Trusts

What do you mean, I Shouldn’t be the Trustee of “my own” Irrevocable Trust? Have no discretion as the trustee with regard to trust asset distributions.   Being trustee of your own trust can undo what the purpose of the irrevocable trust should be doing; this is, protecting your assets. We understand the confusion. Some lawyer told you that you could be your “own trustee.” At Estate Street Partners, although we will honor your wishes in the end, we strongly believe and advise in the safest option, period.   Being “Your Own” Trustee   First, let’s take a look at why we believe that you should not be your own trustee. While you, as the grantor, may technically be allowed to serve as the trustee of your UltraTrust irrevocable trust, you may end up in a precarious situation. If you have any discretion, as the trustee, with trust asset distributions, these assets may be included in your estate for tax, Medicaid, bankruptcy, debt collection and other purposes.   The key here is: “any discretion.” As a trustee, you need to have a lot of discretion to manage the assets of the trust. If any of those discretions are types that cause the court or government agency to claim that you have discretion to distribute assets in such a way that would benefit you, at the very least you will have to pay a lawyer a lot of money to defend you. Estate Street Partners would rather see you relaxing on a beach than stressing in a court room.   Here is an example of the difficulties when a grantor merely “can become” the trustee:   Estate of McTighe v. Comm’r, 36 T.C.M. 1655 (1977).   Fred set up some irrevocable trusts for his sons. When Fred died, the IRS attempted to tax the money left in the trust. The trust challenged the IRS in court. The IRS argued that since Fred had left himself the power to appoint himself the trustee, that he had sufficient control over the trust and should therefore be taxed on it. The trust argued that he never was the trustee and therefore the assets should not be taxed. The IRS won the case because the power to appoint himself as trustee gave him enough control over the trust to keep it in his estate.   Here is an example of very little discretion:   Estate of Farrel v. U.S., 553 F.2d 637 (Ct. Cl. 1977).   Marian set up an irrevocable trust and funded it. She wrote into her trust documents the ability to “fill in” as trustee whenever there was a gap in trustees (i.e. a trustee death or resignation). Otherwise, she could not fill in as trustee. Twice, there was a gap in trustees during Marian’s lifetime, but neither time did she assume the role of trustee, but rather appointed someone else. When Marian died, the IRS imposed a tax based on the amount in the trust. The trust appealed and lost as Marian still had a “thread” attached to the trust.   As you can see, being the trustee of your own trust is a quagmire that can potentially eliminate the advantages of an irrevocable trust. We would like you to reap the full benefits of the UltraTrust irrevocable trust and therefore kindly encourage you to elect a trusted non-family member as a trustee.

What is a revocable or living trust?   First, a trust is a contract that names a trustee to manage any assets owned by the trust. A grantor (aka settlor) gives something to another person with contractual instructions as to what they can and cannot do with the property. Put simply, the grantor is giving an item to another person to hold for them until certain events occur. The trustee does not own the assets, the trust does. Revocable trusts can be changed by the grantor or “revoked” at any time. For this reason, the courts view the property within a revocable trust as still being owned by the grantor. The grantor continues to pay taxes on any income and can control the property as if it were their own.   What are the advantages of a revocable trust?   Two main advantages of a revocable trust are the avoidance of probate and the possibility of “controlling one’s assets from the grave.” A revocable trust can hold every type of asset. If one places all of their assets in a revocable trust, there is nothing left for the probate court to do and thus there would be no need for probate court. Essentially, all of the assets have already been gifted (to the trust).   The trust becomes irrevocable at death because the grantor is no longer alive to make changes or revoke the trust. The trustee must then follow the instructions outlined within the trust document. The document could just describe how to distribute all of the assets, such as in a will, and then dissolve, or it may contain provisions for the trustee to continue to manage the assets for the benefit of the beneficiaries. These provisions may be good for protecting assets for the heirs from the issues described above. For example, the young adult beneficiary may not have access to the full assets of the trust, but rather the trustee could give out assets at certain ages, for certain events or have instructions to cut out the beneficiaries payments if they do not graduate college or run up significant debt or become chemically dependent.   What are the disadvantages of a revocable trust?   Like a will, a revocable trust offers no protection from estate or death taxes. Because the assets are still considered property of the grantor, they are, before the time of death, considered an uncompleted gift. When the assets are then gifted to the trust at death, they are subject to the same estate tax as a will.   A revocable trust, however, offers no financial protection during the grantor’s lifetime. For example, if a grantor is successfully sued, the plaintiff may still take assets from the revocable trust to satisfy their claims. Medicaid also considers assets in a revocable trust as countable assets. In other words, a person entering a nursing home must “spend down” nearly all of the assets in a revocable trust to qualify for Medicaid to help pay for their nursing home care. All of these issues stem from the basic premise that if a person has access and/or direct control of assets (such as a revocable trust – they can be forced to revoke it and use the assets) then these assets are accessible to any creditors such as a nursing home or a winning plaintiff.   Protect your assets for yourself and your children and beneficiaries and avoid tax dollars. Assets can be protected from frivolous lawsuits while eliminating your estate taxes and probate, and also ensuring superior Medicaid asset protection for both parents and children with our Premium UltraTrust Irrevocable Trust. Call today at (888) 938-5872 for a no-cost, no obligatioin consultation and to learn more.   Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.

What is a Trust Protector and Do I Really Need One? Can it protect me and my money? How does a Trust Protector act as a check and balance? What does a trust protector do exactly?   In our gratification-obsessed society, everything is subject to change – even our most intimate relationships.   Today, you’re in a very different place than 10 or 15 years ago. You’ve probably lost touch with many of your old friends. You might live in a different household, a different job, and practice different hobbies. The past is gone forever.   15 years from today, chances are good that things will look different still. While a typical irrevocable trust provides the strongest framework for preserving your hard-earned assets, it lacks the flexibility that your ever-changing circumstances demand.   Simply put, you need a trust protector to back you up. That’s why it’s so important to upgrade to a Trust package with the special power of appointment and trust protector. This added protection gives you the flexibility to respond to unforeseen changes and dilemmas.   Why a Trust Protector?   In many countries, trust protectors are a requirement in an estate plan. While this isn’t true of the United States, legal experts are virtually unanimous in their agreement that trust protectors are a crucial component of any irrevocable trust and estate planning.   A trust protector is a third-party individual – separate from the trustee – who understands the dynamics of your family. He acts as a check on the actions of the trustee and maintains a fiduciary responsibility to the trust. By protecting the assets of the trust from the inevitable squabbles that occur whenever there’s money to be had, he lives up to his name.     The validity of the trust protector has been upheld time and again. The court’s decision in McLean Irrevocable Trust v. Patrick Davis, P.C. (Mo. Ct. App. 2009) clearly establishes the legal basis for the office’s existence and provides a framework for the definition of its roles.   A subsequent case brought by the same plaintiff, McLean Irrevocable Trust v. Ponder, is even more pointed. Here, the court ruled that a trust protector has a fiduciary obligation to take action against unresponsive, incompetent or malevolent trustees.   The trust protector doesn’t have the luxury of looking the other way. He’s like an insurance policy that automatically comes to the rescue whenever a trust’s integrity is threatened – just like the crucial insurance policies that we carry on our homes, cars, and businesses. The trust protector provides the same backup planning.   As we outline in this comprehensive article on “The Trust Protector: Power & Responsibilities”, a trust protector can legally do the following:   Replace your trustee at will Serve as a mediator for squabbling trustees and beneficiaries Veto large disbursements in accordance with existing agreements Change the trust’s state of incorporation if you relocate or to avoid taxes Veto questionable investment decisions and beneficiary distributions Address legal challenges to the trust Terminate a dwindling or unnecessary trust   The true beauty of the role, though, lies in its versatility. A trust protector can do as much or as little as you need. He’s the perfect ally in any trust-related jam. Let’s see 2 real-life examples of what a trust protector can do.   Best Friends, Just Not for Life   Meet Sal.   After graduating from college, Sal started painting houses to make ends meet. Two summers in, he had saved up enough to buy a truck and some tools. Before long, he was working as a foreman for a contracting company that replaced roofs, wiring systems, and insulation in aging suburban homes.   Soon enough, he got sick of repairing other peoples’ homes and decided to buy and fix up his own. His first buy was a sad-looking foreclosure in a working-class neighborhood just outside of Philly, but he worked on it until it was the pride of the block. He booked a cool $100,000 profit from its sale.   Soon, Sal was a mini-real estate mogul who managed a portfolio of eight properties in the area. He had a great system: He’d fix up each house, sell it for well above market price, book the profits and plow the principal back into a new property.   To protect his years of hard work and preserve a legacy for his growing family, Sal set up an irrevocable trust and named his young son as its sole beneficiary. He chose Dave, his former college roommate, to be its trustee. Dave came from a well-off family, so he understood how to manage money and he refused the offer of being paid to serve as trustee.   The experience wasn’t always conflict-free. Sal had a knack for identifying market peaks, but Dave didn’t always listen to his advice. Sal’s properties were always the trust’s most valuable assets, and the proceeds from their sales provided much-needed liquidity.   Fifteen years later, matters have come to a head. Sal’s son has been helping his dad fix up houses for years and finally wants what – he thinks – is due to him. He approaches Dave and proposes using $100,000 of the trust’s funds to buy a late-model Porsche for his personal use. As a wealthy man who is used to having a nice ride, Dave happily agrees to the plan.   Sal is disgusted. Dave has refused to sell any houses for several years, so the trust is low on cash. A frivolous car purchase would further risk the solvency of the trust and, should an unforeseen event occur, potentially jeopardize everything Sal has achieved.   If Sal had a trust protector, he could put a stop to this nonsense by firing Dave or at least vetoing his questionable purchasing decision. Sal’s son certainly deserves a decent vehicle, but perhaps the trust protector could have forced the trustee to purchase a Camry over a Carrera.   As it stands, Sal

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

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.”