For those who avoid irrevocable trusts because they worry about extra taxes, it is true that if you don’t set it up correctly a trust with earned income must file an income tax return. Earned income may include rental income, interest or dividends. However, if it is setup correctly; eg. if the spouses retain a limited power of appointment, they should not incur any increased tax liability as a result of establishing the trust.
A special power of appointment typically means that the grantor has special powers in the trust that do not affect its asset protection benefits. A special limited power of appointment is considered a grantor trust, which does not need to pay income taxes. The income flows through the trust to the grantors, or the husband and wife. They would pay taxes on trust income at the lower individual income tax rate rather than trust rates. In essence, the husband and wife would pay the same income tax that they paid prior to establishing the trust.
Potential Capital Gains Benefits
The estate inclusion also provides a significant tax benefit known as a step-up in basis for capital gains tax purposes. If a parent transfers an asset that has increased in value, the parent’s cost basis carries over to the child. That means, when the asset is eventually sold, the child will be assumed to have taken the asset at the same price as the parents and required to pay capitals gains taxes on the full increase in value. In our example with the Massachusetts couple, if the parents obtained their stock at $100,000 and transferred it as a gift to the children with a value of $500,000, the children are given a cost basis of $100,000. If they later sell the stock for $500,000, the children will realize and recognize a $400,000 capital gain, which translates to approximately $100,000 in federal capital gains tax liability.
Instead, if the parents transferred the stock to an irrevocable trust, the stock would be includible in the gross estate of the parents and given only a step-up in basis. The step-up in basis means the stock is valued as of the date of the parent’s death, not the time of purchase. If our parents put their home into an irrevocable trust with a fair market value of $500,000, the children’s cost basis is $500,000. Therefore, if the children sold the home soon after their parents’ deaths, there would be little or no capital gains to be taxed. As far as the children are concerned, this is a much more desirable outcome. This benefit is not available to individuals who transfer assets to their children as gifts.
In conclusion, the UltraTrust type of irrevocable trust is the only type of trust that allows parents to transfer assets in a manner that will provide protection from their creditors, including the costs of long-term care, and their children’s creditors (including ex-spouses) while allowing the parents to benefit from the assets comprising the trust during their lives. In addition, this trust provides some estate and income tax benefits for both the parents and their heirs. Therefore, the irrevocable trust is about as close as a couple can come to having their cake and eating it, too.
Many couples consider using a life estate to protect their homes rather than transferring property into a trust. Creating a life estate requires executing a deed that transfers ownership of the property to the grantee, yet gives the owners the legal right to live on the property as long as either of them lives. This approach can ultimately protect homeowners from having the property taken to pay for long-term care, but can also create huge unnecessary problems.
If the children experience financial difficulty during the life of the parents, creditors may be able to put a lien on the residence. They could not force a foreclose on the lien while the parents were alive, but the existence of the lien would still cause problems for the children when the property transfers following the death of both parents. If a child gets divorced, the house in a life estate is considered a marital asset and the ex-spouse could get half.
Life Estate Creates Conflicts of Interest
A life estate also means that the parents cannot sell the home without the consent of all children that hold the remainder interest. A child that wants to keep the home in the family can stop the parents from selling.
Life Estate Creates Capital Gains Issues
If the parents sell after transferring the property to their children, the children would be assessed a capital gains tax. In 2013, the capital gains tax rate on real estate is 25%. The tax is based on the difference between the purchase price of the house and the sales price. Consider the hypothetical Massachusetts couple with two children and a house worth $500,000. Assume the property cost $100,000. If the parents transfer the property to their children, retaining a life estate, and later decide to sell, all four individuals are considered owners. The children would be assigned approximately 50% of the cost basis in the property and approximately half of the sale proceeds. That means that each child would be assumed to have earned income of $100,000 from the sale, minus $25,000 of the cost basis, which leaves a capital gain of $75,000. Each child would then have to pay approximately $18,750 in capital gains taxes on the parents’ home.
This unjust outcome becomes even more unfair when the capital gains tax exclusion is factored into the equation. The law allows a capital gains tax exclusion of up to $500,000 for a married couple on a person’s primary residence. That means, if the parents lived in the property and used it as their home for at least two years during a five-year period before the sale, they are allowed to exclude up to $500,000 of the sale’s proceeds from being taxed. Since each parent’s share of the sale proceeds is only $100,000, they pay no taxes – yet their children get a tax bill solely because the parents transferred the property to them before selling it. Also bear in mind that, had the parents not transferred the property to their children, their capital gains would have been $400,000, and no capital gains taxes would have been owed. When looking at these numbers, it is clear that transferring the property to the children and retaining a life estate may not benefit the children. It may also cause strife if the children refuse to sell because of the potential tax liability. Remember that the parents cannot sell without the children’s agreement.
Irrevocable Trust Benefits vs. a Life Estate
If the couple decided instead to transfer the home to an irrevocable trust, they could still retain a joint life estate. However, the remainder interest would belong to the trust. In this scenario, the parents could sell the home without their children’s consent and without facing the capital gains tax issues in the prior example. The couple would be considered the owners for income tax purposes and could take the full benefit of the capital gains exclusion following a sale. They would pay no capital gains tax. In addition, creditors of the children would have no access to the property during the parents’ lives and the trust would give the couple some protection against their own creditors.
Watch the video on 'Top 7 Differences Between an Irrevocable Trust and Revocable Trust'
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Irrevocable trusts and revocable trusts differences are critical and key to making an informed decision about the best device available for a family’s situation in estate planning. These two devices are very different in effect and each serves very different purposes. Here are some of the major differences between the two devices which can help in determining which type of trust is more suitable to an individual’s needs.
1. Ownership of the Property
Once assets are placed in an irrevocable trust, the property no longer belongs to the Grantor; it now belongs to the trust. That does not mean that one can no longer live in the house that they have lived for 30 years or that one can no longer drive the car owned by the trust, it just means that you don’t own it. Just like renting a house or leasing a car, the assets are still there for your benefit and a trust can sell the house and buy another that can be lived in. A properly set-up, implemented, and funded irrevocable trust can provide the best possible protection of assets from claims by creditors, as the assets have literally changed ownership. This is very different from a revocable trust situation where the Grantor retains completed ownership of the property.
An irrevocable trust agreement generally cannot be changed, amended, modified or revoked even with a court order, thus offering the coveted asset protection, whereas a revocable trust allows the instrument to be modified or revoked at the Grantor’s discretion; this means that the assets in a revocable trust are still available for anyone to take. The term ‘irrevocable’ generally implies that the trust cannot be changed under any circumstances, but this may not be the case: A special power of appointment in the trust document may allow the Grantor the freedom to modify the named beneficiaries at his discretion without affecting the benefits of the irrevocable trust.
3. Estate Taxes
With an irrevocable trust, since the Grantor no longer owns the property, it is not included in calculations of the total value of property at the time of death. With a revocable trust, since the Grantor still owns the property, the value of the property in the trust will be included in the calculation of the total value of property at the time of death.
4. Protection of Assets
With an irrevocable trust, since the assets in the trust no longer belong to the Grantor, they are generally protected from creditors or from other claimants. This serves to protect assets from the claims of creditors, Medicaid, and even divorcing spouses. This device has been used to avoid Medicaid restrictions which require an elderly person who is going into a nursing home to spend a majority of his own money before Medicaid provisions kick in (referred to as spend-down provisions). This advantage also comes into play for individuals seeking to shield assets from legal claims. In opposition, with a revocable trust, the assets are not protected: since the Grantor retains full control and power over the assets, he is still liable for legal claims against the assets.
5. Medicaid Planning Purposes
With an irrevocable trust, one of the prime benefits sought during elder planning is to enable the elderly Grantor to obtain Medicaid benefits if he moves into a nursing home: By placing assets into an irrevocable trust five years ahead of the actual need, the Grantor has secured his assets for the benefit of named beneficiaries. This does not work in the case of revocable trusts, where the Grantor remains ownership of the assets.
6. Appointment of Trustee
With an irrevocable trust, the Trustee generally is, and should be, an independent person chosen by the Grantor in order to create a fiduciary duty to protect the assets – family members as a Trustee does not offer this same benefit. The Trustee will manage the assets in the trust and is bound by its provisions. By having a Trustee who is a separate entity from the Grantor, it is apparent that the Trustee is exercising independent control over the trust assets. With a revocable trust, the Grantor often also serves as the Trustee, maintaining control over the assets in the trust.
7. Income Tax Return
With an irrevocable trust, generally, the trust has its own tax identification number (EIN), files a 1041, and then either pays the tax itself (not typical) or issues a K-1 to the Grantor (or the Beneficiaries if Grantor is deceased) for income which flows through to the recipient’s 1040 return through Schedule E. With a revocable trust, there is no such discrepancy, the taxpayer files everything on their 1040 as if they personally owned the assets that generated income – because they do own the assets if they are within a revocable trust!
After reviewing the major differences between irrevocable and revocable trusts, it is clear that the main purpose of an irrevocable trust is to protect assets: It prevents the property from being included in the valuation of total assets of the decedent at the time of death, thereby protecting the assets within the trust from estate taxes as well as the probate process, and it protects the assets from creditors because they no longer own the asset. In contrast, the main purpose of a revocable trust is to avoid the process of probate, thus simplifying the transfer of assets to named beneficiaries and removing the probate court from the process. Deciding whether one of these two devices will meet the needs of the Grantor depends upon the ultimate goals for the trust.
As with all estate planning, the laws can change, so a consultation with an expert is advised before determining which device is more appropriate for the individual situation.
In Article I on protecting the family home we discussed strategies that don’t work on protecting the personal residence: the homestead exemption, tenants by the entirety, tenancy in common, and joint tenancy. In article II we discussed the Revocable Living Trust, the Qualified Personal Residence Trust (QPRT), Limited Liability Companies (LLC), Limited Partnerships, family Limited Partnerships (FLLP), and Corporations as additional methods that don’t work. The final segment, article III we will discuss the more practical approaches to protecting the personal residence: Equity Stripping, Equity Vesting, and Irrevocable Trusts.
The words sound exotic, it means to simply take out large amount of debt on an important asset or to encumber the asset secured by the underlying asset. The theory is simple; if an asset is riddled with debt, then the creditor is unlikely to bother with trying to sue the owner for the asset, thus, asset protection.
Equity vesting, is the repositioning of your vested equity in your home or other commercial real estate through equity mortgage refinancing. Your borrowed cash is then used to buy wealth building cash-value life insurance to fund your tax-free retirement. The benefit is tax-free growth within an insurance company guaranteed rate of return and tax-free withdrawal through insurance policy loans.
The concept isn’t difficult. Experts like Doug Andrews, author of Missed Fortune 101, and Roccy DeFrancesco, author of The Doctor’s Wealth Preservation Guide and The Home Equity Management Guidebook, (get a free copy of this book by Google+ this page) define Home Equity Harvesting as “removing equity” from a personal residence through refinancing (or a home equity loan) where the money borrowed is placed into cash value life insurance. I know it sounds weird. Who in their right mind would want to take a loan out on their home in order to purchase life insurance? Here’s your answer: Think of life insurance as a tax free savings account. A properly structured cash value life insurance policy can grow “tax-free” (no income taxes on capital gains, interest and dividends) and be removed tax-free via policy loans, and when properly structured will distribute tax-free to heirs at the time of death. To properly structure the policy, it must be over funded with cash using the minimum allowable death benefit that will allow the client to borrow from the policy tax-free. You can read more on how to monetize your real estate by using widely accepted leverage on real estate form a well known author Roccy DeFrancesco, J.D. by getting your free book.
An example: Mr. Smith is 45 years old, married and has a home with a fair market value (FMV) today of $400,000. He has 2 children and a spouse where their combined household income is $78,000 a year. Assume the Smith’s purchased the home for $185,000 seven years ago and that the current debt on the home is $125,000. Assume the current home loan is 6.5% with mortgage payment of $935 a month.
Mr. Smith will use a home equity line of credit (not a refinance) and will remove $76,500 of equity from the home over a five year period (which creates a 50% debt to value ratio on the property).
Equity Vesting is removing equity from a home to reposition it into cash value life insurance. Therefore, Mr. Smith will access his new line of credit in the amount of $15,300 every year for five years to fund an over funded/low expense cash value life insurance policy.
It is assumed that the life insurance policy used is and equity indexed life insurance policy that has a 1% guarantee rate of return on the cash value, has its growth pegged to the S&P 500 index and locks in the gains annually. It is also assumed that the policy will return 7.5% annually (which is conservative since the S&P 500 has averaged over 11% for the last 20+ years).
Mr. Smith will retire when he is 65 years old and will withdraw money tax-free through policy loans from his cash value policy from age 66-90 (25-years). Mr. Smith would be able to take $23,000 each year for 25 years for a total amount of $575,000.
If Mr. Smith had a home where they could harvest $200,000 of equity to reposition into a cash value life insurance policy. Using the same assumptions from the above example Mr. Smith could borrow tax-free from his life insurance policy starting at age 66? $61,000 each year for 25 years for a total amount of $1,520,000.
FULL DISCLOSURE: the above Equity Vesting examples have used optimum data as an optimum example. Your particular situation will be different based on your age, your health, borrowing capacity, level of interest rates, deductibility and limitations of your interest deduction on mortgage, and other factors. Please contact us to run your numbers based on your facts. We can be reached at 508-429-0011 or contact us through the contact form using the above link (click the link at the top of the page beside the telephone icon).
While equity vesting is not for everyone, the personal residence is best suited for an irrevocable trust with an independent Trustee. A simple “revocable” trust, also sometimes referred to as a land trust, will not protect your home from potential lawsuits, divorce, Medicaid/Nursing home. You must “divorce” yourself from owning your personal residence or for any other valuable asset you wish to transfer to your irrevocable trust. As in a typical divorce decree spelling out the terms of settlement, so too your Trust Agreement must spell out the terms and conditions of the Grantor (the owner) relinquishing his ownership to the Trustee for the benefit of the Grantor and his heirs. The Trustee cannot be the Grantor, his spouse, his children, or any one related to the original owner by blood or marriage. The Trustee “must be independent” and must act independently in decisions and actions. The independent Trustee’s sole fiduciary duty is to protect the assets transferred at all costs and must grow the assets in order to fund future expectations of the Beneficiaries.
To learn more about repositioning assets for wealth building, implementation of precise asset protection systems, tax minimization strategies, elimination of the probate process, and elimination of the only voluntary estate tax system, and tax efficient transfers to your next generation email us.
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.
Let’s start with the prenuptial agreement. Even if a prenuptial agreement holds up in court, it still is often challenged on many different fronts, causing additional expense and time [see Callahan v. Hutsell, Callahan & Buchino P.S.C. Revised Profit Sharing Plan, 14 F.3d 600 (C.A.6 (Ky.), 1993); Miller v. Weinstein, No. FA 98-0717738 S (CT 5/18/2004) (CT, 2004); Cooke v. Cooke, 647 S.E.2d 662, 185 N.C. App. 101 (N.C. App., 2007); Estate of Patterson v. C.I.R., 736 F.2d 32 (C.A.2, 1984); among others)]. The spouse who is on the losing end of the prenuptial agreement usually attempts to find a way to try to circumvent or nullify the agreement, costing everyone (except the lawyers) in the process.
Spouses attempt many strategies to circumvent a prenuptial agreement with success. A spouse can attempt to prove they had been tricked, coerced or were the victim of bad intent when they agreed. A spouse can also try to prove that the document was never signed, that their attorney was ineffective or the prenuptial agreement is outrageous (maybe it wasn’t when signed, but it is now). Spouses also attempt to prove that the agreement was signed without adequate knowledge of the other spouse’s assets. Any of these can nullify a prenuptial agreement and at the very least pull the other spouse into a prolonged divorce proceeding, and possibly push you into a settlement.
In addition to all those attacks on the prenuptial agreement, the spouse without custody of the children is subject to any and all child support the court demands. So, you may have a prenuptial agreement, but that doesn’t apply to the kids and their standard of living. You could end up paying anyway, just under the umbrella of child support. All of this does not bode well for the prenuptial agreement.
In summation, a prenuptial agreement can be challenged and nullified. A prenuptial agreement, even if not nullified, may cost you a lot of money in court costs, attorney fees and child support. A PRENUPTIAL AGREEMENT DOES NOT DO WHAT YOU WANT IT TO DO.
What about the irrevocable trust? Doesn’t it have some of the same issues? Well, in a word, no. An irrevocable trust beats a prenuptial agreement hands-down. First, an irrevocable trust is set up by the future spouse and the other future spouse does not have to know about it or sign anything for the trust to be official. These irrevocable trusts are used by affluent families; in fact a member of the patriarchal Dupont family used an irrevocable trust to protect assets in expectation of marriage [DuPont II v. Southern national Bank of Houston Texas, No. 84-2043, 5th cir. (1985)]. They can also be used by you. Let’s take a look at how an irrevocable trust keeps your assets where you want them:
Hypothetical Example: Irrevocable Trust vs. Prenuptial Agreement
Future spouse X (or even current spouse) takes all of their worldly possessions and places them in an irrevocable trust prior to the marriage (or during the marriage under certain circumstances). Spouse X has a trustee manage them within the trust while they grow in the value. These assets are untouchable by spouse Y in the event of a divorce. They were never part of the marital estate. The assets in the trust aren’t even counted towards child-support; although some courts have found inventive ways to challenge that and even if the court didn’t, spouse X may make a request to the trustee to support his children or they may be beneficiaries in the trust with specific goals to reach for specific rewards. These payments to X’s children would be on X’s own terms, not the court’s.
Case Law Examples of an Irrevocable Trust and Prenuptial Agreements
Loomis v. Loomis, 158 S. W.3d 787 (2005).
Mrs. Loomis, at the beginning of her marriage, set up an irrevocable trust and funded it with a life insurance policy, worth $0.09 at the time. Over the years, the value of the life insurance policy grew. The Loomis’s were married for about 10 years and filed for divorce. Mr. Loomis attempted to have the current value of the life insurance ($55,567.04) included in the marital assets. The court disagreed, because the life insurance policy was owned by an irrevocable trust that was NOT set up in anticipation of a divorce. The entire value of the trust was left out of the marital assets even though this trust was set up after the marriage!
Avent v. Avent, 849 N.E.2d 98 (2006).
Mr. and Mrs. Avent decided to get married in 1978 and signed a prenuptial agreement saying that during the marriage their assets would remain separate. During their many years of marriage, they continued to keep their assets separate. After 25 years of marriage, they filed for divorce. Now in their 80s, their children managed their finances. Mrs. Avent, despite being a minimally paid school cafeteria worker, managed to save and invest a rather large amount of assets. Mrs. Avent, under direction of her daughter, put a large amount of Mrs. Avent’s assets in an irrevocable trust. Mr. Avent originally had the trust included in the marital assets, but the appeals court reversed and determined that since the assets were in an irrevocable trust, they were not marital assets.
Sharma v. Routh, 302 S.W.3d 355 (2009).
Mr. Sharma was married to Mrs. Sharma who passed away, but left two irrevocable trusts to benefit her husband and children. A few years later, Mr. Sharma and Mrs. Routh were married but only for a few months. In the divorce proceedings between Mr. Sharma and Mrs. Routh, Mrs. Routh tried to have the trusts included in the marital assets. The appeals court excluded the trusts thereby keeping Mrs. Sharma’s assets safely away from Mr. Sharma’s new temporary wife.
How does an irrevocable trust work so well? Well, basically it works so well because you don’t own the assets anymore. So, when spouse X (you) gets married, X owns nothing. When X gets a divorce, X only shares the marital assets outside the trust. The trust owns everything else. In fact, X may be the one getting assets from the marriage because X doesn’t own anything on his own. All of X’s assets prior to the marriage are safe in the trust and probably grew substantially within the trust. Spouse Y can try to challenge the trust, but chances are that the case won’t go too far, because Spouse X transferred his assets before getting married. The judge will most likely take one look at the trust, determine the assets in the trust are not marital assets and remove them from the divorce proceedings.
So let’s compare.
First, one of the most appealing advantages of an irrevocable trust over a prenuptial agreement: YOUR FIANCEE DOESN’T HAVE TO KNOW AND DOESN’T HAVE TO SIGN ANYTHING!
When there is an irrevocable trust involved, a judge will only look to see if the assets in the trust are part of the marital assets and if not, the judge will exclude them.
A prenuptial agreement can be challenged using many different strategies. A prenuptial agreement doesn’t protect against excessive child support. With an irrevocable trust, in most cases, you can pre-determine what assets go to your children, when they are given and under what circumstances.
You can settle a challenge to a prenuptial agreement to avoid a long expensive divorce. With an irrevocable trust you hold the power to give whatever you want or nothing at all. Keeping the power in your hands can encourage the other spouse to settle for whatever they can get, thereby speeding up the divorce.
A prenuptial agreement does not survive death. With an irrevocable trust, your assets will be used how you want them to be used with NO RESTRICTIONS. In other words, your spouse can’t acquire and spend your money on their new “friend” unless you allow it. Your children won’t be able to spend it away or lose it in a lawsuit. Your trust will continue to support whomever you want it to support and cut out those that you do not wish to support.
Why did his Irrevocable Trust Fail? Brown, Bankruptcy No. 09-22962 Case Study
The case study of re: Brown, Banktuptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012) wherein his irrevocable trust failed. But why did his irrevocable trust fail? We look at the causes of why his irrevocable trust was open to creditors.
Brown, Bankruptcy No. 09-22962 Case Study: Why did his Irrevocable Trust Fail?
On May 30th, 2012, a federal bankruptcy court in Utah decided a case involving several irrevocable trusts ostensibly controlled by Douglas Brown [In re: Brown, Bankruptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012)]. Because of the mismanagement of the trusts, the trusts did not survive the attack.
The Brown case is just one in a line of cases that are attempting to minimize the use of irrevocable trusts for asset protection. An irrevocable trust is an excellent way to estate plan to protect assets for the benefit of your family, but only if drafted and executed correctly,” explains Rocco Beatrice of Estate Street Partners, LLC. Many wealthy families successfully use an irrevocable trust to pass assets to their children and grandchildren.”
An irrevocable trust is simply a sort of holding tank where one can place assets, thus becoming property of the trust, that are controlled by a trustee in accordance with the written rules of the trust. Once an individual places assets in the holding tank, the individual does not own the assets anymore; the trust does. This keeps the assets safe from anyone trying to acquire assets from the individual (although sometimes there is a look-back period) because the individual doesn’t own them anymore. Put simply, a creditor cannot take what a debtor doesn’t own. Assets in a trust are then safe for future generations.
In the event of a lawsuit or bankruptcy, creditors increasingly search for a chink in the armor of these trusts. A solid trust is a great start, but you need ongoing support from someone who knows what you need to do to honor the trust,” warns Mr. Beatrice. If a trust creator missteps and creates a situation where there is some doubt as to whether the trust is real or a fiction on paper, the trust could be in jeopardy.” Mr. Beatrice believes that many lawyers draft a trust and then don’t sufficiently explain how they work or what is needed for them to remain intact and do not follow up with the client.
In Douglas Brown’s case, while being investigated and tried by the IRS for back taxes, Mr. Brown created several trusts in which he placed a vacation home and a business. Mr. Brown then filed for bankruptcy and claimed that he did not own these assets, rather they were owned by the trusts.
Mr. Brown lost his case, because although the assets were in the trusts on paper, he was still controlling the assets as if they were not. The trustee allowed him to do as he pleased and did not participate in the management of the assets. The bankruptcy court gave Mr. Brown’s creditors access to his assets. Even if Mr. Brown had not treated the assets as his own, ignoring the trusts, he would have had to deal with the issue of fraudulent conveyance,” explains Mr. Beatrice.
Debtors search to find mistakes in the trust document or how the person creating the trust treats the assets. As the creator of a trust, one can receive some benefits of the trust, but you have to honor the trust for it to stand. You can’t just have a trust on paper. The trust needs to own the assets,” explains Mr. Beatrice, and when done correctly, an irrevocable trust is one of the best ways to control, protect and give assets to your family.”
Irrevocable Trusts and Divorce: Equitable Distribution of the Marital Assets
Irrevocable Trusts, such as our trademarked – Ultra Trust®, can be a very powerful device in divorce. If an Irrevocable Trust is drafted and implemented correctly, assets transferred to the Irrevocable Trust (Ultra Trust®) are the property of the Ultra Trust® and is not “marital property” subject to equitable distribution between the divorcing parties. The Irrevocable Trust is considered to be a third party independent owner of assets titled to the Trust without regard of its creators. Courts cannot force equitable distribution of assets held by an independent third party in cases of divorce.
Community states like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are considered to be “common law” states thus assets are considered to “marital assets” subject to equitable division between the divorcing spouses. Title to property in a community property state are deemed to be owned together by both spouses without regard to who purchased the asset. As a general rule, most property acquired by either spouse during the marriage and while domiciled in the community property state, is deemed to be community property and owned jointly by each spouse and therefore not held by a third party. Third party property is not divisible by the common law state. Generally there are a few exceptions, but you need to consult with each Community State. These exceptions are:
Property received by one spouse through gift or inheritance.
Property received through separate property owned by the spouse outside the community property rules, i.e. rents on separate investment real estate.
Through ownership by some other legal entity: Partnership, Corporation, or Limited Liability Company.
An Irrevocable Trust like our Ultra Trust® with an independent Trustee avoids common law disposition in a community property state. If your Irrevocable Trust is the legitimate title holder / legal owner of the property, such third party property held by the Irrevocable Trust is not a marital asset, therefore, not subject to the equitable division of property by the divorcing spouses.
Without regard to your state’s recognition of the marital asset category of separate and non-separate marital property, assets owned by a third party cannot be divided upon divorce even if your state endorses any type of ownership such as Joint Tenancy, Joint Tenancy with the Right of Survivorship, Tenants in Common, Tenancy by the Entirety, or Community Property.
The law of equitable distribution is not exactly a 50/50 split of assets. It takes in consideration other non-direct factors, such as: the length of the marriage, the income capacity of each spouse, the standard of living acquired and required, the contribution of each spouse during the marriage, health, age, and other factors the “court” considers “relevant” which can be anything as trivial as who owns the pets. You don’t want to be in front of a judge who’s not having a good hair day. The Uniform Marriage and Divorce Act 307 (UMDA 307) is a puzzle still being interpreted by the courts. Under these circumstances, when you are in front of a judge, their “relevant consideration” is always “equitable distribution.” If you don’t like the judge’s decision, the judge says “sue me,” take my decision to the appeals court, and spend your money proving me wrong. In other words, judges legislate from the bench. So good planning is to never be in front of a judge.
The rule against the division of third-party property means that: property owned and controlled by a third party cannot be divided upon divorce because the title of the property is not a marital asset but a rather distinct category of assets falling outside the definition of marital property and is property acquired as a separate property outside the ownership consequences of either spouse and cannot be assumed to be owned by either spouse as long as the ownership and control is by a third party. There are many litigated cases: Elkins v. Elkins, 763 N.E.2d 482,486 (Ind. Ct. App. 2002). The presumption that the equitable title is with the owner of the legal title. 73 C.J.S.PP.36 (2003; Morales v. Coca-Cola Co., 813 So. 2d 162, 167 n.2 (Fla. Dist. Ct. App. 2002; Ritter v. Ritter, 920 S. W. 2d 151, 158 (Mo. Ct. App. 1996); and other similar cases.
The third party (irrevocable Trust) ownership not subject to marital property is further strengthened if the property is owned by an additional independent legal entity i.e. LLC, C Corporation, Sub S Corporation, or the Irrevocable Trust is the General Partner of a Limited Partnership.
Third party: is our Ultra Trust® with an Independent Trustee, and we have added an Independent Trust Protector for additional impenetrable asset protection and healthy checks and balances between the Trustee, the Grantors, and Beneficiaries. Please note that all Trusts are not created equal. The key emphasis of an Irrevocable Trust is that the third party must be independent, the Trustee must be an unrelated person and cannot be related to the Grantor by blood or marriage. For more information about who makes a good independent Trustee follow this link: Selecting a Trustee and : What’s a Trust Protector?
Here’s the strongest asset protection device in cases of divorce:
Irrevocable Trusts vs. Revocable Trusts
I am often asked about Revocable Trusts and to differentiate between revocable and irrevocable. Revocable Trusts are a totally different concept because the “owners” do NOT want to “divorce themselves” from their money. Revocable means, that the original owner(s) created a “Halloween” type mask (Revocable Trust) pretending to be someone else for the purpose of “masking” the ownership of the underlying assets held by the Revocable Trust. The original owners retain the affective control masked by retaining ownership through electing themselves as Trustee, retain powers to revoke or change Trust assets, retaining power to change Trustees, Beneficiaries, or change the terms of the Trust rendering the legal entity a total sham or the alter-ego of the creator. Assets of a Revocable Trust are marital assets because the original owners (Grantors) have retained too much power and control over Trust assets, i.e. “revocable” like looking in the mirror and pretending not to recognize yourself. Imagine being in front of a judge claiming that you have no control over the Revocable Trust and that you cannot be compelled to make distributions. For further reading of Revocable v. Irrevocable Trusts.
This author is of the opinion that: Revocable Trusts are not worth the paper it’s written on and will not take any assignments using the Revocable Trust, even if the client insists, and is willing to pay an outrageous price. I will not do it.
Repeatedly I have stated that: third party property is not part of the marital assets available for equitable distribution in divorce situations, but there are three exceptions to the third party rule:
The first major exception is the underlying problem of “fraudulent conveyance.” 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.”…
Fraudulent conveyance has to do with transferring assets at less than the “fair cash value” thereby defrauding a potential creditor, in this case the spouse, or the “intentional divesting of assets” which would have been available for satisfaction of his creditor claim, eg. your spouse in divorce. This intentional disregard, can become a sticky-wicky, for a judge who does not like to be undermined in his court-room. This problem can be cured by making sure there’s a fair exchange of value for what’s given-up for what is received by the person or entity transferring the underlying asset.
The second major exception to the rule against the division of third-party property is when the courts decide to divide such property because one or both spouses retained an equitable interest in the underlying assets, i.e. retain the right to an income stream derived from the underlying assets if it’s stocks and bonds, or rental income. You can avoid this exception by not retaining any rights to the underlying assets of the Trust, i.e. borrow from the Trust instead.
The third exception is moving assets in anticipation of divorce. So when do you start thinking about Irrevocable Trusts? The first place is to start with your parents. Good planning starts with assets you are going to inherit from your parents. If your parents have an Irrevocable Trust where you are the eventual beneficiary, the best planning is for your parents to reposition your inheritance within an Irrevocable Trust engineered for distributions to occur only when the seas are calm or the Trust retain ownership for the enjoyment of all Beneficiaries.
An Irrevocable Trust with an independent Trustee is regarded to be the third party owner / title holder of assets for which courts cannot interpret as marital property to be split between divorcing parties. When an Irrevocable Trust like our Ultra Trust® properly drafted and engineered with an truly independent Trustee and in our case we encourage a Trust protector, legally implemented in a timely fashion with due care in avoiding fraudulent transfers, will be valid in 99% of situations ending in divorce. The best Ultra Trust® planning starts with your parents. If you are going to become the recipient of a large inheritance, talk to your parents about a proper drafting of an Irrevocable Trust to avoid inheritance taxes, avoid probate, and asset protection and of course eliminate the marital asset problem of divorce.
Our experience is that while there are rules and laws in place to deal with bankruptcy, Federal Bankruptcy Judges often interpret the law differently or do not apply laws on a consistent basis. They appear to err on the side of the creditor rather than the consumers. States may “opt-out” of the Federal Bankruptcy general protection and the new Federal Bankruptcy Act of 2005 makes it even more complex. Only the main residence is generally protected, second homes, vacation homes are not protected, residency is also an issue if you live part of the time in multiple states. Federal tax liens are not protected by state homestead exemptions. In states where you have unlimited homestead be careful not to fall in the trap of using the state’s unlimited exemption as your defense. The states would be committing a crime if they aided and abetted a criminal intent. 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.”…
Homesteading is useless in most situations for example it does not apply to Medicaid, Probate, or the Estate Tax. ALL assets titled in your name, real estate, cash, CD’s,…is subject to MEDICAID CONFISCATION for the purpose of “Medicaid” or “Medicaid Estate Recovery” (Federal Medicaid Act 42 USC ss 1396 et seq. and successor legislation(s) and other federal and state “enabling acts” and their successor acts), immediately upon entering a nursing home, or the filing of an application for Medicaid eligibility.
DISCLAIMER: 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.
DISCLAIMER 2: Laws are dynamic. You need to check with your attorney in your state, before relying on the chart below. We have attempted to provide you with information we believe to be reliable but you should not rely on our information for your state because laws are dynamic and can be changed by any judge using his discretion by setting new precedence or even striking down legislative intent.
Homestead Exemption and Statute
Federal Bankruptcy Exemptions
$20,200 — 11 U.S.C. § 522(d)(1)
$5,000 / $10,000 — Ala. Code § 6-10-2, 27-14-29
$67,500 — Alaska Stat. § 09.38.010
$150,000 — Ariz. Rev. Stat. § 33-1101A
Unlimited for married and head-of-household residents (but once homestead attaches, not destroyed by death, divorce, or dependents’ emancipation) — Ark. Const. art. 4
$50,000 single / $75,000 head of household / $150,000 over 65 or disabled. — Cal. Civ. Proc. Code § 704.730
$45,000 — Colo. Rev. Stat. § 38-41-201
$75,000 — Conn. Gen. Stat. § 52-352b(t)
$50,000 — 10 Del Code Ann. § 4914(c)(1)
District of Columbia Homestead
Unlimited — D.C. Code § 15-501(a)(14)
Unlimited for 160 acres rural or 1/2 acre urban. — Fla. Stat. Ann. §§ 222.01, 222.02, Fla. Const. Art. X, § 4.
$10,000 single / $20,000 married — Georgia Code Ann. § 44-13-100(a)(1). Note: S.B. 133, which would raise the exemption to $50,000 / $100,000, was reported favorably by the Senate Judiciary Committee on 3/1/07
$20,000 / $30,000 for head of household or over 65. — Hawaii Rev. Stat. § 651-92(a)
$100,000 — Idaho Code § 50-1003
$15,000 — I.L.C.S. §§ 5/12-901; 5/12-906
$15,000 — Ind. Code Ann. § 34-55-10-2(b)(1)
Unlimited for 40 acres rural, 1/2 acre urban. — Iowa Code Ann. § 561.16
Unlimited for 160 acres rural or 1 acre urban. — Kan. Stat. Ann. § 60-2301
FWhen you purchased your home, your lawyer probably had you sign a homestead form along with the hundreds of other pieces of paper that were stacked in front of you. If your lawyer did explain it to you, he probably just told you that it would protect your home should you have a debt. Although declaring your homestead may offer some minimal level of protection, homestead laws vary dramatically from state-to-state in the protection they provide from unsecured creditors. Protection can vary from “none” to “unlimited” protection.
The theory of homesteading is to protect “your homestead amount (equity amount)” on your primary residence from a forced sale for the benefit of unsecured creditors. Homestead applies only to your primary residence and only to the person claiming the homestead who must file a state prescribed form in the same registry of deeds where your primary residence deed is recorded.
There are restrictions to the homesteading protection:
It’s limited to the Federal Bankruptcy amount of $20,000 (11 U.S.C. § 522(d)(1)) and further complicated by the amended Federal Bankruptcy Act of 2005.
Homestead does not apply to Medicaid protection or state enabling confiscation acts under Medicaid.
Homestead does not avoid probate or estate taxes.
Homestead does not deter your bank from foreclosing if one does not pay the mortgage.
Some states “opt out” of Federal Bankruptcy protection.
Homesteading only applies to your primary residence, not to your rental unit, or vacation home. So, if you live in Florida part-time (up to 6 months) you forfeit your homestead protection, and in some states the part-time number of days is cumulative from year to year.
The homestead designation applies only to the declarant and in some states your spouse and/or children in their minority years. The homestead designation does not apply to a surviving spouse if remarried.
The homestead designation terminates on sale or transfer, or if your property ceases to be your principal residence.
There is no homestead protection in states like: Maryland, New Jersey, and Pennsylvania.
States like Arkansas, Florida, Iowa, Kansas, Minnesota, Oklahoma, South Dakota, and Texas have no significant value limit on the protection.
Other states like Alabama, Kentucky, Ohio, and Virginia have only $5,000 in protection.
Is it worth the filing fee?
In Arkansas, Florida, Iowa, Kansas, Minnesota, Oklahoma, South Dakota, and Texas, the answer is yes, but… Just remember that homesteads can and will be challenged if you are abusing the objective of your state’s homestead act. If you are being actively sued, or you are expecting a potential lawsuit (you know it’s coming) and you sell your real estate then move to Florida for the purpose of availing yourself of the unlimited homestead, you will not succeed because your transfer is fraudulent. The state of Florida is not going to aid and abet a criminal event. In Havoco of America, LTD., v. HILL No. SC99-98. Supreme Court of Florida. (2001), Mr. Hill bought a new home. The problem being that several years before, Havoco of America had brought a suit against him. Mr. Hill attempted to declare his house a homestead, but even ten years later when the suit was settled, the court reasoned that Mr. Hill was attempting to avoid paying his debts. The court ruled that Mr. Hill’s home was not protected by the homestead declaration.
Not only can transfers be found to be fraudulent, sometimes homesteads can be confiscated. In the case of Butterworth v. Caggiano, 605 So.2d 56 (Fla.1992), Caggiano was convicted of racketeering charges. The state sought civil forfeiture of his home. The court found for the state stating that Caggiano racketeered in the house and that the homestead law did not apply to criminal acts committed using the property.
Bankruptcy laws are not going to be of any help when you knowingly intentionally try to become insolvent to hinder a creditor. 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.”…
Homestead also can only protect one property at a time. If you have more than one property you cannot protect all of them. In the England v. Federal Deposit Insurance Corporation, No. 91-7381 U.S. Court of Appeals, 5th Cir. (1992) England and his wife sold their home, filed for bankruptcy and then purchased a new home. England attempted to be creative and claim the money from the sale of the first home as a homestead exemption linked to the first home and then claim the second home as a homestead. The court found that this would be two homesteads which is prohibited by the Texas state laws. Because of this, the court ruled that the proceeds from the first residence were not protected by homestead exemption, but the second home was.
What’s the better way?
Creating a “third party owner” such as an UltraTrust® Irrevocable Trust for your primary residence and all your other valuable assets is better than any homestead even in states with unlimited homestead. A third party owner is anyone not related to you by blood or marriage. This independent person or legal entity has no underlying linking or subservient relationship to you, your spouse, or your blood relatives but has a “fiduciary” relationship.
What is a fiduciary relationship? The word fiduciary comes from the Latin word fiduciarius, fides (faith), in fiducia (in trust), meaning holding in good faith and trust. A written legal relationship created between two or more parties entrusting “in good faith” acts and deeds created by a contract is a Trust Agreement.
A well written Irrevocable Trust Agreement between the Grantor (guy with the assets) and an Independent Fiduciary Trustee (guy who watches over your assets for safe keeping) for the benefit of your Beneficiaries (you, wife, children, grandchildren, girlfriend, and/or anyone you wish) is significantly better than any homestead even in states with unlimited homestead. Period.
A fiduciary duty imposed on your Independent Trustee is the highest standard of care within the law. A fiduciary is legally expected to give extreme loyalty to the person to whom he pledged his loyalty to the point of defending, even with his own funds if necessary. The fiduciary is contractually obliged to defend your assets to the farthest extent of the law. If they fail to do so, they may be responsible for any assets lost. The Ultra Trust® is a contract that contains just such language.
1,000% better than homesteading is the Ultra Trust® Irrevocable Trust
The Ultra TrustÂ® Irrevocable Trust is part of one of the strongest asset protection strategies for business owners (www.ultratrust.com/asset-protection-strategies-for-business-owners.html) that is specifically designed to give you a high level of protection. In order to grow with your changing needs, your new financial goals and cover every possible life event (getting married, having a new born or adopted child, divorce, death, etc) the Ultra Trust® is designed as a sophisticated, yet fluid document. In fact, the document’s length usually falls between 35 to 45 pages, so you know that it is sophisticated enough to protect your assets while flexible enough to grow with your changing needs. Speaking of protecting your assets, the Ultra Trust® has successfully withstood attacks from your largest creditors: the IRS, Attorney Generals, the Justice Department, banks, and common creditors like yours, so you know that your planning will work regardless of who dares to challenge your asset protection planning.
When you follow our instructions in a timely manner, your estate plan will virtually eliminate your risks and problems. We have a 100% success rate with clients using our strategies over the last 30 years. Our clients range from high profile individuals to local businessmen and from clients of moderate to extreme wealth.
Our Ultra Trust® is dynamic to the ever changing laws and tax legislation. We recently modified or Ultra Trust® language to cover the last far reaching legislation: the Federal Medicaid Act 42 USC ss 1396 et seq. and successor legislation as well as other federal and state enabling acts and their successor acts which require the spend-down of your wealth down to your last $2,000 to qualify for Medicaid. (State enabling acts means the recovery of Medicaid expenses by leaning or suing your heirs.)
Our Ultra Trust® will:
Eliminate the need of Homesteading and avoid its shortcomings.
Reduce the risk of, if not completely eliminate, frivolous lawsuits.
Avoid fraudulent conveyance and civil conspiracy claims by your past, present, and not yet born creditors.
Eliminate probate, which is triggered by the possession of assets on date of your death.
Eliminate estate taxes. Estate taxes are the only voluntary tax in the entire IRS code. These potentially high taxes are based on what you own (titled in your name) on the date of your death.
Eliminate Medicaid and State Medicaid Enabling Acts.
Furthermore, we create checks and balances that you are not going to find elsewhere such as a Trust Protector to oversee the Trustee for your protection.
If you “own nothing” (but still enjoy life the same as you are now) you will eliminate many complexities of ownership. Ironically, the only guaranteed success and protection is to own nothing. The only legal means of owning nothing is through an Irrevocable Trust with an Independent Trustee. Our Ultra Trust® goes beyond your expectations, with the added security of a Trust Protector.
Irrevocable Trust Education & The Laws supporting the Ultra Trust®
The Ultra Trust® is Based on Legal Precedent and Supported by Years of Favorable Court Rulings:
The Ultra Trust® is supported by the Uniform Trust Code Section 505 and the Restatement (second) of Trusts Section 156(2) and the Restatement (Third) of Trusts Section 58(2). The majority of states have adopted some or all of these codes. Because the Ultra Trust® adapts to many different state’s codes, the Ultra Trust® works in any state in the United States. Because it is flexible, the Ultra Trust® can take advantage of the added benefits of certain states, or more conservatively, adhere to the strictest state’s rules incase the trust changes situs to a more strict state.
LAW APPLICATION OF THE ULTRA TRUST®
The Ultra Trust® is an irrevocable trust that includes the following features:
Depending on the State, the settlor is not typically a beneficiary and no distributions should be made to or for the settlor’s benefit.
The settlor retains a “special power of appointment” which allows the settlor to change parts of the trust at any time which does not violate the independence of the trust or its contents.
Assets are exchanged into the trust for full and fair consideration.
Creditors have no claim against the trust because no distributions can be made for the settlor’s benefit. However, the settlor may exchange assets of equal value and grant a power of appointment to another person, the Trust Protector, who could potentially provide benefits to the settlor. The cases and statutes below demonstrate that these powers of appointment do not give creditors any claim against the trust. There are no statutes, cases, secondary sources or commentaries to the contrary.
THE ULTRA TRUST® ORIGINATED FROM CASE LAW. HERE’S WHAT WE LEARNED TO HELP YOU:
1. Protect your assets from just about anything, including yourself.
In trusts we trust, even when drunk and broke. 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 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 ruled 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. The bulk of the trust money was safe for her daughter.
2. Help your children after you are gone with an Ultra Trust®.
You can lend a helping hand even after you are gone. Shurley’s mother and father created an irrevocable trust and funded it with land…a lot of land. Shurley also contributed a tract of land to the trust. Eventually, Shurley’s mother and father passed away and Shurley and her sister were given Â½ interests in the income of the trust. Shurley and her husband fell on hard times and had to file for bankruptcy. The debtors, as they tend to do in these cases, tried to attach the trust to the bankruptcy estate. The court ruled that all of the property in the irrevocable trust that was contributed by persons other than Shurley herself were safe from being included in the bankruptcy estate. The sole piece of property that Shurley contributed was included because Texas has a statute stating that if a grantor donates assets to a trust and is also a beneficiary then the spendthrift clause is invalid towards the grantor. But, Shurley’s parents successfully protected their assets from the bankruptcy court to continue to support their children, including Shurley.
3. An Ultra Trust® allows the trustee to make decisions in everyone’s best interests.
Sometimes it is better if Mom doesn’t give you any money. James filed for bankruptcy. 10 years later, a debtor attempted to attach James’s interest in a trust set up by his deceased father. The trust was irrevocable and gave James’s mother the power to distribute the corpus of the trust and/or any interest in the trust to whomever she chose as long as they were descendants of her husband. She chose not to exercise that power and distributed nothing to James. The bankruptcy court ruled that they had no authority to compel her to use that power, but only the power that James had concerning his finances. Since James could not compel his mother to distribute assets to him, neither could the court. The trust was safe.
4. An Ultra Trust® can weather a divorce or two and still be there to benefit your children.
Sometimes in marriage you can’t do anything right, except an irrevocable trust. Timothy’s mother set up an irrevocable trust with a spendthrift clause for her son that was managed by an independent trustee. Timothy was in his second marriage to a woman named Mary. Timothy had a drinking problem and sought out help. He was at AA meetings from 3-5 nights a week. Mary was not happy that he was gone so much and filed for divorce. During the divorce, she attempted to get part of the irrevocable trust. The court ruled that because Timothy had no control over the trust, there was a spendthrift clause specifically mentioning divorce and because Mary was not a beneficiary, the trust would not be counted in the marital assets. The trust was safe for Timothy’s children.
An Ultra Trust® is better than a prenup. Prior to a getting married, Charles put a significant amount of assets into an irrevocable trust. Charles then married Melanie and they started their lives together. Eventually, the marriage failed and they ended up in court. Melanie went after the assets in the trust as marital assets. The court reasoned that the assets were not owned by Charles, had never been owned by Charles during the marriage, so they could not be marital assets. The assets were safe for Charles and his family in the safety of an irrevocable trust.
Home is where the trust is. Jerome decided to transfer all of his assets, including the home he was living in into an irrevocable trust for his children. Jerome wrote into the trust the ability to live in the home, as long as he paid for the taxes, maintenance and other items of upkeep. Jerome also had the right to force the sale of the home and the purchase of a new home by the trust. Jerome created the trust in order to protect some of the property he brought into his marriage as it was failing. Six years later, Jerome had to file for bankruptcy. The bankruptcy estate tried to have the trust included saying that the trust was a sham. The court disagreed. The court found that Jerome was not a significant beneficiary of the trust as he was basically paying rent to live in the house and was not able to take the corpus of the trust. The court also found that Gerome had no control over the trust and that the trust was set up for the benefit of the children long before he filed for bankruptcy. The court ruled that the trust was outside of the bankruptcy estate and was not created to thwart creditors. Again,
6. Estate Street Partners designed the Ultra Trust® meticulously avoiding common easy-to-make irrevocable trust errors.
One line in the trust document can sink the ship. A woman in Wisconsin, Lucille, thought she had her Medicaid planning all taken care of. In order to pass on her and her husband’s wealth and eventually qualify for Medicaid, they gave almost all of their assets to their children who then set up an irrevocable trust for the benefit of Lucille and her husband. All set, right? Irrevocable trust: check. Drafted and funded well ahead of time: check. Well, when Lucille had to enter a nursing facility, many years after the 5 year Medicaid look back period, she was denied Medicaid because the government said that she had access to the assets in the trust. It’s an irrevocable trust, so how can that be? Well, the trust stated that the “entire corpus and income of the trust is available for [Lucille and her husband’s] support and general welfare.” It turns out that nursing home care is general welfare and the court decided in favor of Medicaid. Lucille had to spend the trust money she wanted to go to her children on her nursing home care. A poorly written trust isn’t worth the paper it’s written on. A well written trust, such as the Ultra Trust, may turn out to be priceless to you and your family.
7. Put every asset in the trust that you need to protect for your family.
Isn’t spendthrift an oxymoron? A debtor, James, filed for bankruptcy and the bankruptcy court attempted to include James’s contingent interest in a trust held by his mother in his bankruptcy estate. The court determined that the contingent interest was part of the bankruptcy estate. How can a trust that hasn’t even been distributed yet be included in the estate? Well, the trust did not contain a “spendthrift clause” (a clause that allows the trustee to withhold distribution in the event of debt and other contingencies) and the court determined that since James was entitled to the trust in the future that the contingent interest could be included. If the spendthrift clause were included, such as the comprehensive one found in the Ultra Trust, the money could have been withheld from the debtor and the trust assets would have been safe.
8. Retain all the trust powers possible while avoiding those that can ruin an otherwise good trust.
Sometimes power is not such a good thing. Wayne decided to put his assets into an irrevocable trust with a spendthrift clause. Good thinking, right? Well, many years later he declared bankruptcy and the bankruptcy estate looked to the wording of his trust. Well, he was a beneficiary of the trust and also had the power to access 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 it wasn’t written correctly and offered no protection for Wayne.
9. Estate Street Partners provides on-going support so that you and your trustee keep the trust in top asset protecting condition.
An alter-ego trust; who knew? Jacob owed back taxes. At or around the same time that he was being informed of this, 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 tax free and also retained control of the property. When the IRS took Jacob to court, the court ruled that Jacob still had possession and control of the property, even thought 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 and the reasons mentioned below, the court ruled that the government could collect Jacob’s tax bill from the trust.
10. Estate Street Partners helps you avoid “fraudulent conveyance.”
You can’t give something for nothing and get protection in return. Jacob’s back and still not having a good day. Jacob, when placing his assets into the trust (see above) received no compensation for the property he gave up. The court ruled that the transfers to the trust, because Jacob received no compensation, were fraudulent in nature (a fraudulent conveyance) and being so were designed to “hinder, delay or defraud either present or future creditors.” Basically, the court said Jacob could not give his assets away to avoid paying his debts. As you know from reading the ruling above, the court ruled that the government may proceed to collect all taxes from the assets held in the trust. If the conveyance had done in such a way as to avoid the label of fraudulent, such as using the proven methods of Estate Street Partners, Jacob may have preserved his trust.
11. Estate Street Partners uses the best legal, tried and proven methods because you cannot hide a fraudulent conveyance.
Spread the money around and bring it all back together. That’ll work, right? Jerrie was set to collect a significant amount of money from his mother’s trust. Sounds great, doesn’t it? Well, Jerrie owed a large amount of back taxes and was being taken to court by the IRS. His mother’s trust didn’t have a spendthrift clause, so when the proceeds of the trust were distributed to Jerrie he decided not to report this and to try and hide it. He took the assets and spread them out among many different accounts across the country and then the assets all rejoined in a limited partnership in Nevada. Jerrie just happened to be a general and limited partner owning 96% of the partnership. The IRS connected the dots and took Jerrie to court and succeeded in getting access to the assets to pay back his taxes. When an irrevocable trust is drafted correctly in the first place there is no need to hide assets. In fact, when done correctly, hiding assets can be more of a hindrance and may even be proof of a fraudulent conveyance used against a debtor.
12. Call Estate Street Partners now to avoid a fraudulent conveyance by acting when there are no threats to your assets.
Put your assets in an irrevocable trust when things are smooth sailing and the court will take notice. In 1990, George and Catherine decided to transfer their money, rental properties and other assets into an irrevocable trust to benefit their children. When they did this, they did not know they were going to be audited by the IRS for back taxes. Several years later, when the IRS determined that George and Catherine owed a significant amount of back taxes from both their private accounts and business payroll accounts, the IRS tried to collect from the irrevocable trust. The court determined that the trust was not formed with the intent to deny creditors because the trust was formed before they could have known that there were any creditors. The court also ruled that the trust was totally separate from George and Catherine, because although they derived some benefit from the trust, they did not control the trust at all. The trust was controlled by independent trustees. In the end, the court ruled that the IRS could not collect from the trust and George and Catherine’s transfer of their assets to the children was safe.