By setting up a special needs irrevocable trust, parents of these children can create an account that will contain assets to be used to care for the special needs child after the parents pass away. One of the most beneficial ways to fund these accounts is through life insurance, using death benefits upon the passing of the parent to fund the trust for the child.
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Here is an example of woman who was married for 14 years. She has been having troubling concerns about her husband who filed for bankruptcy. Her husband has had a trust for a number of years on major assets such as their rental real estate and automobiles. He has chosen to refinance his loans at a lower interest rate. Then he plans on creating an irrevocable trust to protect the major assets. The wife has serious concerns if she will receive anything if they divorce since nothing is in her name. Neither the trust nor the bankruptcy is in her name. They have two kids which she has cared for and she has also provided administrative duties to the business and the family affairs. She feels she needs to seek an attorney and feels overwhelmed at all the financial decisions and at the emotional roller coaster ride her husband has dragged her through. The husband has cheated on her but they have been seeking counseling. She feels uncertain about her future now.
Trust law depends on many factors and there are a myriad of regulations and laws concerning their outcome. The irrevocable trust the husband wishes to create does not ensure that all irrevocable trusts are equal and the same. What I mean when I state that not all irrevocable trusts are the same is that there are no standards for quality of an irrevocable trust. An irrevocable trust written by an amateur (one written by someone with little experience) is not the same as one written by an expert whose irrevocable trusts have been time tested and endured the judicial scrutiny – even though BOTH are called irrevocable trusts. When purchasing an irrevocable trust you are not buying the trust by itself, you are buying the knowledge and expertise of the writer being able to anticipate landmines that will invariably arise.
Since irrevocable trusts are complicated a review of the trust needs to be completed before a legitimate answer can be made for the husband who wishes to create an irrevocable trust. One of the major factors when setting up a trust is where one resides and where the property is located (i.e. in what state).
Community State and Irrevocable Trusts
For instance, California is a community state and, thus, the title of the property is deemed to be owned by both spouses despite who purchased the home or real estate until the spouses divorce or separate. The governing laws regarding the entitlement holdings of the Community property is largely determined by the Community state in which the husband and wife are living in during their marriage. Most Community states will deem a community property as jointly held when either spouse has purchased the property and they are domiciled in that Community state. There are some exceptions to this general Community property rule and each state needs to be examined separately. The exceptions to this jointly held ruling on Community property is as follows:
- When a property is acquired by a spouse via gift or inheritance.
- Property acquired by separate property of one of the spouses which is outside one of the Community states. For example, rents on separate investment of properties.
- Property acquired by a legal entity such as the following:
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- Trust
- Corporation
- Partnership
- LLC (Limited Liability Company
The Community states are as follows:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
Fraudulent Conveyance with gifted assets transferred and asset transferred less than four years
Another critical question to ask is how will the assets be transferred to the irrevocable trust. The husband could be in danger of fraudulent conveyance if the assets were transferred by gifting and the irrevocable trust could be annuled by a judge, by the wife or even a creditor. Fraudulent conveyance could be charged especially if the transfer was done less than four years ago. The stature of limitation on transfer of assets is four years in most states, but there are a handful of cases of a California judge ruling that revoked an irrevocable trust as far back as eight years!
Grantor and wife’s beneficiary benefits to assets
One of the questions the wife should ask is if she will be a beneficiary of the irrevocable trust. If the grantor does not revoke the wife’s beneficiary privileges then she will have access to the assets. As a general rule, the grantor will have the right to change the beneficiary benefits to the assets. However, the irrevocable trust is regarded as one of the best and most powerful ways to protect one’s assets – provided the irrevocable trust is set up with all the precautions in place. Please read Not all irrevocable trusts are the same. Because of the nature of the irrevocable trust, if the wife’s name is not written in the trust then it will be very difficult or near impossible to have access to any of the assets.
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.
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Although a trust can be created solely by verbal agreement it is normal for a written document to be prepared which evidences the creation of the trust (the Trust Deed) which sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries. In essence, a Trust is not dissimilar to a will except that assets are transferred to Trustees during lifetime rather than those assets being transferred to executors on death. The Trust Deed is analogous to the deed of will.
The three elements to a Trust Document:
- Grantor
- Trustee
- Beneficiaries
The Grantor of a Trust
The Grantor in a Trust is the person with the bucks. In other words, the Grantor of a Trust contract is the owner of the asset(s) which could be any asset from personal residential real estate to stock accounts to business or partnership assets and anything else of monetary value. The Grantor’s motivation is to get asset(s) out of his name for either some or all of the following:
- Asset protection and wealth preservation
- Reduce potential frivolous lawsuits
- Elimination of the “probate jail process” (see definition, below)
- Elimination of estate taxes
- To gain some tax benefit or some other tax deferral benefit
If the Grantor initiates the Trust (contract), it’s called a Grantor Trust; otherwise it’s called a Non-Grantor Trust. To me, it’s just legal garbage so lawyers can charge you more.
If the Grantor wants to retain certain control over his asset(s), it’s called a Revocable Trust; otherwise, it’s an Irrevocable Trust.
Revocable Trusts and Irrevocable Trusts have significant asset protection and tax differences. One can think of a Revocable Trust like the kid next door that brings the ball to play basketball with the other kids. Everything is fine, as long as he makes the rules, and he makes the rules as he goes along. If you don’t agree, he takes the ball and goes home. The ball game is over. In the Revocable Trust, he has control and hence the name “Revocable.”
Grantor retains control in Living Revocable Trusts
Since the Grantor retains control in the Living Revocable Trust, it can destroy your estate in the event of a lawsuit, serious illness or elderly care. The Living Revocable Trust is also known as the Living Trust. From the Grantor’s perspective, the sole purpose of the Living Revocable Trust is to eliminate the probate process.
- Assets in a trust, avoids probate
- Assets NOT in a trust goes to probate with or without a will
However, the Grantor may or may not realize the Living Revocable Trust is outright dangerous for asset protection, wealth preservation, and estate tax elimination. The Living Trust is obsolete for assets greater than $675,000. With the Living Trust the Grantor (i.e. owner of the assets) retains significant power over his wealth and will not insulate assets from the lawsuit explosion. There’s absolutely no tax benefit, no asset protection and no wealth preservation benefits with the Living Revocable Trust to the Grantor. I do not recommend the Living Revocable Trust for the Grantor.
Personally, I think the Living Revocable Trust is a sham perpetrated on the Grantor by shameless professionals out to extract more than just one fee. Every time the Grantor needs or wishes to change the Trust Deed, he needs to speak with his lawyer. The lawyer just garnered another fee. So I recommend to my clients, “Don’t just walk. Run!”
For the Grantor: Note on Estate Taxes
Various tax proposals are being bandied about, including House Ways and Means Chairman Bill Archer who says that he’s “pushing” to “g r a d u a l l y phaseout” the death tax within the next 10 years. “Death by itself should not trigger a tax” says Chairman Archer. Currently, estate taxes vary from 37% to 55%. Only Japan has a higher rate of 70%. Germany takes a maximum of 40%, while Australia and Canada, take nothing.
When you add up your federal, state, probate, legal fees, accounting fees, appraisal fees, administrative and executor fees, and every other fee, it could easily cost you 70 to 80% of your estate. You can avoid these unwanted results with the Ultra Trust® the Medallion Trust®.
NOTE: The new 2001 tax phase-in for estate taxes, changes absolutely nothing. The estate tax is the only voluntary tax. The new laws have added confusion. You can avoid the voluntary estate tax by simply engineering an Irrevocable Trust.
Grammar notations: please note that I have capitalized words such as Grantor, Revocable Living Trust, Trust, Beneficiary, Trustee for easier reading and emphasis on these words. Grammatically, they should be in lower case.