BUSINESS SUCCESSION and ASSET PROTECTION / PRESERVATION STRATEGIES 3
by
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:
“We
do not believe the Tax Court's conclusion was clearly erroneous. As recognized
in Hibernia Bank v. United States, 581 F.2d 741, 746 (9th Cir. 1978),
"[t]he federal estate tax is not a tax on the decedent's property, but
rather a tax on the transfer of that property." Hibernia, 581 F.2d
at 746. 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 (2nd 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 offers substantial
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
properly drafted trusts to remain in existence for approximately three (3)
generations so that you may provide continuing asset/lawsuit protection
for your children and their future families, up to a maximum of 360
years’ of lawsuit protection!
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) up to a maximum 55% federal estate taxes (if the policy
proceeds when added to the other assets in your estate, total more than $5,125,000
for the Year 2013).
(b) To your
probate estate:
