Author Archive

08 Apr

Newly acquired property isn’t titled to your living trust

In Asset Allocation,Living Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner May-June 2006

A living trust is one of the most flexible, effective estate planning tools available. It contains instructions for managing and distributing your assets in the event you become incapacitated and when you die. It also avoids probate – an expensive, time-consuming and very public court proceeding.

A will also is an essential estate planning document, but a will by itself won’t avoid probate and functions only after your death; it won’t provide for the management of your assets if you become incapacitated. Assuming no incapacity, a living trust gives you complete control over your assets during your lifetime. You can revoke the trust or dispose of the assets in any manner you wish.

For an asset to be covered by your living trust, it’s important to change the asset’s title from your name to the name of the trust. Any assets titled in your name (unless governed by a beneficiary designation) will be subject to court-appointed guardianship if you become incapacitated and to probate at your death.

Ordinarily, this doesn’t present a problem when you first set up your living trust – your attorney will remind you to change the title of your home, life insurance policies, retirement plans and other assets. But once your living trust is signed, it’s easy to forget to change the title of property you acquire later.

If you don’t know whether all of your assets are properly titled in your living trust’s name, consult your estate planning advisors to discuss. If all your assets aren’t properly titled, the living trust may not serve its purpose.


08 Apr

Avoid the Funding Trap for Trusts — Control Taxes by Monitoring When and Where Assets Go

In Asset Allocation,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Nov-Dec 1997

Estate planning focuses on transferring your assets as you desire while minimizing estate taxes. Although you may set up several trusts to achieve these goals, you might not consider the tax impact of how and when assets pass to each trust. The actual funding of these trusts, however, can greatly affect the amount of taxes due and how much goes to each beneficiary. The following example illustrates the potential impact.

The Estate Plan

John and Georgia were married, and each had significant assets. They structured John’s estate plan so that their two children would receive something on his death even if he died before Georgia. The will allocated:

  • John’s $1 million generation-skipping transfer (GST) tax exemption to two trusts — $500,000 for each child.
  • 50% of his gross estate, after debts and expenses, to a marital trust.
  • The remaining estate, after distributions and estate taxes, to the children.

Execution of the Plan

On John’s date of death, June 1, 1997, his estate was valued at $10 million. Debts and expenses were $100,000. The estate would be divided as follows:

  • GST tax exempt trusts: $1,000,000
  • Marital trust: $4,950,000
  • Federal and state estate taxes: $2,170,500
  • Children’s share (residue): $1,879,500

How John’s will was drafted, the timing of funding the distributions under the will, and the change in the value of assets from the date of death to the date of funding all could affect the plan and result in unexpected or unintended consequences.

Unexpected Capital Gains

For example, assume that John had the assets listed in the box below and the distributions were not funded until Dec. 1, 1998. If the will specifically stated that the distribution to the GST trust was to be a pecuniary $1 million, and the executor used the X Corp stock to satisfy this distribution, the simple act of funding the distribution would produce a capital gain to the estate of $500,000. This would result in a capital gains tax of approximately $100,000, leaving less remaining in the estate for the children.

If John had the same assets, but funding occurred closer to the date of death with the Y Corp stock and one-half the X Corp stock, no gain would occur, and significant appreciation would enure to the benefit of the GST trusts.

Unintended Valuation Effects

Valuation issues also can play a role. If, under the prior example, the executor was required to fund the marital trust using date of death values, waiting to fund might result in serious overfunding of the marital share. This would leave little, if anything, for the residuary beneficiaries after all taxes and expenses had been paid.

Thus, if the Business Z asset was used to fund the marital share, Georgia would receive $6.5 million in current assets and the children would be left with $829,000, less any tax that may result from having to sell assets to pay estate tax. This not only might be undesirable, but it also might cause a rift between the surviving spouse and the residuary beneficiaries.

Monitor Funding To Avoid the Unexpected

While you can’t always control the post-death appreciation or depreciation of assets, closely monitoring the funding situation can avoid the unexpected. If you would like more ideas on funding your trusts effectively, we’d be glad to help.


John’s Assets Date of Death Value Date of Distribution Value

Publicly traded X Corp stock $ 500,000 $ 1,000,000
Publicly traded Y Corp stock $ 750,000 $ 1,000,000
Interest in closely held Business Z $ 5,000,000 $ 6,500,000
Investment real estate $ 3,750,000 $ 2,000,000

TOTAL $ 10,000,000 $ 10,500,000
08 Apr

Alaska and Delaware Now Offer Domestic Asset Protection Trusts

In Alaska Trusts,Asset Protection by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 1998

When you think about an asset protection trust, an offshore trust probably comes to mind. With the recently enacted Alaska and Delaware statutes, however, you may not need to leave the country for an asset protection trust. The Alaska and Delaware Trust Acts offer additional domestic asset protection and estate planning opportunities.
Generally, when you retain an interest in a trust you create, the trust is subject to your creditors’ claims to the extent of the interest you have retained, and perhaps to the full extent of trust assets. Also, because creditors have access to the trust assets, transfers you make to a trust in which you retain an interest — even if the trust is irrevocable — are not completed gifts for estate tax purposes and will be included in your estate at death.

The most reliable way to protect assets from future creditors and keep them out of your estate at death is to not retain any rights to the trust assets or income, including any right to control who receives trust assets. You may not, however, be inclined to give it all away with no strings attached or interests retained. Thus, you may have considered establishing trusts in certain foreign jurisdictions that provide for creditor protection even if the grantor holds a retained interest.

The New Domestic Alternative

Recognizing that trust asset protection is a sound and legitimate financial planning tool, some state legislatures have begun enacting statues that provide similar protection onshore. The Alaska Trust Act and the Delaware Trust Act were changed in 1997 to allow a grantor to create a trust that is protected from his or her future creditors even though the grantor has retained the right to receive discretionary distributions of income or principal.

This is because Alaska and Delaware trusts may prohibit a grantor who holds a beneficial interest in the trust from assigning, either voluntarily or involuntarily, his or her interest in the trust prior to the distribution of the interest to the grantor. This prohibition may also apply to the grantor’s current creditors as long as the transfer into the trust is not a fraudulent conveyance.

How the Trusts Work

Joe transfers $500,000 to a trust he has created outside of Alaska or Delaware. The trustee has the discretion to make distributions of income from the trust to Joe during his life. On Joe’s death, the trust assets will be distributed to Joe’s daughter.

If Joe then incurs a debt he is obligated to pay, the creditor can reach trust assets to the extent of Joe’s income interest. On Joe’s death, the entire value of the trust will be includable in his estate for estate tax purposes.

This would not be the result if the trust were now formed in Alaska or Delaware. Under these states’ statutes, the trust assets would not be available to Joe’s creditors, even though he has retained the right to receive trust income.

In addition, some would say that the trust assets should not be included in Joe’s estate at his death. Why? Because, they would argue, if the trust was formed in a state where the trust assets could not be reached by a grantor’s creditors, the transfers into the trust should be deemed completed gifts and, therefore, not includable in Joe’s estate.

Can Creditors Reach the Assets?

Although Alaska and Delaware offer greater creditor protection than most states, creditors may still be able to reach these trusts. The U.S. Constitution requires any state to enforce the judgments of any other state. Thus, a creditor can obtain judgment against the grantor outside Alaska or Delaware. Enforcement of the judgment, however, would also have to involve an Alaska or Delaware court, making it a lengthy process. Additionally, U.S. bankruptcy law extends to virtually all persons in the United States, so if bankruptcy law could void the transfer to the trust, Alaska or Delaware laws would not protect the assets.

Also, keep in mind that these new laws will not protect the trust assets if any transfer into the trust was intended to defraud creditors or avoid a judgment order for child support.

Weigh the Advantages of Domestic vs. Foreign Trusts

A trust in a foreign country with debtor-friendly laws offers the greatest possible creditor protection. Remember, however, that U.S. reporting requirements relating to creating a foreign trust tend to be onerous and, therefore, make a foreign trust less appealing. Alaska and Delaware offer an attractive alternative for those who want additional creditor protection while keeping assets in the United States. Please contact us if you would like additional information on using asset protection trusts. We’d be pleased to help.

08 Apr

Hunting for Lost Treasures — You May Be the Heir to Abandoned Assets

In Abandoned Assets by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 1997

Over the years, U.S. residents have abandoned tangible and intangible property valued at billions of dollars. State unclaimed-property laws, traditionally called “escheat,” empower states (or other governmental units) to take title to, or claim custody of, property that has remained unclaimed or dormant for a period of time and, therefore, is presumed abandoned. As an heir, you may be entitled to lost treasures you don’t know about.

Finding the Treasure Map

Generally the burden is on the holder or custodian of property to report its abandonment and meet corresponding notice and publication requirements. Newspapers regularly publish such lists, so it may be worthwhile to review lists that appear in states where your relatives have resided. Look for your own last name, your or your spouse’s maiden name, your mother’s maiden name and your spouse’s mother’s maiden name to determine if the state is holding property to which you may have a claim. You also may learn of escheated property when the executor of a relative’s estate discovers evidence of escheated property, such as old uncashed dividend checks or unclaimed redemption proceeds, and contacts you.

Recovering the Treasure Chest

If you believe you have a claim to property that may have escheated to the state, contact the state treasurer to determine what recovery procedures are available. In general, the law provides a procedure to make a claim to retrieve the property.
However, the first hurdle often is determining to just what state the property escheated. Several states may claim custody of unclaimed property based on jurisdiction over the corporate issuer or holder of the property.

For example, if unclaimed intangible property, such as corporate stock, is abandoned, the stock might be covered under the law of the state where the company was incorporated, the state where the corporate headquarters was located or a state doing significant business with the corporation. Under the federal Uniform Unclaimed Property Act, and several state statutes, unclaimed intangible property is payable to the state of the last known address of the owner. Thus, that is the first place to look. If the owner has moved often, it may be necessary to check several states.

Don’t Make Your Heirs Go on a Treasure Hunt

Finding and retrieving escheated property to which you have a claim can be exciting, but wouldn’t you rather have had the property sooner? Make sure that your heirs don’t have to go through the escheat property reclamation process. Keep close tabs on all of your property and write a will or create a living trust to ensure that your estate is passed to your heirs as you wish.


What Is Abandonment?

At what point an asset escheats to the government varies by state and may depend on the type of property that has been abandoned. Under the federal Uniform Unclaimed Property Act, abandonment is presumed in many situations, such as when:

  • Money has been held in a savings account with no activity for five years,
  • Travelers checks have been unused for 15 years,
  • Intangible assets from the dissolution of a business association have not been claimed by the owner within one year after the final distribution date,
  • An employer holds funds for an employee’s benefit that the employee fails to claim when he or she leaves the job, and
  • An individual dies intestate and those around him or her know of no heirs.