War On Wealth Series – Asset Protection

Trusts are a key tool used in the game of asset protection, which means nothing more than making sure you hold on to the money that you currently possess. In this War on Wealth Series, I will teach you the closely guarded secrets of the wealthy that will enable you to grow and build your wealth for years to come.

What Are Some Common Uses of Trusts?

As I have said before, there are many, many uses for trusts. Among other things trusts could be used for:

• Parents with young children
• People who own property that is hard to divide
• People who want to control their property because of family dynamics
• People who want to provide for administration of their estates if they become physically or mentally unable to do so
• People concerned about estate taxes
• Divorcing parents setting up a trust to provide an education for the children
• Anyone who wants to make a large charitable gift but wish to retain some use of the property
• Imposing discipline on a beneficiary so they do not spend all of their wealth
• Setting up streams of income for yourself
  

Myth – Trusts Are For The Rich

Trusts are powerful estate, tax, investment and financial planning tools. The myth here is that you have to be rich in order to make good use of trusts and include them into your estate planning and asset protection strategies. That fact is, the less money you have to lose the more you need to make use of the various asset protection strategies and tools.

Believe me when I say the topic of Trusts is at least an entire book. Then when you add all the reasons to use a Trust, it is a series of books. When you do not have a complete asset protection, wealth accumulation strategy, and Estate Plan evaluation  it is impossible to give this subject the attention it deserves in such a short article, but hopefully it will give you some basic knowledge with which to begin your journey.

What is a Trust?

In its simplest form a trust is an agreement by which money or other assets are held and managed by one person for the benefit of another. There are many types of trusts and I do mean many. However, no matter what type of trust it is it will always have four basic characteristics:

An Individual creates the trust. This person would be called the “donor”, “settler”, “grantor”, or the “trustor”. This person is called the grantor because they are the ones who create the trust between themselves (trustor) and the “trustee”

Someone else or another entity has to agree to hold money and/or property for the benefit of someone else. This person is the “trustee.” There can be more than one trustee and the trustee does not have to be a person. It can be a corporation with trust powers, such as a bank.

Money and/or property must actually be held by the trustee for the benefit of someone else. This money or other property is called the “principal” of the trust. Some people also call this money or other property the “corpus” of the trust. The principal (or corpus) of the trust never stays the same; some is spent by the trustee, some is invested – earning dividends and interest, and some of the principal appreciates and/or depreciates in value. Collectively, we call all of this money and property the “trust fund.”

Someone else must benefit from the trust. We call this person the “beneficiary ” of the trust. There may be more than one beneficiary. In that case, they are collectively called the “beneficiaries”.
What is a trust used for?

By distributing your assets appropriately you can minimize your tax burden or that of your beneficiaries. Because you avoid wills, your affairs are kept from the public record giving you a greater degree of privacy. The biggest advantage is the control of being able to protect your beneficiaries from fraud or mismanagement of your assets, and the continuity to manage your assets appropriately if a life changing event happens.

Classification of Trusts
Remember that all trusts have the same four basic characteristics, so the only things that distinguishes them is the manner in which they are created and their purpose. Also remember that “All trusts are not created equal”. Just like John in the above example most people classify trusts as either “Living or Testamentary”. With all the ads in the newspaper, periodicals, television, flyers and radio, it no wonder why so many people seem to think by osmosis they have already been through a strategic planning session without ever having to have sat down with someone and ask, “what do I need”? “Since everyone is touting living trust, that must be what I need” is the thought with many in this country. “I’ll worry about why I need it later’, must be the other thought.

(1) Living Trust or Testamentary Trust what is the difference?
A Living Trust becomes effective during the grantor’s lifetime and a Testamentary Trust becomes effective only after the grantor’s death. A Living Trust is generally created by a written instrument and a Testamentary Trust is part of the Last Will and Testament. The written instrument created with a living trust will either be called a trust agreement or a declaration of trust depending on the circumstances. If a Living Trust has a trustee other than the grantor then the written instrument will be called a “trust agreement”. It is called a “trust agreement because the trustee and the grantor have to agree on the terms of the trust. If the Living Trust has a grantor who is also the sole trustee, then the written instrument is called a ‘declaration of trust”.

A Testamentary Trust which is part of the Last Will and Testament, becomes effective only after death because the Last Will and Testament becomes effective only after death.

Living Trusts if done properly and managed properly during the grantors lifetime can avoid probate.  Living Trusts are also less complicated to create, more private because it is not a public document, but can be more costly because you are actually creating a separate document. Testamentary Trusts do not avoid probate because it goes into effect only after the Last Will and Testament goes into effect. Because Testamentary Trusts are part of the Last Will and Testament they are generally less costly to create and more public. However the opposite is true in terms of costs. Because the Testamentary Trust is part of the Last Will and Testament it generally cost less to create.

(2) Revocable Trust or Irrevocable Trust?
A second commonly used form of classification is whether a trust is revocable or irrevocable, which really only applies to a Living Trust because a Testamentary Trust only takes effect after the grantor dies and the Last Will and Testament is admitted to probate. With a Revocable Trust the grantor is reserving the right to revoke, change or terminate the trust after it becomes effective, and with an Irrevocable Trust the grantor is giving up that right after it becomes effective. And because a Testamentary Trust does not become effective until after the Last Will and Testament has been admitted into probate by design a Testamentary Trust is always revocable during the testator’s lifetime. Since a Testamentary Trust is always revocable until death this form of classification is only referring to a Living Trust.

If a trust is a Revocable Living Trust you have not given up your right to the property. You can;

1. Determine who manages and how the property will be managed inside the trust,
2. Get the property back,
3. Give the property away,
4. Change the beneficiaries,
5. Change the terms, conditions and benefits being received by the beneficiaries and,
6. Sell the property interest.

If a trust is an Irrevocable Living Trust, you give up all rights to the property. You give up the right to amend, revoke, change or terminate any provisions of the trust.

(3) What is the trust for?
A third way of classifying trusts is to do so by the purpose of the trust. In my opinion this should only be done after a thorough Asset Optimization and Estate Planning evaluation. Names of trusts are for the most part descriptive of their purpose. In this article I will not attempt to talk about the purpose of every trust, however I will give you a non-exhaustive list and briefly give a description of just a few. Types of trusts you can have are;

• Charitable Remainder Trusts
• Charitable Remainder Annuity Trusts (“CRATS”)
• Charitable Remainder Unitrusts (“CRUTS”)
• Charitable Remainder Unitrusts With Net Income Make Up Provision (“NIMCRUT’S”)
• Charitable Lead Trusts
• Charitable Trusts
• Charitable Split-Interest Trusts
• Credit Shelter Trusts
• Complex Trusts
• A/B Trusts
• Asset Protection Trusts
• By-Pass Trusts
• Grantor Retained Income Trusts (“GRITS”)
• Spend Thrift Trusts
• Qualified Personal Residence Trusts (“QPRTS”)
• Resulting Trusts
• Revocable Trusts
• Life Insurance Trusts
• Qualified Terminable Interest Property Trusts (QTIP Trusts)
• Testamentary Trusts
• Complex Trusts
• Crummey Trusts
• Grantor Trusts
• Generation Skipping Trusts
• Dynasty Trust
• Simple Trusts
• Special Needs Trusts
• Constructive Trusts

Each one of these trusts has a particular purpose for which it was created, but as I said it is best left to our Estate Planning attorney to really dive into the specifics of how these trusts are used. I will however, speak just a little on 3 broad areas of trusts, Insurance Trusts and Charitable Trusts and Charitable Remainder Trusts.

Another word for a Charitable Trust is a “Public Trust,” because it benefits the general public through charitable means. Although forming this type of trust can be complicated it offers much flexibility in providing benefits from the trustor or other trust beneficiaries and at the same time meeting charitable goals. It also offers tax advantages to the trustor that is not available to other “private” trusts. Longevity is also a big advantage over private trusts because a Charitable Trust can be established to last indefinitely.

Charitable Remainder Trusts give you the ability to give future interest in an asset to charity and at the same time keep an income stream for yourself or for another beneficiary. Offering an immediate tax deduction thereby lowering your taxes is not the only advantage of a Charitable Remainder Trust. You can also specify a portion of the trust income to be distributed to a non-charitable beneficiary for a certain period of time after which the charity receives the property.

Insurance Trusts are my favorite category of trusts. Individuals with a certain amount of wealth have been educated by their advisors about the many advantages of using Insurance for asset protection and optimization and wealth accumulation. Business Insurance Trusts which can be used to protect the proprietor or partners of a business (also known as “key man insurance”), or Personal Insurance Trusts which involves no business interest and is usually intended to provide help in managing insurance proceeds from estate taxation are two very powerful types of Insurance Trusts. A Life-Insurance Trust which is another form of Insurance Trust is created for the purpose of receiving proceeds payable under a life-insurance policy and is similar to a Living Trust. A life Insurance Trust is also sometimes used to provide a vehicle for continued management and distribution of insurance proceeds for a beneficiary who may need assistance in those matters.

In order to get the tax benefits of having the proceeds excluded from the decedent’s estate of a Life Insurance Trust the insured must divest himself of all interest in the policy, and place those rights in the hands of a trustee with the documents properly drafted. This is why the trustee who is selected for this type of trust is typically someone other than the individual who is insured.  What makes a Life Insurance Trust so appealing are the tax benefits.  But remember, first make sure you are working with a qualified attorney, second because the tax laws are so complex surrounding trusts, make sure your attorney can properly draft the documents, and third the insured must completely divest themselves of all interest in the policy.

One read I would recommend is Douglas R. Andrew’s book, “The Last Chance Millionaire”. This is the third book of a series with more to follow. The first book was “Missed Fortune” (a War and Peace version), and the second was “Missed Fortune 101” (condensed version of first book Missed Fortune). In these books the reader begins to get the whole essence of Asset Optimization and Wealth Accumulation and the importance that properly structured maximized policies can play in this quest. We are students and are being mentored by Doug and his team, and have completely enveloped the Missed Fortune movement because of its importance to the world.

What should you do now?

Before you think about creating a trust there is a lot of discovery you must do before you can even think about what type of trusts you should use and how you should use them. Have a complete Asset Optimization session done by a qualified individual. Some of the things you would consider are:

1. What would be the purpose of establishing the trust?
2. What is your financial situation, real estate holdings, and your goals?
3. What are your family’s financial circumstances?
4. Your age and health;
5. What type of legacy would you like to leave with your family, the community an the world;
6. Estate and generation–skipping taxes, gifts, capital gains and losses etc.

With Asset Optimization it is important that you work with someone who has a team or is part of a team of professionals. It is impossible for your insurance agent to recommend the right coverage for you if he/she has no idea how it fits into your complete financial game plan. Donald Trump and Richard Kiyosaki both talk about the necessity of building a team, however most people do not have the clout to get their CPA, Financial Planner, Mortgage Planner, Insurance Agent, and Estate Planning Attorney all in the same boardroom. Because of this most people go through their entire lives without optimizing their assets and in the process waste a tremendous amount of resources and miss out on incredible experiences they could have had.

Other Posts In This Series are:

War On Wealth – A Primer (Introduction)
The Accidental Philanthropist; but Uncle Sam! How Many Times Can You Tax The Same @#$% dollar?

How Not To Turn $20 Into A $75,000 Disaster

Maximizing The “Bank Of You Concept”; Setting Up Your Own Private Bank

Life Insurance As An Estate Planning Tool

Private Retirement Plans Vs. Employer Sponsored Retirement Plan Options

Special Valuations For Intra-Family Transfers, Gift Taxes And Lifetime Transfers

Why You Should Start A Personal Business?

Advantages And Disadvantages Of Investing In Annuities

How Owning Real Estate Can Help Me Save Taxes

How To Reduce Your Real Estate Taxes

Annuities, How They Work And Their Tax Advantages

The Three Proactive Strategies Of Asset Protection

Trusts – A Basic Foundation

Part II: Why You Should Start A Personal Business; The Nitty Gritty On Tax Advantages

Webinar Opportunity – Minimize Taxes, Empower your Retirement, etc..

We have a webinar on Wednesday from 12:00pm-1:00pm called: “Isn’t It Time You Became Wealthy”, in which we will teach how to minimize taxes, how to make money even in a down market, and how to empower your retirement. Register for the webinar by going to http://becomewealthy.info/leon/Webinars.html

Leon C. Williams
Financial Strategist
LUCA Financial Services
leon@lucafinancial.com
blog: http://leonsblog.leonwilliams.me
Online Business Card: http://bizcard.leonwilliams.me

Other resources to look at:

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Mandatory Trust Allocations

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