In the realm of financial planning, creating a trust can be one of the most important steps in terms of achieving solid asset protection and designing an adequate estate plan. Creating a trust does not have to be a difficult process, but it does require thoughtful consideration and planning.
Choose the right legal or financial professional to create your trust for your family
Most individuals, and even most estate planning attorney’s unfortunately, are not familiar with trust law and how statutes can affect estate planning across different jurisdictions. It is unreasonable to expect someone who is not a legal or financial professional to be able to easily understand how to create a trust; however, certain key aspects of creating a trust can be sufficiently learned so that a do-it-yourself option becomes available.
The following 15 key points are of the essence when creating a trust. Once this information is fully understood, potential grantors will understand how to create a trust to the point that they can begin the process of setting one up by themselves.
1 – The Need and Purpose of Creating a Trust
Trusts were created when the Renaissance period reached the nascent common law system of the English royal court. These legal instruments were born out of an important necessity: when English knights marched across Europe as Crusaders, they conveyed property ownership to individuals whom they trusted to handle affairs such as managing land, paying feudal dues, etc. If the knight did not return to England after a battle, the terms of the trust would establish that the estate would transfer to beneficiaries, who were usually the spouse and children. In the absence of a trust, the Crown would simply claim royal rights over the deceased knight’s property, often leaving his surviving spouse and family penniless.
Good asset protectton is like a puzzle placing together the right pieces in the right place
The historic needs of trusts have not changed. They are still legal documents that establish a fiduciary relationship whereby personal ownership of assets is relinquished and the property is transferred so that it can be managed by a trustee for the benefit of others.
The modern purposes of trusts are: asset protection, wealth management, avoiding probate, Medicaid planning, and estate planning. Individuals and couples whose assets including real estate are worth more than $100,000 should consider creating a trust for their own benefit and to protect the financial futures of their loved ones.
2 – The Laws and Rules Governing Trusts
In the United States, trusts fall under the laws of property, which can be different from one state to another. The most important aspects of trusts that can differ from one state to another are: validity, construction and administration. Validity deals with state-specific laws and rules that may render a trust invalid from one jurisdiction to another. For example, at one point many states adopted a rule against perpetuity, which is intended to prevent legal instruments from placing restrictions on property for too long; however, states such as Florida allows property interest that is non-vested in a trust to remain for 360 years instead of the suggested uniformity of 21 to 90 years.
Although there seems a fair amount of uniformity in terms of the laws that govern probate, wills and trusts across all states, it is imperative that individuals who set up a trust in one state to draft new documents when they move to another state or make sure that your trust is amendable to change the situs. Once someone learns how to create a trust, the second time around will be substantially easier.
3 – Parties to a Trust
Trusts are legal relationships that require at least three parties: grantor (also known as settlor), trustee and beneficiary. Each of these parties can be represented in plurality, which means that there can be more than one grantor, trustee, and beneficiary.
When learning about how to create a trust, the grantor must assume a decision-making role that includes certain responsibilities such as choosing the type of trust, appointing the trustee, naming the beneficiaries, relinquishing property, and transferring the assets into the trust. Depending on the type of trust and the way the assets are transferred, the grantor may incur into gift taxes; nonetheless, skilled trust advisors can come up with a strategy that can alleviate this financial burden even if your estate exceeds the federal limits for a gift exemption. The role of the grantor is pretty much completed after the assets are transferred and the trust papers are properly filed and settled.
The trustee is the party that takes over the management of the trust. The duties and responsibilities of the trustees are defined by the grantor during the construction of the trust. In some cases, grantors initially serve as trustees until they appoint someone else; some individual grantors set up their trusts in a way that will appoint a trustee only when they become unable to assume management.
The beneficiaries are the parties who are named to eventually receive the benefits of the assets in trust contingent on a trigger event – usually the death of the grantor(s). Beneficiaries also have duties and responsibilities: they may have to pay taxes based on the assets they receive as benefits, and they are also responsible for requesting an audit the work of the trustee to ensure that the trust is being managed in accordance to the law and to the wishes of the grantor.
4 – How Creating a Trust Can Help a Family
In every trust, there is an implied desire of keeping property and assets safe for the benefit of families. This implied desire is the historic factor that prompted the creation of trusts in the first place.
Structure your family trust properly so conditions can be placed on distribution of assets when someone passes away
Trusts can be structured in ways that serve the interests of individuals who can be grantors, serve as trustees and also become beneficiaries; notwithstanding this asset protection strategy, creating a trust is something that is more commonly associated with effective financial planning for families.
With a properly structured family trust, conditions can be placed on the distribution of assets when someone passes away. Gift and estate taxation can be reduced or eliminated, and family affairs can be kept away from public scrutiny by means of skipping probate court proceedings. Family fortunes can be protected from lawsuits and overzealous creditors, and trustees can be appointed with the understanding that they must adhere to the terms of the trust and help to make it grow.
5 – Creating a Trust With a Do-It-Yourself (DIY) Platform
Asset protection and wealth preservation are part of an industry that generates billions of dollars in administration fees each year. Attorneys and CPA firms that offer trust creation services often charge hefty fees their planning expertise. As a result, many individuals and families shy away from setting up trusts to protect wealth that they have worked hard to accumulate over several decades.
Although there is a certain amount of complexity involved in the creation of an effective trust that can provide solid asset protection and efficient estate planning, there is also a several DIY approaches that take each step into account making it easy that prospective grantors can take advantage of.
DIY trusts are the result of advances in software and database technology and are so sophisticated and accurate today, that even most attorneys use them for their clients trusts. Using an online platform that presents grantors with questionnaires about their finances, civil status and estate planning goals. The questions are related to the 15 key points discussed herein; once all the answers have been provided and the questionnaire is completed, two reviews take place. One review is automatically conducted by the software; the other review is conducted by seasoned professionals with years of experience in creating trusts. Once the correct documents are drafted, they are sent to the grantor for execution accompanied with instructions and guidance.
Once prospective grantors become familiar with the 15 key points presented in this article, going through the DIY process of creating an irrevocable trust or creating a living trust becomes a task that is not only easy to manage, but also beneficial in terms of avoiding considerable legal fees. This is one of the greatest advantages for those who learn how to create a trust.
6 – Choosing the Trustee
Proper selection of a trustee is crucial when creating a trust. Some individuals who choose a living trust as an instrument primarily for asset protection and not so much for estate planning may be tempted to serve as grantors, trustees and beneficiaries, but there some caveats in this regard. A similar situation arises in family trusts, whereby parents may want to automatically choose their oldest child to serve as trustee.
The choice of trustee should take into account a few factors: knowledge, experience, potential conflict of interest, access to the assets, management abilities, cost, and relationship. Grantors are likely to immediately think about appointing relatives as trustees because they feel that they can trust them to manage their assets and handle their financial affairs, but this could be a problem insofar as creating a burden for a trustee who has his own family and work responsibilities.
Independent trustees should always be preferred because they fulfill the aforementioned factors and they create a fiduciary duty which is golden in the eyes of a court. Fiduciary duty is synonymous with a legal obligation to protect the assets. A CPA, for example, is a professional under the oversight of a state regulator. Appointing a CPA to handle trustee duties is the best course of action for grantors who believe that appointing multiple trustees is a wise choice. While there are no limits with regard to whom you choose or the number of trustees who may be appointed, the conflict of interest factor is amplified with the presence of more individuals acting in a fiduciary capacity.
If for some reason the grantor feels that he or she must appoint various trustees, a trust protector provision may be included to ensure that potential conflicts between trustees can be quickly resolved.
7 – Creating a Trust with a Trust Protector
Grantors who choose to appoint an independent trustee such as a CPA, friend, in-law, or lawyer do not have to worry about completely and permanently ceding all control of the assets and property transferred to the trust. Within the trust contract, a trust protector provision can assign powers to an individual or an entity for the purpose of replacing the trustee as needed.
The trust protector strategy began being used by asset protection lawyers that operate in offshore financial havens such as the Cayman Islands, Cook Islands, and other jurisdictions and has since been implemented into the better domestic trusts. The trust protector provision used by offshore havens allows someone in the United States, for example, to
Prospective grantors in the United States do not have to go offshore for the purpose of strong asset protection. A handful of states recognize that trustees and trust protectors can coexist within a fiduciary agreement. One such state is Delaware, where an individual or entity serving in this capacity is called an adviser under section 3313 of the Delaware Code.
The powers that can be assigned to a trust protector may include: the ability to replace trustees as needed, the right to control spending, the power to veto distributions, and the ability to step in whenever a conflict between trustees arises.
Watch the video on revocable trusts vs irrevocable trusts
Revocable trusts are designed to give grantors an opportunity to easily undo the terms of the agreement so that they can retain control and ownership over their assets. Revocable trusts can also be modified at will by grantors.
Irrevocable trusts are designed to give grantors maximum benefits in terms of asset protection, estate planning, tax advantages, Medicaid planning, and others. Unlike revocable trusts, grantors do not retain ownership or control of assets held in irrevocable trusts, and the terms cannot be modified as easily.
Generally speaking, irrevocable trusts are the better choice for individuals and for families, and they can be set up on DIY basis.
9 – Married Couples and Trusts
Couples who are either legally married or who live together under the terms of a common law marriage or civil union can draft trust agreements that reflect their lifestyle and their financial goals. To this effect, a joint irrevocable trust can be created to meet the needs of most couples. In such case, one or both spouses act as the grantor, but each spouse can designate beneficiaries who can receive a share of property owned in common.
The terms that govern the property held in a joint trust can be dictated by both spouses. The estate planning benefit, when one spouse dies, the assets and property remain in trust for the enjoyment of the benefits. A provision can be included in the trust for the purpose of a final distribution to take place once both spouses pass away.
You can preplan a marriage with a prenuptial agreement
Individual trusts can also be created by married couples who wish to keep their property separate. Reasons for doing this include: second marriages and the desire to not cede control of assets and property to a spouse. Couples who are engaged and wish to keep their property separate throughout their union can also set up individual an irrevocable trust vs a Prenup which work 100% of the time in divorce situation whereas a prenup usually creates more problems than it solves; there is nothing more romantic than asking your wife to preplan a divorce with a prenup before you commit to spending the rest of your life together.
10 – Naming Beneficiaries and Distributing Benefits
Creating a trust is something that is done for the benefit of others, who are usually spouses, children, and relatives; these are the beneficiaries. By creating a trust, grantors have certain advantages and can even create incentives with regard to financial planning for children and minor beneficiaries.
One common concern among grantors as they grow older is whether their children and grandchildren could be negatively affected when they inherit a substantial amount of money. When it comes to beneficiaries who are minors, a trust allows grantors to specify those incentives and conditions that must be met before the trustee can make a distribution. Age is an example of a broad condition; in these cases, a minor must reach certain ages before distributions are made. An incentive would be a specific condition, which could be graduating from high school or from college to encourage that beneficiaries pursue education or careers.
Avoiding lump sum inheritances that may be squandered by potentially not-yet-mature beneficiaries is a popular and wise provision among trust grantors in the United States.
Guardians can also be nominated for minor beneficiaries when creating an irrevocable trust, and this is a designation that should also be made in a will.
11 – Exclusions from a Trust
When learning how to create a trust, prospective grantors must think about every angle that could apply in terms of estate planning and distribution of wealth over the next 50 years. One particular angle that certainly merits careful thought is not so much who will be the beneficiaries; it is important to think about who must be specifically left out of the trust.
Similar to leaving people out of a will or disinheriting someone, a trust can be set up in a discretionary manner so as to designate who should really benefit from the estate and who shouldn’t. Exclusions can be specified in DIY trusts, but they must not run afoul of provisions against disinheritance in certain states.
12 – Depositing Assets in Trust
Transferring assets into a trust is known as “funding the trust.” Just about any type of asset or property can be transferred to an irrevocable trust, and this includes personal and business assets. Cash, life insurance policies, investment accounts, precious metals, and even companies can be transferred, but grantors should keep in mind that they are ceding ownership to the trust, which means that business and investment decisions will be made by the trustee after consulting with their financial advisor, you.
A trust can have a home even though a mortgage is charged against it
With regard to real estate, if the property is shared with a business partner in what is known as a tenancy-in-common agreement, your equity share can be deposited into the trust. Personal checking accounts, everyday vehicles that have no luxury or collectible value, 401(k) and retirement accounts, and assets that are not really valuable typically are left out of the trust.
If your home has a mortgage, it can still be added to the trust and, due to the St. Germain Act of 1982, the bank cannot call your loan due or accelerate your payment schedule with them. If you stop paying your mortgage, however, they can still foreclose on the home because they are still the first lien-holder. What they cannot do is go after other real estate or assets that are properly put into the trust.
13 – Jurisdiction and Venue
When choosing the state where the trust will be created, it is important to know about the applicable statutory provisions; this is known as the trust situs. The significance of choosing the trust situs cannot be ignored, and this was something that was partially discussed in the second point of this article with regard to the rule against perpetuities. Some states offer stronger asset protection than others; however, when real estate property will be transferred into the trust, the trust situs should be the same state where the real estate assets are located.
This means people with a summer home in Michigan or a winter home in Florida and Colorado, will likely need to set up more than one trust.
14 – Reasons for Creating a Trust
Protect your assets before entering into a nursing home
Learning how to create a trust is mostly a matter of function; understanding the reasons for creating a trust and how financial goals will be achieved takes more thought and consideration. When the goals are clearly defined, drafting the trust agreement is easier.
The most common goals chosen by trust grantors include: passing wealth efficiently by avoiding the probate process, reducing estate taxation, preserving assets for charities, retaining control over wealth distribution, and protecting assets by keeping them within the family instead of a creditor or nursing home.
15 – Building a Legacy With Trusts
An irrevocable trust asset protection diagram of the different types of relationships involved. (Click the above diagram to enlarge)
At some point in life, prospective trust grantors shift their focus from wealth creation to wealth preservation. Trusts are not merely for estate planning; they can be used in life to structure distributions to minors as they grow older and start building their lives, or they can also be used to alleviate tax burdens so that gifting to charities can be conducted for maximum benefit.
A properly managed trust can help to build a legacy by providing business continuity over a family fortune across generations. This is how a legacy can be built; financial success does not have to always live in the present, it can also be preserved and protected so that a family can always enjoy its benefits.
We look forward to our visit with you and your professional representatives to assist you with the advancement of your estate planning.
Rocco Beatrice, CPA (Certified Public Accountant), MST (Master of Science in Taxation), MBA (Master of Business Administration), CWPP (Certified Wealth Protection Planner), CAPP (Certified Asset Protection Planner), CMP (Certified Medicaid Planner), MMB (Master Mortgage Broker)
Managing Director, Estate Street Partners, LLC
Riverside Center Building II, Suite 400, Newton, MA 02466
“Helping our clients resolve their problems quickly, effectively, and decisively.”
The Ultra Trust® “Precise Wealth Repositioning System”
This statement is required by IRS regulations (31 CFR Part 10, 10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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.
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.
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
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 can do nothing but watch Dave approve the purchase of a car that he doesn’t really approve of.
Let’s turn to Susan.
As an emergency-medicine doctor, Susan has earned a tidy sum over the years. She’s approaching retirement, though, and her family’s history of metastatic breast cancer has given her pause. To ensure that she qualifies for government medical benefits in the event of a grave illness, she sets up an irrevocable trust with her three adult children as beneficiaries.
As an experienced attorney who’s also nearing retirement, Susan’s brother-in-law Paul is more than happy to serve as the trustee. Things start off well, but Susan’s mother-in-law falls ill about a year later. With her father-in-law lacking the strength to care for her and Paul’s career winding down, Paul steps up to care for her. Susan and her husband, a busy vice president at a local manufacturing company, are grateful.
As Paul’s mother becomes sicker, caring for her turns into a full-time job, and Paul retires a year ahead of schedule to accommodate her needs. Since his dad isn’t in great shape, Paul is in heavy demand. He spends several hours per day at his parents’ house, handling everything from laundry and cooking to basic structural repairs and drug administration.
Paul is a fundamentally decent man who’s under an incredible amount of strain. Meanwhile, Susan remains wrapped up in her demanding career. As their parents’ medical bills pile up, Paul tentatively begins to use the trust’s liquid assets to pay for wound-care supplies, prescription drugs, orthopedic equipment and other important medical supplies. Later, he starts withdrawing modest amounts of cash to pay for their food and home supplies. He never asks for his brother’s permission or stops to consider the ethical ramifications of his actions, but he assumes that his brother and sister-in-law would approve.
Eventually, though, Paul crosses a line. Instead of using the trust’s funds to pay for medical supplies or sustenance for his ailing parents, he begins to make deposits into his own private bank account. He convinces himself that he’s merely being compensated for his time, but the truth is clear: He’s pilfering funds from Susan’s trust without her knowledge.
When Susan finds out, she’s placed in a tricky bind because Paul is a family member taking care of her father-in-law. After all, is she really going to sue Paul after he has been so helpful? While she’s sympathetic to the needs of her husband’s parents, she’s furious that her nest egg is being used in an ethically questionable manner. Without a trust protector, though, she can’t remove Paul as trustee or check his actions in any meaningful way. She’s stuck – and her legacy is threatened as a result.
Protecting Your Assets for All
It’s true that some individuals who use irrevocable trusts and trust protectors to preserve their legacies are quite well-off, but most are regular folks who have worked hard their whole lives and need a safe, secure means to protect their assets.
Maybe they’ve built a moderately successful business but don’t want to “spend down” or forgo pass-through profits to qualify for Medicaid. Perhaps they’ve inherited a modest nest egg from a deceased parent that they hope to preserve for their kids.
Maybe they just don’t want their heirs to pay probate and estate taxes on whatever’s left over when they’re gone. Who can blame them? It was their blood, sweat and tears that earned this nest egg.
Whatever the reason for their existence, irrevocable trusts have proven their worth time after time for the last 150 years in courts throughout the country. When combined with a powerful insurance policy – the trust protector – these instruments are virtually unstoppable. See the legal precedents for the Ultra Trust irrevocable trust here.
This begs the question: If you’re willing to pay for insurance on your home, why wouldn’t you do the same for your legacy? After all, your trust protector might ultimately be responsible for preserving your home – and everything else that’s rightfully yours – for your loved ones.
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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 â€“ 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 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 court ruled that the trust was still valid; but that Wayne had access to all of the trust assets and that they would all be included in the bankruptcy estate. The trust was executed at the right time, way before there was any issues, but the grantor was a beneficiary and offered no protection.
Again, Estate Street Partners is aware of the anxiety involved in moving one’s assets to an irrevocable trust without being a beneficiary or trustee. Rest assured that we have done hundreds of these types of trusts and have never had a client complain after they experienced that there was very little change to their daily life. We want you to have to safest option for your assets. We recommend that you avoid being a trustee or beneficiary of your trust. The power of appointment we include allows for the grantor to change the beneficiary stream at any time. This includes potentially adding yourself at any time, but nobody can force you to amend the beneficiaries.
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 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.”
Now I would like to talk to you about, what is a trust. A trust, no matter what type – irrevocable trust, revocable trust, grantor trust, non-grantor trust – is really nothing more than a contract between you and someone else. If there is a contract between you and I, we can sit down and decide you’re going to do this, you’re going to do that. Therefore, an Ultra Trust® is nothing more than a private contract between you, the person with the money, and your trustee. The trustee is the person who manages the money on behalf of your beneficiaries (i.e. your heir or your children). And the beneficiaries can be you, your wife, your children, anyone you wish, your girlfriend, boyfriend, dog, cat, whatever. It’s whomever you desire.
Understanding the Confusing but useful Intentionally Defective Grantor Trust (IDGT)
IDGTs can be useful in financial planning for those who:
want to protect their homes from creditors
want a solution to the problem of selling highly appreciated assets
want to move assets out of an estate in a gift and estate tax favorable manner
want to purchase life insurance in an estate plan in a gift and estate tax favorable manner
This article was written because many people wish to learn more about using Intentionally Defective Grantor Trusts.
What is an IDGT (Intentionally Defective Grantor Trust)?
An IDGT is an irrevocable trust typically established for the benefit of the grantor’s children and future descendants. An Intentionally Defective Grantor Trust generally benefits the grantor’s children during their lifetimes, and is structured to benefit the grantor’s children’s descendants and future generations after their death.
What does the term “defective” in the IDGT mean?
From an income and estate planning perspective, the IDGT would be purposely structured to be “defective” for income tax purposes, but “effective” for estate tax purposes. Therefore, if there is income in the trust from trust assets, the grantor will receive the tax bill. However, when the grantor dies, the assets of the trust (minus installment payments due if any) will pass estate tax free to the beneficiaries.
Outright Gifts to an IDGT
While Intentionally Defective Grantor Trusts are typically used in conjunction with a sale of assets to the trust (see below), you can simply make an outright gift to an IDGT using the your gift and estate tax exemptions. You can gift assets to an IDGT and the gift works like any gift when using your gift and estate tax exemptions. Again, the unique aspect to an IDGT is that the gift is complete for estate tax purposes but incomplete when it comes to the income taxes.
Selling assets to Defective Trusts
Intentionally Defective Grantor Trusts are typically used when clients are “selling” assets to the trust (vs. just outright gifting to the trust). Why sell assets to a defective trust? There are several reasons. The main one is that a client is looking to transition an asset (many times a family business) in a gift tax free manner while retaining the income to pay income taxes on the trust income and sometimes to provide a retirement income stream for a period of years.
Practice pointer: To ensure that the sale transaction to the IDGT is respected by the IRS, certain attributes of the transaction should be respected. The IDGT must have assets that provide economic substance prior to the sale. The general rule of thumb is that the IDGT should have assets worth at least 10% of the value of those that are being sold to it.
Discount Strategy (The use of an FLP – Family Limited Partnership)
In most cases it will make sense to combine a family limited partnership with an Intentionally Defective Grantor Trust. Clients looking to maximize the economic benefit (paying the least amount of gift or income taxes) of an IDGT should incorporate the use of an FLP. The best way to explain the discounting strategy with an FLP and an IDGT is with an example.
Assume, Dr. Jones, transfers a mixed portfolio of investments (stocks, bonds, and cash) worth $1 million to an family limited partnership. Typical FLP discounts reduce the value of that $1 million to about $650,000. Then Jones creates an IDGT and sells the limited partnership interests (now valued at $650,000) to the IDGT in exchange for an installment note.
If the client sells the family limited partnership interest to the Intentionally Defective Grantor Trust in exchange for future payments, those future payments will be based on the lower value of the FLP interest (vs the actual value of the assets in the FLP), thereby reducing the size of the required installment note payments to the grantor. If the client chose to gift the FLP interest to the IDGT instead of selling the interest, the obvious benefit to incorporating an FLP is the fact that the client only uses $650,000 of his $1,000,000 gift tax exemption.
Because the Intentionally Defective Grantor Trust is not considered a separate taxpayer from the grantor, there is no recognition of capital gains on the sale of the family limited partnership interest to the trust. Also, since the IDGT would be purchasing the stock from the grantor at a market value determined by a qualified appraiser, there would be no gift being made and no gift taxes due on the sale.
The IDGT would issue the grantor an installment note and give the grantor a security interest in the stock. The note would bear interest at the IRS assumed rate (the “federal applicable rate”), and could be structured as a self-amortizing note, a level principal payment note, or an interest-only with balloon payment note. The type of note used will largely depend on the cash flow being generated by the assets being sold to the IDGT. Because the grantor and the IDGT are not considered separate taxpayers for income tax purposes, the grantor will not recognize income when the interest on the note is received.
Benefits of the Intentionally Defective Grantor Trust Transaction
The grantor moved a percentage of his assets out of his estate for estate tax purposes without gift taxes. If the grantor dies before the installment note has paid in full, the remaining payment will be in his estate. However, any appreciation in the assets in the IDGT will pass estate tax free. Additionally, because of the discount of the family limited partnership interest, 35% of the pre-FLP funding value of the assets will pass estate tax free.
If planned correctly, the grantor will be able to pay the income taxes on the IDGT assets out of the installment sale payments being made each year under the terms of the note. The payment of income taxes by the grantor on income of the trust (some of which stays in the trust), is done without gift taxes. While it might not initially seem favorable for the grantor to pay income taxes for the trust, it is a good planning tool due to the fact that paying the taxes benefits the heirs while not incurring gift taxes.
Call Estate Street Partners 888-93-ULTRA (888-938-5872) and one of our advisors can help you.
To learn about irrevocable trusts and estate planning visit:
Watch the video on 'Land Trusts Myths for Asset Protection'
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Simply put, a land trust is a “revocable*” living trust with unique features when it comes to “hiding” the true owner of property in the trust. (*Land trusts can also be irrevocable trusts which would provide terrific asset protection due to the fact that the client no longer owns the property. Clients use land trusts to keep the property in their possession and hide them not to give assets irrevocably out of their estate (which may have gift and income tax consequences)).
You’ll know that I get disgusted when I hear “asset protection” advisors tell clients that a good way to protect assets is by hiding them. There is NO legal way to “hide” assets. Having said that, land trusts are sold on this very concept.
Because asset protection is such an important topic today, marketers have picked up on this and are heavily marketing land trusts as asset protection tools. Why? To generate legal/administration fees. The problem is that a client or advisor reads that land trusts can be an affective asset protection tool and blindly jump in to use them not knowing that there is no real asset protection provided.
What’s the Problem with The Land Trust?
As stated above, a land trust is a “revocable” trust. Asset protection 101 is that revocable trusts provide NO asset protection from creditors. For example: if Dr. Smith has a Christmas party at his house where he is serving alcohol and someone drinks too much and drives home and gets into a terrible car accident killing three people in another car, Dr. Smith is going to be sued. As a general statement, ANY assets in his own name or ANY assets in a “revocable” living trust will be at risk to the lawsuit that will ensue.
The Sale’s Pitch of the Land Trusts
The sale’s pitch with land trusts is that everyone should have their real estate in a land trust because when a plaintiff suing you (or thinking of suing you) does a search to find out what assets you own, they will not be able to “find” the assets you own in a land trust because they are affectively “hidden.”
I found one website which gave an example of a client getting in a car wreck where the client was sued for $3,000,000. The client had $1,000,000 of auto insurance and because the client had his house in a “land trust” the plaintiff’s lawyer was not able to find the house and therefore, settled for the $1,000,000 of insurance coverage instead of going after $3,000,000 in assets.
The above example is absolutely absurd and one of the reasons of the importance of this newsletter to inform you what is reality. Remember that I had several people e-mail me and basically tell me that they thought land trusts would “asset protect” their homes. Land trusts technically provide NO asset protection.
“Hiding Assets” with a Land Trust
Land trusts only temporarily hide your assets so that IF a personal injury attorney does a search to find your assets, the attorney will not be able to do so from an initial cursory search. In the car crash case, the client is going to be sued and the assets owned by the client will be found.
Isn’t a land trust better than nothing? I suppose. If having real estate in a land trust will help your clients sleep at night, than have them use us a land trust IF and ONLY IF they are coupled with other asset protection tools such as the UltraTrust® (the best asset protection tool in my opinion), Limited Liability Companies, Family Limited Partnerships, etc. The problem with the way land trusts are pitched is that they give the client a false sense of security that the land trust will “protect” the assets in the trust. Again, land trusts provide NO asset protection from creditors.
You need to understand that in the “real world” what will happen with a lawsuit is that a personal injury attorney will file suit and then take the deposition of the person being sued. At that deposition, the attorney will simply ask the client to list off their assets. While it may be premature and objectionable, in a deposition the question will be answered, the defendant will have to disclose assets in a land trust and the objection will be noted. Again, there is no legal way to hide assets.
Conclusion of the Asset Protection of Land Trust
In my opinion, land trusts are not very useful when it comes to “asset protection.” If you use one, make sure the asset(s) being transferred to the trust are already owned by a separate entity which provides “real” asset protection. The bottom line is that land trusts do not protect assets notwithstanding what the marketers of the topic will tell you.
Call Estate Street Partners 888-93-ULTRA (888-938-5872) for more information.
To learn about irrevocable trusts and estate planning visit:
Using the IDGT (Intentionally Defective Grantor Trusts) to Protect Your Personal Residence.
As you know if you’ve been reading my newsletters for any amount of time, I believe that NO estate or financial plan can be complete if they do not incorporate asset protection.
One of the most difficult assets to help our clients protect is their personal residence. It is also usually one of the most valuable assets of many clients and therefore should be protected.
Let’s review the traditional personal residence protection tools before getting into the IDGT discussion.
1) Be fortunate enough to live in a state like Texas or Florida. A few states like Texas and Florida asset protect the entire value of the home from creditors through state statutes (with limitations of the new bankruptcy laws).
2) Use a Qualified Personal Residence Trust (QPRT). A QPRT is an irrevocable trust with not very favorable terms and the use of a QPRT as an asset protection tool is usually a tip off that the advisor does not know the better options for protecting the home.
3) Equity stripping (also known as Equity Harvesting). This concept can work out very well from a financial and asset protection standpoint when done right (which is rare) and especially when coupled with the 1% cash flow arm mortgage.
4) Limited Liability Companies (LLCs) (multi-member). Many undereducated advisors will read about the power of LLCs for asset protection and recommend that a client use one to protect the home. The problem with such advice is: 1) the client loses the mortgage deduction; 2) the client could lose the $250,000 per spouse capital gains tax exemption (the client must own the house in his/her own name for 2 years out of 5 in order to use the exemption); 3) in some states the property taxes will double because the client can’t claim the residence as a homestead.
Estate Street Partners recommends equity stripping/harvesting when it is a good fit for a client financially. Equity stripping/harvesting is not for every client with equity (notwithstanding what the Missed Fortune 101 followers believe). That leads us into the discussion about using an Intentionally Defective Grantor Trust (IDGT) to protect the home.
IDGTs (Intentionally Defective Grantor Trusts)
Most advisors are not aware of the power of IDGT when it comes to “advanced” estate and business transition planning. Having said that, this discussion will focus not on a capital gains, income, estate, or gift tax play with an IDGT, but instead will focus on how to use an IDGT for “asset protection.”
I think the best way to explain how to use an IDGT to protect the home is simply to give readers a flow chart for how to set up and use one. For purposes of this discussion, you need to know that, as a general statement, an IDGT is a disregarded entity for tax purposes when the grantor is making the transfer to the trust.
The steps for using an IDGT (Intentionally Defective Grantor Trust) to protect the personal residence
1) The client’s attorney setups up an IDGT (which is just an irrevocable grantor trust).
2) The client “sells” the residence to the IDGT for fair market value (FMV) in exchange for an “installment note.”
3) The client enters into a lease with the IDGT to live in the residence
4) The client pays rent to the IDGT (FMV rent)
5) The IDGT pays the client annual installment payments via the installment note
What really happened? The client sold the residence to the trust and entered into a lease with the trust to live in it. The client pays X dollars to the trust as rent and the trust pays back to the client Y dollars via the installment note.
Frequently Asked Questions: Protecting your personal residence with the Intentionally Defective Grantor Trust (IDGT)
Is the rent deductible to the client? No.
Is the rent income to the IDGT? No.
Is the installment note payment to the client from the IDGT income to the client? No.
Can the note be accelerated? Yes. If the client ultimately would like the house sold, that can be accomplished in the IDGT and the proceeds can be paid to the client through an accelerated installment note payment.
What happens if the property has a mortgage? The IDGT would make the mortgage payments which would still be deductible to the client/grantor as if the house is owned individually.
Summary of the IDGT
This newsletter is not meant to give you chapter and verse for how to use an IDGT (Intentionally Defective Grantor Trusts) to protect the value of a personal residence. Instead, the newsletter is simply meant to make you aware of the fact that an IDGT can be used to protect the residence. If you have wealth and significant equity in your homes, Estate Street Partners can discuss with you on how to protect your home’s equity.
Call Estate Street Partners 888-93-ULTRA (888-938-5872) and one of our advisors can help you.
To learn about irrevocable trusts and estate planning visit: