Following on from my Estate Planning Docs post.
Trust vehicles can be useful to your family and I will illustrate with a couple of stories.
First thing to remember => trusts work best if you set them up long before you “need” them.
Part One: Around the time I turned 40, I found myself in a situation where I had joint & several liability with a business partner who’d made poor choices. As fate would have it, these choices were made inside an insolvent group with over $100 million of borrowings.
Now, the banks were not going to be getting their money back by suing me but (even the remote possibility of) being wiped out late in life was highly unattractive.
Part Two: Long time readers will remember that I used to do bike-focused training camps with top age-group athletes. I would ride, on open roads, with doctors and CEOs who were completely exhausted. If an athlete was killed, or permanently disabled, then it would be easy to prove a large financial cost to their family.
As a business, we dealt with this risk through waivers, event-specific insurance and a family-level umbrella insurance policy.
When I added up the cost/time/worry of this approach it was expensive, even more so once I had my own family to protect.
Take the two parts together => I was working in two fields. The first field was similar to being a director/fiduciary of a company. The second field is similar to being a professional exposed to allegations of malpractice.
One day, I was talking to a tax accountant about what was going on in my life, and the changes that were expected in Estate Taxation. He recommended I speak with a local trust attorney.
An initial meeting showed me that the cost to set up a new structure would be the same as one year’s insurance bill. Because I have the skills to run the fiduciary aspects, the ongoing cost would be a fraction of what I was paying my insurance company.
Step One was setting up something called an Intentionally Defective Grantor Trust. From a layman’s perspective, I put my share of my house and rental property into a trust that benefits my spouse and kids. I retain the tax liability for the trust, for my life.
From my point of view, the main asset I am left with is my earning capacity, balanced against future tax liabilities. I’m a much less attractive target to any potential litigant.
From my family’s point of view, the trust is similar to an annuity, tied to my life. When I die, they can sell assets and/or move into a small rental property, while living off the rental income produced by the larger rental property.
The specifics are technical, there’s a bunch of tax considerations and you should take expert local advice.
This change gave me a more secure feeling than the insurance policies.
Over time, I exited the disaster-prone aspects of my life and that helped too.
Irrevocable Family Trust
I’ll illustrate with a recent example – my brother-in-law died and his balance sheet will flow into my wife’s family.
What follows isn’t what is going to happen, but it could have => check with an expert in your jurisdiction if this seems useful.
Here’s a story… assume Andy had a brother called “Dude” (he didn’t).
Andy had planned ahead and wanted to leave assets to Dude. However, Dude didn’t need the money, or Andy didn’t like Dude’s wife, or any number of reasons Andy might not want to support Dude’s personal balance sheet.
So Andy set up an Irrevocable Trust. Let’s call it The Dude’s Trust => Dude, and Dude’s descendants are the beneficiaries.
Andy then drafted his will, or his Living Trust, to leave everything to Dude, but gave Dude a specific power of appointment to nominate The Dude’s Trust in his place.
Before Andy dies, he would also have the ability to make gifts to The Dude’s Trust.
Did you see what happened? Andy was able to achieve what he wanted => money to Dude. Dude is left with a choice to inherit directly, or into a family trust.
In a world with an unknowable future, this is a valuable option.
The current Estate Tax Threshold is $11.58 million per individual, double for married couples. I’m far, far below that threshold.
However, that limit sunsets in 2025 and who knows what tax regime will be in place when I turn 75 (some time after 2040), or beyond 2080 when my kids age up.
I can imagine we shift to a regime I’ve worked with outside the US => deemed sale at death, zero personal exemption, no step-up in basis, the estate pays capital gains tax and the net flows to the beneficiaries of the estate. It’s simple and I like tax simplification.
In that scenario, trusts that were established prior to the change in rules could be grandfathered, particularly if they already own assets. To get around assets sitting in a trust “forever,” the IRS might create a rule for the deemed sale of trust assets, this rule exists in jurisdictions outside the US.
Even if everything stays the same… given the asset protection benefits of a trust, and the ability to “finance” the structure through reduced insurance payments, it made sense for my family.
This is not legal, tax or accounting advice – seek local experts.