When selecting a Trustee the most important qualities are honesty, stability, dependability, organization, financial experience, and ability to devote time and energy on an impartial basis for the benefit of all Beneficiaries. The Trustee is the most pivotal and critical part of any Trust Agreement.
Selecting a trustee is very important. So choose wisely. Read on to learn the aspects that constitute a trust and how selecting a trustee should be decided upon by you.
The Concept of a Trust Agreement
A Trust is a written contract between the Grantor and the
Trustee for the benefit of all Beneficiaries which can include the Grantor and anyone else he chooses including spouse, children, grandchildren, friends, or charities.
A Trust can be created during one’s life or by will upon death. A trust that is created at death by virtue of a will, is referred to as a Testamentary Trust by the “Testator” (the dead guy). A trust created during the life of an individual is referred to as, the “Settlor,” the “Grantor,” or “Trustor.” The Trust instrument is referred to as “inter vivos” formed during the life of its creator.
A Trust is an integral part of any estate plan for the purpose of avoiding the Probate Process, minimize the impact of taxation on the transfer of wealth from one generation to another or from one individual to another, or to protect against unwanted and unpleasant potential events like a lawsuit. A Trust can financially provide for a spouse, a minor child or children or yet unborn children, an incapacitated or disabled person, or for persons incapable of managing their financial affairs. A Trust must have enough provisions to adapt itself way beyond the life of the grantor(s) and the Trustee is at the center of the goals of the Trust creators.
Once a Trust is created, the Trust becomes the new legal titleholder of assets either transferred to the Trust, as a gift or as a sale. In order to avoid fraudulent conveyance, the individual giving up his legal right to possession or title and the right to own must in return receive equal fair cash value at the time of the transfer. Otherwise, it’s a “fraudulent transfer” to the detriment of all potential creditors or it’s a gift subject to a gift tax.
The Gift Tax on Taxable Gifts
The gift tax applies to the fair cash value given up at the time of the transfer (not the amount that was originally paid). Taxable gifts are reported on IRS form 709, taxable to the person giving up the right of possession by gifting his assets. The person receiving the gift (in this case the Trust) always receives the gift Tax Free. (Note: the person receiving the gift always obtains it tax-free and the person giving the gift is always taxed on it unless it’s less than $12,000 per person beginning in 2006).
Trustee’s Power Derived from Grantor
A Trust can be revocable or irrevocable, grantor or non-grantor. Revocable is when the “Grantor” retains a power to “void” the Trust Contract. Irrevocable is when the Grantor “severs” all power of possession, the legal title to own the Trust. The concept of “possession” is the legal right to own and vested exclusively to the TRUSTEE. The Trustee’s power is derived from the Grantor(s) by a written agreement (Trust Agreement). The most important person is therefore the Trustee.
Consequences When Grantor Names Himself Trustee
If there is a provision in the Trust Agreement for the Grantor to name himself as the Trustee for his list of Beneficiaries, which includes himself, then he runs the risk of frivolous liability and harsh tax consequences since he has elected himself the Pope by blessing himself and kissing his own ring.
Factors to Consider When Choosing a Trustee:
A true Trustee is an independent person not related to the Grantor(s) by blood or marriage or is an independent trust company, bank, or corporate body. The selection of a Trustee is the most significant part of any Trust Agreement.
When choosing a Trustee, several factors should be considered:
- Location of the assets. Real estate, for example, has a definite location and the Trustee more familiar with the financial and tax implications of the property should be given weight.
- The individual Trustee’s physical location (home address) in relation to the Beneficiaries.
- The types of assets. Tangible or intangible, cash or near cash.
- Relationship of the individual Trustee to the Grantor’s family.
- An understanding of the intra-family dynamics of all the Beneficiaries.
- Familiarity with the financial management of himself and others he may employ.
- The financial ability and level of experience with the assets entrusted.
- If it’s a family business, the nature and familiarity of the business.
- The willingness and vitality to serve as an impartial fiduciary.
- The legal capacity to interpret and administer the agreement fairly to all Beneficiaries.
- The willingness to accept the appointment and the willingness to accept potential legal liability from disgruntled beneficiaries.
- Succession planning for a successor Trustee.
Some Bad Trustees
When choosing a Trustee that is intended to last longer than the life of the original Grantors certain types of Trustees may not be the best qualified to serve.
- Corporate Trustees or Trust Companies. For the most part, these types of Trustees are nothing more than business robots driven by numbers staffed by individuals who have no connection to the Grantors or the Beneficiaries. They administer the Trust assets but they lack the sensitivity of the people they are hired to serve. Generally, they are very slow in responding to the needs of Beneficiaries and usually react in the interest of the Trust Company not their clients.
- Banks as Trustees. They are too slow in making decisions, are ultra-conservative, and always afraid to make decisions without first consulting their legal department. They have self-preserving motives and generally have no clue or understanding about the individual family dynamics of the people they are intended to serve.
- Lawyers are very up on the ins and outs of legal maneuvers and they have been trained to handle legal matters but generally have no financial experience or expertise in the management of assets. Even when they hire others in those financial roles, they are usually way too expensive and in some cases, they make the assets their life’s insurance policy.
- Accountants are good at keeping scores but generally lack visibility into the future. They have been trained to accumulate information but very tunneled visioned to make investment decisions. While there are notable exceptions to lawyers and accountants, generally they lack qualities to administer and provide full service or to take legal liability to serve as Trustees.
- Family members as Trustees. It’s not a very good idea to have a family member become the Trustee of anything. The problem is mistrust. If you want to watch a family tear itself apart when it comes to money, especially with lots of money, you can go to family court or watch Anna Nicole Smith’s made-for-TV drama.
Selecting a Trustee is Complicated
Selecting a Trustee can very complicated and you will not generally find individuals ready and willing to assume those fiduciary responsibilities, even when compensation is not an issue. Some Grantors have opted for co-Trustees and even Trust Protectors to ease the responsibility. See my article on “Trust Protectors.” Generally, Trustees are more willing to accept the position if they know that they have a backup for consultation with someone who is closer to the Grantor’s family.
Compare chart Irrevocable Trust, Revocable Living Trust, Non-Grantor Trust, LLC
Posted on: January 21, 2019 at 2:39 am, in
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For those of you not familiar with the 2005 Tax Reduction Act, some of the provisions address specific transfers by seniors under the new Medicaid nursing home provisions. Under the new provisions, before seniors qualify for Medicare assistance into a nursing home, they must spend-down their assets. These new restriction have a 5-year look-back. The look-back used to be 3 years.
By a vote of 216-214, the U.S. House of Representatives passed budget legislation that will impose punitive new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care. Act of 2005, click on
PDF: Deficit Reduction Act 2005. Search for “transfer of assets provision” in the pdf document.
What’s Medicaid?
What’s Medicaid? Medicaid is a government assistance program for people over the age of 65 or who are disabled. Medicaid assistance was designed for those who could not afford medical expenses (for the poor) but Medicaid has become the default for the middle class. The middle class has become the new poor.
Medicaid estate planning and Medicaid rules are complicated. The government is mandating a 5-year look-back on any transfers you may have made to disqualify you from entering the nursing home. Before the 2005 Tax Reduction Act it was 3 years. The transfer of any assets by the elderly has taken a notation of a “fraudulent conveyance” or in government parlance “deprivation of resources.” These new rules are spousal impoverishment programs designed to punish the healthy spouse. If one of the spouses gets sick, all resources have to be spent before you can qualify for government assistance. These new restrictive rules punish the healthy spouse leaving the healthy spouse at the mercy of welfare or her children. It’s very humiliating when seniors have planned their retirement based on their ability to keep their home.
Assets That You Must Spend Down Before You Can Qualify for Nursing Home Assistance:
ANYTHING YOU OWN IN YOUR NAME OR TOGETHER WITH YOUR SPOUSE. Cash, savings, checking, certificate of deposits, U.S. Savings bonds, credit union shares, Individual Retirement Accounts (IRA), nursing home trust funds, annuities, living revocable trust assets, any revocable Medicaid estate planning trust, real property occupied as a home, other real estate you hold as investment property or income producing property, cash surrender value of your life insurance policy, face value of your life insurance policy, household goods and effects, artwork, burial spaces, burial funds, prepaid burial if they can be canceled, motor vehicles, land contracts, life estate in real property, trailer, mobile home, business and business property, ANYTHING IN YOUR NAME OR YOUR POSESSION.
What is “Fraudulent Conveyance” in Medicaid Estate Planning?
What do you mean by “fraudulent conveyance” or “deprivation of resources”? If you give away your assets and you do not receive an equal amount (value) in return, the transfer is a deprivation of resources and you have committed a fraudulent transfer, (you give your house to your children for $100.00 when the fair cash value of your home is i.e. $150,000). If you gave your house to your children for $100 sixty months (5 years) before you entered the nursing home, you “deprived your resources” from the nursing home expenses. Unwittingly, you also incurred a gift tax on the difference between the $100.00 and the $150,000 and in addition you may have cheated the government out of Estate Taxes.
Federal Gift Tax Rules in Medicaid Asset Protection & Estate Planning:
The federal gift tax rules apply to the transfer by gift of any property. You make a gift if you give property (including money), or give the use of property, or give the income from property without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
The general gift tax rules are that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
- Gifts that are not more than the annual $12,000 $13,000 exclusion for the calendar year beginning in 2006 (This is called the Annual gift tax exclusion for any 12 month period, see below).
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
- Annual gift tax exclusion. A separate annual gift tax exclusion applies to each person to whom you make a gift. For 2007 2010, the annual gift tax exclusion is $12,000 $13,000. Therefore, you generally can give up to $12,000 $13,000 each to any number of people in 2007 2010 and none of the gifts will be taxable. However, gifts of future interests cannot be excluded under the annual exclusion provisions. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future. A federal Gift Tax return is filed on form 709 for taxable gifts in excess of the annual exclusion.
Filing a Gift Tax Return:
Generally, you must file a gift tax return on Form 709 if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that have a fair “cash” value of more than the annual exclusion of $12,000 $13,000 for the tax year 2007 2010.
- You and your spouse are splitting a gift.
- You gave your spouse an interest in property that will be ended by some future event.
- Your entire interest in property, if no other interest has been transferred for less than adequate consideration (less than its fair “cash” value) or for other than a charitable use; or
- A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
Estate Tax & Senior Medicaid Estate Planning:
Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions. On the date of your death, everything in your name is taxable. Take inventory of what you own: Cash, Savings and checking accounts, CDs, Stocks, Mutual Funds, Bonds, Treasuries, Exempts, Jewelry, Cars, Stamps, Boats, Paintings, and other collectibles, Real Estate … main home, vacation spot, investment realty, your Business, Interests in other businesses, Limited Partnerships, Partnerships, Mortgages and notes receivable you hold, Retirement plan benefits, IRAs, or any amounts that you expect to inherit from others.
Many people prefer not to think about what will happen on their death, but none of us are immortal and failure to make proper plans can mean that we leave behind is a mess which has to be sorted out by our nearest and dearest, at great expense and inconvenience, at a time when they are emotionally bankrupt.
Your federal death (estate) tax, up to 55%, is based on the “fair cash value” of your property on the date of your death, not what you originally paid. State probate and death taxes are based on the “location” of your property. Thus, if you own property in different states, each state has to be probated and each will want their fair share.
The only real alternative to a will arrangement is to set up a trust structure during lifetime which, with careful planning, can operate to eradicate probate delays, administration costs, and taxes as well as giving a large number of additional benefits. For these reasons the use of trusts has increased dramatically.
What is Your Gross Estate?
Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the following:
- Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs;
- The value of certain annuities payable to your estate or your heirs; and
- The value of certain property you transferred within 3 years before your death.
What is Taxable Estate?
The allowable deductions used in determining your taxable estate include:
- Funeral expenses paid out of your estate,
- Debts you owed at the time of death,
- The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse), and
- The charitable deduction (generally, the value of the property that passes from your estate to the United States, any state, a political subdivision of a state, or to a qualifying charity for exclusively charitable purposes).
The following table applies to Gift Taxes and Estate Taxes (REPEALED in 2010):
| If you die in tax year |
Taxable Estate Exemption |
Gift Tax Exemption |
Estate Tax |
| 2007 |
$2,000,000 |
$1,000,000 |
45% |
| 2008 |
$2,000,000 |
$1,000,000 |
45% |
| 2009 |
$3,500,000 |
$1,000,000 |
45% |
| 2010 |
$0.00(REPEALED) |
$0.00(REPEALED) |
55% |
| 2011 |
$5,000,000 |
$5,000,000 |
rong>35% |
| 2012 |
$5,000,000 |
$5,000,000 |
35% |
| 2013 |
$1,000,000 |
|
55% |
13 times in 32 years, congress has changed the rules. Congress is always tinkering with the “Death Transfer Tax.” For more information on what is included in your gross estate and the allowable deductions, see Form 706.
Medicaid Asset Protection 60 months Before Qualifying for Nursing Home:
You can avoid all of the above unpleasant results and filing requirements with an irrevocable trust implemented 60 months before you plan to qualify for the nursing home. By repositioning your assets (transferring your assets) from you to an irrevocable trust, you will NO longer own the assets:
- you don’t qualify for the probate process, and
- you do not have to file an estate tax return,
- because on the date you qualify for the nursing home you do NOT own any assets,
- at the time of your death you do NOT own any assets for the probate process,
- and at the date of your death you do NOT own any assets to report on your estate tax return.
What’s a Trust? Grantor, Trustee, Beneficiary
Posted on: January 26, 2017 at 1:58 am, in
ULTRA TRUST™ – What’s a Trust?
A “TRUST” is nothing more than a “CONTRACT.”
- The purpose of a TRUST is to create an “Artificial Legal Person” to protect, hold, and manage your private wealth for the benefit of your heirs.
- As in any contract, someone must initiate the contract (Grantor or Trustee).
- The contract (trust agreement) must specify the who, what, where, when, why, and other conditions.
- Finally, the contract is for the benefit of someone or something (beneficiaries: wife, children, grandchildren, church, other charitable organizations, etc.)
Trust concept
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The concept of a trust was first used in Anglo Saxon times and is contractual arrangement whereby property is transferred from one person (The Grantor) to another person or corporate body (The Trustee) to hold the property for the benefit of a specified list or class of persons (The Beneficiaries).
Although a trust can be created solely by verbal agreement it is normal for a written document to be prepared which evidences the creation of the trust (the Trust Deed), sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries. In essence, a trust is not dissimilar to a will except that assets are transferred to trustees during lifetime rather than those assets being transferred to executors on death. The trust deed is analogous to the deed of will.
There are three elements to the “trust” document:
- Grantor
- Trustee
- Beneficiaries
1. The “Grantor”
The person with the money or assets. The owner of the asset(s). The grantor’s motivation is to get asset(s) out of his name for either some or all of the following:
- Asset protection/wealth preservation
- Reduce potential frivolous lawsuits
- Elimination of the “probate jail process” (see definition, below)
- Elimination of estate taxes
- To gain some tax benefit or some other tax deferral benefit
If the “Grantor” initiates the trust (contract), it’s called a “Grantor Trust,” otherwise it’s called a “Non-Grantor Trust.”
If the “Grantor” wants to retain certain control over his asset(s), it’s called a “Revocable Trust” otherwise, it’s an “Irrevocable Trust.”
Revocable / Irrevocable has significant asset protection and tax differences.
“Revocable,” is like the kid next door that brings the ball to play basketball with the other kids. Everything is fine, as long as he makes the rules, and he makes the rules as he goes along. If you don’t agree, he takes the ball and goes home. Ball game over.
#Living Trusts are outright dangerous.
The Living Trust can destroy your estate in the event of a lawsuit, serious illness, or elderly care. One name given to a “revocable” trust is the “Living Trust.” The sole purpose of the Revocable Living Trust is to “eliminate the probate process.”
- Assets in a trust, avoids probate
- Assets NOT in a trust goes to probate with or without a will
The living Trust is outright dangerous for asset protection, wealth preservation, and estate tax elimination. It’s obsolete for assets greater than $675,000. With the Living Trust the owner of the assets retains significant power over his wealth and will NOT insulate assets from the lawsuit explosion. There’s absolutely no tax benefit, no asset protection and no wealth preservation benefits with the “Living Trust.” I DO NOT RECOMMEND THE “LIVING TRUST.” if you have one, reconsider your financial goals. (See my final word about trusts, below)
Personally, I think the “Living Trust” is a sham perpetrated on you by shameless professionals out to extract more than just one fee. Don’t just walk, run!!
Various tax proposals are being bandied about, including House Ways and Means Chairman Bill Archer who says that he’s “pushing” to “g r a d u a l l y phaseout” the death tax within the next 10 years. “Death by itself should not trigger a tax” says Chairman Archer. Currently, estate taxes vary from 37% to 55%. Only Japan has a higher rate of 70%. Germany takes a maximum of 40%, while Australia and Canada, take nothing.
When you add-up your federal, state, probate, legal fees, accounting fees, appraisal fees, administrative and executor fees, and etc. fees, ……. it could easily cost you 70 to 80% of your estate. You can avoid these unwanted results with the Ultra Trust™ or the Medallion Trust™.
NOTE: The new 2001 tax PHASE-IN for estate taxes, changes absolutely nothing. The estate tax is the only voluntary tax. The new laws have added confusion. You can avoid the voluntary estate tax by simply engineering an irrevocable trust.
2. The “Trustee”
The trustee is the guy who manages your trust assets. Great care should be taken in your selection of your trustee.
The trustee is bound by the trust document (contract) and he has a duty to protect trust assets for the beneficiaries. The independent trustee manages, holds legal title to trust assets, and exercises independent control.
The trustee can be your lawyer (worst person you would ever want to trust), your accountant, best friend, or any-one you trust who is not a relative by blood or marriage. You may have more than one trustee. I usually recommend two trustees in all cases of $500,000 or more.
#Accountability of trustee
The law imposes strict obligations and rules on trustees including a duty to account for any benefits the trustee may have gained directly or indirectly from a trust. This goes beyond fraudulent abuse of position by a trustee.
There is a basic rule that a trustee may not derive any advantage directly or indirectly from a trust unless expressly permitted by the trust, for example, where he is a professional trustee and the trust provides specifically for a right to make reasonable charges for services. However, full disclosure of the basis and amount of charges is required.
The trustee of an “Irrevocable Trust” has sole discretion over trust assets. Your selection of your trustee must be a carefully planned decision.
The significant item to remember is that an “Irrevocable Trust” gets the assets completely out of your (Grantor’s) name and in return you get complete asset protection, elimination of probate, elimination of estate or inheritance taxes, in certain cases a tax deduction for the assets contributed to the trust, and finally, under certain conditions other uncommon tax benefits not otherwise available.
Examples of irrevocable trusts are: the Ultra Trust® the Medallion Trust® the Vertex Trust® the Charitable Remainder Trust, the Charitable Lead Trust.
#Duty of trustee is to obey trust document for benefit of beneficiaries
The most important rule relating to the duties of a trustee is that requiring them to obey the directions in the trust deed both with regard to the interests of the beneficiaries (i.e. who is entitled to what) and with regard to the administration of the trust (managing the trust property). Trustees are also subject to very strict standards as to the way in which their powers and discretions may be exercised.
Fiduciary relationship of trustee
The courts regard a trust as creating a special relationship which places serious and onerous obligations on the trustees. Thus the law regards the special “Fiduciary” relationship of a trust as imposing stringent duties and liabilities on the person in whom confidence is placed – the trustees – in order to prevent possible abuse of that confidence. A trustee is therefore subject to the following rules:
A. The Trustee can have no private advantage
A trustee is not permitted to use or deal with trust property for private direct or indirect advantage. If necessary the court will hold him personally liable to account for any profits made in breach of this obligation
B. The Trustee must have the best interests of the beneficiaries
Trustees must exercise all their powers in the best interests of the beneficiaries of the trust.
C. The Trustee must act prudently and is under fiduciary duty to do so
Whether or not a trustee is remunerated he must act prudently in the management of trust property and will be liable for breach of trust if, by failing to exercise proper care, the trust fund suffers loss. In the case of a professional the standard of care which the law imposes is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustee will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling interest.
Additional:
In cases of substantial assets, you may add one other safety measure, “the Trust Protector.” The trust protector’s sole function is to hire and fire trustees, at will and without explanation.
3. “Beneficiaries”
The beneficiaries is the reason for your trust (contract).
Your beneficiaries are the guys that will enjoy the benefits of your trust assets. They include, wives, children, grandchildren, charitable organizations of every color and variety.
The length of your beneficiaries is unlimited. Beneficiaries could include the original grantor, but that would be self defeating. Generally, trusts are irrevocable. The grantor gives-up his assets to gain asset protection, elimination of probate, elimination of estate taxes, and gain certain uncommon tax advantages. Any degree of control by the grantor will render the trust revocable and subject to court discretion.
The period of time of the trust depends on the selection of your trusts legal jurisdiction. Most states and countries have rules against “perpetuities.” That’s to say, that your trust must have an end. Selection of your trust’s Jurisdiction in the United States or outside the United States depends on the degree of risk to be assumed by you. Foreign Asset Protection Trusts (FAPT) are significantly stronger than domestic trusts. Judgments are generally not enforceable outside the United States.
The contract
The trust document (contract) can be as little as three pages and as long as fifty pounds of paper. The more complicated you make it, the more complicated it is to administer. Simplicity is the key.
Trust assets may include, your personal residence, your investment account, other real estate, your business, limited only by your valuable assets you wish to contribute to your trust.
The trust generally obtains a federal identification number and files it’s own tax return. Distributions to beneficiaries, may or may not be taxable, depends on the nature of the underlying assets.
Finally, a trust may be a business, however it’s difficult for others to do business with you, since the trust is really a “private contract” between the grantor, the trustee, and your beneficiaries. Your business partners would more likely ask for a complete copy of the trust agreement and they would have their attorney look it over. As a consequence, most will not do business with a trust, but they will do business with other recognized legal entities such as a Limited Liability Company, Corporation, Partnership, etc. for which the trust may own.
FINAL WORD ABOUT TRUSTS
Before you implement your trust, be absolutely certain that you understand these facts:
A trust is a form of ownership, which is controlled and managed by your designated “independent” trustee, that completely separates responsibility and control of trust assets from your benefits of ownership (you no longer own or control your assets). The IRS recognizes numerous types of trusts and other legal arrangements commonly used for wealth preservation and legal protection against potential lawsuits, elimination of probate, and elimination of estate taxes. The independent trustee, manages the trust, holds legal title to trust assets, and must exercise independent control, anything short of the above facts is pure toilet paper. ALL trust income is taxable to either the trust, beneficiaries of the trust, or the taxpayer unless it’s specifically exempted by the Internal Revenue Code (IRC).
Eldercare with Medicaid: Senior Transfers Assets before Nursing Home Care
Posted on: January 26, 2017 at 1:47 am, in
ULTRA TRUST® – Medicaid Benefits
“The Deficit Reduction Act of 2005 (S.1932) [DRA]” signed by the President on Feb. 8, 2006. The Act established a June 30, 2006 deadline for the Secretary of Health and Human Services (HHS) to release regulations for states to come in compliance with
the new law.
Among other provisions, … the new law places severe new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care.
The law extends Medicaid’s “lookback” period for all asset transfers from (3) three to (5) five years, and changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters a nursing home and would otherwise be eligible for Medicaid coverage.
In other words, these new Medicaid rules are specifically designed to “impoverish the healthy spouse.”
This is an extreme. If you’re approaching the Medicaid Nursing Home Spend-down Provisions…you have to pay attention to these new very restrictive regulations. …The healthy spouse can find him/herself out in the street. If you have parents in this predicament, YOU better take note because you will end-up supporting your parents, specifically when they now have substantial assets.
Living Revocable Trust
Posted on: January 26, 2017 at 1:22 am, in
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A Living Trust or Revocable Trust, or a Revocable Living Trust, are the same Trust. The word “revocable” says it all. The “Grantor” the guy with the assets, transfers his assets to a “Trust” where he is the “Trustee” for the benefit of all “Beneficiaries”, which includes himself and others. In other words he has kissed his hand and declares himself to be the “Pope.”
The revocable trust is not worth the paper it’s written on. The revocable trust does not protect the assets from potential frivolous lawsuits. The revocable trust does not eliminate the estate tax. The revocable trust was designed to avoid the probate process but nothing else.
SO, WHAT’S A “TRUST”?
A “Trust” is nothing more than a contract. The concept of a trust was first used in Anglo Saxon times and is contractual arrangement whereby property is transferred from one person (The Grantor) to another person or corporate body (The Trustee) to hold the property for the benefit of a specified list or class of persons (The Beneficiaries).
Although a trust can be created solely by verbal agreement it is normal for a written document to be prepared which evidences the creation of the trust (the Trust Deed), sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries. In essence, a trust is not dissimilar to a will except that assets are transferred to trustees during lifetime rather than those assets being transferred to executors on death. The trust deed is analogous to the deed of will.
WHAT’S A “GRANTOR”?
He’s the guy with the buck; the owner of the asset(s). The grantor’s motivation is to get asset(s) out of his name for either some or all of the following:
- Asset protection / wealth preservation
- Reduce potential frivolous lawsuits
- Elimination of the “probate process”
- Elimination of estate taxes
- To gain some tax benefit or some other tax deferral benefit.
If the “Grantor” initiates the trust (contract), it’s called a “Grantor Trust,” otherwise it’s called a “Non-Grantor Trust.” To me, it’s just legal garbage so lawyers can charge you more.
If the “Grantor” wants to retain certain control over his asset(s), it’s called a “Revocable Trust”; otherwise, it’s an “Irrevocable Trust.”
Revocable / Irrevocable has significant asset protection and tax differences.
“Revocable,” is like the kid next door that brings the ball to play basketball with the other kids. Everything is fine, as long as he makes the rules, and he makes the rules as he goes along. If you don’t agree with the rules as he makes them up as you play, he takes the ball and goes home. The ball game is over.
LIVING TRUSTS ARE OUTRIGHT DANGEROUS
The Living Trust can destroy your estate in the event of a lawsuit, serious illness, or elderly care. One name given to a “revocable” trust is the “Living Trust” The sole purpose of the Revocable Living Trust is to “eliminate the probate process.”
- Assets in a trust, avoids probate.
- Assets that are NOT in a trust goes to probate, with or without a will.
The living Trust is outright dangerous for asset protection, wealth preservation, and estate tax elimination. It’s obsolete for assets greater than $1,000,000. With the Living Trust the owner of the assets retains significant power over his wealth and will NOT insulate assets from the lawsuit explosion. There’s absolutely no tax benefit, no asset protection and no wealth preservation benefits with the “Living Revocable Trust.”
THE “TRUSTEE”
The Trustee is the guy who manages your trust assets. Great care should be taken in your selection of your trustee.
The trustee is bound by the trust document (contract) and he has a duty to protect trust assets for the beneficiaries. The independent Trustee manages, holds legal title to trust assets, and exercises independent control.
The trustee can be your lawyer (worst person you would ever want to trust), your accountant, best friend, or anyone you TRUST who’s not a relative by blood or marriage. You should not have more than one trustee, however, I usually recommend one trustee and one trust protector in all cases of $750,000 or more.
ACCOUNTABILITY OF TRUSTEE
The law imposes strict obligations and rules on trustees including a duty to account for any benefits the trustee may have gained directly or indirectly from a trust. This goes beyond fraudulent abuse of position by a trustee.
There is a basic rule that a trustee may “not” derive any advantage directly or indirectly from a trust unless expressly permitted by the trust; for example, where he is a professional trustee and the trust provides specifically for a right to make reasonable charges for services. However, full disclosure of the basis and amount of charges is required.
The trustee of an “Irrevocable Trust” has sole discretion over trust assets. Your selection of your trustee must be a carefully planned decision.
The significant item to remember is that an “Irrevocable Trust” gets the assets completely out of your (Grantor’s) name and in return you get complete asset protection, elimination of probate, elimination of estate or inheritance taxes, in certain cases a tax deduction for the assets contributed to the trust, and finally, under certain conditions other uncommon tax benefits not otherwise available. Did I mention it’s the most tax efficient way to transfer your wealth to your next generation?
Duty of trustee is to obey the trust document for the benefit of beneficiaries.
The most important rule relating to the duties of a trustee is that requiring them to obey the directions in the trust deed both with regard to the interests of the beneficiaries (i.e. who is entitled to what) and with regard to the administration of the trust (managing the trust property). Trustees are also subject to very strict standards as to the way in which their powers and discretions may be exercised.
FIDUCIARY RELATIONSHIP OF TRUSTEE
The courts regard a trust as creating a special relationship which places serious and onerous obligations on the trustees. Thus the law regards the special “Fiduciary” relationship of a trust as imposing stringent duties and liabilities on the person in whom confidence is placed – the trustees – in order to prevent possible abuse of that confidence. A trustee is therefore subject to the following rules:
- No private advantage – A trustee is not permitted to use or deal with trust property for private direct or indirect advantage. If necessary the court will hold him personally liable to account for any profits made in breach of this obligation.
- Best interests of beneficiaries – Trustees must exercise all their powers in the best interests of the beneficiaries of the trust.
- Act prudently – Whether or not a trustee is remunerated he must act prudently in the management of trust property and will be liable for breach of trust if, by failing to exercise proper care, the trust fund suffers loss. In the case of a professional the standard of care, which the law imposes, is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustee will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling interest.
ADDITIONAL SAFEGUARDS OF ASSETS
In cases of substantial assets, you may add one other safety measure, “the Trust Protector.” The trust protector’s sole function is to hire and fire trustees, at will and without explanation. The Trust Protector can save unwanted and often unpleasant results (i.e. your wife runs away with the trustee).
“BENEFICIARIES”
The beneficiaries are the reason for your trust (contract).
Your beneficiaries are the guys that will enjoy the benefits of your trust assets. They include, wives, children, grandchildren, charitable organizations of every color and variety.
The length of your beneficiaries is unlimited. Beneficiaries could include the original grantor, but that would be self-defeating. Generally, trusts are irrevocable. The grantor gives-up his assets to gain asset protection, elimination of probate, elimination of estate taxes, and gain certain uncommon tax advantages. Any degree of control by the grantor will render the trust revocable and subject to court discretion.
The period of time of the trust depends on the selection of your trust’s legal jurisdiction. Most states and countries have rules against “perpetuities.” That’s to say, that your trust must have an end. Selection of your trust’s Jurisdiction in the United States or outside the United States depends on the degree of risk to be assumed by you. Foreign Asset Protection Trusts (FAPT) are significantly stronger than domestic trusts. Judgments are generally not enforceable outside the United States.
Getting Sued Hiding Assets
Posted on: January 26, 2017 at 1:07 am, in
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You just had a car accident causing a fatality or a disability. You are handed a ticket and released with a warning not to leave the state. You call your lawyer, you’re getting sued, you ask about hiding assets.
Your lawyer is going to tell you, there’s nothing you can do.
In my book, it’s better to do something than nothing. Exposing your open wallet for every potential creditor is not in my vocabulary. Your insurance company is your first line of defense. They will send a team of lawyers limited to your insurance coverage. But the Insurance Company is not going to cover your negligence.
Taking stack of what you own and how it’s going to evaporate between legal fees and court decisions, completely out of control.
Your lawyer is partially incorrect. A judge is going to decide how much guilt you are going to bear. Your police are going to determine the amount of negligence and possible criminal prosecution. You will have to defend yourself on both fronts. Most people will hire one attorney to handle the civil and criminal. In my opinion, that’s wrong. Criminal attorney are trained differently. The criminal side of life is to put up defenses to keep you out of jail. The civil attorney is to keep your assets. They are different defenses with different objectives.
4 THINGS YOU CAN DO IMMEDIATELY TO PROTECT YOUR ASSETS:
- Reposition your asset(s) with an independent trustee through an irrevocable trust, before the lawsuit is filed.
- Have your documents notarized and filed with the registry of deeds.
- Avoid fraudulent conveyance by transferring asset at less than it’s fair market value.
- Hire an expert defense lawyer.
- Will it work? It depends. But it’s better to give them the run around to your assets than a straight line to your bank account.
Offshore Asset Protection
Posted on: January 26, 2017 at 12:28 am, in
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The litigation explosion are forcing professionals and small business owners to focus on ways/strategies to protect their savings, investments and other accumulated assets that may become attractive to potential contingent fee trial lawyers.
Presently, well over half the world’s wealth moves around internationally, taking advantage of business opportunities. National political boundaries, from a financial point of view, are becoming virtually transparent. Many Americans have come to the realization that the only way for them to protect their assets is to hold international assets. This offshore asset protection strategy has nothing to do with tax evasion and everything to do with the creation and protection of wealth.
In the United States, the legal system is often stacked in favor of the plaintiff and against the defendant. The corporate veil is routinely ignored. This encourages the filing of spurious lawsuits.
For a mere filing fee, a contingent fee lawyer and his client risk very little to see how things turn out.
The possibility of being on the receiving end of a ruinous judgment can instantly result in the loss of a lifetime’s accumulation of hard work. Lawyers for plaintiffs only prosecute cases they believe will pay off. The largest growing business in America is contingent fee lawyers, just look in the yellow pages of your phone book.
The Internet has facilitated an exponential rate of detailed information about your personal and/or your business accounts, property ownership, investment holdings, income, savings, and many other facts about you, your business, your associates, your buying/spending habits, and so forth.
Most trial lawyers will tell you, that forming U.S. based corporations for asset/wealth protection is not worth the certificate it’s written on. Judges will inform you that if any asset is within their jurisdiction anywhere in the U.S. they have the power to redistribute your wealth.
SO WHY USE OFFSHORE ASSET PROTECTION?
Many international jurisdictions impose less governmental regulatory restrictions and reporting, less taxes on their assets and income, greater flexibility and disclosure requirements. Individuals, professionals, entrepreneurs, and their companies adopt an aggressive policy to safeguard and preserve their wealth/assets from predators and their very clever lawyers, while significantly reducing their costs of doing business.
An offshore asset protection Corporation or other offshore Foreign Limited Liability Company (FLLC’s), or International Business Company (IBC’s) or other legal entities can conduct any type of business in the United States. You sacrifice nothing by having a corporate veil with real teeth. An International Business Company (IBC) is an offshore corporate legal entity that does not have to comply with a U.S. based judgment.
Judgments are not enforceable in non-United States jurisdictions. U.S. contingent fee lawyers and their clients have a significant jurisdictional problem: only citizens of the tax haven jurisdiction can practice law. U.S. lawyers or their clients will have to hire a local law firm and pay up-front legal fees, post bonds, pay court costs, and pre-pay other expenses to pursue their claims. Generally speaking, the local authorities frown upon foreign-generated claims/judgments. “You are in your home-country.”
The need for international diversification arises because of perceived shortcomings in the U.S. judicial, legislative, and political processes. Once the plaintiff see the uphill battle involved, plus the enormous costs out of his/her own pocket, he/she may either re-evaluate the merits of filing a lawsuit or settle for a fraction of the settlement he/she may have received in a U.S. Court. This fact alone can become your catalyst for good financial offshore asset protection planning and save thousands off your liability insurance premiums.
Foreign asset protection is the Rolls Royce of asset protection planning. For most Americans it would be overkill. For an asset protection fortress within the United States, the Cadillac of asset protection is the Irrevocable Trust combined with a Limited Liability Company.
For additional reading on offshore tax havens, llc, international business company, foreign llc:
Learn more about irrevocable trusts and asset protection:
Asset Protection from Medicaid
Posted on: January 26, 2017 at 12:04 am, in
What’s an asset protection trust? What’s a Trust?
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The Deficit Reduction Act of 2005 established a June 30, 2006 deadline for the Secretary of Health and Human Services (HHS) to release regulations for states to come in compliance with the new severe new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care.
The law extends Medicaid’s “lookback” period for all asset transfers to 5 years, it was originally 3 years and changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters the nursing home. Qualification to enter the nursing home is achieved when the individual is out of funds, meaning he/she cannot afford to pay the nursing home. The new federal law applies to all transfers made on or after the date of enactment, February 8, 2006. Any transfer made before February 8 falls under the old transfer rules. Exact enactment provisions are state by state, but it’s clear that non-compliance by 50 state legislatures puts their federal funding at risk.
You can protect yourself from the Medicaid nursing home care by taking action now while you still have your health.
You can reposition (transfer) your assets from you to an irrevocable trust with a truly independent trustee. The key is the “Independence of your Trustee.” The trustee cannot be any-one related to you by blood or marriage. And, you must be willing to give-up complete control over your assets. This lack of perceived control is the most difficult to achieve. Seniors have a deep sense of independence by their ability to control and manage their assets.
Revocable or irrevocable trust, what’s that mean? Revocable is when the original person with the assets transfers (repositions) the assets to a trust with strings attached. The tax lingo is “grantor-type trust. The “strings” when the original grantor (person with the assets) elects himself as the trustee, and the beneficiary of the trust. The grantor, the trustee, and the beneficiary are the same person. Effectively you have kissed yourself on the hand and blessed yourself as the pope. This simply will not work. Period.
An irrevocable trust is when the grantor (the person with the assets) gives-up complete control to an independent trustee who in turn will use his judgment as trustee to manage the assets for the beneficiaries of the trust. The fiduciary relationship of the trustee is to the protection of the assets at any cost. The trustee must protect and must diligently invest under the prudent man rules, he cannot ever deal for himself. The courts do not look favorably on dereliction of duties while serving as trustee. An irrevocable trust is the only significant asset protection device for avoiding the Medicaid spend-down provisions.
Asset protection from Medicaid requires foresight and a strong conviction to walk away from perceived control. Inaction is devastating. Seniors must use all their funds first, then qualify for the nursing home. It’s clear, that these new rules are designed to impoverish the healthy spouse.
Rocco Beatrice, CPA, MST, MBA, CWPP, CMMB, CAPP
Managing Director, Estate Street Partners, LLC
Mr. Beatrice is an asset protection, award-winning trust and estate planning expert.
Senior Medicaid Asset Protection
Posted on: January 25, 2017 at 11:40 pm, in
What’s an asset protection trust? What’s a Trust?
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As tax preparation time begins, many seniors are asking to include Medicaid asset protection as part of their tax planning strategies. For those of you not familiar with the 2005 Tax Reduction Act, some of the provisions address specific transfers by seniors under the new Medicare nursing home provisions. Under the new provisions, before a senior qualifies for Medicare assistance into a nursing home, they must spend-down their assets. These new restriction have a 5 year look-back, used to be 3 years. And used to be that each spouse had a one-half interest in the marital property, it now appears that all the marital assets are to be spent-down. I have not seen specific regulations but it appears that the healthy spouse will be left without any assets if one of them gets sick.
Suggestions by seniors have been to transfer their assets to their children. Although this option is available, I’m not sure that it’s a good option. What if the child decides to use the asset for themselves, what if they get divorced and the judge awards assets originally intended for the parents to the divorcing wife’s decree, what if the child get’s sued?
There are also tax implications. If the assets are transferred to the child for less than fair market value, then it’s a taxable gift. Even worse, if this type of transfer to the child is completed before the 5 years-look back, is it a “fraudulent conveyance?”
Medicaid asset protection has to be done very carefully. Planning in this area is evolving. There are a lot of eldercare law firms popping up all over the place. I have been approached by such a firm to send them clients. They claim that they can structure a new deal whereby the nursing home won’t be able to attach assets even after they enter the nursing home.
I know this much, any method used to deflect assets from the original owner has to be done at it’s fair market value. For example you just can’t transfer your house from you to your child. There are tax consequences. Did you just sell your house? Or did you just gift your house? Who will determine the fair market value? Did you get a genuine appraisal? If therefore, it’s at less than fair market value (willing buyer and willing seller, neither under compulsion to buy or sell, each acting in their best interest) did you just create a more challenging problem?
Any method whereby there’s an element of strings attached, it’s revocable and therefore you have done nothing to disassociate yourself from your asset. One can challenge your intent, to divert assets for the purpose of defrauding a potential creditor and failure to have filed a gift tax return has statutory penalties, and interest, worse- if Medicare intended, criminal?
I am aware of only one method of disassociating yourself from your asset (personal residence, your CD’s, your investments, vacation spot) is to give it away. Period. You can gift it to your children, pay the tax and that’s it. The problem is that you no longer have any control and you are at the mercy of your child’s good intentions and a blessed spouse. Risky? You bet!
An irrevocable trust with an independent trustee (not related to you by blood or marriage) will fit the bill. An irrevocable trust, is an irrevocable contract between you and the independent trustee to manage the assets for the benefit of all beneficiaries. You and your spouse can become beneficiaries along with your children and grand children.
Timing is extremely important. If the transfer (repositioning) of your valuable assets is done before the 5 years, chances are good that it will stand-up in court. What if it’s before the 5 years are up? Is your Medicaid asset protection plan still good? In my book it’s better to have done something than nothing.
Rocco Beatrice, CPA, MST, MBA, CWPP, CMMB, CAPP
Managing Director, Estate Street Partners, LLC
Mr. Beatrice is an asset protection, award-winning trust and estate planning expert.
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