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Types of Asset Protection & Trusts, Self-Settled Trust, Domestic Asset Protection

Simple Trust, Gift-taxing Exclusion, Generation Skipping Transfer-Tax Exemptions, Grantor Trust, Protecting Assets from Malpractice

Discuss different types of asset protection and trusts in estate planning. Simple trusts, gift-tax exclusion; generation skipping transfer-tax exemptions; transfer-tax system; supercharging trusts with no estate tax & gift tax; grantor trust.

Protect your assets from lawsuits, divorce, Medicaid. Asset Protection as well as estate planning and trusts, in general, can be viewed similar to a poker match. In some cases, you need a simple hand and sometimes only a full house will win. This is a unique way to look at asset protection, estate planning, and trusts. There is no shame in winning with just a pair of deuces. Sometimes, that low pair can win hands. However, in many cases, the pair of deuces may not cut it when you are on the World Series of Poker Tour. You might need a more powerful hand. The same is true with estate planning and trusts. Often, an expert on asset protection planning will tell you that a simple pair will suffice, while other times, you will need that full house.

Simple Trust: Parent sets up trust for child; Gift-tax exclusion

This is the simplest form of a trust. For example, this type of trust is when a parent sets up a trust for their child and names an independent trustee. As long as the assets from the trust remain in the trust, they will be protected from impudence on behalf of the child, divorce or other possible problems. The parents have the ability to select a trustee that will manage the trust. Through distributions from the trust, the trustee can guide the child in the right direction. In most cases, the trust will include an annual demand power. This assures that any gifts that are given to the trust will qualify for the annual gift-tax exclusion. This will preserve the parent's exemption of $1 million.

Protecting Assets in Trust forever: Generation Skipping Transfer-Tax Exemption; Transfer-tax system

This is where a little more planning comes into play. Let's say that the trust is to last a long time, maybe forever if it is allowed by the state. As long as the assets associated with the trust remain in the trust, the assets can be protected. However, seeing as the trust will last forever, the parent can allocate some of their generation skipping transfer-tax exemption. In this case, all growth in the assets of the trust will be removed from the transfer-tax system forever.

Asset Protection of Supercharged Trust: Growth in assets free from estate tax and gift tax forever; Income tax benefits; Two-tax benefits in one

Is there a way to improve a trust that retains the growth in assets out of the estate tax and gift tax system forever? There is a way. Simply supercharge the trust with an income tax benefit. The trust that was set up for Two Pair was a good plan, but each year, depending on how the trust is set up and how it is used and the level of distributions, the trust may have to pay an income tax on any earnings. Seeing as tax rates will probably rise, this option may not be the best choice. This means that any growth within the trust will be reduced by income taxes.
What if there was a trust that could be structured in a way that the parent paid the income tax on all of the earnings? This would preserve all of the growth in the trust as well as outside of the tax system. This way, you will actually be getting two tax benefits in one! The payments for the taxes that the parent pays will in turn deplete the estate. This will then reduce the estate tax!

Asset Protection from Malpractice Suits: Self-settled Trust; Domestic Asset Protection Trusts (DAPT); Grantor Trust

Dr. Bob Smith wishes to protect his assets from any malpractice suits and bad rating. What are his options? To begin with, he could set up a trust in one of many states that allow self-settled trusts. These states include Delaware, Nevada, South Dakota and Alaska, to name a few. This type of trust is one that you set up yourself and fund with assets. You remain the beneficiary of the trust and your creditors have no reach. These particular trusts are referred to as domestic asset protection trusts, or DAPT. Let's say the good doctor gifts a total of $500,000 of assets to his new trust. This amount barely makes a dent in his net worth. Seeing as that is the case, Dr. Smith structures his trust so that it is a grantor trust; He then sells substantial assets that he owns to the trust. Since it is a grantor trust, there is no recognized gain on the sale of the assets. The trust gives the doctor a note for the purchase price. The extent to the assets sold to the trust will appreciate faster than any interest rate on the purchase note. Now, all the growth is removed from his estate.
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