At the Noble Law Firm, we understand it is difficult to think about death or disability, however, establishing an estate plan can help protect your family from the delay and frustration associated with managing your affairs when you pass away or become disabled. A proper estate plan will ensure that your assets are distributed according to your wishes and will protect the inheritance you leave from your beneficiaries’ creditors and divorcing spouses. Additionally, a well developed estate plan will minimize legal fees and court costs associated with a probate and can also assist in reducing, if not eliminating, your federal estate tax burden.
You should always have a qualified estate planning attorney prepare and/or review your estate planning documents to make sure they are aligned with your individual financial situation.
BENEFITS OF A REVOCABLE TRUST
In addition to assisting with probate avoidance, the benefits of properly executing your Revocable Trust include both 1) the protection of one’s beneficiaries’ inheritance from creditors and divorcing spouses, and 2) the insulation, to the extent possible, of the inheritance (including future appreciation) from one’s beneficiaries’ own estate taxes upon their death.
This trust will possess numerous disability provisions which direct how the Trustee should handle the affairs in the event of a disability. In short, the trust will provide that the Trustee should apply and expend funds held in the trust for the Grantor’s benefit so the grantor or grantors receive the maximum medical, nursing and rehabilitative care.
Upon the grantor’s death, the documents will provide for creation of Dynasty Trusts for the benefit of the grantor’s descendants. The assets held in the grantor’s descendants’ trust will be held in a manner which, if administered properly, will protect the assets from their creditors and will not be added to their respective estate values upon their deaths for purposes of calculating their estate taxes. Any assets remaining in the trusts at their death will be divided equally and held in a similar protected manner for their descendants.
BENEFITS OF AN IRREVOCABLE “GRANTOR” TRUST
The Grantors of a trust are treated as the owner of all Grantor trust assets for income tax purposes. As a result, the Grantors are individually taxed on all of the trust’s income tax items and would include those amounts on the Grantor’s individual income tax return each year.
There are many substantial benefits to the Grantor Trust which are summarized below.
(1) Current Benefit to Trust Beneficiaries. The Grantor Trust will permit the selected beneficiaries to obtain current benefits from the grantor’s wealth (such as distributions of income or principal for designated purposes such as “health”, “education”, and/or “support”) on a transfer tax-free basis.
(2) Transfer Tax Free Gift of Income Taxes Attributable to the Trust. Because the grantors are actually legally obligated pursuant to the income tax laws to pay the income taxes attributable to the Grantor Trust, the grantors are effectively making an additional transfer to the Grantor Trust in the amount of your income tax liability which is attributable to the Grantor Trust. Importantly, because of the Grantor’s legal obligation to pay the income taxes from their own funds, this transfer is not subject to any transfer taxes (estate, gift, or GST taxes). The assets in the Grantor Trust will therefore be able to appreciate on an income tax-free basis. This aspect of the transaction can actually be the most significant (and beneficial) from a tax perspective. However, this income will be “phantom” income because the grantor will be paying income taxes on funds which you are not receiving.
Upon the grantor’s death, the documents will provide for creation of subtrusts for the benefit of the grantor’s beneficiaries. The assets held in the descendants’ trusts will be held in a manner which, if administered properly, will protect the assets from the descendants’ creditors. Any assets remaining in the trust at their death will be divided equally and held in a similar protected manner for their descendants.
Benefits of a LIMITED LIABILITY LIMITED PARTNERSHIP
A Limited Liability Limited Partnership (“LLLP”) is an effective way to consolidate and preserve your assets. The LLLP separates the control of the partnership assets from the financial interest in the partnership assets. It is generally set up with a Limited Liability Company (“LLC”), owned by family members, as the General Partner and the remaining family members, or trusts for their benefit, as Limited Partners. This allows the General Partner to actively manage the partnership assets, while the Limited Partners enjoy the beneficial ownership of the partnership assets. The General Partner will have liability for all of the LP’s debts (but not for the debts of individual Limited Partners). Interests in the LP may be transferred among family members by Assignment document or certificate transfer.
Limited Creditor Remedy. When properly structured, the assets held by an LP may be protected from an individual partner’s creditors. Generally, a creditor may attach a Limited Partner’s interest in the partnership, but such attachment only allows the creditor a right to distributions from the partnership to the debtor Limited Partner. There is no right to liquidate the Limited Partner’s interest to satisfy the debt. Moreover, the creditor may neither foreclose the Limited Partner’s interest, nor participate in the management of the partnership. In order to levy on a limited partnership interest, a creditor must resort to a “charging lien” on the limited partnership interest.
Consolidation of Management. Another benefit of a limited partnership is that the partnership allows for common management of various types of assets. The partnership can own and manage assets such as real property, C corporation shares, Limited Liability Company interests, notes and other instruments.