposed that Louie execute a will in which his entire estate will pass to a testamentary marital trust with a QTIP election. The income from the trust would be paid annually to Kathleen, but she would be restricted to withdrawing principal only for her health, maintenance, and support.

At Kathleens death, the assets would pass equally to Jerry, Sal, and Ava, per stirpes. The terms of the trust do not give Kathleen the right to change the beneficiaries, but she can direct a different allocation of assets among the beneficiaries at her death.

The attorney has also recommended that while Louie is still in good mental condition, he and Kathleen both execute advance medical directives and powers of attorney for property and health care. Louie would like to have sole responsibility to take care of his finances and medical decisions until he is incapacitated. Louie wanted to make things as easy as possible at his death for Kathleen and Jerry so he prepaid his funeral expenses.

TRUST INFORMATION

Four years ago, Louie and Kathleen established a trust (called the children and grandchildrens trust) for the benefit of Jerry, Sal, and Emily. The trust must distribute income to Jerry and Sal during their lifetimes, with the remainder to transfer outright to Emily at their deaths. Louie and Kathleen transferred $4 million worth of their shares in Borelli Casinos to the trust. The gift to the trust was considered a split gift for gift tax purposes, and they each elected to allocate their applicable exclusion amount for generation-skipping transfer tax purposes.

Louie and Kathleen have no current or future rights with regard to the trust. Louie and Kathleen elected a representative at the local bank to serve as a corporate trustee over the children and grandchildrens trust. The trustee sold the stock in Borelli Casinos and allocated the proceeds to a portfolio of large-cap growth stocks that do not pay dividends.

The selected stocks are well diversified across all major sectors and industries, representing both U.S. and foreign companies. A reasonable administrative fee for the trustees services is paid directly from the trust. Each month the trustee sends a statement of the trust holdings to Jerry, Sal, and Emily.

To create parity between Ava and his other two children, Louie would like to transfer $2 million in shares of Borelli Casinos to a grantor trust for Avas benefit. The trust would pay income to Louie and Kathleen for five years, and then the assets would pass outright to Ava.

INVESTMENT ACCOUNT INFORMATION

Louie and Kathleen have one large brokerage account in which they accumulated assets during Louies career in the casino business. While Louie was working, he deferred $500,000 of his salary into his 401(k) plan. After his retirement, he rolled the assets into an IRA account that has since grown to be worth $1,100,000. Louie and Kathleen allocate the portfolios in both accounts 50% to equities and 50% to bonds.

INSURANCE INFORMATION

InsuredOwnerBeneficiaryFace AmountTypeCash ValueAnnual PremiumNotesLouieLouieKathleen$2,000,000Whole life$750,000$20,000Purchased 25 years ago

ANNUITY INFORMATION

Louie inherited a condo in downtown Las Vegas 10 years ago, worth $1,500,000, which he subsequently sold to Sal, in exchange for a single-life $55,000 annual annuity payment made at the beginning of each year. Sal has made 10 payments to date.

Louie and Kathleen BorelliProjected Cash Flow for the Current Year

Cash Inflows Portfolio income$100,000Social Security income$ 32,000Private annuity income$ 55,000 Cash Outflows Taxes (income and real estate)$ 25,000Lifestyle expenses$120,000Insurance premiums$ 20,000

Louie and Kathleen save any remaining income into their brokerage account.

Louie and Kathleen BorelliStatement of Financial Position as of December 31st Last Year

ASSETS Cash and Cash Equivalents Checking account$ 75,000Savings account$ 175,000TOTAL Cash and Cash Equivalents$ 250,000 Invested Assets Borelli Casinos company stock¹$ 20,000,000XYZ Company stock²$ 25,000Louie's IRA³$ 1,100,000Brokerage account$ 2,300,000Annuity⁵$ 800,000TOTAL Invested Assets$24,225,000 Personal Use Assets Nevada ranch⁶$ 1,400,000Cars$ 75,000Furniture and household items$ 250,000TOTAL Personal Use Assets$ 1,725,000 Total Assets$26,200,000 LIABILITIES AND NET WORTH Liabilities (none)$ 0TOTAL Liabilities$ 0 Net Worth$26,200,000

All assets are considered community property unless otherwise noted.

¹ The basis in the stock is $1,230,000. This amount represents 20% of all outstanding shares.

² XYZ is a publicly traded company. The basis in the stock is $56,000.

³ Kathleen is the named primary beneficiary. Jerry and Sal are the named contingent beneficiaries.

⁴ The basis in the brokerage account is $1,900,000.

⁵ See the Annuity Information section for details.

⁶ The land is worth $300,000. The basis in the property is $440,000. The mortgage is paid off.

Question

The trustee of the children and grandchildrens trust is considering some changes. If initiated, which of the following actions might be considered a breach of his or her fiduciary duties?

1. Reallocate the portfolio to diversified portfolio of 100% fixed income.
2. Maintain some exposure, approximately 6% in Borelli Casino stock with the large cap stock.
3. Inform the children and grandchildren of transactions through a periodic account statement.
4. Reducing the trust value through a fee for administrating the trust and for serving as trustee.