Asset Protection Trusts can address Long Term Care

April 5, 2023

Asset protection trusts can address long term care costs. As the number of people aged 65 plus continues to increase, more seniors realize they must address the cost of long-term health care, which can quickly devour assets intended for retirement or inheritances. Those who can prepare in advance do well to consider asset protection trusts, says the article “Asset protection is major concern of aging population” from The News Enterprise.

Asset protection trusts are irrevocable trusts in which another person manages the trust property and the person who created the trust—the grantor—is not entitled to the principal within the trust. There are several different types of irrevocable trusts used to protect assets. Still, one of the more frequently used irrevocable trusts for the purpose of protecting the grantor’s assets is the Intentionally Defective Grantor Trust, called IDGT for short.

As a side note, Revocable Living Trusts are completely different from Irrevocable Trusts and do not provide asset protection to grantors. Grantors placing their property into Revocable Living Trusts maintain the full right to control the property and use it for their own benefit, meaning any assets in the trust are not protected during the grantor’s lifetime.

IDGTs are irrevocable, and grantors have no right to principal and may not serve as a trustee, further limiting the grantors’ access to the property in the trust. Grantors may, however, receive any income from trust-owned property, such as rental properties or investment accounts.

During the grantor’s lifetime, any trust income is taxed at the grantor’s tax bracket rather than at the much higher trust tax bracket. Upon the grantor’s death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding a hefty capital gains tax.

While the term “irrevocable” makes some people nervous, most IDGTs have built-in flexibility and protections for grantors. One provision commonly included is a Testamentary Power of Appointment, which allows the grantor to change beneficiary designations.

IDGTs also include clauses providing for the grantors’ exclusive right to reside in the primary residence. However, if the grantor needs to change residences, the trustee may buy and sell property within the trust as needed.

IDGTs provide for two different types of beneficiaries: lifetime and after-death beneficiaries. Lifetime beneficiaries are those who will receive shares of the total estate upon the death of the grantor. Lifetime beneficiary provisions are important because they allow the grantor to make gifts from the trust principal. Hence, there is always at least one person who can receive the trust principal if need be.

Asset protection trusts are complicated and require the help of an experienced estate planning attorney. However, when used properly, asset protection trusts can address unanticipated creditors, long-term care costs and even unintended tax liabilities. If you would like to learn more about asset protection, please visit our previous posts.

Reference: The News Enterprise (March 4, 2023) “Asset protection is major concern of aging population”

Photo by Karolina Grabowska

Irrevocable Grantor Trust can reduce Tax exposure

March 16, 2023

Forbes’ recent article entitled “How To Pass On Business Assets While Paying As Little In Taxes As Possible” says that one of the first steps you’ll likely undertake in an estate plan is gifting assets so they’re not part of your estate. By gifting assets expected to appreciate over time—like company stock and real estate—into an irrevocable grantor trust and having those assets appreciate outside of your estate, you can reduce your estate tax exposure. Remember: the amount you can gift is restricted to you and your spouse’s combined lifetime federal estate and gift tax exemption ($25,840,000 in 2023).

As the grantor of the irrevocable grantor trust, you’ll be taxed on all income in the trust despite not receiving any of it. However, the payment of taxes from your estate reduces the value of your estate proportionately. Therefore, the assets in the trust can grow unburdened by taxation.

A drawback of gifting appreciating assets into a grantor trust is that the assets will retain the tax basis you, as the grantor, had when you gifted the assets. As the assets are no longer a part of your estate when you die, the assets you transferred to the grantor trust won’t get a step-up in basis to what their value is at that time. Capital gains taxation occurs when the trustee or beneficiary sells the appreciated assets.

Assuming that one of your goals for establishing the trust is to pay as little tax as possible, there are a few ways to avoid capital gains taxes inside a grantor trust.

As the grantor, you have the power to take trust assets back by buying them with cash or replacing them with other assets—low-appreciation ones are ideal. Therefore, if you get a large amount of your employer’s publicly traded stock, you might swap these shares for other publicly traded securities of equal value that have appreciated.

Since the assets traded must be equal in value, there shouldn’t be a change to your estate’s value used for calculating estate taxes. After the trade, you’ll own the highly appreciated stock. However, there won’t be a taxable gain when you pass away because you’ll get a step-up on the basis.

Likewise, for grantor trusts with appreciated real estate, an IRC §1031 exchange allows for capital gains taxes to be deferred when swapping one real estate investment property for another. Discuss with your estate planning attorney how an irrevocable grantor trust can reduce your estate tax exposure. If you would like to learn more about trusts and tax planning, please visit our previous posts.

Reference: Forbes (Dec. 22, 2022) “How To Pass On Business Assets While Paying As Little In Taxes As Possible”

Consider placing your Home in a Property Trust

March 7, 2023

Property trusts allow you to place your personal residence or any property you own into a trust to be given to a beneficiary, explains a recent article, “When Should I Put My Home in a Trust,” from yahoo!life.com. Consider placing your home in a property trust. A property trust makes it far more likely your home will go to its intended beneficiary.

The property trust can be a revocable or irrevocable trust. Which one you use depends on your unique circumstances. If it’s a revocable trust, you can change the terms of the trust up until your death. However, because you maintain control of the asset in a revocable trust, it’s not protected from creditors.

If the main reason you’ve put the house into a trust is to protect it from creditors, a court could reclaim the asset if it were determined the sole reason for the transfer into the trust was to elude creditors.

Generally speaking, people have three basic reasons to place their homes into property trusts—to avoid probate, to keep their transaction private and to keep the transfer simple.

Avoiding probate. People who put their homes in a property trust often do so to avoid having their home going through the probate process. When the owner dies, their estate goes through this court process and any debts or taxes owed on the property are paid. If there is no will giving direction to how the property should be distributed, then it is distributed according to the state’s laws.

If the home is not in a trust and not mentioned in a will, the property will usually go to a spouse or child, although there’s no guarantee this will happen. If there is no spouse and no offspring, the property will go to the next closest living relative, such as a parent, sibling, niece, or nephew. If no living relative can be found, the state inherits the property.

Chances are you don’t want the state getting your family home. Having a will, even if you don’t put your property into a trust, is a better alternative.

The cost and time of probate is another reason why people put their homes in trusts. Probate costs are borne by the estate and thus the beneficiaries. Probate also takes time and while probate is in process, homes need maintenance, taxes need to be paid and costs add up. If the house is sitting empty, it can become a target for thieves and property scammers.

Another benefit of a property trust is to keep the transfer of the home private. If it goes through probate, the transfer of property becomes part of the court record, and anyone will be able to see who inherited the home. When family dynamics are complicated, this can create long-lasting family battles.

A property trust is also far simpler for your executor, especially if the home is in another state. If you have a vacation home in Arizona but live in Michigan, your executor will have to navigate probate in both states.

Speak with an estate planning attorney if you want to consider placing your home in a property trust. They will create a property trust and transfer the property into the trust. This is a straightforward process. However, without the guidance of an experienced professional, mistakes can easily be made. If you are interested in reading more about managing property in your estate plan, please visit our previous posts.

Reference: yahoo!life.com (Jan. 31, 2023) “When Should I Put My Home in a Trust”

Better to have a Revocable or an Irrevocable Trust?

February 20, 2023

Is it better to have a revocable or irrevocable trust? It’s not always obvious which type of trust is the best for an individual, says a recent article titled “Which is Best for Me: Trusts” from Westchester & Fairfield County Business Journals.

In a revocable living trust (RLT), the creator of the trust, known as the “grantor,” benefits from the trust and can be the sole Trustee. While living, the grantor/trustee has full control of the real estate property, bank accounts or investments placed in the trust. The grantor can also amend, modify and revoke the trust.

The goal of a revocable trust is mainly to avoid probate at death. Probate is the process of admitting your last will and testament in the court in the county where you lived to have your last will deemed legally valid. This is also when the court appoints the executor named in your last will. The executor then has access to the estate’s assets to pay bills and distribute funds to beneficiaries as named in the last will.

Probate can take six months to several years to complete, depending upon the complexity of the estate and the jurisdiction. Once the estate is probated, your estate is part of the public record.

A revocable living trust and the transfer of assets into the trust can accomplish everything a last will can. However, distribution of assets at the time of death remains private and the court is not involved. Distribution of assets takes place according to the instructions in the trust.

By comparison, irrevocable trusts are not easily revoked or changed. Most irrevocable trusts are used as a planning tool to transfer assets for the benefit of another person without making an outright gift, or for purposes of Medicaid or estate tax planning. An Irrevocable Medicaid Asset Protection Trust is used to allow an individual to protect their life savings and home from the cost of long-term care, while allowing the trust’s creator to continue to live in their home and benefit from income generated by assets transferred into the irrevocable trust.

The grantor may not be a trustee of an irrevocable trust and the transfer of assets to a Medicaid Asset Protection trust starts a five-year penalty period for Nursing Home Medicaid and a two-and-a-half-year penalty period for Home Care Medicaid for applications filed after March 1, 2024. After the penalty (or “look back”) periods expire, the funds held by the trust are protected and are not considered countable assets for Medicaid.

An irrevocable trust can also be used to transfer assets for the benefit of a loved one, friend, child, or grandchild. Assets are not controlled by the beneficiaries but can be used by the trustee for the beneficiary’s health, education, maintenance and support.

Trusts are used to reduce the size of the taxable estate, to plan for the well-being of loved ones, and to protect the individual and couple if long-term care is needed. Whether it is better to have a revocable or an irrevocable trust depends a lot on your own circumstances. Speak with an estate planning attorney about which trust is best for your unique situation. If you would like to learn more about trusts, please visit our previous posts.

Reference: Westchester & Fairfield County Business Journals (Jan. 26, 2023) “Which is Best for Me: Trusts”

Photo by Mikhail Nilov

Avoid leaving Co-op Ownership to Heirs

January 25, 2023

If you own a co-op you might be tempted to include it in your planning. It is wise to avoid leaving your co-op ownership to your heirs. Here is a cautionary tale.

Parents bought a studio apartment in a New York City co-op for their adult son with special needs. He’s able to live independently with the support of an agency.

The couple asked the co-op board to let them transfer the property to an irrevocable trust, so when they die, the son will still have a place to live. However, the board denied their request.

An individual with special needs can’t inherit property directly, or he’ll no longer be able to receive the government benefits that support him. What should the parents do?

The New York Times’ recent article entitled “Can I Leave My Co-op to My Heirs?” explains that parents can leave a co-op apartment to their children in their will or in a trust. However, that doesn’t mean their heirs will necessarily wind up with the right to own or live in that apartment.

In most cases, a co-op board has wide discretion to approve or deny the transfer of the shares and the proprietary lease.

If the board denied the request, the apartment will be sold and the children receive the equity. Just because the will says, ‘I’m leaving it to my children,’ that doesn’t give the children the absolute right to acquire the shares or live there.

In some instances, the lease says a board won’t unreasonably withhold consent to transfer the apartment to a financially responsible family member. However, few, if any, leases extend that concept to include trusts.

The parents here could wait to have the situation resolved after their deaths, leaving clear directives to the executor of their estate about what to do should the board reject a request to transfer the property into a trust for their son. However, that leaves everyone in a precarious position, with years of uncertainty.

It is safer to avoid leaving your co-op ownership to your heirs. Another option is to sell the co-op apartment now, put the proceeds in a special-needs trust and buy a condo through that trust. The son would then live there.

Unlike co-ops, condos generally allow transfers within estate planning, without requiring approval.

While this route would involve significant upheaval, the parents would have more peace of mind.

However, before buying the condo, an experienced estate planning attorney should review the building’s rules on transferring the unit. If you would like to read more about leaving real property to your heirs, please visit our previous posts.

Reference: New York Times (Oct. 1, 2022) “Can I Leave My Co-op to My Heirs?”

Young Professionals Need Estate Planning

December 28, 2022

Even those whose daily tasks bring them close to death on a daily basis can be reluctant to consider having an estate plan done. However, young professionals, or high-income earners, needs estate planning to protect assets and prepare for incapacity. Estate planning also makes matters easier for loved ones, explains a recent article titled “Physician estate planning guide” from Medical Economics. An estate plan gets your wishes honored, minimizes court expenses and maintains family harmony.

Having an estate plan is needed by anyone, at any age or stage of life. A younger professional may be less inclined to consider estate planning. However, it’s a mistake to put it off.

Start by meeting with an experienced estate planning attorney in your home state. Have a power of attorney drafted to give a trusted person the ability to make decisions on your behalf should you become incapacitated. Not having this legal relationship leads to big problems. Your family will need to go to court to have a conservatorship or guardianship established to do something as simple as make a mortgage payment. Having a POA is a far better solution.

Next, talk with your estate planning attorney about a last will and testament and any trusts you might need. A will is a simpler method. However, if you have substantial assets, you may benefit from the protection a trust affords.

A will names your executor and expresses your wishes for property distribution. The will doesn’t become effective until after death when it’s reviewed by the court and verified during probate. The executor named in the will is then appointed to act on the directions in the will.

Most states don’t require an executor to be notified in advance. However, people should discuss this role with the person who they want to appoint. It’s not always a welcome surprise, and there’s no requirement for the named person to serve.

A trust is created to own property outside of the estate. It’s created and becomes effective while the person is still living and is often described as “kinder” to beneficiaries, especially if the grantor owns their practice and has complex business arrangements.

Trusts are useful for people who own assets in more than one state. In some cases, deeds to properties can be added into one trust, streamlining and consolidating assets and making it simpler to redirect after death.

Irrevocable trusts are especially useful to any doctor concerned about being sued for malpractice. An irrevocable trust helps protect assets from creditors seeking to recover assets.

Young professionals need estate planning because not being prepared with an estate plan addressing incapacity and death leads to a huge burden for loved ones. Once the plan is created, it should be updated every three to five years. Updating the plan is far easier than the initial creation and reflects changes in one’s life and in the law. If you would like to read more about estate planning for business owners, please visit our previous posts.

Reference: Medical Economics (Nov. 30, 2022) “Physician estate planning guide”

Estate Planning is a Personal Process

December 27, 2022

It’s a question that some couples should ask. For many, their estate is their estate together, right? Not always. There are benefits to using the same estate planning attorney. However, there may be reasons to use different attorneys, as discussed in the article “Should My Spouse and I Hire the Same Estate Lawyer?” from The Street. When it comes down to it, estate planning is a personal process.

If your estates are relatively simple and your interests are the same, it does make sense to use the same estate planning attorney. If there’s no need for sophisticated tax planning, yours is a first marriage with no children, or you own one piece of property, one attorney can represent both partners.

It’s important to understand joint representation. This means both partners and the attorney agree to share all information learned from one spouse with the other spouse. These terms are often outlined in the engagement letter signed when the attorney is retained.

However, life and marriages are not always so simple. Let’s say that one spouse owns property or a share of property in another state purchased before the marriage and not co-owned with the spouse. This often occurs when property is owned by members of the spouse’s immediate family, like a business property or a vacation home they own jointly with siblings or parents. It may also be property one spouse is likely to inherit with the expectation the property ownership remains solely with bloodline family members.

Note that owning property in another state will likely also require the services of another estate planning attorney who is familiar with the local laws. The out-of-state attorney can advise if there are any special planning considerations needed, such as placing property in a family-controlled entity, like a limited liability company or other family partnership.

Coordinating communication between the out-of-state attorney and the primary in-state attorney will be important, since there may be interrelated planning considerations to be addressed in wills or trusts.

What if you and your spouse have different communication styles? One wants a talkative attorney who wants to dive into long-term planning goals, engaging in discussions about building a legacy, while the other wants documents prepared, signed and executed, minus any big picture conversations.

A simple solution would be for each spouse to identify an attorney at the same firm who matches their personal style.

Another reason for using different estate planning attorneys is if one wants to use a “floating spouse” provision, which can cause some feelings to arise. This is a provision defining a “spouse” as the person you are married to at the time of death. If there’s a divorce and the prior spouse would have had a vested interest in property, the floating spouse provision affords another layer of protection to keep assets to the spouse at the time of death.

There are non-divorce related reasons for the floating spouse provision. If an irrevocable trust is created to benefit the spouse, the ability to make changes to the trust can be challenging, time consuming and costly. With a floating spouse provision, the prior spouse is removed as a beneficiary and the new spouse could be easily substituted. In this case, independent counsel is advised, as interests are considered legally adverse.

Estate planning is a personal process and there is no one-size-fits-all solution. If any part of the estate creates adverse interests, joint representation may not work. However, when the estate is relatively simple and the couple’s goals are the same, having a spouse by your side during the planning process could give each of you the incentive to take care of this very important task. If you would like to learn more about estate planning, please visit our previous posts.

Reference: The Street (Nov. 30, 2022) “Should My Spouse and I Hire the Same Estate Lawyer?”

Steps to Ensure a Smooth Probate

December 7, 2022

What can you do to help heirs have a smooth transition when settling your estate? Probate can be a costly and time consuming process. There are steps you can take to ensure a smooth probate. A recent article from The Community Voice, “Managing probate when setting up your estate,” provides some recommendations.

Joint accounts. Married couples can own property as joint tenancy, which includes a right of survivorship. When one of the spouses dies, the other becomes the owner and the asset doesn’t have to go through probate. In some states, this is called tenancy by the entirety, in which married spouses each own an undivided interest in the whole property with the right of survivorship. They need content from the other spouse to transfer their ownership interest in the property. Some states allow community property with right of survivorship.

There are some vulnerabilities to joint ownership. A potential heir could claim the account is not a “true” joint account, but a “convenience” account whereby the second account owner was added solely for financial expediency. The joint account arrangement with right of survivorship may also not align with the estate plan.

Payment on Death (POD) and Transfer on Death (TOD) accounts. These types of accounts allow for easy transfer of bank accounts and securities. If the original owner lives, the named beneficiary has no right to claim account funds. When the original owner dies, all the named beneficiary need do is bring proper identification and proof of the owner’s death to claim the assets. This also needs to align with the estate plan to ensure that it achieves the testator’s wishes.

Gifting strategies. In 2022, taxpayers may gift up to $16,000 to as many people as you wish before owing taxes. This is a straight-forward way to reduce the taxable estate. Gifts over $ 16,000 may be subject to federal gift tax and count against your lifetime gift tax exclusion. The lifetime individual gift tax exemption is currently at $12.06 million, although few Americans need worry about this level.

Revocable living trusts. Trusts are used to take assets out of the taxable estate and place them in a separate legal entity having specific directions for asset distributions. A living trust, established during your lifetime, can hold whatever assets you want. A “pour-over will” may be used to add additional assets to the trust at death, although the assets “poured over” into the trust at death are still subject to probate.

The trust owns the assets. However, with a revocable living trust, the grantor (the person who created the trust) has full control of the assets. When the grantor dies, the trust becomes an irrevocable trust and assets are distributed by a successor trustee without being probated. This provides privacy for the beneficiary and saves on court costs.

Trusts are not for do-it-yourselfers. An experienced estate planning attorney is needed to create the trust and ensure that it follows complex tax rules and regulations. Taking the steps needed to ensure you have a smooth probate process will give you peace of mind. If you would like to learn more about the probate process, please visit our previous posts.

Reference: The Community Voice (Nov. 11, 2022) “Managing probate when setting up your estate”

Photo by Ksenia Chernaya

Community Property Trust is Potential Tool

October 17, 2022

Where you live matters for estate planning, since laws regarding estate planning are state specific. The same is true for taxes, especially for married couples, says a recent article “How Community Property Trusts Can Benefit Married Couples” from Kiplinger. A community property trust is a potential tool to consider in your planning.

There are two different types of basic ownership law for married couples: common law and community property law. Variances can be found across states, but some general rules apply to all. If a state is not a community property state, it’s a common-law state.

Community property states have a tax advantage for assets when one spouse dies. But if you live in a common-law state, don’t worry: several states have now passed statutes allowing married couples living in a common-law state to establish a community property trust with a qualified trustee. They can gain a step-up in cost basis at each death, which previously was not allowed in common-law states.

First, let’s explain what community property means. Each member of the married couple owns one half of all the property of the couple, with full rights of ownership. All property acquired during a marriage is usually community property, with the exception of property from an inheritance or received as a gift. However, laws vary in the community property states regarding some ownership matters. For example, a spouse can identify some property as community property without the consent of the other spouse.

Under federal law, all community property (which includes both the decedent’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) gets a new basis at the death of the first spouse equal to its fair market value. The cost basis is stepped up, and assets can be sold without recognizing a capital gain.

Property in the name of the surviving spouse can receive a second step-up in basis. However, there’s no second step-up for assets placed into irrevocable trusts before the second death. This includes a trust set up to shelter assets under the lifetime estate tax exemption or to qualify assets for the unlimited marital deduction. This is often called “A-B” trust planning.

Under common law, married couples own assets together or individually. When the first spouse dies, assets in the decedent spouse’s name or in the name of a revocable trust are stepped-up. Assets owned jointly at death receive a step-up in basis on only half of the property. Assets in the surviving spouse’s name only are not stepped-up. However, when the surviving spouse dies, assets held in their name get another step-up in basis.

To date, five common-law states have passed community property trust statutes to empower a married couple to convert common-law property into community property. They include Alaska, Florida, Kentucky, South Dakota and Tennessee.

The community property trust allows married couples living in the resident state and others living in common-law states to obtain a stepped-up basis for all assets they own at the first death. Those who live in common-law states not permitting this trust solution can still execute a community property trust in a community property state. However, they will first need to appoint a qualified trustee in the state.

For this potential tool to work, a community property trust needs to be prepared properly by an experienced estate planning attorney, who will also be able to advise the couple whether there are any other means of achieving these and other tax planning goals. If you would like to learn more about community property, please visit our previous posts.

Reference: Kiplinger (Sep. 18, 2022) “How Community Property Trusts Can Benefit Married Couples”

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The Difference between Revocable and Irrevocable Trusts

October 13, 2022

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier. There is a difference between revocable and irrevocable trusts.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

Add or remove beneficiaries at any time
Transfer new assets into the trust or remove ones that are in it
Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Speak with an experienced estate planning or probate attorney to help understand the difference between revocable and irrevocable trusts. If you would like to learn more about trusts, please visit our previous posts.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

Photo by Yan Krukov

Category: Irrevocable Trust

Asset Protection Trusts can address Long Term Care

Irrevocable Grantor Trust can reduce Tax exposure

Consider placing your Home in a Property Trust

Better to have a Revocable or an Irrevocable Trust?

Avoid leaving Co-op Ownership to Heirs

Young Professionals Need Estate Planning

Estate Planning is a Personal Process

Steps to Ensure a Smooth Probate

Community Property Trust is Potential Tool

The Difference between Revocable and Irrevocable Trusts

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