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LLC | LP | Corporations | Pension Plans, IRAs, Or Any Self Directed Retirement Fund | Real Estate, Personal and Investment | Irrevocable Trust | Triangle

The Intentionally Defective Domestic Grantor Trust ("Ultra Trust")

USE - Estate Planning
          Asset Protection

The Ultra Trust is a structure that is used because of its overall planning advantages.

The Ultra Trust Program is designed to help eliminate Federal Estate Taxes, eliminate the probate process, as well as give tremendous asset protection. The Ultra Trust has a number of characteristics that are similar to the Foreign Security Trust or as it is more commonly known, the Asset Protection Trust. In essence, the Ultra Trust is treated as a "Revocable Trust" for income tax purposes, and an "Irrevocable Trust" for asset protection and estate tax purposes. Because of this, the Ultra Trust is income tax neutral. The Ultra Trust generally provides the best of both worlds.

Unlike some other structures, there is no loss of the income tax benefits associated with owning real estate by placing real estate in an Ultra Trust. Because the Ultra Trust is treated as an Irrevocable Trust for asset protection purposes, it also provides significant protection for the assets that are placed within the Ultra Trust.

Because of its Federal income tax attributes, the Ultra Trust is a suitable structure for ownership of Subchapter "S" stock and provides significant asset protection.

The obvious decision that a client needs to make is to decide which of the client’s assets they want to place within the Ultra Trust’s unique provisions.  If the client decides to put any or all of their real estate within the Ultra Trust, the client will gift or sell the selected real estate to the Ultra Trust.

We would like to emphasize that the Ultra Trust has been carefully drafted to accomplish a number of objectives. The Ultra Trust will be classified as a "Grantor Trust" for income tax purposes. A client will therefore be able to claim the income tax benefits associated with the client's real estate or other appropriate assets transferred to the trust as if the client were the true owner.

Conversely, for probate avoidance purposes, Estate Tax purposes, and asset protection purposes, the Ultra Trust will be treated as the separate owner of the assets it acquires. The Ultra Trust has also been designed to allow the client to make gifts of the client's life insurance policies to this trust. The proceeds from those policies, upon the client's death, will not be subject to Estate Tax. If the Ultra Trust is utilized for holding title to life insurance policies, it may not be necessary to utilize a separate Insurance Trust.

The Ultra Trust is usually established by an initial gift from the client or someone else to the trust. The trustee of the Ultra Trust must be an independent trustee who is usually a close and trusted friend. The function of the trustee is to administer the trust for the benefit of the trust's beneficiaries. Generally, the beneficiaries are the grantor and the grantor's family.

Keep in mind what the Ultra Trust accomplishes. The Ultra Trust can virtually eliminate all Federal and State Estate Taxes. A possible potential down side to this planning is ensuring that any state excise taxes or transfer (stamp) taxes due as a result of any of the transfers are not out of proportion to the expected benefits. If there is a state excise or transfer (stamp) tax as a result of transferring assets, you will need to review the use of the Ultra Trust within the plan.

Q AND A ABOUT ULTRA TRUST (INTENTIONALLY DEFECTIVE GRANTOR TRUST)

I) Q) Who can be the beneficiaries of the trust?
  A) The trust grantor(s) determine:

1)         Who the beneficiaries are
2)         When the beneficiaries receive distributions.

Note - Even though this is part of the family of irrevocable trusts we can build a Power of Appointment into the trust that gives the persons named in the Power of Appointment the authority to:

            a)         Add beneficiaries
            b)         Change the amount any beneficiary receives.

     
II) Q) How is income received by the trust treated for income tax purposes?
  A) This trust is considered part of the grantor trust family for income tax purposes. That means that all income and/or losses pass through the trust to:

            a)         The grantors and/or
            b)         The beneficiaries.

     
III) Q) Once assets have been titled to the trust can the grantor(s) get them back?
  A) Yes. Language in the trust allows for substitution of like valued assets. Think - a $1 Million piece of property has the like value of a $1 Million note.
     
IV) Q) How are assets transferred to the trust?
  A) Gifted or sold. If sold we can utilize an immediate Private Annuity, an Installment Note or a Self Cancelling Installment Note. This minimizes the cash outlay and extends the recognition of a gain over a period of years.
     
V) Q) Who can be the trustee?
  A) This trust is part of the family of irrevocable trusts. Based on that fact the trustee may not be:

1)         A beneficiary
2)         A grantor
3)         A person subservient to the grantor(s).

Note - If the grantors utilize an LLC that has a contract with the trustee to manage the assets of the trust, the grantor(s) continue to have direct input on how the assets are managed.

Note - We can build into the trust the right to replace the trustee. This right can be held by the grantor(s), a trust protector or the beneficiaries.

     
VI) Q) How are assets valued in the trust?
  A) If assets are gifted then Code Section 2512 prevails. That section states that assets are valued at the market value on the day they are gifted. Form 709 must be filed to lock in that valuation. If assets are sold to the trust then the sale price will determine the value of the asset.
     
VII) Q) Does this trust eliminate probate?
  A) Absolutely.
     
VIII) Q) Why can’t I be the trustee?
  A) This is part of the family of irrevocable trusts. If you were the trustee then the trust might be treated by the IRS as a revocable trust. However, you can be the Manager of a Limited Liability Company that has a contract with the independent trustee to manage the assets of the trust.
     
IX) Q) Does this trust eliminate estate taxes forever?
  A) This is not a dynasty trust. It does not last forever. As long as the assets remain titled in the trust or in a named sub trust no estate taxes will be due on the assets owned by the trust.
Note - There is a rule against perpetuity. The rule says that a trust can last 21 years beyond the death of the last named beneficiary.
     
X) Q) Can this trust own my personal residency?
  A) Yes and you keep any capital gains forgiveness for which you may be eligible.
     
XI) Q) I have traditional qualified money. Can I put it in the trust with no tax consequences?
  A) No. Changing the owner of traditional qualified money is considered to be a distribution and could cause a taxable event.
     
XII) Q) I have some annuities or cash valued life insurance. Can the trust own them?
  A) Normally yes.
     
XIII) Q) Does this trust offer asset protection?
  A) Yes. This is considered an asset protection device.
     
XIV) Q) I heard about spendthrift provisions. What are they and does this trust have them?
  A) Yes. The trust document spells out what can be done with the assets of the trust. One of the provisions that most planners like to add to a trust is called a spendthrift provision. Simply said this provision allows the trustee to refuse to make a distribution not deemed to be in the best interest of the beneficiary. Hence, a beneficiary with a judgment against them could receive from the trust the payment of bills, groceries, utilities, even debts but the payments would not be made directly to the beneficiary. Rather, the trust would make the payments on behalf of the beneficiary. Hence, the term Spendthrift since the trustee provides for the beneficiary yet does so in a way that a creditor cannot seize the amounts paid.
     
XV) Q) Why would someone use a trust that is defective?
  A) The answer is our goal is to accomplish two different tax treatments:

  1. Income tax - we want the trust treated as a grantor trust - pass through to the grantor(s) or beneficiary
  2. Estate tax - we want the trust to be treated as an irrevocable trust - thus eliminating estate taxes.

The IRS says that if we do certain things to a grantor trust it becomes a defective grantor trust. Hence, we add language to the trust that triggers the IRS defined defect. By adding that language the trust becomes an Intentionally Defective Grantor Trust.

SUMMARY OF BENEFITS OF THE ULTRA TRUST

  • Ability to substitute assets
  • Can be designed to allow the grantor(s) to change beneficiary stream or add beneficiaries
  • Ability to replace trustee
  • You can protect any amount of assets from creditors
  • May be used by residents of all 50 states
  • Less expensive than Offshore Asset Protection Trust
  • Can protect future generations’ assets
  • Trust assets may be protected from becoming marital or community property in the event of a future marriage
  • Pass through for income tax purposes
  • Eliminates estate taxes
  • Eliminates probate
  • Gains in the value of assets owned by the trust also escape estate taxes
  • Can be used for personal residency without a loss of capital gains forgiveness

Click here to view flow chart.

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ASSET PROTECTION TRUST

USE - Asset Protection
          Possible Estate Tax Elimination

The Nevada Asset Protection Trust is a trust created in 1999 by the Nevada legislation. Nevada is the one of several states that passed special legislation that mimics the Offshore Trust in providing asset protection but no tax planning. The official name of the legislation is the Spendthrift Trust Act of Nevada and is found in Chapter 166 revised of the Nevada Statute. Even though the trust is called the Nevada Asset Protection Trust it can be utilized by any person living anywhere.

The Nevada Asset Protection Trust is by statute an irrevocable trust. However, unlike most other “irrevocable trusts” the grantor, beneficiary and one of the trustees can be the same person. For a non Nevada resident, one of the trustees of a Nevada Asset Protection Trust must be a Nevada resident. There are companies that provide the Nevada co-trustee for a nominal charge. The Nevada trustee can be an entity established in Nevada.

SOME QUESTIONS AND ANSWERS ABOUT THE NEVADA ASSET PROTECTION TRUST

Earlier you mentioned a Spendthrift Trust. What is a Spendthrift Trust and how does it differ from other trusts?

Basically trusts are contracts between three groups:

I. The ones who put in the assets, called Settlors/Trustors/Grantors

II. The ones who receive the benefits from the trust who are called Beneficiaries

III. The ones who manage the assets of the trust who are called Trustees.

Members of these groups can be real people or artificial people created by the legislature.

The trust document spells out what can be done with the assets of the trust. One of the provisions that most planners like to add to a trust is called a spendthrift provision. Simply said this provision allows the trustee to refuse to make a distribution not deemed to be in the best interest of the beneficiary. Hence, a beneficiary with a judgment against them could receive from the trust the payment of bills, groceries, utilities, even debts but the payments would not be made directly to the beneficiary. Rather, the trust would make the payments on behalf of the beneficiary. Hence, the term Spendthrift since the trustee provides for the beneficiary yet does so in a way that a creditor cannot seize the amounts paid. However, for the Spendthrift provision to be enforceable at least one of the trustees must have a Nevada domicile. We have a Nevada company that will provide the service of acting as co-trustee with the client.

I live in California. Is there a California Asset Protection Trust?

No. There are several states that have passed similar legislation. Some of these states are:
Nevada
Alaska
Delaware
Rhode Island

Actually there is an advantage to having your trust domiciled in a state other than the state in which you are domiciled.

Does an Asset Protection Trust solve all my asset protection problems?

Possibly not. In building any asset protection plan it is generally recognized that like assets belong with like assets. Hence, you do not want the ownership of a fast sports car to be in the same ownership as your house. An empty lot has less liability than a 24 unit apartment house. So in many instances the asset protection planner will put the asset into an entity - Limited Partnership, Limited Liability Company - and then have that entity owned by the trust.

Does an Asset Protection Trust solve estate tax issues?

We believe that the answer to that question lies in who is acting as trustee. If the grantor/beneficiary/trustee are all the same person(s), then we believe the IRS position will be that this trust, for estate tax planning, is treated like a revocable trust. If however, the trust has a truly independent trustee, then we believe that the trust might qualify as a true irrevocable trust and everything owned by the trust could pass with no estate taxes.

Does an Asset Protection Trust eliminate probate?

Yes.

Can I put my personal residency in an Asset Protection Trust?

You could, however, there are other planning techniques that might accomplish more than the Nevada Asset Protection Trust.

For tax purposes what kind of a trust is the Nevada Asset Protection Trust?

For tax purposes this is considered a grantor trust. That means the trust files an information return with the IRS and the trust profits/losses are passed to the grantor in the year in which the profits/losses occur.

Is the Asset Protection Trust bullet proof?

Actually under the legislation there are two situations where the trust is vulnerable.

  1. Creditors existing at the time of the creation of the trust have a two (2) year window to attack the assets.
  2. After two (2) years the trust offers good asset protection assuming that nothing has been done to void the trust.

How do you get assets into an Asset Protection Trust?

There are two basic methods for getting assets into the trust:

1) Gift - simply retitle the asset into the trust.    
 
Advantage -
i) costs nothing,
      iii) is gift tax free up to $5,250,000 per Federally recognized spouse in 2013.
       
2) Sell for an Installment Contract    
 
Advantage -
i) arms length transaction, hence the sale would be hard, if not impossible to reverse.

SUMMARY OF BENEFITS OF THE ASSET PROTECTION TRUST

  • You can control your assets
  • You can protect any amount of assets from creditors
  • May be used by residents of all 50 states
  • Less expensive than Offshore Asset Protection Trust
  • Not prone to IRS audits and investigations
  • Can protect future generations’ assets
  • Trust assets may be protected from becoming marital or community property in the event of a future marriage
  • May be stacked to build firewalls around different types of assets
  • Pass through for income tax purposes
  • May eliminate estate taxes
  • Eliminates probate

DISADVANTAGE

  • Either the asset or a co-trustee must be a resident of Nevada Note - United has an independent company based in Nevada that can act as co-trustee
  • Transfers within 2 years of origination of trust may be challenged

Click here to view flow chart.

 

MULTIPLE USE IRREVOCABLE TRUST PACKAGE

USE - VA Aid and Attendance Monthly Pension
          Medi Program Qualifying

VA Aid and Attendance Monthly Pension

The Veterans Administration offers, to those who qualify, a monthly pension which is available to pay for assisted living, board and care. The pension amount is determined by the status of the individual.  The four (4) status categories are:

            Married with Spouse both veterans
            Married with Spouse one veteran
            Single Veteran
            Surviving Spouse.

To qualify for the program there must be no assets in the name of the veteran or the person who applies.  Plus the veteran must have served at least 90 days of active duty with at least one day during any of the following time periods:

            WWII - 12/07/41 - 12/31/46
            Korea - 06/27/50 - 01/31/55
            Vietnam - 08/05/64 - 05/07/75
            Persian Gulf - 08/02/90 - to be determined.

Unlike the Medi programs this program has no qualifying look back time period.

Medi Programs (Medicaid/Medi-Cal/Other Similar Programs)

These are Federally controlled programs principally paid for with Federal dollars that are administered by the various states under Federal guidelines.  Medicare, the basic health care program for those over 65, only pays for 100 days of skilled nursing.  After Medicare runs out the program that might offer assistance is Medicaid.  However, Medicaid programs are programs that have an asset test.  In addition to an asset test, these programs also have look back rules.  As a general rule the look back is 60 months.  Any asset over the allowable amount or type that has been disposed of within the look back period will cause the applicant to be ineligible for assistance for a period of time that the value of the disposed of asset would have paid the cost of assisted living.  Hence, if an asset with a $50,000 value was disposed of within the 60 month period and if the cost of assisted living was $5,000 a month, the disposed of asset would cause a 10 month delay in receiving Medicaid benefits.

Under current law to qualify for Medicaid assisted living benefits you may have the following assets:

  Single Married
Cash *1 $2,000   $109,560
Home *2 Yes Yes
Car One One
Other Assets Zero Zero

 

*1        This amount is indexed and may change from year to year.
*2        To keep a home when you are receiving Medicaid assistance you must state that it is your intention to return to the home.  However, the state will normally place a lien against the property for the cost of the services received.  Therefore, the state gets first call on all equity in the property.

The Multiple Use Irrevocable Trust Package was specifically designed to accomplish the goal of qualifying for these assistance programs and at the same time providing for the family to achieve access to the previously owned assets.

Trust Assets

Once assets are titled in the name of the irrevocable trust they are no longer considered to be owned by the client.  Hence, for VA purposes the client has no assets.  For Medicaid qualification purposes the clock has started to run on the 60 month look back.

Trust Package Contains 

  Married - Both Single
Pour Over Will Both Yes
Durable Power of Attorney Assets Both Yes
Durable Power of Attorney Health Both Yes
HIPAA Both Yes
Trust Document  Yes Yes
Certificate of Trust Yes Yes
Transfer Documents Yes Yes

Trustee

This is a true irrevocable trust so the trustee must be independent.  The trustee may not be:

            1)         A beneficiary of the trust
            2)         Subservient to the grantors.

How are Assets Transferred to the Trust?

That depends on the type of program that is being pursued.

  VA -  Gifted or transferred.  You must use caution that the gifted amount does not cause the grantor to exceed their Federal lifetime gifting total.
  Medicaid -  The personal residence is exempt and may be transferred to the irrevocable trust without look back consequences.  Other assets can be sold to the trust for a Note so long as the Note pays out in under 60 months or the assets may be transferred to an entity managed by the grantor.

Benefits Eligibility

  VA -  Immediately after the value of the assets are less than the allowable amount are no longer in the grantor’s name.
  Medicaid -  Look back is 60 months and is subject to:
                         a)         Limits previously discussed
                     b)         Delayed eligibility.

Beneficiaries of Trust

The grantors of the trust determine:

            a)         Who will be the beneficiaries of the trust
            b)         When the beneficiaries will get trust assets
            c)         How much of the assets each beneficiary shall receive.

What is a SCIN?

It is a Self Cancelling Installment Note.  It may be used in the Medicaid scenario so long as:

  1. The trust assets generate enough income to support such a note
  2. The pay out period ends prior to the end of the look back window of 60 months.

Questions and Answers

1) Q) Does this program avoid probate?
  A) Absolutely everything titled in the trust passes to the beneficiaries without the probate process.
     
2) Q) Does this program work in all 50 states?
  A) Yes.  Both of these programs are Federally controlled and the process we have described complies with the Federal regulations.
     
3) Q) How long does the process take?
  A) The trust package will take 10 days from the date that our office receives the completed profile, order form, asset information and required payment.  The actual transfer of title is dependent on the institution involved.
     
4) Q) I am bothered by the independent trustee issue.  Why can’t I or the beneficiaries be the trustee?
  A) If you or the beneficiaries are the trustee, then control has not passed and that trust is legally considered a revocable trust.  To accomplish the goal of qualifying we need an irrevocable trust.
     
5) Q) I have a property tax exemption - Veteran - Senior - Disability.  By titling the house to the trust do I lose that exemption?
  A)

No.  We have language in the trust that protects that exemption.

     
6) Q) If I use this trust how do I get my own money?
  A)

Actually we have language in the trust that allows the trustee to funnel all of the trust income to you until you apply for benefits.  At the time you apply for benefits, or sooner, you can shut off the flow of official income, hence becoming eligible.

     
7) Q) I have qualified money (Traditional IRA, SEP or 401K).  Can the trust own these?
  A)

No.  It would be considered a distribution.  Discuss with the advisor the best way to handle this issue.

Click here to view flow chart.

Click here to view flow chart.

 

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