Kansas & Missouri Estate Planning

Discretionary Trusts Can Trump Bankruptcy Liquidation

Sometimes giving assets to a loved one in hopes of protecting those assets from future creditors may not be such a good idea. This is especially true when the loved one is a young one. No, if you want your asset protection planning to be successful, then that usually means a trust is necessary.

Trusts are incredibly powerful tools for a number of reasons, foremost because they allow you to protect both the beneficiary and the assets.

A powerful lesson on trusts recently came out and is featured in a recent Forbes article. It's the case of re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) and it's worth a look.

The case focuses on a trust containing a "spendthrift provision" against bankruptcy. A mother set up the trust for her daughter (and soon to be debtor) with her son as trustee. The trust has a spendthrift provision, meaning that the assets are controlled and kept from the beneficiary except in regular distributions. Further, the trust provided that the brother, as trustee, has discretionary control over the distributions, and can release them or hold them in the trust as deemed appropriate in his capacity as trustee.

The daughter went bankrupt. Soon thereafter, her bankruptcy trustee soon turned a leering eye to those trust funds. You see, bankruptcy is about marshalling the available assets of a debtor to pay as many debts as possible. However, thanks to the spendthrift provision the trust funds are immediately disqualified from consideration.

Why? Because the beneficiary doesn't "own or exercise control" over them. Nevertheless, the bankruptcy trustee did try to grab an upcoming distribution, thinking it was leaving the trust and therefore fair game. This, too, was denied, because the trustee had discretionary control over its release and simply wouldn’t release it into the hungry jaws of creditors.

If the trust had appointed the brother as trustee without granting discretionary powers and, instead, required mandatory distributions, then the distributions would have fallen into the creditors but instead it was saved.

In the end, there are a few good lessons for the wise in this case. Here are a succinct few advanced by the Forbes author:

1. A well-drafted Living Trust can provide, as here, very substantial asset protection for beneficiaries. Mark me as in the camp that says that children should never be given a significant gift outside of a trust, since children (particularly those with money, but without experience) are prone to develop creditors.
2. A well-drafted non-self-settled trust can provide, as here, very substantial asset protection for beneficiaries. Contrast this with self-settled spendthrift trusts (a/k/a "asset protection trusts" which despite their nickname provide at best highly dubious and almost entirely untested asset protection advantages). See Chart Regarding Effectiveness of Asset Protection Trusts
3. For asset protection purposes, trusts should be drafted as discretionary trusts. Remember: If a beneficiary has a right to the trust assets or payments, etc., so will creditors.

To learn more and to successfully set up a trust for your loved ones, you will want competent counsel. This is not a Do-It-Yourself project.

Reference: Forbes (December 28, 2011) "The Real McCoy: Living Trust Provides Spendthrift Protection To Assets Of Beneficiary In Bankruptcy"

Selecting the Right Trustee

So, you’ve created a trust to protect your loved ones. Did you name the right person as trustee?

Likewise, perhaps you've just been asked to serve as trustee without a firm appreciation for what that means, or perhaps you’ve just figured it out. Question: Should the trust have a professional trustee?

Whether you're parent who's set up a trust or you're a named trustee, Special Needs Answers recently offered a couple of tests to determine if the trust has the right trustee and if a professional may be in order. Their advice, as you would imagine, is especially poignant in the case of a special needs trust, but also has broader application.

Does the trustee have enough time? Being a trustee is not like being a god-parent; it's almost like another job and even a full-time job for some kinds of trusts. Is the trustee able to keep up with it?

Does the trustee keep track of the rules? Every trust has various rules in place to maintain it, and even more to make sure it accomplishes its goals. In the case of a special needs trust this means keeping track of government benefit rules (even as they change, or threaten to change as in the current political climate). The trustee has to be able to do this.

Does the beneficiary make things complicated for the trustee? If the trustee knows the beneficiary directly, whether by familial relation or long acquaintance, then they also may exert more influence on the trustee than the trustee ought to allow. If the beneficiary feels entitled or wants to ask for something, they may have leverage and the trustee may cave.

Of course, these questions illustrate the common difficulties a trust and a trustee will have to face. Everyone involved ought to understand these difficulties in advance and make the right choices for all concerned.

Bottom line: If you're setting up a trust, seek the advice of qualified estate planning legal counsel.

One of the best articles I have come across on this subject (and not just because I was interviewed for it) appeared in the March 2007 issue of Kiplinger's magazine, entitled "In You They Trust," by Steven Goldberg. Check it out for further background on this important issue.

Reference: Special Needs Answers (November 2, 2011) "Is It Time For A Professional Trustee?"

Six Rules For The Road - Creating Trusts For Heirs

It doesn't take an experienced estate planner to say so, but "the love of money is the root of all evil." Unfortunately money bears with it the potential for good and bad ends alike. And, unearned money (read an "inheritance"), can be a blessing or a curse.

An experienced estate planner can help your loved ones lean to the positive when it comes to the inheritance you leave them. When it comes to trust money, and inheritances in general, you need to find a balance that will help your children become the people you know they can be.

For some solid tips check out the 5 trust fund rules to help children, as set forth in a recent article in The Fiscal Times . The balance these rules help to create, as so aptly put by Warren Buffet, give your children "enough to do anything, but not enough to do nothing." So, let's review a few of these "rules of the road," so to speak.

Carrots and Sticks. A trust need not just leave money; but it can be a tool. By building the appropriate provisions, you can offer certain tests and incentives to guide your heirs towards positive goals. You earned your money through hard work and, likewise, the trust can help foster similar lessons as you see fit.

Timing. The funds in a trust can be made readily available or made available over time, with or without incentive goals. After all, you might not want to lock a child into set goals (you might not know enough about which goals are appropriate for them), but you might want to keep their access to the funds at pace consistent with their age and maturity. Generally speaking, such an approach generally is a solid bet. It can give a sense of security, without instilling laziness, too.

Money Isn’t everything. In keeping with the above, consider using the conditions that surround the trust (i.e., your death) as an opportunity to provide your wisdom through your own letters or videotapes of success stores, so that the trust fund is opened as your words are received. Against this backdrop, I highly recommend an excellent family film to share with your loved ones called "The Ultimate Gift." [Be sure to stock up on tissues.]

That's only three of the five rules. For the other two, read the original article.

Regardless, the time to act is now.

The issues surrounding how to create the trust are worth mulling over, but just as important is the planning that goes into creating the trust and the correct timing to maximize its value. You can make good use of this timing given the present generous state of our estate and gift tax law, along with the currently depressed asset values.

Again, whether it's thinking about the funds to put in the trust or the future of the inheritor, there's no time like the present to plan!

Reference: The Fiscal Times (September 20, 2011) "5 Trust Fund Rules That Can Really Help Children"

“Crummey” Trust Anyone?

If you want to follow in Reverend Crummey’s footsteps, create a Crummey trust and have it buy a life insurance policy on your life. Why might this be a savvy strategy? Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust... without being included in the value of your estate (for estate tax purposes).

When you're looking to pass on significant assets, a trust can be a powerful tool. Quality is important. While a "crummy" trust won't cut it, a "Crummey" trust just might do the trick. Reader advisory: Poor puns like this and others abound in a recent Forbes article about "Crummey trusts." Nevertheless, I thought it might inform your thinking on the subject.

A "Crummey trust" – so named after the case of Crummey v. Commissioner and the good Reverend Crummey himself – provides a means of legally avoiding estate taxes while passing on wealth to heirs... by combining an irrevocable trust and a life insurance policy. To create a Crummey Trust, you first create the trust and then have it buy a life insurance policy on your life. In the end, when you pass away, the beneficiaries of the trust inherit the proceeds from the life insurance policy without that money ever "coming in contact" with your taxable estate.

This strategy isn't without its challenges, however. One challenge is the risk of incurring gift taxes. However, as long as annual premiums are below the gift tax threshold of $13,000 per trust beneficiary (and you don't gift the trust beneficiaries anything else during the year in excess of that amount in combined gifts) you can stay in the clear.

The biggest challenge usually lies in the practice of sending out annual letters – so called "Crummey letters" – since the beneficiaries must be notified within very specific windows during which they may elect to withdraw the gifted funds. Failure on the part of the trustee to send out the letters can raise questions with the IRS and may upset the apple cart, so to speak, when seeking to qualify the annual gifts as falling within the annual gift exclusion. For this reason, many families find the safest approach is to engage a professional trustee to handle these notice letters and other administrative duties to ensure compliance.

Reference: Forbes (October 9, 2011) "With Trusts, ‘Crummey’ Is Good"

Estate Planning For Firearms

When most folks think about their assets, they naturally recall real estate, bank accounts, retirement funds, and life insurance, just to name a few. However, don't overlook other less obvious assets, to include tangible personal property. One example of such an asset you ought not overlook is your firearms. Special care is necessary to ensure a clean, legal transfer.

A recent Forbes article considers the special estate planning problem of firearms.

Guns are as natural to own for some as any other asset. Indeed, to some, their firearms collection is really more akin to an art collection. That noted, under the law, passing down your firearms to your heirs may trigger a different set of laws than passing down your tools set or that painting in your hearth room.

Firearms are highly regulated at both the federal and state levels. Consequently, the laws and regulations need to be followed, particularly if the firearms will be crossing state lines. Passing down firearms to heirs can take time and require the approval of several parties, such as the chief law enforcement officer for the respective jurisdictions.

Enter the "gun trust." This can be a simple and powerful tool to pass down your firearms. Practically speaking, it is a special purpose revocable living trust. At its formation, the owner of the trust is both trustee and beneficiary. At the owner's death, the trust property (i.e., firearms) is passed down to the lifetime and remainder beneficiaries by the successor trustees. Of course, trust or not, there are some hard and fast rules imposed by the National Firearms Act and all parties have to comply with them (or risk incurring serious fines and possibly even forfeiture of the right to bear arms).

Your firearms (and other atypical estate assets), may hold a unique status under federal and state laws. Make sure you comply with any law governing their transfer, as part of your estate planning.

Reference: Forbes (September 22, 2011) "Gun Collections Pose Special Estate Problems"

Serving As Executor... Honor Or Horror Story?

For many folks, it is the highest honor to be appointed as executor (or, as "personal representative" in this era favoring a more gender neutral/political correctness title) under a Last Will and Testament. Beware, the what began as an honor may morph into a horror story once the job starts.

Choosing an executor can be a difficult task. Why? It means finding someone you trust to carry out your last wishes after you are gone.

Commonly, the appointment of an executor is a means to honor and a gesture of respect made to a friend or family member. Neither the estate planner nor the would-be executor ought to forget, however, that serving as executor can be a fairly difficult role to play. The Wall street Journal recently offered some practical insights and advice on the topic, noting that to be named executor is both "an honor… and a pain."

Simply put, the executor administers a decedent's Last Will and Testament through probate, navigating the many twists and turns of that court process. Administration involves accounting for assets, paying bills, and distributing assets in accordance with the terms of the Last Will.

The process typically takes time, too. It can mean up to several years for larger estates, and during that time the executor must keep up with the associated laws, tax code changes, and financial investments, or else intelligently delegate such responsibilities to professionals. It means that a "non-professional" can do the job, but perhaps not an "amateur"; you have to know your abilities and have confidence. To top it off, the compensation for being an executor is often meager, given the heavy workload, and is regulated by state laws.

The biggest challenge an executor will face, by and large, is a shifting relationship with the family. Money can make people antsy or even belligerent, even if the terms are clear in the Last Will, and that's something an executor might have to bear. This is especially true of family members turned executors who may face soured relationships at family functions. Accordingly, that can make for some awkward moments around the Thanksgiving table.

Practically speaking, to serve as an executor you must anticipate the challenges ahead of time, prepare for them, and remain organized. Indeed, organization is essential throughout the probate process, to include separating yourself into the two roles: executor and family member/friend.

While planning your estate and settling on an executor, consider alerting your would-be executor of your decision ahead of time. Doing so will allow them to prepare for the role, and perhaps even get special instructions from you personally. For more advice and anecdotes you can read the original article here, but to get a better idea of the challenges it is best to consult with your estate planning attorney for advice and counsel.

Back in March of 2003, Kiplinger's magazine ran an excellent article on this subject, but from the angle of serving as a "trustee." I would commend it to your reading (and to forwarding it to your trustees), as it provides some very practical pointers and points out some very hazardous pitfalls.

Reference: The Wall Street Journal (September 19, 2011) "Estate Executors: An Honor… and a Pain"

Reference: Kiplinger's (March, 2003) "In You They Trust"

You Can Trust A Trust (For Inheritance Protection)

There are many options to protect an inheritance "from" your children, as well as "for" your children. Otherwise a lifetime of your hard work and thrift could become a curse and not a blessing for your loved ones.

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can't fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will (read: disinherit). Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change.

Problem cases for inheritances aren't all "problem" children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators manifest themselves as divorces, lawsuits and bankruptcies.

Indeed, much of the time the concern is over the possibility of future problems, ones you can't foresee while planning your estate today. This especially is the case when you're planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future problems by instilling character.

How can you do it? The most powerful tool is the trust, for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems or merely the attractant, a lump sum inheritance certainly is not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it.

Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the "incentive trust." Like the name implies, this trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can contain character-building triggers like admission to a certain college or graduation from one. In short, the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to "game" after you are gone.

For those planners who take a uniquely long view, there also is the option of the "dynasty trust." It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that, properly drafted and implemented, a dynasty trust properly can protect the family wealth from problem inheritors for several generations.

Reference: The New York Times (September 2, 2011) "Using an Inheritance to Teach Your Problem Child a Lesson"

Your Vacation Home - Keeping It In The Family

So, you enjoyed that family vacation home again this summer and, perhaps, over the Labor Day weekend. Would you like to keep the property (and the memories coming) for future generations? If yes, then this is a good time to start thinking about creating a succession plan for the property. A detailed plan will make the transfer of ownership easier and establishes rules to will help prevent bitter family conflicts down the road, experts say.

Ensure the future of the family cottage and the peace and domestic tranquility of your family through proper estate planning. How do you do that? Fortunately, The Wall Street Journal Online recently touched on the topic.

The best way to leave an inheritance that includes a family vacation home depends on who will be inheriting it. That is the first essential decision. For example, are you leaving it to one family member or to several? Who will be interested in the home (or more interested in your portfolio)? Who, realistically, will be able to use the home? For example, an adult child living in California might not be able to enjoy the Cape Cod cottage. This is especially true if they have such child has his or her own vacation property. On the other hand, the property may be conveniently located for them, but they wouldn't be able to afford the upkeep, insurance and taxes. Both are lose-lose propositions.

If you've settled on a single person to inherit the family vacation home, then it's relatively easy: you can either gift it during your lifetime (before 2013 would be prudent), or leave it through your Last Will and Testament or your Revocable Living Trust. If you are leaving it to multiple beneficiaries, like an entire generation of your family, then maybe consider establishing a specific arrangement for such ownership. For instance, many families find the Limited Liability Company (LLC) or various forms of trusts to be practical tools.

If all of the heirs are adults, then an LLC might be a better bet as it allows members a more equal say, while still providing a framework for decisions or an organizational structure through the use of a solid operating agreement. Of course, you could take it a step further and form a trust that owns an LLC that owns the home, or even specific trusts like a Qualified Personal Residence Trust (QPRT).

When there are young children in the family, then a trust with a long-term duration might be better. Why? Because it allows parents to pass on the vacation home to their children while still appointing an adult in charge as trustee. In addition, properly drafted with "spendthrift provisions," such trusts can protect the family home from the potential divorces, lawsuits and bankruptcies of the heirs.

For many, a family vacation cottage is a place of many happy memories shared over a long family history. As a result, it just has to stay in the family. Once you start down the path to make that happen, however, don't wander too far without appropriate legal counsel. You will need experienced help to navigate the details, figure out what's best for your unique situation, and eventually put ink to paper.

Reference: The Wall Street Journal Online (September 4, 2011) "Create A Plan To Pass On The Family Cottage"

Estate Planning Alphabet Soup

Have you ever thought about making gifts to your loved ones with strings attached? Well, welcome to the world of estate planning alphabet soup. You just might like to try a bowl of GRATs, GRUTs, GRITs and QPRTs.

Estate planning opportunities tend to be hard to time. Practically speaking, you tend to not be "done" with your estate when the law creates a planning window. Certainly, that was the joke in 2010 when the estate tax lapsed and it become "the year to die." [Just ask the family of George Steinbrenner!]

That noted, both 2011 and 2012 are incredibly favorable years for gifting. While the law (and other factors) have made these scant two years such a great window, that doesn't mean you're necessarily ready to gift assets away just yet. Thankfully, there are a number of legal "tools" that allow you to give without giving up (at least not yet) such assets.

There was an excellent article in a recent edition of The Des Moines Register regarding this issue. In fact, the article provided a brief overview of those legal tools I referenced about as "estate planning alphabet soup."

Bottom line: The solution to giving without fully giving up your gifted assets completely is found in a class of trusts called "retained interest trusts." Why this name? Because, literally, you retain an interest in the assets and the type of interest retained, in turn, determines the exact kind of trust. As with most things in life, each flavor of trust has its own strengths, weaknesses, and a terrible acronym.

The GRAT, or "Grantor Retained Annuity Trust" is the most commonly talked about these days for a number of reasons (like those in a recent issue of the Wall Street Journal). Essentially, a GRAT allows you to retain an interest in the assets in the form of an “annuity” that will provide a steady income to you.

The GRUT, or "Grantor Retained Uni-Trust" allows you to keep an interest in the assets in the form of a regular payment which is a "fixed percentage" of the value of the assets in the trust. This means if the value of the assets appreciates, so to will your regular payment.

Then there’s the GRIT (not to be confused with "True Grit"... either with John Wayne or Jeff Bridges) or "Grantor Retained Income Trust," which allows you to retain an "income" from the assets. Note: This generally is less flexible when it comes to giving to heirs, except when it is used to give away a residence. Surprise! A GRIT can be a "QPRT" instead, which is a "Qualified Personal Residence Trust." With a QPRT, the asset is a residence and the income to be retained is the "right to live there." In other words, putting your home into a QPRT is giving the home away, but without the hassle of moving (yet, anyway).

In all cases, whatever you would give away to your loved ones outright is, instead, put into the trust. You retain the respective interest in the asset and name your heirs as beneficiaries, effectively transferring the asset and taking advantage of a good estate planning opportunity well before your time. In all cases, though, a great deal depends on your specific situation and certainly qualified legal counsel will be required to assess how to best weave the plan together (not to mention to implement the appropriate trust). This is not amateur hour.

Reference: Des Moines Register (August 27, 2011) "Retained Income Trusts Benefit Heirs"

Revoking The Irrevocable?

"Prediction is very difficult, especially about the future." Niels Bohr, Danish physicist (1885-1962)

When you signed that irrevocable trust years ago, your daughter was happily married to a fella you would have hand-picked for her. A miracle. Unfortunately, who could have predicted that this fella would "date around" after the wedding? Not good. To make matters worse, against your attorney's advice, you appointed "Mr. Right-turned-Mr. Wrong" as the trustee over an irrevocable trust for your daughter. Awkward. So, just how "irrevocable" is that irrevocable in your irrevocable trust?

Fortunately, the answer is a legal proceeding known as a "trust reformation." Under the right circumstances it could be your cure for estate planning-induced insomnia. In fact, the subject is well-addressed in a recent Smart Business article in the form of an interview with Mark Sales, of Dykema Gossett PLLC. I would commend it to your reading.

Note: A trust can't be changed on a whim. If they could, why go to the trouble? Typically, a trust a good candidate for reform when accounting for unanticipated changes or unclear language. An irrevocable trust appointing a philandering ex-son-in-law as trustee for your daughter's inheritance could be such an "unanticipated change." Practically speaking, any change that would clarify or expedite the administration of the trust, and work to the benefit of all involved parties, might be an admissible purpose for reformation.

The process is not entirely simple, however, especially if a family business is part of the trust or if there is a charitable remainder aspect in play. Regardless, the most complicated parts tend to be emotional since trusts can put match to the kindling of family discord. According, it is essential that the process is transparent and that all parties are kept on the same book and page throughout the process. The SmartBusiness article discusses more of the possible hazards to face – legal and emotional – but in the end it is your own legal counsel who will have to determine the possibility of reformation and to then carry the water.

Reference:  Smart Business (August 1, 2011) "How the Reformation of a Trust Can Benefit the Trustees and Beneficiaries"