Are Living Trusts Created Just For Tax Benefits?

For Professional Advisors.  Lawyers and advisors around the country are getting some push back from their clients when they recommend Revocable Living Trusts (RLT). The issue seems to be that their clients perceive RLTs to only be good as tax planning tools.

With the federal estate tax exemption currently set at $5 million per individual and $10 million per married couple, some perceive a reduced need for such trusts.

But there are many important benefits to the RLT beyond tax protection.

Keeps You in Control

With a properly drafted RLT, a client can not only control who inherits his assets, but also how those assets are disbursed and under what circumstances.

The Grantor (your client) can set up rules or stipulations in the trust that must be met before assets are inherited by beneficiaries. The Trustee, chosen by your client, manages those assets according to your client’s wishes.

Some clients want the Trustee to have a lot of control, particularly when beneficiaries are minors or are financially inexperienced.  Others want the Trustee to exercise less control, particularly when the beneficiaries are mature adults.  We encourage our clients to keep beneficiary assets in trust for Protection and Privacy.

Protection and Privacy

Even properly drafted, a simple Will is essentially no more than a letter to a probate court judge. It informs the judge of the decedent’s wishes about what he or she wanted done with personal property and other assets, but the court can rule differently.

Court hearings and documents filed in a probate case are public record, meaning that if all your client had was a Will, then his personal worth and any records of family infighting over the estate could make the headlines. An RLT is executed outside of a probate court’s venue, keeping the entire matter private and out of public view.

After death, the RLT continues to offer protection to the client’s heirs. If left in the name of trust, assets are shielded from the beneficiaries’ creditors, lawsuits and divorce settlements. It also helps protect your client’s children from “accidental” disinheritance when a surviving spouse remarries.

Reduction in Stress

Probate can last many months to several years, depending on the size and complexity of your client’s estate. Administering a trust can often take less than a year.

Ask your clients how much grief and anxiety they are willing to let their heirs endure after their death due to poor planning. An RLT can dramatically reduce the wait time for an estate to be settled, allowing beneficiaries to move forward with their lives much sooner and receive the assets your client wanted them to enjoy and benefit from.

Have you experienced push back from a client when you propose a revocable trust?  Please let me know by post a comment.

Revocable Living Trusts are flexible tools. If you think you have a client that may need one as part of his or her plan, we would be delighted to talk to both of you about its benefits.

On first glance, it looks like the recently signed “Illinois Residential Real Property Transfer on Death Instrument Act” would only interest lawyers, title companies, and the government.  In fact, this new law, which goes into effect on January 1, 2012, will allow a majority of our clients to “have their cake and eat it, too”, just by addressing how their residence title is issued.

Until now, assuming there are no estate tax considerations, we have been faced with a dilemma when planning for the asset protection of a married couple’s primary residence. We could have the residence titled in the name of one or
both spouse’s revocable trusts, avoiding probate costs, delays, and creditors. Unfortunately, doing so meant that both husband and wife had to previously surrender important asset protection against potential judgment creditors and others.

When a residence is held as “tenancy by the entireties”, a spouse’s creditors could not foreclose on the residence because of the other spouse’s interest. So, if there were a car accident with a large judgment, financial mistakes, or other circumstance, the property was at least temporarily protected for the remaining spouse.

Last year, the General Assembly tried to create a law where married clients could put property in trust AND still retain the asset protection benefit of tenancy by the entireties. But, the legislation was drafted in a way that no
attorney could understand how to accomplish it, so we were stuck without a solution.

One solution we’ve recommended for clients is to have the residence owned by an Illinois land trust, which gives them the advantages of a trust (including flexibility, private administration and reduced costs) and the asset protection of entireties property. But, this solution comes with an annual cost to a bank or trust company, so it’s not perfect.  And, only one residence can have entireties protection from judgment creditors.

Now, using the new “Transfer on Death Act” provisions, we can help clients protect their property assets without the attendant cost of maintaining a land trust. We draft these provisions into the conveyance instruments, and
once they are properly recorded, they are immediately effective.

The residence can be owned by the spouses as tenants by the entireties.  Upon the death of the first spouse, the survivor is instantly and automatically the owner. Upon the death of that surviving spouse, the property is conveyed into the trust, by providing only a copy of the death certificate and a form affidavit.  There is no probate, no delays, no creditor interference.

The Residential Real Estate Transfer on Death Act doesn’t just apply to married couples.  Single individuals can convey their property to heirs through a Transfer on Death Deed, and avoid the probate process. Under most circumstances, holding a single individual’s property in a revocable trust may be a better, more comprehensive solution.

The act also simplifies planning for non-traditional couples, including those taking advantage of Illinois’ new civil union laws, though the benefits of entireties property do NOT apply in these cases.

In light of the new legislation, we will take time at each client’s annual review to re-examine how the residence title is held. If changes are appropriate, based on client objectives, we will recommend and implement them.

If you have questions about how your residence is titled, please call our office.

For Clients, Community, Professional Advisors.

Recently, business and estate planning attorneys have increasingly focused on assisting their clients in protecting their assets from loss due to unexpected circumstances.

The typical business owner will respond, “But, my business is structured as a corporation/limited liability company (LLC).  It’s already protected”.  This is only partly true.

The business has inside protection.   That is, the assets inside the corporation have asset protection.  In other words, if there is an accident in the business, the owner’s personal assets cannot be taken away.  That’s the key advantage of using a corporation or a limited liability company.  However, there is a separation between the business assets and the owner’s personal assets.  It’s a form of asset protection.

In a world of creditors, predators, unforseeable circumstances and divorces, it’s important to take active steps to protect our assets.  In the above situation, the assets inside the business may have some protection, but the ownership interest (the shares or membership interests themselves),-  the  “outside interest” – is not protected in any way.

If the owner of the business is in a major car accident and has a large judgment against him or her, he or she could lose his or her interest in the business in a moment’s time.  Having a corporation does not protect the outside ownership interest in the business from potential judgment creditors and other predators.  Many very smart and sometimes very wealthy business owners fail to understand this fact.

A recent study in New York demonstrated that there were a surprising number of judgments in the prior five year over $5 million dollars.  The study found that there was no correlation between the amount of insurance carried and the amount of the judgment.    Under many court rules, once there is a judgment against you, the court can issue supplementary process to find out all of your assets– no matter where they might be.  This is called a Citation to Discover Assets.  Hence, advance planning is important.

Many states have passed new laws designed to protect the outside interest of shareholders and particularly members of limited liability companies.  As we review our clients’ estate plans and prepare for our business clients’ annual meetings, it is our obligation to bring these new techniques to our clients’ attention.  We have already seen situations in our practice where using simple asset protection techniques has saved our clients and their families significant dollars.

Look for further articles in my blog and for additional information on our website concerning asset protection tools and techniques.

For Clients, Advisors, Community

A recent published case emphasizes the importance of clients checking their beneficiary designations of their retirement plans including; profit sharing, 401(k) and pension — on a regular basis. The general rule is that if the participant is married, he or she must name his or her spouse as beneficiary (unless the spouse signs a waiver in the presence of a notary or a plan representative).  This law is to protect the interest of spouses.

Here is a good example of where problems with unchecked beneficiary designation can occur: After his first wife passed away, the plan participant named his three adult children as his plan beneficiaries.  Subsequently,
he remarried. He never changed the beneficiary on his plan accounts. His intent was that his three adult children become the beneficiaries of his retirement plan account. No spousal waiver was executed. Six weeks after he remarried, he died. His new wife and his three adult children both made claim for his 401(k) account balance.

The plan administrator filed suit asking the court for directions on who was the rightful beneficiary. The court awarded the account balance to his wife because no waiver had been signed. This was not the participant’s intention!

This litigation occurred in Federal District Court. These situations can be messy, cause family disharmony and are extremely expensive.

The lesson is clear: Double check your beneficiary designation on an annual basis. Make sure that it is properly coordinated with your estate plan and structured to defer income taxes as long as possible. This is a simple step. The retirement plan account is sometimes the largest asset in the estate.

We are increasingly finding the need to stay on top of these changing circumstances.  So, it makes sense to pay attention and review the plan every year.   We have developed a program which provides annual review and estate plan enhancement every that helps our clients ensure that these problems do not occur.

There are new techniques, particularly for larger plan benefits or IRAs which allow the family to “stretch” the benefits deferring taxes over an extended amount of time. We often discuss this topic with our clients during their annual estate plan enhancement meeting. For more information, call us.

For Clients, Professional Advisors

Since my March 3, 2011 posting on inherited IRAs, there has been an interesting precedent. A Federal Court in Texas has issued an important appellate decision. The case is Chilton v. Moser.

What happened? Shirley died in 2007 naming Janice as beneficiary of her $170,000 IRA. Janice opened an IRA titled, “Janice, beneficiary of Shirley IRA” and transferred the funds to this account. Janice filed a bankruptcy petition in December, 2008. Janice sought to protect the IRA from the bankruptcy estate, claiming that the assets were exempt from her creditors under Federal law. The United States Trustee objected. The bankruptcy court judge held that the assets were part of the bankruptcy estate and that they could be distributed to the creditors. Janice appealed to the Federal District Court.

In a well-reasoned appellate decision, Judge Ron Clark reversed the bankruptcy court decision. He held that in order for inherited IRA funds to be exempt from creditors in a bankruptcy (a) they must be tax exempt under §401 or §408 or §403 (or other) section of the Internal Revenue Code (covering individual retirement accounts, pension and profit sharing plans and certain non-profit organization annuity plans) and (b) they must be retirement funds.

The court went on to conclude that Shirley’s funds were both tax-exempt and were retirement funds. Therefore, the exemptions under the bankruptcy code applied and the money was in fact Janice’s. Her creditors in the bankruptcy case would be unable to reach them!

Can Illinois residents rely on these cases? The trend of the decisions is clear. All Federal District Court Decisions to date and one Appellate Court decision has been consistent with the holding in Chilton v. Moser.

However, one cannot say for certain that this is the law of the land. There is some likelihood that the Federal appellate courts will differ in how they apply the bankruptcy code to IRAs. Nationally respected IRA and tax expert Bob Keebler recommends that professionals continue to offer clients an individualized IRA trust for asset protection. It provides certain asset protection.

Until the matter is resolved by the Seventh Circuit Court of Appeals (Illinois, Wisconsin and Indiana), or if the circuits disagree, by the United States Supreme Court, we continue to offer our clients with large IRA accounts an individual retirement plan trust that provides the asset protection they need.

Why take a chance if a deal goes bad?