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

I was recently privy to quite a spirited online debate among a group of estate planning attorneys. The topic? Revocable Living Trusts and whether most clients really need them.

I didn’t actually participate in the debate (I didn’t see the discussion until after the fact), but the topic is an important one, so I thought I’d take a few minutes to contribute my thoughts.

First and foremost, there are certain states where the time and costs involved in probating a decedent’s estate are significantly greater than those involved in administering a Revocable Living Trust. In these states, a Revocable Living Trust can make sense strictly as a probate avoidance measure.

However, even in states with a streamlined probate process, Revocable Living Trusts can have a number of other advantages, including:

• Avoidance of Ancillary Probate: Where a client owns real estate in another state, a Revocable Living Trust saves the family from the expense and hassle associated with maintaining probate proceedings in multiple states.

• Privacy: The terms of a Will are a matter of public record in a probate proceeding. The terms of a Revocable Living Trust are not subject to disclosure to prying eyes in most cases.

• Prevention of Anticipated Challenges: For some clients, the chance of a Will contest is significantly elevated. Whether a client expects a challenge to arise because of a same-sex relationship, bad blood within the family, or another reason, opting for a Revocable Living Trust over a Will can help keep litigious relatives out of court and allow for the smooth, orderly, and relatively peaceful settlement of the estate.

Beyond streamlining the process of settling a decedent’s estate and warding off potential challenges, a continuing trust can be beneficial for numerous purposes. For instance:

• Taxation. Credit shelter trusts can shelter assets from taxation in the surviving spouse’s estate. Similarly, generation skipping transfer (GST) trusts can be used to protect assets from taxation in the next generation’s estate.

• Management. When a client has a beneficiary who is a minor, or who just isn’t prudent or financially savvy enough to manage their own inheritance, a continuing trust can be the right choice for protecting that beneficiary’s inheritance.

• Divorce and Creditor Protection. A continuing trust can be an invaluable tool for protecting a beneficiary’s inheritance from creditors’ claims, not to mention dissipation in the event of a divorce.

It’s important to note that not every continuing trust begins as a Revocable Living Trust. A Will can also be used to generate a continuing trust. Which brings me to my real point: no estate plan is one-size-fits-all. That’s why clients need the counsel of an experienced, qualified attorney who can help them understand all the costs and benefits of the various estate planning options available to 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