UltraTrust Irrevocable Trust Asset Protection

Estate Planning

Estate Planning, Trusts

Being Own Beneficiary of Trust

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What do you mean I won’t be the Beneficiary of “my own” irrevocable trust? A self-settled trust is another name for being the beneficiary of your own trust. What are the cons of being the beneficiary of your own trust?   We understand the confusion. Some lawyer told you that you could be “your own beneficiary,” and some other lawyer told you that they did not recommend it, and we are telling you that it might be safer if you were not a beneficiary of the trust depending on the state you are in. It might be prudent to temporarily leave yourself off…with the Ultra Trust irrevocable trust and its special power of appointment, you can always add yourself later.   What is a Self-Settled Trust?   Now let’s take a look at being a beneficiary of your own trust. This is commonly known as a self-settled trust. First Alaska, then several other states created statutes that allow the asset protection benefits to extend to self-settled trusts. The vast majority of states do not. I am certain that your wheels are turning. Why not base the trust in one of those states? Well, we could do that without too much complication, but will the trust always be domiciled there? As part of the Estate Street Partner’s Ultra Trust® irrevocable trust we include in the powers of the “trust protector” the power to move the situs of the trust if it benefits the beneficiaries. We do this so that down the line, if state taxes or the laws of the state change, the trust protector can move the trust to a better place.   What are the Cons of Being a Beneficiary of your own Trust (i.e. Creating a Self-Settled Trust)?   So what are the perils of the being a beneficiary? You would be surprised, but we aren’t. In most causes of action and bankruptcy cases, the court determines your assets using a relatively simple idea: any assets that you have access to. Assets that you have access allow those that seek to collect from you too (i.e. your creditors). At the very least, the court will grant those that seek to take your assets access to your “income” from the trust if there is any. At the most, the court may decide that the wording of the trust allows you access to the principal of the trust whenever you would like and therefore those that seek to take your assets have access to the entire trust. (link to “Being Your Own Trustee”). If you choose to be a beneficiary, we can’t help you with the first scenario. As for getting access to the principal of the trust, the Ultra Trust® is designed to protect the principal.   Here is an example of the best case scenario involving a grantor-beneficiary:   In Re: Jane Mclean Brown, No. 01-16211, (2002).   Jane inherited a sizable amount of money from her mother. Jane was also an active alcoholic but was aware of her alcoholism. Jane had a plan. She took her inheritance and put it into an irrevocable trust, out of her own reach. She did, however, keep an income stream from the trust, but as this particular trust was written, did not have access to the principal in the trust. Later, as often happens in cases of alcoholism, Jane spent all of her money and ran up significant debt. She filed for bankruptcy. The creditors attempted to have the trust included in her bankruptcy estate. The court ruled that the corpus of the irrevocable trust was untouchable by Jane and therefore untouchable by the court and creditors. They did, however, rule that as Jane had control over the payout of 7% of the trust each year, this amount is the only amount that could be included in the bankruptcy estate.   Here is an example of where a trust was invaded because the grantor was a beneficiary that did not respect the legal structure and with too much control:   U.S. v. Evseroff, No. 00-CV-06029 (E.D.N.Y., April 30, 2012). Jacob owed back taxes. He decided to put his assets in an irrevocable trust, which included the property in which he lived. Despite having an independent trustee, Jacob lived in the property and retained total control of the property without any involvement of the trustee what-so-ever, made all decisions concerning the property without consent of the trustee, invoked these decisions as they pertained to third parties and paid all of the bills using Jacob’s own personal checks.   In essence, there were absolutely no trustee activities pertaining to the property or even an acknowledgement to third parties that there was a trustee, other than the actual trust document, that a trustee existed. When the IRS took Jacob to court, the court ruled that Jacob still had possession and control of the property, even though the title was in the trust. The court determined that Jacob had so much control that the trust was his “alter-ego.” Basically, the court said that despite the language of the trust document, Jacob had too much control over the assets in the trust and therefore the trust was not truly an independent entity. For this reason the court ruled that the government could collect Jacob’s tax bill from the trust.   Here is another example where being a beneficiary didn’t work out so well for the grantor in which the grantor set up a spendthrift clause:   In Re: Wayne H. Schultz, Jr., Case No: 4:04-bk-2062 E, United States Bankruptcy Court Eastern District of Arkansas, 2005.   Wayne decided to put his assets into an irrevocable trust with a spendthrift clause. Many years later he declared bankruptcy and the bankruptcy estate looked to the wording of his trust. He, the grantor, was a beneficiary of the trust and also had access to the principle of the trust. The state law had a rule against having a spendthrift trust that covers the creator of the trust. The

Estate Planning, Trusts

Testamentary Trust:What is a Testamentary Trust?

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What is a testamentary trust? A testamentary trust extends the will that permits the grantor (deceased person) to place assets into a trust (irrevocable or revocable trust) after the grantor has passed away. The purpose of the testamentary trust is to control who receives what assets and when the beneficiaries receive the assets.   A testamentary trust is an extension of a will that allows someone to put assets into a trust after they pass away for the purpose of controlling their distribution after they are no longer around to direct the assets. Testamentary trusts, while useful to set up instructions for the use of your assets after you are gone, aren’t useful for much else. A testamentary trust is basically a trust that emerges from your will at the time of your death. For example, one can state in their will at the time of death that they would like all of their assets to be placed in a trust for the benefit of their son. This trust could potentially have various instructions as to what benefits the son could receive, such as education, rent, a car, a trip to Iowa and whatever else the grantor (the deceased person) desires to be written in. Whitney Houston provides a real life example as she created a testamentary trust for the purpose of limiting the availability of assets to her daughter. The instructions were to give a percentage of assets upon her daughter’s 25th, 30th, and 35th birthdays.   “A trust is a great way to help your family when you are gone. You can make sure they are fiscally responsible, provide for all of their needs and accommodate only the wants that you choose,” explains Rocco Beatrice of Estate Street Partners, parent company of UltraTrust.com. Although this sounds helpful, any trust can accomplish this. One problem is that with this kind of trust, your family will still have to go through probate and pay estate taxes. Setting things up this way also does not help with asset protection or Medicaid planning.   A domestic Trust may or may not apply for a federal identification number. Revocable Trusts need not apply, but an irrevocable Trust generally applies for Federal identification. A federal identification application is filed on Federal From W-4. If it’s a Foreign Trust, the Grantor must check the box on Form 1040 schedule B, line 7a for the existence of a foreign bank account, and Form 1040 schedule B line 8 reporting the creation of a foreign Trust on Form 3520.   What is probate?   Probate is the procedure in which the judge peruses your estate planning documents, accounts for all of your assets and then decides on who will receive what assets. The job description of an executor (aka personal representative) is to ensure the judge receives all the necessary papers and that all legal matters are followed. The executor can have an enormous task ahead of him and this process in itself can take several months or even years and costs 4-10% of the estate. A testamentary trust does not avoid this process, but two other kinds of trusts do: an irrevocable trust and a living (revocable) trust.   Unlike the testamentary trust, both the irrevocable and living (revocable) trusts are set up during one’s lifetime. This means that they are funded with assets before death and, since the assets were not owned by the deceased at death, are not subject to the probate court process. For those interested in protecting assets and reducing the estate tax, the UltraTrust irrevocable trust is the best choice. “An UltraTrust irrevocable trust is, in my opinion, the best option for those people who want to best secure their assets to provide for their loved ones,” explains Rocco Beatrice. For those solely looking to avoid probate and do not need or want the increased protection and reduction in taxes, but are more interested in control, the living (revocable) trust will work as well.   A testamentary trust neither helps with estate taxes nor protects assets. During your lifetime, your assets are in your name and subject to creditors, lawsuits and any other financial threat one can imagine. A testamentary trust doesn’t help with estate taxes either. By waiting until after death for assets to enter a trust, one has not taken advantage of the yearly gift allowance or any of the many strategies employed by prudent planners to reduce taxes. These all must be done in your lifetime using an irrevocable trust.   In summation, testamentary trusts only do one thing: allow you to control assets when you are gone, although any trust can accomplish this. “I don’t know why testamentary trusts are still around. They offer no advantage and a huge disadvantage to a well-written irrevocable trust like the Ultra Trust”, states Rocco Beatrice of Estate Street Partners, “I have never recommended one and I don’t expect to recommend one in the future. There are much better options that give much better results.”

Estate Planning

Tenants in Common, Tenancy by Entirety

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Many people have the false conception that they will be able to get solid asset protection if they co-own property. Some of the common ownership types include joint tenancy, tenants in common, and tenancy by the entirety. While these can offer some benefits, these methods of ownership will not offer solid asset protection; and actually may make it worse.   Read Part 1 Joint Tenancy   Read more on Tenants in Common, Tenancy by Entirety       Tenants in Common (T.C.) (The rights of the owner in the property that is held as tenants in common).   Every owner of the property held as tenants in common will own an undivided interest in that property. For example, three individuals from separate families own a vacation home, with each person having 1/3 ownership.   What is the difference between a Tenants in Common and Joint Tenancy?   The ownership is transferable. This is different than with joint tenancy. If a tenant in common passes away, the interest in the property would then be passed to their heirs, not the co-owners.   Disadvantages of Tenants in Common   The tenants in common is an asset and this asset will be subject to any creditors.   The major problem with using tenants in common as ownership is that other tenants can do what they wish with their interest. For example, one of the tenants in common’s could get a loan on their 50% interest. Since their interest owned is subject to creditors with regard to asset protection, the amount of interest can be taken from the owner if ordered by the courts. Using the doctor as an example, if he owned property as a tenant in common with two other people, 1/3 of the interest in property would be subject to creditors if there were to be a malpractice suit. The doctor’s interest is not asset protected in any way.   This form of ownership will not give asset protection.   What is a Tenancy by Entirety?   Tenancy by the Entirety (T.E.) This type of ownership has different characteristics than the other two ownership forms mentioned.   Advantages of Tenancy by Entirety   Tenancy by Entirety will only apply to married couples. The property right cannot be divided or alienated. Neither of the spouses will be allowed to sell the property without the approval from the other spouse. This ownership will provide protection over joint tenancy and tenants in common if either spouse happens to incur a liability. There is an automatic right of survivorship which means that upon the death of one spouse, the property will be transferred to the living spouse.   What states are Community Property?   There are nine states in the United States that will treat property owned by a couple differently than other states. These “Community Property” states include: Arizona California Idaho Wisconsin New Mexico Louisiana Texas Washington Nevada Rules of Community Property   If you are residing in these states and are married, the rules of property ownership will apply and it states that the interest of each spouse in the community property will be subject to the claims of creditors of the other spouse. This means that all assets deemed community property will be at risk.   Disadvantage of Community Property   Owning community property is a mistake and will not help with any planning in regards to asset protection.   Disadvantages of Tenancy by Entirety   The property owned will be subject to joint creditors, which can include the IRS or really any creditor as long as the creditor sues both spouses.   Tenancy by the entirety does have one benefit. If one of the spouses is sued, the property will not be subject to the creditors. However, there are various disadvantages to this type of ownership. The property will not be protected from joint creditors in a tenancy by entirety, including state government, personal injury suits and the IRS. For example, if the couple has a teenage child who got drunk when consuming alcohol belonging to the parents and then killed another person in a car crash, the property will not be protected.   Tenancy by the entirety can protect from single creditors, but it is not an available option in most states.   Relying on co-ownership is not the way to protect your assets. The best thing to do is have an Asset Protection Irrevocable Trust or establish a Limited Liability Company or Partnership whose shares or membership units are owned by the Irrevocable Trust.   Read more on joint tenancy as asset protection.  

Estate Planning

What is Joint Tenancy: Pros and Cons

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Many people have the false conception that they will be able to protect their assets if they co-own property. Some of the common ownership types include joint tenancy, tenants in common and tenancy by the entirety. While these can offer some benefits, these methods of ownership will not offer solid asset protection; and actually may make it worse.   Why Joint Tenancy to Avoid Probate and Taxes is Not the Best Asset Protection Plan   Many people think of joint tenancy as a form of asset protection. Families will use a joint tenancy to avoid probate and avoid taxes of their property and real estate. They also will use it to distribute the real estate to their beneficiaries equitably. This form of asset protection may not be wise.   Asset protection is an important part of estate planning, but there could be some problems with the ways to own property if you listen to the wrong “expert.” There are a large number of estate planning attorneys that will recommend common ways to title property to incorrectly do asset protection. The problem is that many of these ways can be a disaster when looking at them from the view point of Asset Protection. There are a few ways that clients will typically own property.   Pros and Advantages of Joint Tenancy   Joint Tenancy This is also referred to as joint tenancy with the rights of survivorship. Owning property as a joint tenancy will allow each joint tenant the same rights, which can include:   1. Right of joint tenant to use property   The right of the joint tenant to use the property, including with land, the right to occupy the entire property, with bank account money or stocks and the right to spend the entire amount.   2. Joint tenant can transfer ownership of property   The right to make a transfer of the interest that is in the property without having to receive permission from other co-owners.   3. Right of Survivorship in joint tenancy   A survival right, for example, when a tenant dies. This means that the share of the tenant that has passed will automatically become an asset of the other co-owners. Basically, this states that a joint tenant cannot transfer the interest at death.   Avoiding probate with the joint tenancy   The question is why joint tenancy is even used. It happens to be one of the most common forms of ownership for a large variety of assets, including real estate, brokerage accounts and bank accounts. The reason this is a common form of ownership is because when one owner dies, the entire asset will then become the asset of the other owner. The end result is that this is one of the best ways to avoid probate for a particular asset. The following will address why these may not be good in regards to asset protection.   Cons and Drawbacks of Joint Tenancy   While joint tenancy may sound great at first glance, there are some reasons why it is not the best choice in regards to asset protection, such as:   1. Joint tenancy can be served   Joint tenancy can be served. This means that is one of the tenants transfers or sells the interest in the property, the joint tenancy will then become a tenancy in common.   2. Joint tenancy can be subject to creditors   The joint tenancy is an asset of each individual co-owner and can be subject to creditors. If either owner were to be sued and lost the court case, the creditor could receive the interest in the entire property. This will destroy the joint tenancy and could also result in the entire property being sold in order to satisfy the debt.   Case Scenario of a Joint Tenancy   Example: Let’s say that Doctor Johnson owns some property that has a worth of $1 million and he owns it as joint tenants with a sibling.   The doctor is then sued for malpractice and the final judgment against him totals $3 million. He only has $1 million in malpractice insurance. The creditor can then proceed in asking the court to force the sale of the property that is owned with the doctor’s sibling. The creditor could also ask that the interest in the property be transferred directly to the creditor. Either of these transactions will have consequences. Basically, the bottom line is that any asset that is owned by joint tenancy will be subject to creditors of multiple people.   3. Whoever lives the longest wins in a joint tenancy   Joint tenancy is nothing more than a gamble. Basically, whichever co-owner lives the longest will end up with all of the assets. Generally, this is not the intent when the joint tenancy is established. In fact, many people who have this type of ownership do not even realize the potential problems that could arise. This is often the case when parents are trying to avoid probate and taxes on property and have the desire to give an equal share of the property to any children.   Read more on joint tenancy as asset protection.   Based on these possible problems, it is suggested to avoid joint tenancy as a means of asset protection.   Read Part 2 Tenants in Common, Tenancy by Entirety   Read more on Joint Tenancy: Community Property

Estate Planning, Tax

What is Estate Tax?

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How can you save on estate taxes?     Watch the video on What is Estate Tax?   Like this video? Subscribe to our channel.   Now I would like to talk to you about what is an estate and how it relates to the estate tax. An estate is everything that you own on the date of your death. The fair market value of that asset, your stocks, whatever it is worth on the date of your death, or 6 months after, there are some very specific rules that are a little bit complicated, but basically, it is to determine the value, the fair market value, of all of your assets so they become taxable. And the IRS, your lawyers, your accountant, your appraiser, are all haggling with each other about how much everything is worth, so that the government gets a bigger chunk. They’ll say your estate is huge, and you’ll argue that it’s not that much. The more your estate is worth the more the US government gets because of the estate tax.   What is the estate tax?   The estate tax is a very major item. The estate tax is the only voluntary tax within the IRS code. Without proper estate planning, the tax forces sales of your estate at the most inopportune time. You have heard horror stories where people have had to sell their farms in order to pay the IRS their dues. All of this can be avoided with an Ultra Trust®, the rock solid irrevocable trust asset protection plan without going offshore. With the Ultra Trust® you have no assets on the date of your death. In other words, you have repositioned your assets from yourself, in your name, to the Ultra Trust®. You have just protected your assets and estate from the estate tax, from probate and have deferred your capital gains tax too.   The Ultra Trust® irrevocable trust asset protection can save your assets and estate   However, if you have trouble with ownership, you have ownership issues. In other words, you must own things, you must own the land, you must own the building, you must own the car, you must own all your assets. If you have these kinds of issues and can’t separate yourself from the asset, then the UltraTrust® irrevocable trust is not for you. If the Ultratrust® irrevocable trust is not for you, then somebody will have to pay the taxes (the estate taxes); somebody will have to support all these lawyers, accountants, appraisers and so forth, within the legal system. And again, if you have more assets in different states, each state will have the whole process of taxation.   Estate planning with the Ultra Trust® irrevocable trust, you can avoid all of these complications.   Continue to read part 9 of 11 on the Ultra Trust® benefits as one of the best irrevocable trust plans for asset protection here: Medicaid Spend Down Rules Part 1 – Estate Street Partners Part 2 – What is the Ultra Trust®? Part 3 – What is a Trust? Part 4 – Asset Protection Plan Part 5 – Asset Protection Eligible Assets Part 6 – Irrevocable Trust Tax Benefits Part 7 – What is Probate? Part 9 – Medicaid Spend Down Rules Part 10 – What is the Ultra Trust®? Part 11 – Irrevocable Trust Benefits Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.   Mr. Beatrice is an asset protection award winning trust and estate planning expert.   To learn more about irrevocable trusts and senior elder care visit: Medicare: elder care Asset Protection from Medicaid Hide My Assets Medicare Protect Assets Nursing Home Costs Nursing Home Spend-down Program Medicaid Estate Planning

Asset Protection, Estate Planning

Asset Protection Trust & Estate Planning

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Devise an asset protection plan that will provide a shelter for your assets from creditors   Build a Wall Around Your Assets: Estate Planning and Trusts   You have worked your entire life accumulating assets. These hard earned achievements can be lost in a short period of time if they are not protected. If you are sued, all of your assets are at risk. They are also at risk if you file for bankruptcy. Seeing as the best thing to do is to protect those assets, lawmakers have passed various acts that will protect certain assets.   Anyone is at Risk with Unprotected Assets   Regardless of what you read in asset protection blogs, many people believe only the wealthy are targets. This is far from the truth. No matter how many assets you have, whether your IRA & retirement plan investing account is $10M or $200,000, you are a target as long as you own those assets in your name. There are many legal circumstances that can place your assets at risk. Civil lawsuits and divorce can be perfect examples of where people lose their unprotected assets. No matter how safe you think you are from being sued, it is almost always best to take extra precaution. This is why asset protection is so important. It will help you safeguard those assets if there ever is a time where a lawsuit is filed on you.   Laws Can Protect Some Assets: Can an IRA be Taken in a Lawsuit?   There are various state and federal laws that determine what type of protection many of your assets can have from judgments and creditors. For example, your Traditional and Roth IRAs have a protection cap of $1 million from any bankruptcy proceeding. Any money that has been rolled over from other retirement accounts, such as 403(b) and 457(b) plans, are completely protected by law. It is important to remember that this protection is only in effect during a bankruptcy proceeding. They will not be protected from other court judgments.   In addition to IRA accounts, qualified retirement plans are also protected by law during bankruptcy. ERISA plans are also protected, so an ERISA asset protection retirement plan is not needed if you are going into bankruptcy.   Consider your large assets, such as your home. The amount of protection on your home can vary depending on what state you reside in. There are some states that offer limited legal protection, while other states will not provide any protection at all. Again, this is why it is imperative that you have an asset protection plan in effect. If the state and federal laws do not offer protection, you will already have a plan in place that will protect all of your assets.   State laws will determine how much protection is given for life insurance and annuities. In some cases, the cash surrender value of the life insurance policy will be protected. However, this does not always happen. In other cases, the only protection is for the beneficiary’s interest. Again, there are many states that offer no asset protection at all. If you need to know what laws are in place to protect your assets, check with your state’s official website to find out what protection is offered.   Just because there are laws in place, this does not mean that you will be safe from creditors during a lawsuit. No matter what kind of protection is offered by your state, it is always best to consult with an expert on asset protection planning such as Estate Street Partners. This is the only way you will be sure that your assets are protected, regardless of the type of legal proceeding.   Build a Wall Around Your Assets – How to Protect Them from Creditors   Too many people rely on just the protection offered by their state. This often leads to a disastrous outcome. These people usually end up losing most, if not all of their assets. There are many strategies that are effective when planning for asset protection. Proper planning can actually deter creditors from attacking your estate and may save you from your assets from being lost. Proper asset protection planning may even save you from a lawsuit being filed in the first place. What contingent lawyer will take a case if he cannot find assets in your name when he does an asset search? None.   Read more on Asset Protection Strategies

Asset Protection, Estate Planning

Asset Protection: Planning to Protect Your Assets

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Asset Protection: Questions on Protecting Your Assets   Estate Planning and Protecting Your Assets   Asset protection is one of the most important things you can do. The planning is a method of preparing for any possible lawsuits in the future. It entails rearranging the ownership of your current assets so that they cannot be touched by creditors during a lawsuit. Asset protection can also act as a form of supplementary insurance. It can protect you from the various risks that can be associated with professions and businesses. Generally speaking, asset protection is used to safe-guard your assets that would be at risk. There are different degrees of asset protection. Typically, the more complex the planning is, the more effective it will be in the future. However, even though complex planning can offer you the best protection, it is also very expensive and there are more restrictions involved.   Do You Need an Expert on Asset Protection Planning?   If you have assets that require you to plan your estate if you die, then you probably have enough assets to strongly consider an asset protection plan. It is important to protect these assets from lawsuits that could occur before your death. The decision is entirely personal and is based on risk aversion, your asset level and the level of protection you need. There are very few levels of protection that as you may imagine, have a correlated cost to set up, but it is a very personalized product and a professional needs to assess all of these factors when making a recommendation.   What Assets Can Be Protected?   Asset protection involves exempt property that is considered unreachable by creditors. Each state has its own unique laws that define what exempt property is. Some properties can be entirely exempt, while others may be limited. Some common examples of exempt property include clothing and jewelry, tools of a trade or a business and household furnishings. In some cases, life insurance and social security may be classified as exempt property. But there is no reason to risk laws changing in your particular state; an asset protection plan should take these potential risks into consideration.   If your property is not exempt, you should consider an asset protection plan attorney. This simple plan would transfer the property from you to an irrevocable trust. By transferring ownership of valuable assets to a trust, you will protect those assets from creditors. This transfer will protect your assets while you are living and will also protect them from a tax collector when you die. There are some disadvantages associated with these transfers which include the new owner’s exposure to creditors, your personal loss of control over the particular asset that was transferred and any gif tax consequences that result from the transfer.   Are My Retirement Assets Protected from Creditors?   If your assets are held in a retirement plan, the federal law will not allow creditors to reach those assets. Some examples of assets that are protected by a retirement plan include profit sharing, pensions and 401(k) plans. IRA’s may not be protected. You will need to check the laws in your state to see if your IRA is legally protected from creditors.   How You Can Protect Your Assets When Starting a Business   If your new business is not incorporated or held within an LLC with the shareholders being an irrevocable trust, you will place your personal and business assets at risk. Any claims that are made against the business could result in the loss of assets; personal or business-related. There are different tools that can help protect your assets when starting a business.   Partnerships and Trusts   Family limited partnerships have been deemed one of the available asset protection devices. While this is effective, it is not foolproof unless an irrevocable trust is the general partner. Many states allow limited liability companies to be formed, and they are also viewed as a great ownership form when considering asset protection. It is very difficult for any creditor to reach any assets that have been transferred using these devices if the membership shares are in the name of a trust.   Fraudulent Transfers   Asset protection is ethical and legal as long as the plan is put in place before a lawsuit is filed. It may be too late if there is already a claim or a lawsuit pending. Asset transfers during this time could be considered fraud. More specifically, fraudulent conveyance is where someone divests themselves of assets without fair consideration because they see a problem arising and would like to avoid paying a claim. However, a few highly sophisticated firms have ways of legally transferring assets in distressed times with a financial instrument to avoid problems with fraudulent conveyance.Please contact Estate Street Partners if you are seeking counseling to legally transfer your assets in distressed times and still avoid fraudulent conveyance. Each will be taken on a case by case basis. Estate Street Partners will never condone illegal practices and advocates transparent accounting and legal practices.

Estate Planning

Succession Planning Steps in Business Estate Planning

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How-To guide to succession planning for successful estate planning and transitioning your business to your successors. Timelines, how to choose your successor and the transitional options avaiable are discussed.   If you’re a business owner you should consider succession planning as part of your overall estate plan with your financial advisor. Succession planning is the process of handing over the responsibilities of running a business to someone else when you are no longer able, or willing, to run it. There are many steps to consider when planning who will inherit and run your business, and it is advised not to wait until you decide to retire to begin.   Step One of Succession Planning: Create a Timeline   One of the first steps you should take is putting together a timeline for when you would like to hand over the business. You should have a rough estimate of when you would like to start delegating authority to others that work for you, and when you would like the process to be complete so that you may retire at a reasonable age. This timeline will be a valuable gauge of how much opportunity you have to train your successor to run a successful company in your absence.   It is important to give as much time as possible train your successor so that the transition of authority is as smooth as possible when the time comes for you to leave. Depending on the size and type of business operation you run, you should consider three to five years as a minimum to accomplishing this goal. For this reason it may be wise to begin implementing your succession plan around age fifty-five or sooner depending on when you wish to leave the business to make sure you are still capable of teaching all the necessary skills to your successor.   Step Two: Choose an Appropriate Individual or Group of Individuals To Run Your Business   When you have your timeline in place, it becomes necessary to choose an appropriate individual or group of individuals to take control of your business. It is important to have more that one candidate in mind just in case your first choice decides to leave the business or does not wish to take over your position and responsibilities. Your successor should be someone with similar views to your own about the direction the company should take, have excellent managerial skills, and a proven track record for resolving conflict.   These traits are important to look for whether the successor you choose is from your family or a key employee you have come to rely on over the years. If you plan on leaving the business to more than one individual, such as multiple children, you should make clear ahead of time which responsibilities each person is in charge of. This will help to eliminate conflict later on when you are no longer around to serve as mediator for sibling rivalry.   Step Three: Transitioning the Ownership of Your Business   Now that you have your timeline and successor in order, you must consider the options of actually transitioning ownership of the business. The first step will be to consult with your financial advisor such as Estate Street Partners who will be familiar with the estate and gift tax laws particular to your state. It is important to review this information carefully so you do not leave your successor with unnecessary tax burdens which may put your hard earned business at financial risk.   The first step in determining your financial plan will be to obtain an accurate valuation of your business. You may need to hire a professional appraiser to determine the fair market value of your tangible and intangible assets in a manner that conforms to IRS standards and will prevent an audit of your estate once it passes out of your control.   Once you have determined the value of your business, you have several options on how you may transfer control to your successor: Gifting: This is an option that allows you to transfer ownership of your business over a set number of years without taxes, assuming you follow the current annual IRS gift limits. Gifting your business is also an excellent way to protect the financial security of your family and successors by removing the gifted amounts from your overall estate value. Staying within IRS limitations will help your family avoid gift and estate taxes which might otherwise cause them financial strain. Buy/Sell Agreements: These agreements are usually made between multiple shareholders in a company. A typical agreement might stipulate that if one shareholder decides to leave the company, the other shareholders are obligated to buy back his/her shares to keep the company from being sold to an outside party. Some agreements allow for all shares to be sold back to the business at fair market price, which means that employees other than the principals would have the opportunity to own part of the business.   Even if you do not have business partners, you should consider opening a business life insurance policy. If something were to tragically happen to you, a properly funded life insurance policy will provide your family and successors with the financial stability to continue business operations and pay off any necessary estate taxes. To protect the future of your business it is important to have an accurate valuation performed and to discuss changing tax laws with your financial advisor or Estate Street Partners on a regular basis.   Read more articles on: Estate Planning and Trusts Private Annuity Trust Living Will Tax Sheltered Annuity Hide Your Assets Now Eldercare Caregiving What is Asset Protection?

Estate Planning, Financial Planning

Single Member LLC: Charging Order, Creditor Claims, Pass-through

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A Single Member LLC is not enough protect from the creditor claims. The LLC is used as a pass-through for income and expenses. Many financial advisors believe the charging order defines the creditor as a “substituted limited partner for tax purposes.” Brief description on fraudulent conveyance and civil conspiracy in the LLC.     Watch the video on Single Member LLC: Charging Order, Creditor Claims, Pass-through   Like this video? Subscribe to our channel.   Recently I’ve run across some significant issues with the single member LLC’s with courts handing down noteworthy judgement decisions in favor of creditors using the theory of “fraudulent transfers” and “civil conspiracy.” I ran across two such individuals that have made me more caution on client advice regarding single member LLCs.   Single Member LLC – Limited Liability Company Pass-through Legal Entity   The LLC is a TAX HYBRID “pass-through” legal entity similar to a partnership but with the limited liability of a corporation. The LLC is tax-driven and was classified legally by the IRS on January 1, 1997 when the IRS threw out its old, and unnecessarily complicated, business entity tax classification regulations and agreed that LLCs should be taxed as partnerships (or sole proprietorships if they have one owner) without jumping through a number of technical hoops. Moreover, the IRS now lets an LLC elect to pay taxes as a sole proprietorship, as a partnership, or as a corporation by filing IRS Form 8832.   For “Income Tax purposes” income and expenses of the LLC “pass-through” directly to your income tax return proportionate to your percentage of ownership, or if there is more than one member, whatever percentage you decide, for example, 50/50 or 75/25. Irrespective of your equity ownership percentage, this is a significant advantage over other forms of business entities, and the LLC also has another significant advantage; members decide how they want to be taxed or, in other words, as sole proprietor, partnership, or corporation. The LLC will obtain it’s own Federal Identification Number (similar to a social security number), operate as a business, and maintain it’s own bank account.   Single Member LLC May Not Be Protected From Creditors   Ninety percent of financial advisors give the wrong advice regarding single member LLC formations. Single member LLC are mistakenly assumed to protect the member from the creditor. Most financial LLC advisors state that a Limited Liability Company (LLC) protects the owner (i.e. single member LLC) against present, past, and future creditors because the creditor may not step into the shoes of the LLC and has to look at the LLC member for collection.   The advisors point to an IRS Revenue Ruling (77-137), where the creditor holding the “Charging Order” will receive the “K-1.” They further explain, the creditor must pay the taxes on the income generated by the LLC, even though the creditor never receives any actual cash from the business. The creditor saddled by the charging order is treated as a “substituted limited partner for tax purposes” and will suffer the tax consequences without capacity to force payment, dissolution, or distribution of the LLC.   Charging Order Defines Creditor as Substitued Limited Partner for Tax Purposes?   The area of the laws surrounding the issues of the charging order to protect the single member LLC is dynamic and evolving. There’s no legal reasoning for a charging order protection for single member, even though most state statutes call for such protection. The charging order protection cannot create a “personal legal liability” out of a legal business entity for “the acts” of the LLC.   There are several litigation issues unique to the LLC that are beginning to emerge in trial forums. State LLC laws, when written, were primarily tax driven, and accordingly, they defined key terms and concepts in accounting and tax terms, and not with thought of contract tort law issues. When the LLC is in financial distress, litigation will usually focus on: Dissolution issues, Capitalization issues, Failure to comply with state statutory and regulatory requirements, and Violation of one or more provisions of the entity’s documents. Fraudulent Conveyance, Civil Conspiracy   The central issue to single member LLCs (one owner) is “FRAUDULENT CONVEYANCE” which, if not handled properly may become part of a “civil conspiracy” to fraudulently act against creditor claims. In some cases the financial planner, lawyer, or accountant becomes part of the conspiracy and in some cases such advisors have been reprimanded.   Single shareholder corporation, single shareholder of Sub “S,” and single member LLCs can provide the owner with protection against liabilities arising from “the conduct of the LLC” but not the owner of the LLC membership shares. In other words, “if” the LLC does something wrong, the owner is not necessarily responsible. To reach the owner’s personal assets, a plaintiff would have to “pierce the veil” of the entity showing that: The LLC, the corporation, or the Sub “S” was undercapitalized for it’s intended business purpose, Formalities were not followed, The owner used the LLC, Corporation or Sub “S” mostly for personal purposes, It did not serve a “bona fide” commercial purpose, It lacked in economic substance and was merely an alter ego of the owner whose sole intention is to frustrate the creditor(s), etc.   A single member LLC (one owner), Corporation, or Sub “S” will not protect the owner, because the charging order protection that is much touted, is based on protecting the “innocent” non-debtor.   Under the Uniform Fraudulent Transfer Act you would be committing a crime, see Section 19.40.041   “…(a) a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor…”   Read the second part of this article “Single Member LLC: Charging Order, Creditor Claims, Pass-through” by clicking here Fraudulent

Estate Planning, Financial Planning

Living Will: Pros, Cons to a Living Will, Free Living Will Forms

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Do you have a Living Will? To Living Will or to not to Living Will. These questions lend themselves to more questions: How well do you know and trust your loved ones? How confident are you that they understand your core values and views on what your final wishes are? Are you really sure they will respect the passing comment you made regarding your wishes in the case of terminal illness or vegetative state?      Watch the video on Living Will: Pros, Cons to a Living Will, Free Living Will Forms   Like this video? Subscribe to our channel.   The answer to these questions can often be resolved with a Living Will. A Living Will is a type of Advance Directive that outlines your treatment wishes should you become terminally ill or fall into a persistent vegetative state. While you have the option of making your Living Will oral or written, it is advised to have a written Will in case you are unable to communicate at the time when the Living Will is to be carried out.   A Living Will outlines to a healthcare professional which services you do and do not want. You can state that you do not want cardiopulmonary resuscitation, or a respirator, but you do want feeding tubes to provide you with necessary nutrition and you want to die at home.   Living Wills are often written in vague terms because you are trying to cover a variety of circumstances which are unknown to you when the Will is drafted. You may choose to sign a more restrictive Living Will, known as Do Not Resuscitate which prohibits the use of cardiopulmonary techniques to keep you alive during cardiac arrest.   It should be noted that unless you are wearing a special identifier such as a bracelet, your Living Will does not apply to the efforts of an Emergency Medical Team (EMT). There has been much debate in the news involving contrasting views on Living Wills, and most people will remember the Terri Schiavo case as an excellent example for debating the issue for drafting a Living Will.   Living Will Pros and Advantages   A Living Will, as with a standard Will, is a legal document and must be signed in the presence of witnesses and notarized. The importance of having a Living Will is that it clarifies to family and healthcare professionals which treatments you do and do not want if you are unable to speak for yourself. Although the wording in a Living Will is often ambiguous to cover a variety of situations, you might be surprised what can happen without one.   In the absence of a Living Will, most states will elect someone close to you (usually a family member) to make decisions for you. This person (sometimes referred to as the surrogate) may have no idea what your personal beliefs are regarding artificial nutrition and resuscitation, but if you are unable to speak for yourself this individual must act in what they feel is your best interest.   In some states the appointment of this surrogate will only occur when you are determined terminally ill, and all treatments leading up to this diagnosis are up to your doctor who has taken an oath to preserve life. If you have a Living Will you can alleviate indecision in your family by outlining the terms of your treatment.   You are never too young to draft a Living Will, and you may want to consider writing one “just in case”. The future can be unpredictable and it is better to be prepared than suffer an accident and leave others to decide your fate, especially if your religious beliefs conflict with artificial medical treatments such as feeding tubes.   Living Will Cons and Disadvantages   There are limitations associated with Living Wills. A Living Will is often written in vague terms. What “heroic measures” mean to you may not be the same as what it means to your doctor. Your definition of “heroic measures” might mean that you do not want feeding tubes used to sustain your life if you are unable to eat unassisted, but your doctor may not feel that use of a feeding tube is a “heroic measure”.   In addition, a Living Will is often not enacted until a person is deemed terminally ill. Doctors may disagree on when your condition falls into this category, and you may receive treatment which goes against your values as outlined in your Living Will. It is possible to be as specific as you want when drafting your Living Will, but keep in mind that the more specific wording you use, the greater the chance of excluding a wide range of scenarios in which you would want your Living Will applied.   One of the more common downsides to a Living Will is that it is not readily accessible to your healthcare provider. Some people choose to keep their Living Will locked up in a safety deposit box or another secretive location in their home. If you fail to provide your doctor with a copy of your Living Will, and you become unable to communicate, they will treat you as if you never had a Living Will drafted.   Free Living Will Forms: How to a Draft a Living Will?   Although you may be uncomfortable talking to your doctor about drafting a Living Will, your healthcare provider has access to free living will forms which are state specific. The Internet can also be used as a source for finding free living will forms, although it is wise to check with an attorney when using these forms or if you move to a different state to ensure your Living Will is in accordance with state laws.   A Living Will is revocable and you can change your mind at any time. You can obtain new forms from your doctor or attorney and change your mind whenever you want

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