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When we think of asset protection planning, we think of many things….like heading South to Florida or Texas, for example. But most estate planning attorneys do not think of QPRTs for asset protection. Rather, we think of them as a way of getting value out of the estate and down to the children or other beneficiaries at a discount.
However, in a recent newsletter (Asset Protection newsletter #219) on Steve Leimberg’s website (www.leimberservices.com), author Jay Adkisson discusses a bankruptcy case from the Eastern District of New York, In re: Yerushalmi. If you are a subscriber to Leimberg Services, be sure to take a look at the newsletter. (If you wish to subscribe to the service, click here.) (I forwarded the newsletter to the Members of the American Academy of Estate Planning Attorneys, with the kind permission of Steve Leimberg, of course.)
How can one use a Qualified Personal Residence Trust for asset protection? With a QPRT, the grantor contributes their residence into a trust, the QPRT. The QPRT allows the grantor to use the residence as their own during the initial term of the trust, say 10 years, while the remainder goes either outright or in further trust to various beneficiaries, like children, at the end of the initial term of years. The value of the gift is the discounted present value of the remainder interest, using the rate under section 7520. The asset protection benefit comes in because the debtor/grantor only has a right to use the residence for a term of years. This property right is not nearly as marketable as the full bundle of property rights in the home. Not only does this reduce the value of the property rights which can be attached, but it increases the inconvenience to the creditor because the debtor/grantor (and hence the creditor standing in their shoes) cannot force a sale of the home.
As with most asset protection planning, the key to using a QPRT for asset protection is doing it before the creditor problems arise and while the client is still flush with assets. Essentially, in Yerushalmi, the court determined that the QPRT was a valid asset protection device because it had been set up before the debtor/grantor’s creditor issues arose. Therefore, the home which was worth millions was out of reach of the creditors.
If that ship has already sailed and creditors are already knocking at the client’s door, it may be too late to do a QPRT or most other asset protection strategies. There are many cases in which the creditors have been able to pursue claims against the attorney who assisted the debtor with asset protection strategies when the debtor had creditor claims in excess of their assets.
Again, I encourage you to take a look at www.leimbergservices.com. The service is a valuable tool to stay current with commentary in many areas of the law, including asset protection.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
As of this blog posting, there are 12 days left before the clock strikes midnight on December 31st and the law changes.
It’s just like watching the ball drop in New York’s Times Square:
10…9…8…7…6…5…4…3…2…1…
As of this writing, the law to which it will change will be the pre-EGTRRA/TRA law. In other words, we will have a $1 million applicable exclusion per person. Gone will be the days of the $5.12 million exclusion. Also, portability will be history. For many people, the New Year will not be very happy because of the tax changes it might bring.
It remains to be seen if Congress and President Obama can come to an early resolution on the issue before the expiration of the “Bush Tax Cuts” on January 1, 2013. It’s unclear whether the estate tax is even part of the negotiation on the “fiscal cliff.” Both sides have been very quiet in this regard.
If we go back to the old law, many things will change. Estate taxes will, once again, become more relevant to many people. However, there is one thing which I hope will not change. Clients and practitioners have refocused in the last few years, in ways I think are for the better. For the most part, their top priority has not been the tax issues. Their top priorities have been the legacy which the clients wish to leave, as well as asset protection, divorce protection, and Medicaid concerns.
I cannot help but think of the ending of the Great Gatsby: “So we beat on, boats against the current, borne back ceaselessly into the past.”
I hope that if we are borne back to prior law, clients and estate planning attorneys alike can retain the focus which they have learned. Taxes may become a more important part of the conversation after January 1st. However, I hope that we will make resolutions to remember the other priorities upon which we have come to focus in the last few years.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Clients often seem to want to have their cake and eat it, too. They want to remove assets from their taxable estates, yet they want to control the assets, or even use the assets if they need to do so.
This year, we have an unprecedented opportunity for clients: the gift tax applicable exclusion is $5.12 million. But, clients are reluctant to make a gift and give up control. We used to tell clients to put their assets in an entity which they controlled, like an FLP, and gift away the limited partnership interests while retaining control of the general partnership interest. For a while, that seemed to work. However, after Strangi and its progeny, keeping complete control is no longer a viable strategy. The best that may be achieved safely is retention of control of day-to-day matters while relinquishing control over distributions of income and dissolution of the entity.
So, what’s a control-hungry client to do? What about a 529 plan? A contribution to a 529 plan is a completed gift and is not included in the estate of the donor, except to the extent the transferor had used future annual exclusions which for periods beyond the donor’s lifetime. This is a statutory safe harbor. IRC 529(c)(4). So, even if the transferor is the account owner with complete control, it is not in the transferor’s estate. Thus, the client can transfer the funds to the 529 plan and retain complete control. If the client has a setback and needs to retrieve the assets for their own use, they can do so.
Typically, 529 plans are touted for their income tax benefits. If the plan is used for qualified higher education expenses, such as tuition, the income and growth is tax-free, not just tax-deferred. Further, some states give a deduction or credit for contributions. However, even disregarding the income tax considerations, the 529 plan may be exactly what the client is seeking: A way to 1) maintain control, 2) reduce the taxable estate, and 3) retain the ability to regain the assets for their own use. Perhaps 529 plans really are estate planning’s Holy Grail, as I suggested in this article. The 529 plan is especially useful in today’s environment of the $5.12 applicable exclusion because many clients are feeling pressured and motivated to make gifts to take advantage of this limited-time opportunity—without giving up control or access.
In addition to the estate and gift tax attributes, there are other factors to consider in choosing a plan. Some characteristics, including the investment performance and the maximum allowable contribution, vary by plan, even within the same state. Other characteristics, such as asset protection attributes, vary by state.
Now, you can show your clients that there may be a way to have their cake, and eat it, too. But, they’ll need to do their homework in choosing a plan. They can get started on their research at savingforcollege.com.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Last week, I discussed how the transfer of real estate into a trust could trigger issues regarding Homeowner’s Insurance and Title Insurance. There are many other issues to consider. This week, I’ll look at tax and asset protection considerations.
Taxes
- Capital Gains Tax: Transferring a residence to a grantor trust (like a revocable trust) does not interfere with the grantor’s $250,000 (or $500,000 for joint returns) capital gains exclusion, provided the property otherwise qualifies.
- Deductions: After property is transferred to a grantor trust, the grantor can continue to claim deductions for mortgage interest and property taxes paid by the trust.
- Property Tax: Some states offer a homestead exemption that serves to reduce property taxes for homeowners. This exemption can be very valuable. If your state offers this exemption, check to be sure that transferring a residence to a trust does not interfere with the exemption. Also, think about how property tax reassessment works in your state. Some jurisdictions don’t have periodic reassessment of property taxes—only a reassessment upon the transfer of the property. If the property has appreciated in value, make sure that transfer to the trust will not trigger property tax reassessment.
Asset Protection
- Tenancy by the Entirety. In some states, property held in “tenancy by the entirety” is given an extra level of protection from creditors. Few states will allow property to maintain its “tenancy by the entirety” status in a trust. In most states, transferring such property to a trust destroys the tenancy by the entirety protection. Prior to transferring tenancy by the entirety property to a trust, consider:
1. Your state’s rules for allowing a trust to hold property in tenancy by the entirety, and
2. Whether any loss of asset protection is worth the advantages offered by funding the property into the trust.
- Bankruptcy. Debtors’ homes are given preferential treatment under bankruptcy law. This is called the “debtor’s homestead exemption.” This exemption varies from state to state. For example, a Florida resident can protect his or her home – no matter the value – from creditors in bankruptcy. In other states the exemption may be limited to $100,000 or less. In some states, however, transferring a home to a trust means losing the homestead exemption in bankruptcy. If bankruptcy is a possibility, it is imperative to know your state’s bankruptcy law before deciding whether to fund the home into a trust.
Amazingly, there are still more issues to look at! Next week, we’ll look at a number of additional concerns you’ll want to be aware of before you transfer real estate to a trust.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Adoption of children is a relatively common occurrence in the United States. But, in most states, it is also possible to adopt an adult. The adult adoption tool has been used in planning for same-sex couples for decades. Now, it seems that its use may be spreading, in the right circumstances.
There are many reasons to adopt an adult, both legal and emotional:
- Establish a tighter bond between the parties
- Enable inheritance rights between the parties
- Enable the “child” to get health insurance on the “parent’s” plan
Let’s look at a situation to see how this might arise. John is the heir to a large sum of money. However, these assets are left in trust for him. At his death, the assets are to go to his children. The trust and state law do not exclude adult adoptees as potential children. If he has no children, the assets go to his cousins. If he had a limited power of appointment, he could send those assets elsewhere at his death. He does not. He wants the assets to go to his domestic partner, Mike. By adopting Mike, John can ensure that his assets go to Mike.
In a unique twist, adult adoption can give lifetime access to otherwise protected money. Floridian John Goodman had placed $1.5 million in an irrevocable trust for his children. He had two children at that time. The assets were invested and ballooned in value to several hundred million dollars. The transfer of assets into the trust was not a fraudulent transfer and Goodman had no interest in the trust. Thus, those assets were exempt when he became involved in litigation in which he was accused of drunk driving and killing a 23-year-old man and then leaving the scene.
Goodman, age 48, adopted his girlfriend, age 42. When she became one of his “children,” under the terms of the trust, she gained access to the funds in the trust. So, through the adult adoption, Goodman’s girlfriend (and, indirectly, Goodman himself) gained access to millions of dollars of money which has been deemed off limits to his creditors.
Here’s a link to the story: http://www.forbes.com/sites/trialandheirs/2012/02/06/can-florida-millionaire-justify-adopting-his-girlfriend/
Perhaps adult adoption may be increasingly relevant as an estate planning and asset protection tool.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
As estate planning attorneys, we know that our practice is a complex one. Estate planning is the nexus of various different areas of the law, including Wills & Trusts, Taxation, Asset Protection, Elder Law, Family Law, etc.
Of course, we must master and keep current on the substance of these various areas of the law. But, at least as importantly, we must learn to extract from our clients their true goals.
For example, if asked how they wish to leave their assets, they may say “outright to my children.” However, if asked if they are concerned about their children being party to a divorce, many will divulge that fear.
When the various options are explained to the client, many will opt for a different solution than they originally thought they wanted.
Of course, this is true when dealing with issues that touch on various different substantive areas. For example, maximizing Tax savings may not be the best way to provide for elder law planning.
Let’s look at this situation in greater detail. The client is 70 and in good health, but has a family history of Alzheimer’s with an expected onset at age 80. He owns his own home, has social security, and a pension, which meet his living needs. He wants to qualify for Medicaid, which he could do in 5 years, if he gifts away his liquid assets. However, his daughter is a successful entrepreneur and is in a high income tax bracket. By giving his liquid assets to his daughter, the family will pay more in income taxes, which he does not want to do.
We must remember, we do not create the options for our clients, we just present and explain the pros and cons to them. It is then up to the client to decide which course of action is best for them.
In this situation, the client must decide whether it is better to give the assets to his daughter, enabling him to qualify for Medicaid in 5 years, and have increased income taxation on the assets. Perhaps you could explore middle ground with the client. Gifting the assets to an income only trust may allow the client to qualify for Medicaid, while having the income taxed to him. However, the income may end up going to share of cost if he goes into the nursing home. Of course, much of this depends on how the particular state administers the Medicaid program.
What is important to remember here is that, sometimes, it is not possible for the client to maximize the results in every area of interest. In the above situation, one client may choose to gift the assets outright, while a different client with different preferences and experiences may choose to do the income only trust. The role of the estate planning attorney is to provide the best information possible to the client for them to make the best decision for them.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
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