Trust in Asset Protection in Advanced Estate Planning

An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third. Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time including:

  • Net worth statement, or at the very minimum a broad overview of your wealth; and

  • Final wishes – burial or cremation, memorial services.

Estate planning documents that have been created and what purpose they serve:

  1. Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures;

  2. Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy;

  3. Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust;

  4. Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash; and

  5. Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts; and standalone retirements trusts—which are created to specifically hold your retirement accounts—in order to give you back the asset protection and tax benefits that the U.S. Supreme Court took away with their decision in Clark v. Rameker.

Who will be in charge if you become incapacitated or die—agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will?

Benefits of lifetime discretionary trusts created for your heirs:

  1. Fosters educational opportunities

  2. Provides asset, divorce, and remarriage protection

  3. Protects special needs beneficiaries (if properly drafted)

  4. Allows for professional asset management

  5. Minimizes estate taxes at each generation

  6. Creates a lasting legacy for future generations

Overall goals and intentions for inheritance – what the money is, and is not, to be used for (in other words, education vs. charitable work vs. vacations vs. Ferraris vs. business opportunities vs. retirement), and who will be trustee of lifetime discretionary trusts created for your heirs and why you’ve selected them

Where important documents are located – this should include how to access your “digital” assets

Who your key advisors are and how to contact them

How Can Your Professional Advisors Help You Communicate Your Wealth Transfer Goals?

Your professional advisors are well-positioned to help you discover your wealth priorities, goals, and objectives and then communicate this information to your heirs.  This, in turn, will prepare your heirs to receive your wealth instead of being left to figure it out on their own and, as statistics have shown, lose it all. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Strategies for Reducing the Income Tax Squeeze on Irrevocable Trusts

Under federal income tax laws, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets. In 2014, the top 39.6% tax rate kicks in at only $12,500 of trust income. In addition, trusts in the top tax bracket are subject to the 20% long term capital gains rate and a 3.8% surtax on the lesser of undistributed net investment income or adjusted gross income over $12,500.

What Can Trustees Do to Lower a Trust’s Taxable Income?

Due to this unfavorable income tax treatment of irrevocable, non-grantor trusts, Trustees of this type of trust must plan carefully to minimize annual income taxes. Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are in a lower income tax bracket and/or not subject to the 3.8% surtax. This, in turn, will lower the income that is taxed inside of the trust. Nonetheless, any distributions aimed at reducing a trust’s income tax liability must be made within the distribution parameters established in the trust agreement and applicable state law.

With these limitations in mind, income-reducing strategies Trustees should consider include:

  • Making in-kind distributions of low basis trust property to beneficiaries who are in a lower tax bracket or plan to hold on to the property and not sell it any time soon

  • Exploring options to permit capital gains to pass to beneficiaries instead of being taxed inside of the trust, such as reforming or decanting the trust to broaden the Trustee’s discretion to allocate between trust income and principal

  • Shifting trust investments to minimize taxable income and gains

  • Terminating small, uneconomic trusts under the terms of the trust agreement or applicable state law

Final Considerations for Trustees of Irrevocable, Non-Grantor Trusts:

Planning to minimize trust income taxes is a delicate balancing act. Trustees must carefully weigh the tax benefits of making distributions or changes to the trust’s provisions against the grantor’s intent, the ongoing needs and tax status of the current beneficiaries, and what will be left for the remainder beneficiaries. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs and expenses of the trust beneficiaries will undoubtedly change from year to year.

If you are the Trustee or beneficiary of an irrevocable, non-grantor trust, attorneys from our firm are available to speak with you now about strategies that can be used to reduce your trust’s income tax bill.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.