Trusts

April 1, 2014March 27, 2014

3 Estate Planning Mistakes From Which To Learn

If you haven’t already done your estate plan, perhaps hearing a few horror stories about people who made common mistakes will prompt you to do it — and do it right.

Last Will And Testament (Photo credit: Ken_Mayer)

An article in the Green Bay Press Gazette, recounts a few cases that detail classic mistakes involving estate planning, or the lack of it.

A former Supreme Court justice wrote his own will, using just 176 words. It cost his family $450,000 in estate taxes and court fees because he didn’t take the time to do it right.

Lesson: Know what you know, know what you don’t know.

A young woman left her assets to her minor son. When she died, she had $1 million in her estate due to a wrongful death claim. Her son died soon afterwards and the money went to his only heir, his father, who was a drug addict.

Lesson: She could have put the assets into trust with a contingency plan were he to die, so the money could not go to the father.

A father had a stroke and had to go into a nursing home. His children closed his bank account but never went through his mail. After he died, they found a statement for a $1 million life insurance policy. But the premiums had not been paid since the bank account was closed. They didn’t get the money.

Lesson: Make sure somebody knows what assets you have, usually the person who has power of attorney, a trustee named in a trust you have set up or the personal representative named in your will.

These are common mistakes that can be avoided if you engage a qualified estate planning attorney to help you with your estate plan.

March 26, 2014March 25, 2014

Some Strategies To Shield Your Money

If you wish to protect your money or assets or are about to receive a sudden windfall such as an inheritance, you may want to consider a number of strategies to protect yourself from lawsuits. Simple reason: “The Deep Pockets Theory”; the people with the money are the people who are sued.

judge hand with gavel — (Photo credit: SalFalko)

Here are a few strategies, according to an article in the Chicago Tribune:

1) Increase your liability insurance. If you are about to inherit $3 million, call your broker and increase your liability policy to protect that additional $3 million. Do it before you get the money. Rates are inexpensive.

2) Consider separating assets. You may not want your spouse to have access to your new windfall. If you put the money in a joint account, that is what will happen.

3) Protect yourself from renters. If you have rental property or are going to get rental property, put the property into a business entity such as an LLC to shield your assets from a disgruntled tenant. That way, they can sue the entity for what it has, but cannot go after you and what you have.

4) Create a trust and/or business entity to shield your assets. If you do part-time work you probably are operating as a sole proprietorship. But all of your assets are at risk if you are sued.

5) Be careful with partnerships. If you have an informal partnership, you are responsible for the actions of your partner. Form an LLC or other entity to provide legal protection.

March 11, 2014April 10, 2014

‘Gifting’ May Be Penalized By Medicaid

While people can “gift” up to $14,000 each to anyone they want to each year without tax penalty, that tactic is not going to fly if it is being done to “spend down” in order to get Medicaid to pay for nursing home care.

If a person is “gifting” money to family or friends in order to spend down to reach the resource limit for Medicaid nursing home coverage, it better be done five years ahead of time, according to an article in the New York Daily News.

Gifts made within five years of applying are likely to disqualify the gift giver from obtaining coverage for a period of time based on how much was given. The larger the gifts, the longer the wait.

Medicaid will presume the gifts were made to get around the criteria for coverage.

The penalty period is likely to be in place even if the gifts were put into a trust.

Because Medicaid planning and the use of trusts is complex, the article suggests consulting with a qualified estate planning or elder law attorney.

March 6, 2014March 11, 2014

Florida Court Ruling Provides Guidance For Those Using Trust For Asset Protection

A recent appellate court ruling in Florida gives former spouses the legal grounds to take funds from a type of trust that was thought to be unavailable to them.

Discretionary trusts are set up by the wealthy to give a trustee the authority to make or not make distributions from the trust. But the ruling late last year in Florida gives ex-spouses and the children of beneficiaries more leeway to gain access to those funds in certain circumstances.

However, estate planning experts are divided over whether this ruling establishes a precedent for other states, according to an article on fa-mag.com.

In this case, Bruce Berlinger challenged a lower court ruling that allowed his ex-wife, Roberta Casselberry, to obtain funds from a discretionary trust fund after he stopped paying her $16,000 a month alimony. The trust had been paying the money directly to her and not to him.

Usually, a creditor may not garnish funds in a discretionary trust if the trustee does not make the distributions to the beneficiary. In this case, the court ruling the ex-spouse was deemed to be an “exception creditor “and could seek distributions from the trust to satisfy her alimony requirements.

About 30 states have some form of “exception creditor” provision in their trust codes.

March 5, 2014March 5, 2014

Hoffman’s Will Raises Legal Issues

Actor Phillip Seymour Hoffman, who died of a drug overdose in February, had not updated his will in years. The mistake could prove troublesome for two of his daughters and their mother.

Philip Seymour Hoffman won a Academy Award for... — Philip Seymour Hoffman (Photo credit: Wikipedia)

The will was signed in 2004 when the actor had just one child, Cooper, now 11. But he subsequently had two daughters, Tallulah and Willa, neither of whom are mentioned in the will.

This may or may not be a problem.

The award-winning actor, who was just 46 when he died, left everything to his longtime companion, Marianne O’Donnell, the mother of his three children. But that’s just the beginning of the story, according to an article on Forbes.com.

Since Hoffman and O’Donnell were not married, she does not get any of the estate tax breaks available to spouses. You can give an unlimited amount to your spouse during life or in an estate plan, with no federal or state tax applied.

Hoffman was worth an estimated $35 million at the time of his death. The federal estate tax exemption is $5.3 million, but the rest is taxed at up to 40 percent. New York has its own estate tax of up to 16 percent for non-spouses, with a $1 million exemption.

In all, Hoffman’s estate will be taxed at more than $15 million. And since they were not married, any assets that remain at O’Donnell’s death would be taxed again.

There may be a way out for O’Donnell, however, The will allows for her to turn down all or part of her inheritance and put it into a trust. Any assets that go into the trust bypass her estate and cannot be taxed when she dies.

But the fact that only Cooper was mentioned in the will, complicates the matter. The will provides that he get half the principal of such a trust when he turns 25 and the other half when he turns 30. However, the law of New York and most states protects children not named in a will that has not been updated from being disinherited.

The article suggests that O’Donnell, who is the executor of the will, should appoint a guardian to represent the two sisters.

Other matters that could complicate matters include if Hoffman had set up a retirement account or a life insurance policy.

But all the confusion could have been avoided if Hoffman had included a clause in the will stipulating that any reference to Cooper includes any other children born after him.

February 18, 2014February 14, 2014

Tax Avoidance Scheme for Wealthy: Move Assets Across State Borders

Not all states are created equal when it comes to income taxes. As part of their estate planning and asset protection schemes, wealthy Americans are taking advantage of this inequality by moving billions of dollars’ worth of assets to newly created trusts in states that do not impose income taxes. A recent article discusses this tax avoidance scheme.

The scheme is similar to that employed by large corporations that move operations or assets overseas to avoid or reduce taxes. Popular states for tax avoidance include Delaware and Nevada. The legislatures for both states have passed laws in order to make their state more appealing for wealthy Americans considering moving their trusts. While Nevada has no state income tax, Delaware allows out-of-state beneficiaries to avoid income tax liability.

Estate planners shifted their focus to income tax avoidance after Congress significantly narrowed the field of individuals who will be responsible for paying federal estate tax. Currently, federal estate taxes only apply to those who have an estate with a total value of $5.34 million.

However, this practice is not without scrutiny. Officials in the state of New York are particularly concerned, as this practice drains an estimated $150 million per year from the state. Recently, a New York tax commission recommended laws that would limit the use of out-of-state trusts.

To evaluate your options in setting up a trust, please contact us at 732-521-9455.

February 6, 2014February 6, 2014

It’s Good Enough for Walmart: Tax Avoidance with a GRAT

Billionaire Sheldon Adelson is not alone in his disdain for estate taxes. As one of the world’s richest men, Adelson has the ability to hire top attorneys and advisors to employ financial and estate planning tools that ensure his estate pays little or no taxes. One of these tax avoidance tools is the Walton grantor retained annuity trust (“GRAT”). A recent article discusses the use of this popular trust.

Named after Walmart heir Audrey Walton, the Walton GRAT is a popular tool used by the wealthy to avoid estate taxes. Essentially, a Walton GRAT works by rapidly transferring large quantities of stock into a trust fund that requires that the initial investment be returned after two years. If the stock gains value while in the Walton GRAT, the additional value will be left over in the trust. The trust can then transfer the remaining value to a third party without incurring gift tax liability.

Recognizing this loophole, the government sued Audrey Walton for using a similar scheme in 1993. The court ruled in Walton’s favor, thereby legitimizing and nicknaming the Walton GRAT. Since then, many wealthy individuals – such as Facebook chief executive Mark Zuckerberg and Goldman Sachs chief executive Lloyd Blankfein – have benefited from their own use of the Walton GRAT.

January 30, 2014January 29, 2014

3 Steps for Baby Boomers Without a Plan

While every mentally competent individual over the age of 18 should have an estate plan in place, it is especially important that Baby Boomers without a plan begin to put something together. A recent article offers several estate-planning strategies for baby boomers to begin planning:

1. Create a Will and Trust: No matter what type of estate planning scheme a person employs, he or she should incorporate a will into that scheme. Within a will, a person can designate a guardian for his or her minor children, as well as the distribution of personal items such as heirlooms and valuable items.

2. Designate a Power of Attorney: A power of attorney is a vital document for any estate plan, because it allows you to designate a person to handle your financial and legal affairs should you be involved in an accident.

3. Create a Health-Care Power of Attorney and Living Will: Just as a power of attorney allows an individual to designate the person who will handle his or her financial and legal affairs in the event of an accident or emergency, a health care power of attorney allows an individual to designate the person who will make medical decisions on his or her behalf.

January 23, 2014January 29, 2014

Review Your Financial and Estate Planning Goals for 2014

A recent article quoted financial planner Michael Joyce as saying, “There’s nothing magic about reviewing goals […], but it is a good time to refocus people on their financial goals.” Joyce’s statement could not be moretrue. It is good practice to periodically review financial and estate planning goals, and the end of the year or the beginning of a new year is a great time to check this off of the to do list.

English: Picture I made for my goals article — (Photo credit: Wikipedia)

Individuals should begin their review by checking the beneficiary designations on their retirement accounts, life insurance policies, 401(k) plans, and any other account with a beneficiary designation. It is important to not only ensure that a beneficiary has been named, but also that the named beneficiary is still appropriate.

Additionally, review the provisions in your will and trust documents. Consider whether any provisions need to be changed, added, or omitted. This is especially important if you have experienced a marriage, divorce, or the birth or death of a loved one since you first signed your will.

Individuals should also consider any tax law changes that will impact their assets. Tax laws are in constant flux, so a periodic review of applicable laws is the best way to plan to reduce anticipated taxes. This review should also include a review of gift tax limits, which may encourage an individual to increase year-end gift-giving in order to achieve a greater tax benefit.

January 22, 2014January 20, 2014

Trusteed IRAs to Assist Your Heirs in Managing Their Inheritance

The fear that a person’s adult children will mismanage their inheritance is not uncommon. Luckily, the field of estate planning offers many tools to assist parents in ensuring that this does not happen. As a recent article explains, one of these tools is the trusteed IRA.

A trusteed IRA combines a traditional IRA with the benefits of a trust account. Importantly, the owner of a trusteed IRA can more confidently leave his or her account to his or her heirs, as the trusteed IRA provides a long-term distribution plan for making withdrawals. Chief fiduciary officer of U.S. Bancorp Sally Mullen explains that “for clients who want to control what happens after their death, this is an interesting and attractive vehicle.”

Before selecting any estate planning device, it is important to understand the risks associated with various devices. A trusteed IRA presents two major risks: (1) the trusteed IRA could end up with a higher tax liability than the heirs would have otherwise been responsible for, and (2) the IRS may determine that the trust is not a “see-through” or “conduit” trust, meaning that his or her heirs would not be able to take the stretched-out withdrawals as planned.

January 15, 2014January 15, 2014

The Biggest Estate Planning Mistake You Are Probably Making

An estate plan is not one document. Rather, it is a collection of various documents that deal with a wide variety of assets, and leave instructions for various situations. An important part of any estate plan is a person’s beneficiary accounts. As a recent article explains, one of the most widespread estate planning mistakes occurs when people fail to update their beneficiary designations.

Beneficiary accounts such as IRAs, retirement accounts, insurance policies, mutual funds, bank accounts, brokerage accounts, annuities, and 529 college savings plans are accounts that are transferred to a designated beneficiary immediately at the death of the account holder.

Importantly, a person’s will or trust does not trump his or her beneficiary designations. For example, if a divorced man failed to take his ex-wife’s name off of his retirement account before he died, the proceeds of the account would go to his ex-wife. This would be the outcome even if he clearly stated that the ex-wife was to be disinherited in his will.

It is good practice to update your beneficiary designations once every few years and after important events, such a marriage or divorce.

January 7, 2014January 8, 2014

Leaving the Vault Open: A Revocable Trust Will Not Protect You From Creditors.

One popular misconception concerning estate planning is that any trust will protect an individual’s assets from creditors. However, as a recent article explains, this is not true. If you are considering incorporating a trust into your estate plan as an asset protection tool, it is important to understand which trusts will actually provide asset protection.

As the title suggests, a revocable living trust will not protect trust assets from creditors. The primary purpose of these trusts is preserve privacy & ease the transfer of wealth by keeping a person’s assets out of probate, which often saves a family time and money. If you have a revocable living trust, it is important to realize that creditors can reach the assets within that trust. This is because you never fully relinquish control of your assets in a revocable trust so you are still considered the legal owner.

If you are interested in incorporating a level of asset protection into your estate plan, consider using an irrevocable trust, or in some cases, as Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC). In contrast to a revocable living trust, an irrevocable trust, FLP and FLLC will protect your assets from creditors. This is because the trust or entity creator is not considered the owner of the assets held in the trust or entity. The trade off, however, is that you may relinquish direct total control of the assets placed in the trust (although, if done right, you may still exercise indirect control.)

December 17, 2013January 3, 2014

Using a Trust to Protect Your Legacy

For parents of minor children, passing assets on to their children cannot be the only focal point of estate planning. Rather, parents must have a plan for the management and control of these assets until the children are old enough to handle them responsibly. A recent article discusses how trusts accounts can be used to accomplish this goal.

Even if your children are no longer minors at the time of your death, they still may be unable to responsibly handle an inheritance. There are a number of reasons that this may be the case, such as immaturity, substance abuse, or mental incapacity. Additionally, parents who leave their children particularly large inheritances tend to spread them out until the children reach age 25 or 30.

No matter how you choose to structure the distribution, the simplest way to do so is through a trust. When creating the trust, you can select a person to manage and distribute the assets for your children (a “Trustee”). Additionally, you can leave detailed instructions for the trust to ensure that the assets are distributed the way you would have wanted. For example, you can specify that funds will not be released until a child is 25, unless he or she needs them for college tuition.

Furthermore, a parent can design the trust so that he or she retains access to all assets within the trust during his or her lifetime. That way there is no worry that the assets are being given up too soon. Finally, during the life of the trust, it can provide the added bonus of protection against divorcing parents, creditors, plaintiffs, and business risks.

December 12, 2013December 11, 2013

How to Plan for, or Avoid, Transfer Taxes

As a recent article suggests, estate planning encompasses a lot more than most people would think. Not only does estate planning allow you to structure the final distribution of your assets upon your death, but it also allows you to provide for the management of your assets during life, plan for the care of your children, and make important decisions about what kind of medical care you would like to receive at the end of your life. Although estate planning encompasses all of these things, most people come to the table with an overwhelming goal of avoiding transfer taxes, namely Estate Taxes, Inheritance Taxes and Gift Taxes.

There are plenty of ways that estate planning can be used to minimize the tax liability an estate will face after the owner’s death. In many situations, it is possible to plan for zero estate taxes. Some strategies involve giving up control of certain assets. For example, a person could zero out their tax liability by setting up a charitable trust. Others, such as Family LLCs (FLLCs) and Family Limited Partnerships (FLPs) allow owners to maintain more control..

For the ultra-wealthy, there are many sophisticated asset transfer mechanisms that can be used to avoid transfer taxes. These mechanisms include foreign grantor trusts, dynasty trusts and private placement trusts. Again, these mechanisms often mean that a person has limited or no access to the assets within the trusts.

For those who want to maintain full control of their assets, life insurance is another way to provide money for anticipated taxes. These policies are often used to provide quick cash for a person’s heirs to pay any taxes and fees on the estate.

December 10, 2013January 3, 2014

Separate Accounts From Your Spouse? Avoid This Asset Protection Pitfall!

It is becoming more commonplace for spouses and cohabitating unmarried couples to keep their financial accounts separate. While this strategy has many advantages, it comes with at least one (avoidable) asset protection pitfall. A recent article discusses what this pitfall is, and how you can avoid it.

As the article explains, tangible property that is jointly held between two spouses has an automatic layer of protection against plaintiffs and bankruptcy creditors in most states. This protection comes from the fact that plaintiffs and creditors often will not pursue tangible assets that they can only gain a half interest in. Most often, tangible assets must be liquidated in order to be of any benefit to a creditor or plaintiff. However, this would be impossible if, for example, a creditor and your spouse are half owners of your home.

Alternatively, tangible assets that are owned separately are considered fair game because the creditor or plaintiff can pursue the entire interest. However, this problem can be easily solved through the use of trust accounts. If spouses would like to keep their assets separate, they can each create a trust account to hold the assets. This will not only protect the assets from creditors and plaintiffs, but it can also facilitate the transfer of the assets upon either spouse’s death.

November 26, 2013November 26, 2013

Three Investment Structures for Asset Protection & Tax Planning

There is no one-size-fits-all asset protection strategy. Rather, asset protection needs to be completed for each individual or family and is based on particular needs. A recent article discusses different investment structures that may be part of your asset protection scheme.

Personal Ownership: Personal ownership of assets may work for individuals and families who have a low marginal tax rate. Additionally, personal ownership is important for those who require unrestricted access to their assets. However, personal ownership cannot protect assets from creditors. Therefore, if one anticipates facing personal liability in a lawsuit or divorce, one should consider implementing some level of asset protection planning.

Company Ownership: Individuals or families can also own assets through various business forms. These are common for families in high marginal tax rates, and those with large family trusts. Through company ownership (typically an LLC, a Corporation or a Partnership), a family can protect important assets from creditors, and pass them on through the generations.

Trust Ownership: Placing assets in a trust is popular for its ability to protect assets against creditors, maximize tax-effectiveness, and ultimately be used as an estate planning vehicle. When putting assets into a trust, it is important to carefully select the terms of the trust based on your use of the assets.

November 12, 2013November 20, 2013

Before Kramer vs. Kramer: Protecting Assets Following Divorce

One of the greatest threats to an individual’s wealth is divorce. With the chance of a successful marriage hovering at or below 50% in the United States, it is important that individuals consider asset protection strategies before marriage. A recent article discusses how one man used a “Collapsing Bridge Trust” to protect his assets against a messy divorce.

The man, let’s call him Fred, who was worth $150 million and facing divorce, contacted his father’s attorney in an attempt to shield his assets from his soon to be ex-wife, let’s call her Wilma. The attorney quickly created a “Collapsing Bridge Trust,” which proved successful in protecting Fred’s assets from the divorce.

In order to do this, Fred’s attorney first created an offshore asset protection trust. These trusts are often set up in places such as the Cook Islands or Belize. Next, the advisor created a Domestic Limited Liability Company owned entirely by the new offshore trust. Fred’s attorney then moved half of Fred’s assets into the LLC, and named the man as the manager. Although this meant that Fred no longer owned the assets, Fred was able to oversee their management and investment.

If Wilma attempts to access the assets within the trust, the collapsing bridge provision would come into play. Essentially, the offshore trust would collapse the LLC, which would revert the assets in the LLC to the trust. In the trust, the assets would have been unreachable by Wilma.

As with any Asset Planning, timing is everything. Be careful to consult with your attorney to ensure that any such plans do not run afoul of Fraudulent Conveyance rules.

October 22, 2013October 22, 2013

Calling an Audible: Avoiding Taxes Caused by a Bypass Trust

Since estate-planning maneuvers can cause unintended consequences, it’s important to plan with flexibility. A recent article discusses how one man dealt with the unintended consequences of a bypass trust he inherited from his wife before it was too late.

Bypass trusts are a very common estate-planning tool used to pass wealth to several generations. Angie Stephenson, partner at ParenteBeard Wealth Management LLC, explains that “these [bypass] trusts were common years ago when the estate-tax exemption was much lower, so you see them in many wills.”

When this particular man’s wife passed away, he received a bypass trust worth $730,000. In creating the trust, his wife’s intentions were that the trust provide him with income for the remainder of his life, and then distribute the remaining assets to their children. The problem was that when the children receive the remaining assets, they would also receive a large bill for capital gains taxes.

Through planning, the man was able to work out a way to include the trust assets into his estate, thereby eliminating the capital gains tax liability for his children. In order to accomplish this transfer, the man was granted the power of appointment over all assets held by the trust. Importantly, this maneuver gave him control over the assets which would then be considered as part of his estate upon his death. Such a result illustrates the benefit of planning with flexibility.

October 9, 2013October 9, 2013

What Goes in the Bucket? (i.e. What Can I Use to Fund My Trust?)

Aside from an individual’s Last Will and Testament, a trust is probably the most popular estate planning tool. Trusts, which come in various forms, are often used as a vehicle for tax avoidance. Assets in certain Irrevocable Trusts often avoid taxation because, by putting them in such a trust, the owner relinquishes ownership of the assets to a trustee.

When considering whether an estate plan should incorporate a trust, it is important to consider what type of assets within the estate may be transferred to the trust. A recent article discusses certain types of trusts, and the assets that they hold. This is NOT an exhaustive list, but rather a ‘sampler’ of sorts.

Property and Land Trusts: These trusts can hold any sort of property or real estate, such as your residential home or an investment property.
Financial Asset Trust: This type of trust can hold a multitude of financial assets, such as stocks, bonds, and shares.
Life Insurance Trust: This type of trust holds a life insurance policy that is ‘written into trust.’ A life insurance policy that is ‘written into trust’ will be paid out to the trust, rather than an individual.

Many other assets, such as Business Interests (even S Corporations), Hotel Investments and Personal Property, can be written into appropriate trusts as well.

October 3, 2013

Planning With a Baby on Board

The birth or adoption of a new child is a frenzied and joyous time in the parents’ lives. Understandably, estate planning is often the last thing on the minds of expectant parents. However, as a recent article explains, certain parts of estate planning are essential for a growing family. Expectant parents should consider at least the following two questions, and plan accordingly before it is too late.

Who Would You Trust to Care For Your Children?

Should the unthinkable happen and neither you nor your partner are able to care for your children, it is important that you have a plan in place. If you do not designate a guardian for your children, or the guardian you have designated declines to serve, the court will select the person who will care for your children. This may or may not be the person that you would have chosen.

Do You Have Life Insurance?

Life insurance is an important part of the estate of many parents. Life insurance provides a guaranteed sum of money that can finance the care of your spouse and children. For extra protection, you can designate that if you and your spouse pass on before your children reach the age of majority, the money will be kept in trust and distributed only by a designated trustee. You can further designate that, should you die after your children reach the age of majority, they can simply receive the sum outright or in installments at various ages such as 21, 25, and 30. Yet another popular option is to allow the money to stay in trust forever to maximize asset protection, while ensuring financial needs are met.

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Category: Trusts