#TuesdayTips: Utilizing Asset Protection Trusts

To utilize an Asset Protection Trust you must Assess your needs; Create what is missing; and Tie in your plan.  In other words, you must ACT!

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By: Jessica L. Estes, Esq.

If you read last week’s #TuesdayTips article, you learned how to protect your stuff in three easy steps: 1) know the rules; 2) know your predators; and 3) know your options.  Easy, right?  But, knowing is only half of the equation.  Now, it is time to: Assess your needs; Create what is missing; and Tie in your plan.  In other words, you must ACT!

Protecting your stuff starts with an assessment of your needs, which, in turn, requires careful consideration of your goals and values.  Typical goals of an estate plan include maintaining control and not becoming a burden to loved ones, all the while keeping it as simple as possible.  Most people would agree that protecting their stuff from future long-term care costs, is important to them.  That way, they maintain control of the assets, protecting them after they are gone for the benefit of their loved ones, while at the same time, minimizing the costs of such long-term care and the burden to their family while they are alive.

So how, exactly, does an asset protection trust work? First, there are three parties to a trust – the grantor, trustee and beneficiary.  The “grantor” is the person who is transferring his or her assets to the trust.  The “trustee” is the person who manages and administers the trust in accordance with the trust provisions.  The Trustee is responsible for making all decisions regarding the trust, including any management or investment decisions, as well as deciding whether to make distributions from the trust.  The “beneficiary” can be a single person, multiple people or an entity such as a church or charity.  There are two types of beneficiaries: “lifetime” beneficiaries and “residuary” beneficiaries.  “Lifetime” beneficiaries are those individuals named by the grantor who are entitled to receive distributions of income and/or principal during the grantor’s lifetime.  The “residuary” beneficiaries are those individuals named by the grantor who are entitled to receive distribution of the trust assets after the death of the grantor.

After the trust is established, your assets must be transferred to the trust and the trust will become the owner of the assets.  Even though you will no longer own the assets, you maintain control of them because you are the trustee.  The plan must, of necessity, though, limit direct access to the principal to ensure that creditors, predators and lawsuits do not obtain access to it.  Still, the trust can provide indirect access to the principal during the remainder of your life through your designated lifetime beneficiaries.

Finally, upon your death, and because the trust is a separate entity, any assets owned by the trust would bypass probate and could be distributed immediately to your residuary beneficiaries.  Overall, irrevocable asset protection trusts are not only a great way to protect your stuff, but also can be very flexible and easily customized to meet your individual goals.

Call ERA Law Group, LLC today at (410) 919-1790 to learn more!

 

#TuesdayTips: Asset Preservation in 3 Easy Steps

Asset preservation is simple; all it takes are three easy steps.  First, know the rules.  Second, know your predators.  Third, know your options. 

By Jessica L. Estes

Asset preservation is simple; all it takes are three easy steps.  First, know the rules.  Second, know your predators.  Third, know your options.

There are two sets of rules: rules that apply during your lifetime and rules that apply after your death.  During your lifetime, your named financial and health care powers of attorney will be able to act for you with respect to your finances and medical/end- of-life decisions, respectively.  These are your rules.  If you do not have these powers of attorney, you should get them; otherwise, your loved ones will have to apply for legal guardianship of you.  Not only does this require certificates of incompetency from two doctors, but it also requires a hearing and/or trial, which can be costly.  And, the court will be involved in your finances and health care decisions until you die.  Guardianship is the government’s rules.

After your death, your Last Will and Testament will take effect and your personal representative, or executor, will distribute your assets to your beneficiaries.  The Will represents your rules, but the Will must be probated, which is a legal process involving court oversight (or, the government’s rules).  Again, this can be costly, ranging from 5% to 20% of the total value of your estate according to AARP, and the personal representative cannot distribute assets to the beneficiaries for a minimum of six months.  Also, probate estates are available for public inspection.  Rather than a Will, you may want to consider a trust, which would bypass the probate process and the government’s involvement.

Now that you know the rules, you need to be aware of your predators.  They include the government (i.e., guardianship, probate, and taxes), long-term care costs (i.e. in-home care, assisted living and nursing homes), family (e.g. a spouse that requires long-term care or a child that is a spendthrift), and lawsuits, either yours or your beneficiaries.

Finally, your options – use the government’s rules or make your own.  By drafting your documents in a way that assures: 1) you are in control, 2) you decide who benefits from your estate plan and 3) you direct when and under what circumstances (e.g. while you are alive and well, incapacitated, and deceased) such benefits are distributed, you have created a proper estate plan that protects not only you, but your family as well, during your lifetime and after.   And remember, most people have documents, but not a plan.  To create your plan today call ERA Law Group at (410) 919-1790!

#TuesdayTips: Charitable Remainder Trusts

It’s that time of year again… the hustle and bustle of the holidays are upon us!  If you are like me, you may still be searching for that perfect gift for everyone on your list.  Perhaps this year, as you make your list and check it twice, you may want to consider a charitable remainder trust.

It’s that time of year again… the hustle and bustle of the holidays are upon us!  If you are like me, you may still be searching for that perfect gift for everyone on your list.  Perhaps this year, as you make your list and check it twice, you may want to consider a charitable remainder trust.

A charitable remainder trust is an irrevocable trust that allows the donor, or anyone else you name, to receive each year either a fixed dollar amount from the trust or a percentage (at least 5%) of the value of the trust.  The right to receive this distribution is either for the individual’s lifetime or for a period of years not to exceed 20 years.  At the end of the term, the amount remaining in the trust is distributed to a qualified charity.  Generally, a qualified charity is one that has been deemed tax-exempt by the Internal Revenue Service.

Moreover, the charity will serve as trustee of the trust and will be responsible for investing and managing the asset(s) to produce income for you.  Because the charity is also the remainder beneficiary, it has an incentive to increase the value of the trust, which in turn, benefits not only the charity, but you as the income beneficiary of the trust.

In addition to the income benefit, there are three primary tax benefits.  First, after you have transferred the asset(s) to the trust, you may take an income tax deduction, spread over five years.  You are not, however, allowed to deduct dollar for dollar the amount that you gave.  Rather, you are only allowed to deduct the amount of the “gift,” which is the amount donated less the amount of income you are expected to receive.  Second, whatever the charity receives at the end of the trust term, is not subject to estate tax.  Similarly, the donation will not be subject to gift tax based on the amount the “gift,” unless the income beneficiary of the trust is someone other than the donor or their spouse, in which case, there may be a gift tax imposed on the amount of income that is paid to the income beneficiary.  Lastly, because the charity is tax-exempt, there is no capital gains tax on the sale of the asset(s) in the trust.  So, you can turn non-income-producing property that has increased significantly in value from the time at which you acquired it, into cash without having to pay capital gains tax on the profit.  This enables you to invest the full proceeds of the sale into an income-producing asset.

Further, you can elect to have either fixed annuity payments or a percentage of the current value of the trust.  If you choose the fixed annuity, you will receive a fixed dollar amount each year.  This is beneficial if the trust has a lower than expected income return because you will still receive your fixed payment.  Sounds great, but be careful.  The higher your annuity is, the lower your income tax deduction.  Also, if the trust does not generate enough income to cover your annuity payment, then the trust’s principal will be used.  The more principal that is used, the less likely it is that the charity would receive anything at the end of the trust term and consequently, the less likely it is that the charity would accept your donation in the first place.

Conversely, if you elect a percentage of the value of the trust, your payments will reflect any gains or losses in value of the investments each year.  And, it is important to note, that once a decision is made, you cannot change it later.  If you are considering a charitable remainder trust, call ERA Law Group, LLC at (410) 919-1790 before making a final decision.  Happy gift giving!