Estate and Asset Protection Plan Strategies 2

V.         Other Estate Planning Documents and Techniques:

A.         Will Substitutes (as to specific assets):

1.         Retirement Benefits Designations

Payment options and designation of beneficiaries are treated differently for tax purposes and you should ask your financial or tax adviser (or we will be happy to respond to any inquiries in this regard), how your choice(s) will impact both your future estate and income tax liabilities, and more importantly, how such designations will potentially have a negative impact on that “special needs” family member.

2.         Gifts

Currently the federal tax law currently permits each person to make an unlimited number of tax-free gifts per year, as long as gifts are not more than $14,000 per each done ($28,000 if a couple joins to make the gift).  However, there is an unlimited marital deduction for lifetime or transfers upon death to your spouse; but, the recipient spousemust be a U.S. citizen to qualify for the unlimited marital deduction.  If either you or your spouse are not a U.S. citizen, then you should consult your financial or tax advisor (or we will be happy to discuss this matter with you also) on the special rules applicable to your particular situation.

3.         Joint Ownership

Joint tenancy (sometimes called survivorship) can be a useful way to transfer property at death; such transfers do in fact avoid probate.  However, if you and your spouse'scombined assets exceed (most recently for the Year 2013) $10,000,000, then holding title to all your property in joint tenancy is NOT a "tax-wise" ownership of that property; and, MORE IMPORTANTLY, such JTROS does not afford you or your spouse any lawsuit protections during lifetime. This personal estate tax exemption amount has now been made permanent at $5M effective January 1, 2013, but should be periodically reviewed since such amount would continue to be subject to future revisions by the Congress.

However, taxes should not be your sole consideration, since the legal tools that work so well for the super wealthy, can also be used by you to protect your assets and your family’s financial security and peace of mind by way of a comprehensive asset protection plan, regardless of whether your estate is over the $5M threshold or not!

4.         Trusts

A trust is a legal relationship created with a “trustee”  (who may be an individual family member or a corporate fiduciary such as a bank or trust company) who holds property for the benefit of another.

Different Kinds of Trusts:

“Special Needs” trusts are created to support an incapacitated loved one. 

If you, or a loved one, have concerns about a potential future nursing home stay and its devastating consequences on your family’s finances, please give us a call. An effective, comprehensive estate and asset protection plan should incorporate the benefits of a “special needs” trust, which is designed to support an incapacitated family member.

These trusts require specific language and provisions to ensure for the care and benefit of that special loved one, protecting and preserving those assets for the extended care of that family member without subjecting those assets to the Medicaid spend-down requirements.  A properly drafted special needs trust will also enable an incapacitated child currently qualified for SSI payments, rent subsidies and other available governmental program assistance, to not lose that valuable aid for which your hard-earned tax dollars over the years have help pay. 

A special needs trust can also be drafted to ensure that upon the subsequent passing of that special loved one, any remaining trust assets will be distributed to your other family members, and not the nursing home or the State Medicaid Agency.

As you may be aware, your creditors and potential lawsuit claims are currently precluded from taking your retirement funds away from you during your working lifetime, but what happens upon your death?  With a properly drafted Will and “special needs” trust designation as beneficiary, those hard-earned dollars will not become a “retirement nest egg” for some litigation attorney or the nursing home owners and their children! 

Also remember, if is just as important to protect life insurance policies currently held by you or your spouse, so that those death benefits will be used for the care of your loved ones when you do get your “audition for that heavenly choir.”  Without proper planning, those benefits could easily end up in the hands of a nursing home or your creditors. But please be aware, such planning is still subject to a three (3) year “pullback” period for tax purposes, AND NOW, FIVE (5) years with regards to a possible nursing home stay: the lesson learned -- plan ahead; PLAN EARLY; do not delay!

This type of trust may be established and “funded” during your lifetime, called an inter vivostrust, or upon your death by way of a testamentary trust (special provisions contained in your Will).  Under current rules, while the lifetime trust may be drafted to preserve assets from a nursing home for an incapacitated child, only the testamentary trust will protect the assets for your spouse.

Discretionary trusts (commonly referred to as a “sprinkling” trust) permit the trustee to distribute income and principal among various beneficiaries and should be used cautiously to avoid unintended income or estate tax consequences, in the event a family member is designated as your trustee.

Insurance trusts are very important tools in any estate and asset protection strategy, and will permit up to three (3) generations of your family to avoid otherwise quite substantial estate taxes. These trusts may be utilized to buy a life insurance policy, the proceeds from which are then used to benefit the grantor’s beneficiaries after the death of the grantor (person establishing the trust). A life insurance policy is typically purchased on the life of the individual establishing the trust, who we refer to as the "grantor"; and, upon the death of the grantor, the insurance proceeds (cash) are held in the trust and utilized for the financial well-being of the grantor's beneficiaries (the surviving family). Typically, your spouse is initially named as trustee for the family, and upon his/her “being auditioned for that heavenly choir” your children or other designated family members assume the role of trustee for the family.

Living trusts are revocable trusts that permit you to put all your assets in a trust while still alive (we strongly recommend caution in the establishment of any such trust).  You should be aware that a revocable living trust offers no tax-savings for your family upon your death, and likewise, no creditor (lawsuit) protection for you and your spouse during your lifetime.  In your presenter’s humble opinion, these instruments are not worth the hard-earned dollars with which you would have to pay for such documentation, and there are better legal options, such as the family investment company (LLC) which serve to protect you and your family much better than the living or revocable trust at about the same legal costs. 

In addition, as has been noted by the highly-respected and often-quoted United States Court of Appeals for the Second Circuit (consisting of primarily New York State), a living trust arrangement will often result in unnecessary taxes by subjecting the estate (the surviving family) to even greater estate taxes as a result of the inadvertent loss of administration expense deductions by the estate.  The Second Circuit observed as follows:

“By choosing to convey the bulk of her assets through a [living] trust, [Mrs.] Grant limited the amount of her property that was transferred in her estate and consequently limited the estate's tax deduction for administration expenses. ”

Estate of C.R. Grant v. Commissioner, doc. no. 00-4066 (2^nd Cir. June 21, 2002) (emphasis supplied) (In order to be tax-deductible under the federal estate tax laws, it is not sufficient for the personal representative's fee to merely be allowable by state law as a percentage of the estate, but those expenses must also meet the requirements of Internal Revenue Code Section 2053, and in the case of a living trust, the claimed administrator’s fee did not qualify; no estate tax deduction allowed in such case.).

Testamentary trusts are provided for in your LWT and, of course, do not come into existence until your death.  This type of trust, which becomes irrevocable upon your death, generally offerssubstantial estate tax savings for your children (if properly drafted), as well as providing them what could ultimately become critically important creditor (lawsuit) protection in the event of an unfortunate divorce or other legal “complication” involving your family members. 

Again, if properly drafted, these types of trusts can permit your children to serve as their own trustee, having full access and control to their inheritance, but also provide important asset (lawsuit/divorce) protections as well during their lifetime, and even ultimately for the lifetime of your grandchildren.  Alabama law currently permits such trusts to remain in existence for approximately three (3) generations, up to a maximum of 360 years’ of lawsuit protection!

Charitable trusts are created to support some charitable or tax-exempt purpose.  You may receive a current income tax deduction and for those individuals wishing to make such charitable donations, gifts of appreciated property (instead of cash) are the wisest gifts from a tax standpoint.  

5.         Insurance Beneficiary Designations

When you name beneficiaries of your policy other than your estate, the money passes to them directly without going through probate.  If most of your money is tied up in non-liquid assets such as your business or real estate, life insurance can be an important planning tool to get cash into your beneficiaries’ hands and provide for other liquidity needs.

If you own life insurance you can have the proceeds distributed in three (3) ways:

(a) Directly to beneficiaries:

Designation of individual beneficiaries is of course the quickest and simplest way to get money directly into the hands of your survivors.  However, such designation may subject these critically important liquid assets (which you otherwise wish to provide for your family's welfare) to federal estate taxes up to a maximum rate of 55% (if the policy proceeds when added to the other assets in your estate, had totaled more than $5,000,000); AND MORE IMPORTANTLY, WILL MOST LIKELY HAVE UNDESIRABLE CONSEQUENCES (loss of SSI and other need-based program assistance) WHERE THAT SPECIAL LOVED ONE HAS BEEN NAMED AS OUTRIGHT BENEFICIARY.

(b) To your probate estate:

If you choose this route, the proceeds will be distributed along with your other assets according to the terms of your LWT.  However, they may become tied up in the probate process, possibly add to the cost of probate by making the estate larger, and (most importantly) will be subject to potential creditors’ claims.  Again, as noted above, designating your estate as beneficiary of any life insurance policies insuring your life, which might also subject those liquid proceeds to a substantial federal estate tax extraction (again, up to a maximum 55% tax rate).

(c) To an insurance trust:

Paying the proceeds to a life insurance trust has several advantages:

First, your family will not have to pay estate (nor income) tax on the proceeds if the policy was owned by the trust for more than three (3) years before your death and the trust instrument itself was properly drafted and administered during your lifetime. Establishment of a life insurance trust during your lifetime also permits your family to avoid any inconvenience and expense that would otherwise be associated with the policy proceeds passing through the probate administration process.

This three-year waiting period may be avoided on a purchase of new life insurance policies, if additional liquidity for your family is needed, or if the “purchase” of the coverage is made by a “grantor” trust or LLC.  To accomplish this avoidance of the 3-year waiting period, the application for a new policy, the premium payment, and the policy itself must all be made in the name of the trust or LLC, rather than your name individually or the name of your spouse. Therefore, if you are interested in the possibility of acquiring new or additional insurance coverage on you life, in order to avoid the three-year waiting period, do not sign any documents or application forms prior to discussing this matter further with either your attorney or your financial advisor.