1.
Legacy
planning – Not only can a trust be used to minimize or eliminate estate taxes,
but it can also be used to create an ongoing legacy for future generations.
Several states will allow for the trust to continue on for hundreds of years so
that the individuals can establish the trust for their current and future
family members. Legacies can also be created in a community by setting up a
trust or foundation that will provide a gift that will last for many years.
2.
Asset
protection – There are many types of trusts that also offer the added bonus of
protection of judgments and even divorce decrees. For example, offshore trusts
are used to keep assets away from creditors and gifting through a family
limited liability corporation offers protection for the property owned by the
company.
Family Limited
Partnerships
Family
limited partnerships (FLP) have been popular for several years as asset protection
and tax planning. It’s a type of limited partnership that is formed by an
official filing with the Secretary of the State in the state in which you
reside. Family members control the entity and are used to own family assets and
permits transfers of interests to be discounted for gift and estate tax
purposes. The partnership is a separate legal entity and any income or loss is
reported on the tax return. Factors such as family investments, savings and
titles to businesses and real estate investments are transferred into the FLP
and are protected from potential claims and lawsuits if the partnership is
properly structured. The partnership is also used to transfer land and other
assets from one generation to another, all while reducing the total value of
the asset and reducing estate taxes.
To
get a clearer understanding of how FLPs work, here’s an example. Two parents
establish an FLP and transfer $1 million in assets and give 40 percent of the
limited partnership interests to their children. The parents maintain full
control over the property and the interest cannot control of affect the
decisions made about how the asset will be dispersed, nor can it be sold or
converted into cash. Tax law says that the interest is not $400,000, but is
worth something less than that amount. In turn, the parents have transferred
that $400,000 value to their children and have reduced their future estate
taxes by more than $75,000. The actual savings is based on the actual value of
the assets transferred into the FLP, the size of the gift adopted and the
amount of the discount applied.
It’s
pretty clear that the IRS is greatly opposed to these partnerships in regards
to death taxes because they lose out on potential gains. When an FLP is created
around the same time of a parent’s death for the sole purpose of reducing
estate taxes without considering legal formalities, the challenge made by the
IRS is successful.
FLPs
are known as a little tax loophole when it comes to asset protection and estate
planning and even Forbes Magazine claimed
that people were successfully using this technique to get a discount on the
value of their estate by up to 90 percent.
Revocable Living Trusts
A
revocable living trust is the more popular of the two types of trusts, mainly
because it can be changed at any time. This type of legal document is created
to hold and own the individual, or trustmaker’s, assets. In turn, the trusts
are invested and spent to benefit the trustmaker as the beneficiary by a
trustee. In many cases, the trustmaker is also the trustee, and some people may
opt to have an institution manage their property. The three parties involved
are you, the settler or grantor who creates the trust; the trustee, the person
who agrees to accept the property and manage it according to the trust
agreement; and the beneficiaries, those who will receive the income of the
property or the property itself in the trust.
The
downside of a revocable trust is that assets funded into the trust are still
considered to be personal assets for creditor and estate tax purposes. For
instance, if you’re sued, the trust offers no creditor protection and you will
be subject to state and federal estate taxes.
Since
the assets of a revocable living trust will no longer be owned by the
trustmaker but by the trustee of the trust, the assets will avoid going through
probate to prove ownership by the courts. Instead, the Administrative Trustee
can settle the trust without any court supervision.
There
are three main reasons why revocable living trusts are preferred:
1.
In
the case that the trustmaker becomes mentally incapacitated, a Disability
Trustee can manage the trust, rather than a court-supervised guardian.
2.
Assets
in a revocable living trust will avoid probate and pass directly to the
beneficiaries named in the agreement.
written by Bradford Richdale
copyright Brad Richdale TM 2010 all rights reserved
written by Bradford Richdale
copyright Brad Richdale TM 2010 all rights reserved
