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Domestic Non Grantor Trust | Ultra Trust | Sale Agreement | Engineered Capital Gains Transactions | SAM/SAL | Charitable Remainder Trust | Charitable Lead Trust
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)
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Q) |
Who can be the beneficiaries of the trust? |
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A) |
The trust grantor(s) determine:
1)
Who the beneficiaries are
2)
When the beneficiaries receive distributions.
Note *1 - 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. |
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| II) |
Q) |
How is income received by the trust treated for income tax purposes? |
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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. |
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| III) |
Q) |
Once assets have been titled to the trust can the grantor(s) get them back? |
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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. |
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| IV) |
Q) |
How are assets transferred to the trust? |
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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. |
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| V) |
Q) |
Who can be the trustee? |
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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 *2 - 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. |
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| VI) |
Q) |
How are assets valued in the trust? |
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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. |
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| VII) |
Q) |
Does this trust eliminate probate? |
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Absolutely. |
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| VIII) |
Q) |
Why can’t I be the trustee? |
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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. *2 |
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| IX) |
Q) |
Does this trust eliminate estate taxes forever? |
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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. |
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| X) |
Q) |
Can this trust own my personal residency? |
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A) |
Yes and you keep any capital gains forgiveness for which you may be eligible. |
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| XI) |
Q) |
I have traditional qualified money. Can I put it in the trust with no tax consequences? |
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No. Changing the owner of traditional qualified money is considered to be a distribution and could cause a taxable event.
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| XII) |
Q) |
I have some annuities or cash valued life insurance. Can the trust own them? |
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A) |
Normally yes. |
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| XIII) |
Q) |
Does this trust offer asset protection? |
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A) |
Yes. This is considered an asset protection device. |
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| XIV) |
Q) |
I heard about spendthrift provisions. What are they and does this trust have them? |
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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. |
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| XV) |
Q) |
Why would someone use a trust that is defective? |
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The answer is our goal is to accomplish two different tax treatments:
- Income tax - we want the trust treated as a grantor trust - pass through to the grantor(s) or beneficiary
- 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 *1
- 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
- Not prone to IRS audits or examinations
*1 Not available in the Basic Ultra Trust
*2 LLC carries an extra charge with the Basic Ultra Trust
Click here to view chart of Ultra Trust.
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