When people decide to incorporate asset protection into their comprehensive estate plans, the reason is to secure their family wealth and guard against risks to their assets. When assets are properly structured, you can be sure that your family wealth will be protected for future generations. Family wealth trusts provide asset protection in a way that is not only effective, but very flexible.
What is a Trust generally?
A trust is basically an agreement between three parties: the property owner, the trustee and the beneficiary. The person who owns the property to be placed in the trust is called the “grantor” of the trust. The grantor transfers the legal title of the included assets to the trustee. The trustee holds the property for the benefit of the beneficiary. Trustees can be relative, friends, attorneys, accounts or trust companies. The choice is yours.
Basic types of trusts
Trusts will be either revocable or irrevocable. The difference is that revocable trusts can be changed or terminated, whereas, an irrevocable trust cannot be modified. With a revocable trust, the assets continue to be considered a part of the grantor’s taxable estate, meaning that your estate will be required to pay estate taxes on the assets that are still a part of your revocable trust.
How can a trust protect assets?
One benefit of an irrevocable trust is that the assets transferred to it are permanently removed from your estate. Unlike a revocable trust, the income that is earned from the trust assets can be distributed by the trustee, according to the terms of the trust. Then, when the grantor passes away, the assets will not be considered part of the estate. That means the assets are not subject to estate taxes.
Qualified Personal Residence Trust
A Qualified Personal Residence Trust, or QPRT for short, is another kind of trust that can be used for asset protection. With a QPRT, you can remove your residence from your estate, under certain conditions. For example, if you use your vacation home as a residence for at least the designated period of time, you can transfer that property into the QPRT. A great benefit in doing this, is that the gift tax you may incur will be lower because you still retain the rights to the house.
A Generation-Skipping Trust
Clients often want to leave substantial amounts of money to their grandchildren. The IRS imposes a “generation-skipping” tax on property that is passed on to a generation that is two or more generational levels below yours. Put another way, when you pass property on to your grandchildren, as opposed to your children, the IRS assesses a tax on that transfer.
While there is a Generation-Skipping tax exemption of $5.34 million each year, you would still be assessed a tax for any transfer over that amount. In those situations, the Generation-Skipping Trust is probably the best way to protect your generation-skipping tax exemption on gifts to your grandchildren, while still being able to avoid paying a gift tax on any amount that exceeds the exemption amount. For example, if you place $100,000 in a generation-skipping trust and allow it to accumulate earnings for several years, your lifetime exemption would only be reduced by the original $100,000. This provides a great investment tool, as well.
If you have questions regarding trusts, or any other asset protection needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.