Basic Estate Planning

Everyone can benefit from a properly structured estate plan. Whether you are young, old, wealthy or not-so-wealthy, there are many good reasons to plan for your disability and eventual death. For high-net worth clients, estate planning can minimize taxes and maximize asset protection. For other clients, revocable trusts can be used to avoid probate and provide an efficient administration of your estate to save money by avoiding the statutory fees for ordinary services executors and their attorneys are entitled to by law. The example below will help illustrate the costs of a probate without any disputes:

Gross Estate:$1 million
Statutory Fee for Executor:4% of the first $100,000 = $4,000

3% of the next $100,000 = $3,000

2% of the next $800,000 = $16,000

1% of the next $1,000,000 = n/a

Total = $23,000

Statutory Fee for Executor’s Attorney:4% of the first $100,000 = $4,000

3% of the next $100,000 = $3,000

2% of the next $800,000 = $16,000

1% of the next $1,000,000 = n/a

Total = $23,000

Grand Total:$46,000

Using a revocable trust to avoid probate, makes financial sense even for more modest estates. Let’s use another example with a more modest estate:

Gross Estate:$350,000
Statutory Fee for Executor:4% of the first $100,000 = $4,000

3% of the next $100,000 = $3,000

2% of the next $800,000 = $3,000

1% of the next $1,000,000 = n/a

Total = $10,000

Statutory Fee for Executor’s Attorney:4% of the first $100,000 = $4,000

3% of the next $100,000 = $3,000

2% of the next $800,000 = $3,000

1% of the next $1,000,000 = n/a

Total = $10,000

Grand Total:$20,000

Even though the administration of a revocable trust following your death will involve some expenses, a simple trust administration of a $1 million estate or a $350,000 estate will be a fraction of the cost of a probate. A trust administration comes with the added benefits of being capable of being completed within a few months and being completely private. A probate administration will take in excess of a year due to our overworked and underfunded courts and is a public process where filings are viewable by the general public.

In addition to saving on costs, trusts are flexible agreements that allow you to hold assets in trust for your children until your children reach certain ages. Typically, parents are not keen on the possibility of a child receiving his/her entire inheritance at the age of 18. I normally see parents withholding principal distributions until their children reach ages 25, 30, 35 and 40 years old. Theoretically, your children will be more mature and capable of managing and investing large sums of money when they are older. Other parents seek to use the trust as a means to incentivize their children to no rely on trust funds and instead to work hard and find success through their own efforts and then reward the child with trust funds for his/her independent success. Whatever your goal, a properly structured trust can be used as the vehicle to make it happen.

Basic Estate Plan Package for Married Couple:

    • One (1) Joint Married Revocable Living Trust
    • Two (2) Pour-Over Wills (one for each of spouse)
    • Two (2) General Durable Power sof Attorney for financial matters (one for each spouse)
    • Two (2) Advance Health Care Directives for health care matters (one for each spouse)
    • Two (2) HIPAA Authorizations (one for each spouse)
    • Two (2) General Assignments of Personal Property (one for each spouse)
    • One (1) Certificate of Trust
    • One (1) Affidavit of Trust
    • One (1) Set of Funding Instructions for future reference
    • One (1) Quitclaim Deed transferring your personal residence into the new trust
    • Two (2) Personal Property Distribution Forms (one for each spouse)

Advanced Estate Planning

Revocable trusts can also allow higher net worth individuals maximize their lifetime unified estate and gift tax exemptions ($5.45 million per person as of 2016). Just a few years ago, the estate and gift tax exemptions were quite a bit less and more people potentially had taxable estates. This lead to the use of more advanced techniques to reduce the size of taxable estates. With our current exemption amounts, very few people have taxable estates which has dramatically reduced the need for most people to engage in more advanced estate planning techniques that were quite popular just a few years ago. Despite our high estate tax exemptions, it is a good idea to monitor Congress as they tend to use estate and gift taxes as a bargaining chip and we often see our estate and gift tax regimes changes every few years.

Common advanced planning techniques for persons with taxable estates is to use irrevocable trusts and family limited partnerships to take advantage of discounting and gifting strategies to reduce the size of their estates. An irrevocable trust can be structured to own life insurance and keep the proceeds from being included in your taxable estate (an “Irrevocable Life Insurance Trust” or “ILIT”). Other types of irrevocable trusts used for tax planning include Charitable Trusts like a Charitable Remainder Trust (“CRT”) and a Charitable Remainder Unitrusts (“CRUT”), and Annuity Trusts like a Grantor Retained Annuity Trust (“GRAT”) and a Grantor Lead Annuity Trust (“GLAT”). Depending on your personal financial situation, the nature of your assets and your objectives, these advanced planning techniques may be advised.

Asset Protection

It has been said that the best asset protection is good estate planning. What that means is that the same strategies that reduce the size of your estate for estate taxes also remove those assets from your ownership and control which thereby puts those assets out of reach of your creditors. Asset protection concerns are personal in nature. Some clients tolerate a substantial amount of risk with little thought, while others stress with even a hint of potential liability. No matter what your tolerance is for liability, there is an asset protection strategy that can help.

The most basic and common asset protection technique is the use of limited liability entities like Corporations and LLC’s to own assets like businesses, rental properties and other investments. Corporations and LLC’s protect your personal assets from the liabilities of the business. Using entities to own assets that produce liability is a no-brainer and well worth the cost to set up and maintain.

Irrevocable trusts (described briefly above) can also be used in certain circumstances. As a general rule in California, you are unable to set up an irrevocable trust in California, transfer assets to it and then prevent your creditors from attaching those assets to satisfy a judgment. However, you can set up an irrevocable trust in California for the benefit of another, transfer assets to it and then prevent the creditors of the beneficiaries for whom the trust was established from attaching the trust assets. Unlike California, other states (like Nevada, Delaware, and Alaska to name a few) have enacted legislation that permits self-settled asset protection trusts. For individuals residing in those states, a self-settled asset protection trust may be a good solution. However, for California residents with no assets located in the state (e.g. Nevada), I am not confident that a Domestic Asset Protection Trust will protect your assets from your creditors.

The effectiveness of these domestic asset protection trusts for residents of California is questionable given that each state much honor, respect and enforce the judgments entered by all of the other states, also known as the “Full Faith and Credit Clause” of the United States Constitution. In other words, if you are sued here in California and the plaintiff obtains a judgment, the judgment creditor should be able to take that judgment to any other state where your assets are located and get that other state’s judge to assist it with executing it and attaching assets located in that state.

For California clients that are seeking the best asset protection, I often recommend that they look offshore. A Foreign Asset Protection Trust is an irrevocable trust registered in a jurisdiction outside of the United States. It is important to settle these trusts in a jurisdiction with the most favorable law. Most often, either the Cook Islands or Nevis is chosen since those jurisdictions are widely regarded as having the best asset protection trust laws. A Foreign Asset Protection Trust can be one of the strongest asset protection tools available, and is often used in conjunction with a Family Limited Partnership (FLP), Limited Liability Company (LLC), and/or Corporation to provide even stronger protection, flexibility, and control for the Settlor of the trust.

A Foreign Asset Protection Trust is the strongest asset protection tool available because it removes your assets from the jurisdiction of the United States court system and places ownership of your assets in the trust, which is settled in the jurisdiction that your trust is domiciled. While you may attempt to “import the law” instead of “exporting your assets,” the best asset protection requires the trust’s assets to be invested abroad. The laws in these foreign jurisdictions do not honor United States judgments and often require the judgment creditor to bring the lawsuit again against the Foreign Asset Protection Trust in the trust’s jurisdiction. This will prove exceedingly costly and challenging due to a number of features of the laws of the Cook Islands and of Nevis, namely that contingency fee arrangements are prohibited, cash bonds are required of plaintiffs due to the “loser pays” the other party’s fees and costs system, and burdens of proof and the standards for meeting those burdens are much higher than they are in the United States. In other words, it is exceedingly difficult for a creditor of the United States to successfully pursue its claim in the Cook Islands or in Nevis. Faced with these roadblocks, the presence of a Foreign Asset Protection Trust can promote reasonable demands and settlements at an early stage of the litigation.

The timing of asset protection planning is critical to avoid the transfer(s) being deemed a fraudulent conveyance. A “fraudulent conveyance” is a transfer with the actual intent to hinder, delay or defraud any known creditor. To avoid any claims that the asset transfers were fraudulent conveyances, the best time to do this type of planning is well in advance of any claims being brought or threatened. You are not prohibited with doing asset protection planning just because a claim has been brought. However, you will need to reserve assets outside the asset protection structure to satisfy the known claim(s).

It should be noted that a Foreign Asset Protection Trust is a tax neutral since it is typically structured as a “grantor trust” for tax purposes, and is deemed a “disregarded entity.” This reduces the administrative burden, but does not eliminate it. As typically structured, a Foreign Asset Protection Trust is purely an asset protection and estate planning tool and provides no tax advantages or disadvantages. All income from the Foreign Asset Protection Trust must be reported and paid annually to the IRS by the Settlor. The IRS requires a number of filings to stay in compliance which should be prepared by a competent tax professional. Evidence of your diligent compliance with U.S. laws can actually work in your favor when the legitimacy of the trust is challenged by a U.S. judge.