Everything You Wanted To Know About Trusts But Were Afraid To Ask

Finance
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Everything You Wanted To Know About Trusts But Were Afraid To Ask

Given that more and more state legislatures and courts are allowing the ‘piercing of the corporate veil’ in regards to LLCs, it would be more prudent to utilize a long-standing proven asset protection vehicle.

Of course nothing is absolutely ‘bullet-proof’, but given the case law and precedents, trusts are about as close as one can get, which is why you rarely see trusts in trial courts, and when you do the attacks are overwhelmingly unsuccessful, which is not the case for LLCs. Not to mention that trusts, unlike other methods of holding assets, are completely exempt from the horrors of probate.

One of the most useful type of trusts is the ‘Grantor Trust’, as federal, state, and local governments and courts consider them a legal fiction.

A Grantor Trust exists as the legal owner of assets (for purposes of property law) but does not exist as a separate taxpayer for income tax purposes. All taxable transactions inside the trust are treated as if the grantor executed the transaction without the existence of a trust.

Instructions for Form 1041:
In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor

The legal fiction is extended to real estate taxation, as in most jurisdictions, real estate held in a Grantor Trust can take advantage of reductions in real estate taxes, such as Veteran Discounts, Senior Citizen discounts, low-income discounts, and more, which is not the case with LLCs and other forms of ownership.

In addition, there are trust and sub-trust variables that can be utilized to fine-tune estate planning, such as:

Spendthrift Trusts can protect from a beneficiary squandering an inheritance and in addition protects the assets from any of the creditors of the beneficiary.

Sprinkling Trusts allow a successor trustee (subsequent to your demise) to decide how to allocate some trust assets among beneficiaries according to the circumstances at that future time.

Charitable Remainder Trusts allow you to make an irrevocable gift of property to a charity while you’re alive, and retain any income, use, and control of the property until your demise, when the property then passes to the charity, but without any estate taxation.

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This is the response wiki post. You can edit this out for your response.

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I am very interested in the topic, unfortunately due to time constraints I haven’t been able to fully research this topic. Here are some questions that I have, that I am sure others will have as well:

At what income/net worth level does it make sense to use a trust as asset protection?

How can an individual form a trust? Is this as easy as filing a few forms with a government body, or is it something that you essentially need a lawyer for?

What kind of assets can be placed in a trust? In the original post, real estate was mentioned. How about other assets, such as stocks, bonds, CDs, bitcoins, gold, etc? Is it possible for a trust to open a bank account or brokerage account?

Assuming stocks, bonds, etc can be placed into a trust, is it possible to transfer them to a trust without having to pay capital gains taxes?

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[quote=“nasheedb, post:3, topic:2142, full:true”]
I am very interested in the topic, unfortunately due to time constraints I haven’t been able to fully research this topic. Here are some questions that I have, that I am sure others will have as well:

At what income/net worth level does it make sense to use a trust as asset protection?[/quote]

Do you own a home? That’s plenty.

Hate to use legalize, but that depends. At least if you know exactly what you want, it’s much easier to shop it around.

Yes to all, in one manner or another. You can transfer major assets in, and then utilize a “Pour-Over Will” that will auto-transfer all your miscellaneous stuff into the trust at death, or even something major you recently acquired but didn’t have the chance to transfer in prior to getting hit by that bus.

Yes. With the proper trust, it’s a transfer, not a sale.

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That would depend on the state homestead exemption for creditor protection.

https://www.assetprotectionplanners.com/planning/homestead-exemptions-by-state/

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The key word there is “some”, and even a lot of that is age restrictive. A trust also simultaneously offers estate planning.

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My parents are getting up there in age, and I am the only child. Their lakeside home is basically their only asset, and my mom has already talked about transferring ownership to me. Here are my questions:

  1. If my parents need to move to assisted living/nursing home, can Medicare/Medicaid force the sell of the home inside a trust before providing financial assistance?

  2. Real estate taxes (Oklahoma) are currently fixed because of their age. I presume this will change when I take ownership of the trust?

  3. After I take ownership, can I modify the trust to go to the heirs of my choice?

  4. Can I set up a trust without a lawyer?

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If my parents need to move to assisted living/nursing home, can Medicare/Medicaid force the sell of the home inside a trust before providing financial assistance?

You might want to look into this kind of trust. An Irrevocable Trust protects assets in the trust from impacting government benefits such ad disability, and Medicare/Medicaid. These can also be set up without a layer, as long as you understand how they work, and you feel comfortable doing so.

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Yes, some of the exemptions are ridiculously low, considering the price of homes. My state’s exemption amount is one of the higher ones. Effectively 80%+ of my home’s value would be exempt with no age restrictions.

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[quote=“SweetClover, post:8, topic:2142, full:true”]
You might want to look into this kind of trust. An Irrevocable Trust protects assets in the trust from impacting government benefits such ad disability, and Medicare/Medicaid.[/quote]

I’m afraid that’s a myth.

While it is true that an irrevocable trust can shield assets from Medicaid, that’s only the case AFTER the look-back period, which is the same as a revocable trust.

Irrevocable trusts created during the look-back period are considered gifts under the law, and would be in violation of the look-back period, and subject to penalty, just as a transfer to a revocable trust would.

Therefore, utilizing an irrevocable trust would have all the disadvantages, and none of the advantages of a revocable trust.

The key is to create the trust prior to the look-back period, which is five years everywhere but Cali, where it is now 2.5 years.

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[quote=“storm, post:7, topic:2142, full:true”]
My parents are getting up there in age, and I am the only child. Their lakeside home is basically their only asset, and my mom has already talked about transferring ownership to me.[/quote]

Do NOT transfer ownership now.

With the correct type of trust, no.

Perhaps in the future, but circumstances could also be different by then.

Absolutely.

See my next post.

My advice would be to setup a Grantors Trust with your parents as co-trustees, and you as the secondary trustee and beneficiary. They can pass the trusteeship to you at any time and still retain control until they do. If one of them passes, the trusteeship automatically moves to the remaining co-trustee.

Once the look-back period has passed, all assets in the trust are protected from Medicaid.

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I want to address the reoccurring question, Can I setup a trust without a lawyer?

If it involves a rather straightforward transfer between TWO ADULTS ONLY, I would say yes. If a spouse wanted to transfer a house to their spouse, or one parent to a child, or a sibling to a sibling, you could utilize a boiler-plate template and even accompany that with a boiler-plate Pour-Over Will.

BUT.

If it involves multiple people, a spouse to a spouse and children, parents to multiple children, grandparents to multiple grandchildren, it’s too complicated and subject to error and the whole thing could end up in court, not in an attempt to attack the trust, but to determine what the intent was, particularly if mistakes were made.

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My situation is rather simple. I have one home and one saving account that I want to put under a grantor trust. Hopefully it will be simple enough to do without a lawyer?

Could you please outline the steps to do that. I started reading up on that and got lost previously.

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Who are the beneficiaries?

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Beneficiary would be my spouse. Secondary beneficiary would be 2 children. I did some research and basically from what I understand 2 steps are needed:

  1. Form a trust. For a simple situation there might be some online sources providing boiler plate documentation. Not sure what is a good resource etc.
  2. Put assets under trust. This could be a little painful. Not exactly sure how to put the house under trust. My savings are on Ally which has some information stating how to create trust accounts / move accounts under trust. So that should be easy.
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Actually, a much simpler method for bank, mutual fund, and brokerage accounts, is to convert them into POD accounts. Most states have versions of Pay On Death accounts, which happen instantly and completely avoid probate.

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Thanks the the insight Joe. I will probably look into a local estate planning company to understand this a little better.

For contingent I can probably appoint my parents but they don’t live in US so it could be a little challenging should that scenario prevail. Alternatively I can appoint a cousin (who is in US) with some language in the trust that proceeds should go for children benefit.

For Ally and other brokerage accounts, the way I have set them up as a joint account so that my spouse can take ownership after me.

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Wholeheartedly agree with this! No cost, no fuss, and can sometimes be done online.

For joint accounts we have our 2 kids named as POD, just in case we meet with a mutual accident. Unlikely, but you never know. For retirement accounts, my husband is POD on mine with the 2 kids as contingent. I’m POD on his with the 2 kids as contingent.

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POD or beneficiary? I didn’t think you could set up a POD on a retirement account.

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Yes, you can. It’s just a process of naming beneficiaries for the account. It can even be done online, if the financial institution allows it. The account title will still have only the name of the account owner.