May 2010

Five Reasons You Need to Plan Other than to Avoid Probate

Author: Mark F. Winn, J.D. L.L.M.

Your family and your property are at the heart of estate/asset protection planning. A good estate/asset protection plan is all about protecting what you have and leaving assets in a “protected manner” for your loved ones. Putting together a good estate/asset protection plan is one of the most important things you will ever do.

There is so much hype about wills and trusts and how trusts can be used to avoid unnecessary probate. This hype is true. Good planning can avoid unnecessary probate. However, we are not going to expound on why avoiding probate with a trust will be good for your family and your financial privacy. By now, you know that less court involvement is better for your family in terms of costs and delay. Instead, we will expound on the other reasons you need to create a good estate/asset protection plan.

1. To keep your assets in your family bloodline;

2. To avoid unnecessary loss of assets to your in-laws if your child or children become divorced;

3. To leave assets to spouse and children protected from lawsuits;

4. To avoid unnecessary income tax acceleration on retirement plans;

5. To avoid unnecessary estate taxes.

This is important to most of our clients. So, how is it done? The short answer is you leave assets in trust for your loved ones and dictate that the remainder interest (the amount left over that they did not use) will go to their children, who are your lineal blood descendants. For instance, Jack leaves all assets to Susie, in trust for her benefit, with the remainder to Jack’s children. If Jack wants his kids to enjoy the remainder interest so the assets are protected from lawsuits, he will leave those assets in trust for his children. Can they be the trustee of their own trust? Yes. With a properly drawn trust, you can make sure that your assets will stay in your blood family. You can make sure that a spouse or loved one in a second marriage situation will be able to live in the house for their life, and the remainder will go to your children. The possibilities, in terms of what can be accomplished, are limitless. Every case depends on the unique family situation and the unique objectives to be accomplished.

This too, is quite important to our clients. Since approximately 50 percent of marriages end in divorce, leaving your assets to your loved ones protected from loss in divorce can be quite beneficial. So, how is it done? Well, the same way you keep assets in the bloodline, see above. You need, however, to make sure the standard for distributions in the trust are drawn properly to accomplish the loved one having full use of the property but at the same time excluding the funds from the claims of creditors and claims of alimony and support. The right standard in the trust can accomplish this, coupled with a properly drawn spendthrift clause.

This too, is quite important to our clients. So, how is it done? Well, the same way you keep assets in the bloodline and avoid unnecessary loss to in-laws, see above. It all comes down to leaving assets “in trust” for a loved one. The trustee of the trust can be the beneficiary and you can still manage to incorporate all the benefits of asset protection alluded to above. Some may call this a beneficiary controlled spendthrift trust (BCST). A BCST is perhaps the single most beneficial manner in which to leave assets to a loved one. Of course, if the loved one is a spendthrift or has drug problems, then you may want to consider having someone else serve as the trustee and perhaps making the standard for distributions a little less open.

Regarding IRA’s, if you are to designate a trust as the beneficiary for estate tax reasons or asset protection reasons, then special care must be taken to ensure the beneficiary designation is proper and that the trust has the necessary language to comply with the regulations dictating that the oldest beneficiary will be the measuring life for purposes of computing required minimum distributions. For some who wish to benefit grandchildren, it may be wise to consider leaving an IRA to the grandchild in trust. If done properly, the money will have a long time to grow in a tax deferred environment. The results when the grandchild turns 30 can be truly amazing.

This is easily accomplished with a properly drawn trust. The trick here is to make sure the assets are titled properly so they will be able to go where we want them to go. A trust designed to avoid estate tax is often called a credit shelter trust, or bypass trust, or family trust. The gist is that the standard for distributing principal must be ascertainable. If the standard is ascertainable, then the assets will NOT be included in the beneficiary’s estate for purposes of the federal estate tax. Currently there is no federal estate tax, but this could change. Given that we are in an environment of uncertainty, we are more inclined to provide all assets to the survivor of a married couple with the survivor having the ability to disclaim assets. If and to the extent assets are disclaimed, then they go into the credit shelter trust. When this is the mechanism to shelter the credit, the client must fully understand how to disclaim, and also the general power of attorney should include language that authorizes the agent to disclaim.

For all of the above reasons, putting together a good estate/asset protection plan is one of the most important things you will ever do. So, when you do decide to get it done, make sure that the attorney or law firm has an approach that is designed to serve you well. The approach MARK F. WINN, PLLC has developed over the years is to provide the clients with an in-person review of the papers. This brings the client into the process and encourages their participation. If you understand how the plan works, then you can understand what changes you want made, etc. So, we usually represent a couple over the course of four meetings. The first meeting is complimentary and involves getting a sense of the family and the assets. Then I propose the outline of a plan and we proceed. In the second meeting, we are reviewing the papers in-person. The papers usually include Last Will, Revocable Trust, Health Care Power of Attorney and General Power of Attorney. The client goes home with a full draft which permits them to read the papers closely at home and call to ask questions or make changes. It is a collaborative process. To think that a client is properly represented when they have not had the chance to ask questions or absorb what their papers are doing and how they work is far-fetched in my opinion. There is simply too much we want the client to understand to properly accomplish a representation in two meetings. So, the third meeting is usually to sign the papers and then we usually meet once more for a fourth time to make sure the beneficiary designation on IRA’s etc. is proper and that assets are titled properly to avoid probate and so as to shelter the maximum amount from estate taxes.

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