Category: The Wealth Advisor

Asset protection has become a common goal of estate planning.  Asset protection trusts come in many different forms and can be used to protect property for your use and benefit as well as for the benefit of your family.  In this issue you will learn how you can easily integrate asset protection trusts into your estate plan.
 
What is An Asset Protection Trust?
An asset protection trust is a special type of irrevocable trust in which the trust funds are held and invested by the Trustee and are only distributed on a discretionary basis.  The purpose of an asset protection trust is to keep the trust funds safe and secure for the benefit of the beneficiaries instead of having those assets be an available resource to pay a beneficiary’s debts. 
 
Asset protection trusts come in two forms:  third party trusts and self-settled trusts.  A third party trust is set up by one party for the benefit of another, while a self-settled trust is set up by one party for their own benefit.
 
Third Party Asset Protection Trusts Equal Inheritance Protection
Leaving an inheritance outright to your child or grandchild without any strings attached is risky in this day and age of high divorce rates, lawsuits, and bankruptcies.  Aside from this, your beneficiaries may not have developed the financial skills necessary to manage their inheritance over the long run.  There is also the very real risk that an outright inheritance left to your spouse will end up in the hands of a new spouse instead of in the hands of your children or grandchildren.  Finally, a beneficiary may be born with a disability or develop one later in life that will end up rapidly depleting their inheritance to pay for medical and other bills.
 
There are a number of different types of third party asset protection trusts that you can establish to insure your hard earned money is used only for the benefit of your family:  

• Trusts for minor beneficiaries – Minor beneficiaries cannot legally accept an inheritance, so a discretionary trust for a minor is a necessity.
• Trusts for adult beneficiaries – Adult beneficiaries who are not good with managing money, are in a lawsuit-prone profession, have an overreaching spouse, or have an addiction problem will benefit from a lifetime discretionary trust. 
• Trusts for surviving spouses – If you are worried that your spouse will not be able to manage their inheritance, will remarry, or will need nursing home care, you can require your spouse’s inheritance to be held in a lifetime discretionary trust.
• Trusts for disabled beneficiaries – Disabled beneficiaries who receive an inheritance outright run the risk of losing government benefits and would need to spend down the funds to requalify, but an inheritance left to a special needs trust can be used to supplement, not replace, government assistance.

Planning Tip:  Asset protection trusts designed for inheritance protection can be as rigid or as flexible as you choose.  For example, a beneficiary can be added as a co-trustee at a certain age or after the beneficiary reaches a specific goal such as graduating from college.  Another option is to name a corporate trustee, such a bank or trust company, but give the beneficiary the right to remove and replace the corporate trustee with another one. 
 
You can also make trust distributions as limited or as broad as you choose.  For example, you can state that the funds can only be used to pay medical bills or for education, or the Trustee can be given broad discretion to make distributions in the best interest of the beneficiary.  You may also want to require the Trustee to take into consideration the beneficiary’s income and other assets before making distributions.  Alternatively, the Trustee can be given the authority to deplete the trust in favor of one beneficiary to the detriment of other beneficiaries.  If there are multiple beneficiaries, such as a trust for the benefit of your spouse and your children, the Trustee can be directed to give preferential treatment to one or more beneficiaries over the others.
 
Self-Settled Asset Protection Trusts Are the New Frontier
The basic premise of a self-settled asset protection trust is that a person can transfer their own assets into the trust and retain a beneficial interest in the assets to the detriment of their creditors. Until the late 1990s, self-settled asset protection trusts were not recognized in the United States.  Prior to this a self-settled asset protection trust was required to be established offshore in an exotic place such as the Cook Islands or the Cayman Islands.  Then in 1997 Alaska became the first state to recognize self-settled asset protection trusts, followed closely by Delaware.  Since then, a handful of other states have enacted self-settled asset protection legislation in some form, bringing the current total to fifteen:   

• Alaska – 1997
• Delaware – 1997
• Hawaii – 2010
• Mississippi – 2014
• Missouri – 2004
• Nevada – 1999
• New Hampshire – 2009
• Ohio – 2013
• Oklahoma – 2004
• Rhode Island – 1999
• South Dakota – 2005
• Tennessee – 2007
• Utah – 2013
• Virginia – 2012
• Wyoming – 2007

A domestic (rather than offshore) self-settled asset protection trust avoids some of the burdensome IRS reporting requirements.  While the laws of these states vary widely, in general they require the trust to be irrevocable, at least one trustee must be a state resident or a corporation authorized to do business in the state, and some assets need to be located in the state.  From there the laws differ on “exception creditors” (creditors who can still access the trust assets, such as an ex-spouse who is owed alimony or a child who is owed child support) and statutes of limitation with regard to preexisting and future creditors (1.5 years to 6 years). 
 
Planning Tip:  You should be aware that there are only a limited number of U.S. cases interpreting domestic asset protection statutes and this type of planning is still developing.  Nonetheless, when layered with other types of asset protection planning, including liability insurance, third party asset protection trusts, and limited liability entities such as LLCs or corporations, a domestic self-settled asset protection trust offers another tool in your planner’s toolbox designed to put up roadblocks between your assets and your creditors.     
 
The Bottom Line on Asset Protection Trusts
Asset protection trusts offer many planning opportunities for people of even modest means.  We are available to answer your questions about asset protection trusts and help you integrate this type of planning into your estate plan. 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies. 

With the end of the year approaching fast, now is the time to consider ways to reduce your 2014 income tax bill. In this issue you will learn:

• How charitable trust-based planning can be used to reduce your taxable income.
• If you are the Trustee or beneficiary of an irrevocable, non-grantor trust (such as a Bypass Trust or Dynasty Trust), how distributions, trust reformation or decanting, and investment shifting can be used to reduce the trust’s taxable income.

A Quick Review of the Federal Income Tax Laws
Significant changes to federal income tax laws went into effect in 2013, including:

• Raising the top tax bracket from 35% to 39.6%. In 2014, this top rate applies as follows:
• Married couples filing jointly or qualifying surviving spouses with taxable income above $457,600
• Heads of households with taxable income above $432,200
• Married individuals filing separately with taxable income above $228,800
• Single individuals with taxable income above $406,750
• Trusts and estates with taxable income above $12,500
• Increasing the long-term capital gains rate on the top tax bracket from 15% to 20%
• Applying a 3.8% surtax on the lesser of net investment income or modified adjusted gross income for individual taxpayers earning as follows:   Married couples filing jointly or qualifying surviving spouses, $250,000
• Married individuals filing separately, $125,000
• Single individuals or heads of households, $200,000
•  Applying a 3.8% surtax on trusts and estates on the lesser of undistributed net investment income or adjusted gross income over $12,500 (in 2014)

This means that the top tax rate could be as high as 43.4% for certain taxpayers. Therefore, it is important to understand how these new laws impact you and what can be done to reduce your income tax liability.

Planning Tip: Since each taxpayer’s circumstances are unique, planning to minimize taxable income is not one-size-fits all, or even most. We are available now to discuss your personal situation and help you explore the options for reducing your income tax bill.
 
Charitable Trust-Based Tax Reduction Strategies
While you may be familiar with Charitable Remainder Trusts (CRTs) as an estate planning technique used to minimize estate taxes, CRTs are also effective in reducing income taxes under the right circumstances.
 
A CRT is a type of irrevocable trust that pays an annual distribution to one or more individual beneficiaries for a term of years, after which the balance of the trust passes to one or more charitable organizations.
 
The income tax deduction for contributions to a CRT is limited based on several factors, including a taxpayer’s adjusted gross income, the taxpayer’s other charitable giving, and what assets are used to fund the CRT. Aside from being able to take a limited income tax deduction over five years for the value of the property transferred into a CRT, a CRT can be used to reduce your income tax bill in the following situations:   

• Avoiding a Large Capital Gain. If you anticipate recognizing a large capital gain on an appreciated asset, such as the sale of your business, you can transfer the asset into a CRT which then sells it. You will not recognize any capital gain on the sale. In addition, payment of the annual distribution is only taxed when you receive it, which spreads the income over a number of years. 

• Shifting Income to the Next Generation. If you will not need the income from an income-producing asset, you can provide an income stream for your children by transferring the property into a CRT. This shifts the taxable income down to the next generation, who are most likely in a lower income tax bracket. 

• Planning for Retirement Income. A Net Income with Makeup Charitable Remainder Trust (NIMCRUT) can be used to invest for tax-deferred growth while you are still working and will not need investment income. After you retire, the CRT assets can be invested to replace your lost income.

Planning Tip: You should consider a CRT if you have charitable intent and substantial investable assets that are expected to increase in value and you will not need to rely on the income from these assets. If this describes your situation, please call our office now so that we can help determine if any of these CRT strategies are right for you.
 
How to Avoid the Income Tax Squeeze on Trusts
As mentioned above, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets (in 2014, the top 39.6% tax rate kicks in at only $12,500 of trust income). In addition, trusts in the top tax bracket are subject to the 20% long-term capital gains rate and the 3.8% surtax.
 
As part of their fiduciary responsibilities, Trustees of this type of trust must carefully consider ways to reduce the trust’s taxable income. After taking into consideration the terms of the trust agreement, the ongoing needs and tax status of the trust beneficiaries, and applicable state law, income-reducing strategies Trustees should consider include:

• Distributing income to beneficiaries so that the income is taxed in the beneficiaries’ lower bracket
• Making in-kind distributions of low basis assets to beneficiaries
• Invoking the 65-day rule and distributing trust income to beneficiaries by March 6, 2015, which will allow the trust to deduct the income as a 2014 distribution
• Exploring options to permit capital gains to pass to beneficiaries, such as reforming or decanting the trust to broaden the Trustee’s discretion to allocate between income and principal
• Shifting investments to minimize taxable income and gains
• Merging or terminating small, uneconomic trusts

Planning Tip: Trustees must weigh the tax benefits of making distributions and changes to the trust’s provisions against the grantor’s intent, the ongoing requests of the current beneficiaries, and what will be left for the remainder beneficiaries. If you are the Trustee or beneficiary of an irrevocable, non-grantor trust, we can analyze your trust’s 2014 tax liability and help evaluate the options for minimizing the trust’s taxes.
 
Final Advice for Individuals and Trustees
Planning to reduce income taxes is a balancing act. The needs of the individual taxpayer or trust beneficiary must carefully be weighed against the overall tax savings. In addition, income, gains, losses, and tax brackets must be reviewed annually since the expenses of the individual or beneficiary will change from year to year.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. 

You don’t have to make your family’s assets easy for creditors to reach.  Protecting your hard-earned assets for the benefit of yourself and your family can be accomplished through careful planning. These seven trust-based asset protection strategies can put significant (and often insurmountable) obstacles in the way of a creditor.
 
In this newsletter you will learn about seven trust-based asset protection strategies and how they can:

• Protect your assets from creditors, predators, and lawsuits.
• Protect assets gifted to, or inherited by, your spouse, children, or other beneficiaries.

If you have questions or would like to discuss your options for trust-based asset protection, please call our office now.
 
Four Types of Lifetime Asset Protection Trusts – Having Your Cake and Eating it Too
 
A Lifetime Asset Protection Trust is an irrevocable trust created during your lifetime that can be used to accomplish several goals.
 
1.      A Medicaid Planning Trust may qualify you or your spouse for Medicaid while preserving an income stream for the well spouse and protecting the trust assets from estate recovery after death.
 
2.      A Lifetime QTIP Trust is a lifetime trust for your spouse’s benefit using the gift tax marital deduction. This can provide asset protection plus a reduction in overall estate taxes.
 
3.      A Family Bank Trust, also known as Spousal Lifetime Access Trust (“SLAT”) is a lifetime trust for your spouse’s benefit using annual exclusion gifts and the lifetime gift tax exemption. Again, these trusts can provide asset protection plus a reduction in overall estate taxes.
 
4.      A Domestic Asset Protection Trust (“DAPT”) is a lifetime trust for your benefit, primarily providing asset protection.
 
1.  Medicaid Planning Trusts 
 
Medicaid Planning Trusts may help you and your spouse (if you’re married):

• Qualify for Medicaid while protecting an income stream for the benefit of the well spouse.
• Avoid estate recovery.  Assets held in this trust will pass to your heirs protected from the government’s estate recovery, which would otherwise require paying back Medicaid benefits that were received during your lifetime.

Planning Tip:  Medicaid is jointly funded by the federal and state governments, so each state sets its own rules and guidelines for Medicaid eligibility and estate recovery.  Therefore, a Medicaid Planning Trust must be tailored to the laws of your state of residence.  Trusts may also be subject to a look-back period (NOT “disqualification period”) of five years.  Medicaid Planning usually works best if done as early as possible, so please call our office now if you have Medicaid planning questions.
 
2.  Lifetime QTIP Trusts 
 
When one spouse is significantly wealthier than the other spouse, a Lifetime QTIP Trust offers the following benefits:

• Makes use of the less wealthy spouse’s federal estate tax exemption.
• Provides a lifetime, asset-protected trust for the benefit of the wealthier spouse if the less wealthy spouse dies first.  (Subject to state law.)
• Insures that assets left in the trust (after both spouses die) get distributed according to the wealthier spouse’s wishes.

Planning Tip:  Lifetime QTIP Trusts offer a great deal of flexibility when spouses have lopsided estates.  During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive principal.  If the less wealthy spouse dies first, then the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption. Although some of the estate tax savings might be obtainable with “portability,” the asset protection aspects are only available with a Lifetime QTIP.
 
Depending on applicable state law, the remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit. These trust funds will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed according to the wealthier spouse’s wishes. 
 
3.  Spousal Lifetime Access Trusts
 
SLATs or “Family Bank Trusts” became popular for married couples in 2012 when it was anticipated that we would go over the proverbial “fiscal cliff.”  They still remain popular today as an estate tax reduction and asset protection strategy. 
 
This trust is sometimes also referred to as a “Lifetime Bypass Trust” since it is funded with lifetime gifts that are held for the benefit of you or your spouse.  As with a Bypass Trust created after the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose. 
 
Planning Tip:  SLATs are useful if you live in a state that does not collect a state gift tax but collects a state estate tax and the state exemption is expected to remain significantly lower than the federal exemption (e.g., Maine, Massachusetts, Minnesota, New Jersey, Oregon, Vermont and Washington).
 
4.  Domestic Asset Protection Trusts
 
The goals of a DAPT are to allow you to fund the trust with your own property, maintain some degree of interest in the trust as a beneficiary, and protect the trust’s assets from your creditors.  Currently 16 U.S. states permit creation of DAPTs and the number will likely continue to grow, although laws vary widely from state to state.
 
Planning Tip:  The laws governing DAPTs are relatively new and still evolving.  In addition, U.S. courts have been limited in interpreting them.  Aside from this, bankruptcy laws allow trust assets to remain exposed to the claims of your creditors for ten years.  Nonetheless, a DAPT can be a powerful asset protection strategy for the right person.
 
Three Types of Testamentary Asset Protection Trusts – Ruling from the Grave
 
A Testamentary Asset Protection Trust is an irrevocable trust created after your death and used for a variety of reasons.
 
1.      Irrevocable Life Insurance Trusts (“ILITs”) protect life insurance proceeds for the benefit of your heirs.
 
2.      Standalone Retirement Trusts protect retirement accounts for the benefit of your heirs.
 
3.      Discretionary Trusts protect other assets for the benefit of your heirs.
 
1.  Irrevocable Life Insurance Trusts
 
An ILIT is a powerful tool for leveraging generation-skipping planning and protecting insurance proceeds for the benefit of your intended beneficiaries. In addition to asset protection, an ILIT can remove life insurance proceeds from your estate for estate tax purposes and, with proper planning, provide much-needed liquidity for owners of illiquid assets, like farms, closely held businesses, or real estate.
 
2.  Standalone Retirement Trusts 
 
Because of the recent U.S. Supreme Court decision in Clark v. Rameker (which held that an IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors), the Standalone Retirement Trust has become an important vehicle for protecting retirement accounts from the creditors of your beneficiaries.
 
Planning Tip:  If you have more than $200,000 in a retirement account and you have named your children as primary beneficiaries of the account, then please call our office now to discuss how a Standalone Retirement Trust can be used to protect the account from your children’s creditors after death.
 
3.  Discretionary Trusts
 
A Discretionary Trust is an Irrevocable Trust that can be built into an ILIT and is an integral part of a Standalone Retirement Trust.  You can also include a Discretionary Trust for each of your beneficiaries in your Revocable Living Trust to protect other assets. 
 
Planning Tip:  If you are concerned about an heir who is (or may become) a spendthrift, married to an overreaching spouse, bad at managing money, in a high-risk profession, or worried about being sued, we can help you incorporate Discretionary Trusts into all of the testamentary trusts created in your estate plan.
 
Trust-Based Asset Protection Planning – The Bottom Line
 
Although asset protection trusts must be irrevocable to safeguard the trust property, they still offer a great deal of flexibility and protection for your own property as well as property gifted to, or inherited by, your loved ones. 
 
This type of planning can become complicated and should not be attempted without the assistance and counseling of an experienced attorney.  We are here to answer your questions about trust-based asset protection strategies and advise you on planning options.  Please feel free to call our office now.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. 

If you’re like most people, when you hear “estate planning” or “asset protection planning,” you think of someone like JR Ewing of the 1978 show Dallas, Bill Gates, or the Kennedys. 
 
WARNING:  Common Misconception
 
A very common misconception is only wealthy families and people in high-risk professions need asset protection planning. 
 
But in reality, anyone can be sued and lose all of his or her assets.
 
A car accident, foreclosure, job loss, medical crisis, business failure, or an injured tenant can result in a huge monetary judgment, decimating your finances. 
 
The goal of this newsletter is to provide you with a quick overview of asset protection strategies.  0
 
What Exactly is Asset Protection Planning?
 
Asset protection planning is the process of taking property currently vulnerable to seizure by creditors, predators, and lawsuits and positioning it in a way to discourage lawsuits, provide a valuable bargaining chip if a lawsuit arises, and minimize loss.
 
Basic, Every Day Asset Protection Planning

It may surprise you to know that you are likely taking advantage of basic asset protection strategies without knowing it. 
 
For example, the first line of defense against liability is insurance, including homeowner’s, renter’s, automobile, business, professional, malpractice, long-term care, and umbrella policies. 
 
Planning Tip:  We suggest you check your insurance policies to determine if your policy limits are in line with current assets and net worth; make adjustments as appropriate.  Then, be sure to review your policies on an annual basis to confirm that the coverage is still adequate and benefits have not been stripped to keep premiums the same. 
 
For example, Randi owned a rental property near the state university.  A balcony collapsed when too many college students gathered for a party.  Randi was sued and ultimately settled the case for $950,000, just under her umbrella liability policy of $1 million.  Randi’s personal and business assets were protected.
 
Planning Tip:  In some states, married couples are afforded asset protection in the form of “tenants by the entirety” (TBE).  With this type of ownership, the creditor of one spouse cannot attach a judgment to the couple’s TBE property.
 
For example, Bob and Sue are married and own their home as TBE.  Bob goes through a red light and crashes into a school bus.  Many children are injured.  He is sued and the jury determines Bob is liable and must pay out $1 million dollars.  Though other assets might be taken, the home cannot be seized because it’s owned as tenants by the entirety. 
 
Planning Tip:  Another type of basic planning 401(k) or IRA investment.  Under federal law, 401(k)s and IRAs (excluding inherited IRAs*) are protected from creditors in bankruptcy (with certain limitations).
 
Maximizing contributions to your 401(k) if you still are working will not only increase your retirement savings, but will also keep the investments away from creditors, predators and lawsuits. 
 
For example, Andrea lost her job and went bankrupt.  She was sued and lost many assets; however, the law protected her retirement plan.    
 
*If you want to assure retirement plans are protected when they pass to your loved ones, we can show you how to do that as well.
 
Sophisticated Asset Protection Planning
 
If you are a landlord, real estate investor, business owner, work in a high-risk profession, or have accumulated or inherited a significant amount of unprotected property, we recommend you consider sophisticated asset protection planning.
 
Please note that sophisticated planning will usually require giving up some or all control and, perhaps, ownership of the property.
 
We would like to help you determine whether sophisticated asset protection planning is required in your individual situation. The use of advanced asset protection strategies requires the expertise of a legal advisor who understands all of the applicable laws and specializes in the implementation, and, just as important, the maintenance, of sophisticated asset protection plans.
 
WARNING:  You Must Plan Ahead
 
To protect your assets, you must plan ahead.  Asset protection planning cannot be done as a quick fix for your existing legal problems. 
 
Your plan must be in place before a lawsuit arises.  And, in some situations, a significant period of time must pass before the asset protection plan is effective (up to 10 years in some cases). 
 
The bottom line is that everyone needs some form of asset protection in place. 

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. 

Lance D. Like is a Certified Specialist in Estate Planning & Administration. He is the founder of the Like Law Group LLC, a Bloomington, Indiana law firm. Practice areas include estate and Medicaid planning, elder law, probate, trust administration, and business planning.

Herald Times Readers’ Choice Awards
Greetings! It is that time of year again for the Herald Times Readers’ Choice Awards. This is a great opportunity to recognize local businesses in our community for their great products or service. I encourage you to take a few minutes to vote for your favorite local businesses. A paper ballot can be found in the Herald Times Newspaper if you prefer. However, an online ballot is available. Here is a link that will take you directly to the “service” section category:
http://hoosiertimes.secondstreetapp.com/l/2016-HeraldTimes-Readers-Choice-Voting/Ballot/Services

If you believe my firm has earned your vote I would be honored if you would take the time to vote for my firm in the “Law Office” category. Simply type in “Like Law Group” in that field. Make sure you vote for all of your other favorites as well. Voting ends Friday March 11, 2016 at 5 p.m.

Now, on to this month’s article titled Wills vs. Trusts:
Everyone has heard of wills and trusts. Most articles written on these topics, however, often presume that everyone knows the basics of these important documents. But, in reality, many of us don’t – and with good reason – as they’re rooted in complicated, centuries-old law.

Let’s face it, if you’re not an estate planning attorney, these concepts tend to remain merely that – concepts. So, if you’re “fuzzy” about wills and trusts, know that you are not alone. After we show you the difference between these two documents, we’ll tell you why a trust is often (but not necessarily always) the better choice.

Wills vs. Trusts: Defined
Let’s take a minute and define both “will” and “trust”:

Will. A will is a written document that is signed and witnessed. A will is considered a “death” document as it only goes into effect when you die.

A will:
• provides for the distribution of assets owned by you, but not assets directed to others through beneficiary designations (e.g. life insurance or retirement benefits)
• sends assets in your individual name or payable to your estate through the probate process
• allows you to appoint permanent guardians for your minor children
• names the person you wish to settle your estate (e.g. executor or personal representative)
• doesn’t always include protective trusts for beneficiaries and tax planning because many wills are simple 2-3 page documents
• permits you to revoke or amend your instructions during your lifetime
• tends to cost less than a trust on the outset but costs more to settle during court proceedings after death
Trust. A trust is a legal document, signed and (depending upon state law it may also have to be witnessed), and effective during your lifetime, during any period of disability, and after death. Because the trust is effective during your lifetime and you can change it, it’s referred to as a “living” document.

A trust:
• has lifetime benefits
• provides for the distribution of your assets
• avoids probate if fully funded
• provides for a successor trustee upon your death or incapacity
• allows for the management of your property – even if you’re incapacitated
• can address appointing disability guardians for minor children
• often includes protective trusts for beneficiaries and tax planning
• permits you to revoke or amend your wishes during your lifetime
• costs more than a simple will on the outset but much less upon administration, while typically providing significantly more value

The Probate Process: A Key Element in Deciding Between a Will and Trust

One key element in deciding between a will and a trust is understanding the probate process. The term “probate” – which literally means “proving” – refers to the process wherein a decedent’s will must be authenticated, outstanding legitimate debts paid, and assets transferred to the beneficiaries. State law dictates how this process plays out. Part of the process includes publishing notice to creditors in a newspaper and there are certain mandatory waiting times in the probate process that must be followed.

The downside is that probate can take a long time – even years – it’s expensive in many places and the entire process is completely public, meaning your nosey neighbor Nancy and evil predator Paul both know exactly who got your assets how to contact them. In virtually all cases, the only upside of probate is that creditor claims are cut off.

Now, in Indiana probate is often times not as onerous as it is in other states. Most probates my firm handles are done so through what is referred to as “unsupervised” probate administration which typically is less costly to handle than a “supervised” probate.

• Probate Guaranteed with a Will. If you use a will as your primary estate planning tool, you own property in your individual name, or property is made payable to your estate, probate is guaranteed.
• Probate Avoided with a Trust. If you use a fully-funded trust as your estate planning tool, probate is avoided – saving your family time and money.
The Bottom Line on Wills vs. Trusts

HOW TO DECIDE: As everyone’s situation is different, it’s important to analyze every aspect of your situation – and what the future may hold – so that you can determine what’s right for you and whether probate avoidance, incapacity planning, and trust protections have value to you and those you love. Many people receive the greatest overall benefit from having a trust. Although I prepare trusts for many clients each situation is different. That is why the counseling is important to make sure the client understand all the options and then can make an educated decision about the structure of their plan.

ACT NOW: Without an estate plan in place, whether a will based plan or a trust based plan, you and your family are left completely unprotected. Call our office now and we’ll help you determine whether a will or a trust makes sense for your situation. You don’t have to make these decisions alone.

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Income tax basis may not be the most exciting topic to read about.  However, it is a critically important topic to anyone who owns significant assets. Gaining an understanding of the basics of basis is a way to avoid costly mistakes.
 
The Real Meaning of Basis
According to IRS Tax Topic 703, your basis “is generally the amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.”
 
In plain English, basis means the cost you paid for an asset, plus any amount you paid to improve the asset, less any deductions you have taken against the asset. This means that your basis is used to determine the amount of capital gain or loss to report on your income tax return when the asset is sold.
 
Lifetime Gifts: A Basis Disaster Waiting to Happen
Thoughtful estate planning requires an understanding of when and how basis can change. You should always consider that the benefit of giving away assets during your lifetime may be offset by the carryover basis that your donee will receive. For example, if you decide to gift to your daughter that low basis AT&T stock or a lake house that has been in the family for years, then that gifted property will retain its low basis in your daughter’s hands. In other words, your basis is transferred to your daughter and becomes her basis. Unfortunately, this also means that there will likely be significant capital gains when your daughter sells the property you gave her. 
 
Bottom line: Gifting low basis property during your lifetime may not be the most tax efficient way to place the property into your daughter’s hands. In the alternative, passing the property to your daughter after you die will give her a “step up” in basis to its fair market value as of the date of your death. This makes sense if your estate isn’t taxable for state or federal purposes and your heirs are likely to sell the inherited property shortly after your death instead of holding on to it for years into the future. Of course, you will have to consider whether your estate is likely to grow in value to become subject to estate tax at your death, or if there is any possibility that the estate tax exemption (presently $5,340,000) will become less significant in the future due to inflation or legislative action.
 
To avoid a basis disaster, if you’re considering gifting that low basis stock or house to your children or other beneficiaries, please contact us before you do.
 
AB Trusts – Do You Need to Get Rid of Yours?
For married couples, basis has become more important now that portability of the federal estate tax exemption has been made permanent. In simple terms, “portability” means that when the first spouse dies, the surviving spouse can claim the deceased spouse’s unused federal estate tax exemption and add it to his or her own exemption. 
 
For example, if Fred dies in 2014 and none of his $5.34 million exemption is used, then his wife, June, can add Fred’s $5.34 million exemption to her $5.34 million exemption so that June now has an exemption equal to $10.68 million. All property passing to June from Fred’s estate, revocable trust, or by right of survivorship will receive a full step up in basis to the fair market values as of Fred’s date of death. Subsequently, when June dies her beneficiaries receive a full, second step up in basis to the full fair market value as of June’s date of death.
 
Let’s consider another possibility. What if Fred and June have a typical 1990s estate plan, which uses “AB Trusts” (also called “Marital and Family Trusts” or “QTIP” and “Bypass Trusts”) to ensure full use of both spouses’ federal estate tax exemptions? 
 
Back in 1999, the federal estate tax exemption was only $650,000. Using our scenario with Fred and June, if Fred and June were lax and neglected to update their estate plan and Fred dies in 2014, then not only will June be stuck with AB Trusts that were drafted using decades old planning priorities, but their heirs won’t receive a step up in basis for the assets remaining in the B Trust when June dies. Instead, they will inherit the B Trust assets with the basis calculated as of Fred’s 2014 date of death. In some cases, the lack of a step up for the B Trust assets may not make a big difference due to stagnant asset values or the enhanced asset protection opportunities that may be available for B Trust assets.
 
If you are married and your estate plan is more than a few years old, please give us a call so that together we can determine if an AB Trust plan still makes sense for you and your family. We may be able to revise your existing estate plan to take advantage of the good features of AB Trust planning while gaining the benefits of an additional step up in basis.
 
Beyond the Basics – Advanced Basis Planning Opportunities
Moving beyond the basics to some advanced planning opportunities, if you have low basis stock or other property that you are eager to sell, but would prefer not to take the immediate tax hit, here are some options to consider:

• You can enter into an installment sale for the low basis property which spreads the gain over a number of years and avoids running your income up the AGI ladder
• You can fund a Charitable Remainder Trust (CRT) with low basis property which achieves the following:

• Perhaps you have some low basis property with sentimental value (example, that AT&T stock or lake house you inherited from Aunt Betty). If you’re concerned about gifting such property directly to your children or other beneficiaries because you fear they may not share your personal interest in the property and will sell it rather than keep it, then a number of different trust structures can be used (preferably with a non-family member as the trustee) to ensure that your wishes will be carried out.

The Bottom Line on Basis
While it’s not a particularly glamorous concept and it can be confusing at times, basis remains a critical factor in any estate plan. Failing to update one’s estate plan or ignoring a low cost basis when property is gifted or sold can lead to disastrous tax consequences. So before you gift or sell that AT&T stock you inherited from Aunt Betty, give us a call first. We are here to answer all your questions.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. 

There is always a media swarm around the death of a celebrity, especially when they’re young, active in their careers, beloved, and tragic. The death of actor Philip Seymour Hoffman in early February is no exception. Hoffman was an incredibly talented actor who appeared to be in the prime of his career. But that career was cut short by a history of depression and substance abuse. His long-time partner found him dead in their Manhattan apartment after Hoffman apparently overdosed on heroin, cocaine, amphetamines, and other drugs.

Most often, articles about the estate plans of dead celebrities focus on the legal challenges they raise or the amount of estate tax that could have otherwise been avoided. Many of the articles about Hoffman’s death — and Sopranos star James Gandolfini before him — bear this out. But recently an article surfaced about Philip Seymour Hoffman’s estate plan that caught my eye. Published in JD Supra’s Business Advisor, author Anne Bjerken noted that Hoffman’s estate plan specifically included instructions for the guardian of his minor son. The instructions serve as a reminder that some of the most important things have NOTHING to do with financial or tax-related matters. (For many sophisticated planners, this borders on heresy!)

“ it is my strong desire…that my son, COOPER HOFFMAN, be raised and reside in or near the borough of Manhattan in the State of New York, or Chicago, Illinois, or San Francisco, California, and if my guardian cannot reside in those cities, then it is my strong desire, and not direction, that my son, COOPER HOFFMAN, visit these cities at least twice per year throughout such guardianship. The purpose of this request is so that my son will be exposed to the culture, arts, and architecture that such cities offer.” [1]

This is a reminder to us all that many care about their personal “values” legacy. What do I want my kids/grandkids to know was important to me? What kind of humans should they become? How can my estate plan help to influence that? Hoffman felt strongly enough about providing cultural exposure for his kids that he had it written into his will.

Values statements take many forms, from separate “letters of wishes” to firmer instructions to guardians and fiduciaries within the terms of a will or trust. Most are written as precatory guidelines — carrying influence, but no real legal effect — while others serve as incentive distribution provisions (or limitations on distributions) that are binding on the fiduciary.

These are the really important things that don’t get legislated away and that have little to do with the size of one’s estate, the federal Applicable Exclusion Amount, the rate of tax, or any other sterile, soulless legal or tax provision.

While parents and forebears should take the time to imbue their values on younger generations in real time during their lives, the estate plan is an important place to reinforce those values. Through the planning process we can capture those best elements of your passions and help to articulate those for the loved ones you leave behind.

We can’t know how well Philip Seymour Hoffman communicated his values to his kids. We do know that his opportunity to do so was cut short by a tragic death. The broader message to me is that even for the wealthiest Americans, often the personal, non-financial part of the estate plan is as important as — if not more important than — the financial and tax-driven side. 

[1] See Phillip (sic) Seymour Hoffman’s Last Wishes – I Want My Son to be Raised as a New Yorker, JD Supra Business Advisor, (Anne Bjerken) 3/19/2012. Available at http://bit.ly/1gQk5lq

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Make this your top New Year’s resolution — update your estate plan this year. If you didn’t update your estate plan last year when the federal tax laws changed, 2014 is the year to make some important changes in it. Alterations to tax laws can definitely impact your estate, plus addressing two other key issues can help you be confident you have everything in place for yourself and your heirs. Here are the three main reasons to review and update your estate plan as soon as you can this year.

Estate Taxes Are Now Stable
The federal estate and gift tax exemption is now an inflation-adjusted (from 2010) $5,000,000 per individual. Plus, there is no longer a built-in “sunset” for this exemption to automatically revert to $1,000,000. For a married couple, their estate can be worth more than ten million dollars before they have to worry about estate taxes. In the past, when the exemption was or was scheduled to be much lower, a large number of estate plans were set up using A/B trust provisions. In most estate plans I prepared these would have been referred to as the “family trust” and “marital trust” within the documents. With that structure, when a spouse dies, the deceased spouse’s assets do not go to the surviving spouse but rather are put in an estate tax avoidance/asset protection trust to the extent possible without causing the estate to be taxable. That trust would be a separate taxpayer and file its own income tax return each year. There are also ongoing management and administrative costs. Offset against those disadvantages are the asset protection advantages that an irrevocable trust can provide and the possible opportunity to preserve the deceased spouse’s assets for heirs if the survivor has to go into a nursing home.  

For the majority of people, there is no longer a current tax need for complex A/B provisions and so estate plans can be designed in a much more straightforward manner to meet non-tax goals. Your estate will be administered as directed by the plan in place when you die, so, with these major tax law changes, now is the time to come in and work with our firm to review your plan and your situation to determine if your plan should be updated and/or simplified.

Provide Divorce and Lawsuit Protection
No parent likes to think of their children in dire straits or that their heirs might have personal or business difficulties in the years ahead. But life does have a tendency to get in the way of the best laid plans. You want to protect your heirs and provide some financial security, yet most estate plans do not provide the heirs an adequate level of asset protection from the risks of loss of inheritance through getting divorced or sued. There are three issues that could negatively impact an inheritance:

1)    Immaturity or mismanagement of assets could cause an inheritance to dissipate long before you intended.
2)    Even if funds are managed well, an heir could be involved in a failed business venture or an accident. The resulting lawsuit could result in their inheritance being taken by a judgment creditor.
3)    With a divorce, all assets not proved to be inherited or gifts are subject to division, which does not have to be evenly. If the inheritance you provided ends up untraceable, like in a joint account, it could all be lost.

Once an inheritance is lost, there is no way to recover it. You want the part of your hard-earned assets that you leave to pass on to your heirs to provide them a measure of financial security. That is best done through a “testamentary” trust – one that goes into effect and receives assets upon your death. A testamentary trust can provide divorce and lawsuit protection to your heirs as well as to protect a young or unwise heir from himself.

Skyrocketing Costs of Long-Term Care
The issue of needing long-term care as we age is emerging as the greatest single real risk to estates of middle class Americans. There is now a 70% likelihood that an adult American will need nursing home care and the costs of that care are increasing rapidly. An average monthly cost for a nursing home can range from $5,000 to upwards of $15,000 depending on the location. In the Bloomington, Indiana area it is not uncommon for the cost of care to be $6,000 a month and above. In some cases, both spouses are in care at the same time, resulting in costs that can range from $10,000 – $30,000 a month. As care needs increase, for example with Alzheimer’s patients as their disease advances, monthly care costs can escalate to far, far above the average.

Most Americans worry about how long they may need care and how they will pay for it. Few have the income to cover those costs and so have to consume their assets to pay for care that is not covered by insurance. Medicare provides only limited, temporary nursing home care coverage, and that is only following a hospitalization of at least 3 days. Medicaid requires a person have minimal resources and the inability to pay for the nursing home before providing help. Protecting yourself and your spouse from ruinous long-term care costs requires a different sort of trust plan. Now is the time to review your estate and include some long-term care planning.

One possibility is moving assets into a Medicaid Asset Protection Trust. Assets that have been in a Medicaid Asset Protection Trust for five years are not included in the Medicaid calculation, so the sooner the trust is established, the more effectively it works.

If you do not have long-term care insurance, you should explore getting some. Your health will be a determining factor in whether it is available for you and its cost. There are also a variety of new insurance products that combine a life insurance death benefit with a long-term care benefit. Having a strategy for long-term care in your estate plan will give you, and your heirs, peace of mind.

Your estate plan may also need revision to protect assets for the survivor after the other spouse dies. The federal Medicaid laws have strict requirements for how that can be accomplished.

Early 2014 is the time to think about these three crucial issues and how they may relate to your own estate strategy. Make that New Year’s resolution today and call us for an appointment to review and revisit your current plan and goals. We will discuss with you the best possible solutions to meeting your estate plan objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.