Leaving Assets Can Be Tricky – Part 3

Maybe you grew up without much. You worked hard. You earned a good education. You succeeded in life even though the streets were not paved with gold where you grew up. In fact, maybe you grew up in a very impoverished, oppressed community.

Now you (and your spouse if you are married) have accumulated enough so you are comfortable. Maybe you are not a billionaire, but you feel like you have achieved a reasonable level of material success. After your death, you would like to provide for your loved ones so they can be a step up the ladder of financial stability and so they can get a good education and get a good start in life.

Deciding to whom you want to leave your assets is often the easy part. Often the difficult decision is determining the best way to leave them your assets. Let us say you want to leave your assets to your children at your death. What is the best way to do it?

You could leave your assets to them outright. That might be the right solution sometimes, but all too often, that is not the right solution. This is the third in a series of blogs examining different ways to leave assets to a beneficiary and when and why that might be appropriate.

A Special Needs Trust is tailored to help a beneficiary with special needs receive an inheritance without jeopardizing their current or future public needs-tested benefits, such as Medicaid or Supplemental Security Income (“SSI”).

If you have a child or other beneficiary who has special needs, you want to provide them the best chance to lead a full and meaningful life, just like any other child or beneficiary. If you leave assets to them outright, it could jeopardize public needs-tested benefits which they are on.

Let us look at a quick example. Betty is leaving assets to her son, Jackson. Jackson has special needs. Betty loves Jackson and wants the best chance for him. But she knows Jackson will have unique challenges in life. Betty has $800,000 in assets and she has two children, Jackson and Abigail. Both her children are now adults and Abigail attends college. If Betty leaves assets to Jackson, he would be ineligible for needs-tested public benefits. Betty could leave all the assets to Abigail and ask her to watch out for Jackson. However, if Betty did that, the funds intended for Jackson would be lost if Abigail had financial difficulties from creditor issues, divorce, mismanagement, etc.

Betty could leave the portion intended for Jackson in a Special Needs Trust for him. Abigail could be the trustee of that trust and distribute from it for Jackson’s special needs. This would allow the funds to be used for Jackson to enjoy life through education, vacations, and other “special needs” without jeopardizing his needs-tested public benefits. Also, if Abigail had creditor issues, her creditors could not attach the assets in Jackson’s Special Needs Trust.

From an income tax standpoint, the Special Needs Trust for Jackson is treated as a separate taxpaying entity. A separate tax ID number would be needed for the trust. The trust’s taxable income might be carried out to Jackson if there are distributions to or for Jackson’s benefit that year. Otherwise, the trust would pay its own taxes.

As demonstrated by the three articles in this series, leaving assets to beneficiaries can be tricky. Often the best way to leave an inheritance to someone you love is not leaving it outright. Rather, it is often better to leave them assets in a trust with provisions tailored for their benefit. For some beneficiaries, a Special Needs Trust is appropriate. For other beneficiaries, an Asset Protection Trust is best. For still other beneficiaries, a Divorce Protection Trust is best.

Leaving Assets Can Be Tricky – Part 2

Maybe you grew up without much. You worked hard. You earned a good education. You succeeded in life even though the streets were not paved with gold where you grew up. In fact, maybe you grew up in a very impoverished, oppressed community.

Now you (and your spouse if you are married) have accumulated enough so you are comfortable. Maybe you are not a billionaire, but you feel like you have achieved a reasonable level of material success. After your death, you would like to provide for your loved ones so they can be a step up the ladder of financial stability and so they can get a good education and get a good start in life.

Deciding to whom you want to leave your assets is often the easy part. Often the difficult decision is determining the best way to leave them your assets. Let us say you want to leave your assets to your children at your death. What is the best way to do it?

You could leave your assets to them outright. That might be the right solution sometimes, but all too often, that is not the right solution. This is the second in a series of blogs that will examine different ways to leave assets to a beneficiary and when and why that might be appropriate.

The first article in the series discussed the “Divorce Protection” Trust or “Access” Trust. The second way which is the topic in this article is a fully discretionary trust, often called an “Asset Protection” Trust or a “Sentry” Trust. In many ways these trusts are opposites. While the beneficiary of an Access Trust has the right to demand whatever they want, whenever they want it, the beneficiary of a Sentry Trust cannot demand anything ever. The distributions from the trust are in the complete discretion of the Trustee.

A completely discretionary trust has many benefits. First, it allows the trustee to use their discretion and withhold distributions if they think the beneficiary is acting unwisely or inconsistent with their best interests. For example, this type of trust might be good for someone with a substance abuse problem or a gambling addiction.

This type of trust also is the best way to provide asset protection. A creditor of a beneficiary stands in the beneficiary’s shoes. So, if the beneficiary can access funds so can their creditor. In this trust, the beneficiary cannot demand anything, so neither can their creditors.

Let us look at a quick example. Jane is leaving assets to her son, Bill. Bill has a history of substance abuse and drunk driving. In fact, Bill is currently incarcerated related to his substance abuse issues. Jane would like to be sure Bill’s inheritance is protected and used for his best interests. Jane leaves the assets in a Sentry trust for Bill’s benefit. The trustee, who should not be Bill, can use the assets for Bill’s benefit, in the trustee’s discretion. But Bill cannot force any distributions from the trust. This way, the assets are protected from Bill’s creditors and Bill’s indiscretions. If there is a victim of the crime, there could be restitution owed. Even if it is a victimless crime, most states charge inmates for the privilege of being housed and fed during their stay. For example, for a recent three-year stay, Florida charged $55,000. As prisons pay inmates little or nothing, they often come out with large debts that could wipe out an inheritance if it were not left in a protected trust.

From an income tax standpoint, this trust is treated as a separate taxpaying entity. A separate tax ID number is needed for the trust. The trust’s taxable income might be carried out to Bill if there are distributions to Bill that year. Otherwise, the trust pays its own taxes (at a compressed rate schedule).

A Sentry Trust allows someone serving as Trustee to watch over the assets of the beneficiary and distribute them to the beneficiary in the Trustee’s discretion. This protects the beneficiary from the beneficiary’s creditors or misjudgment.

Leaving Assets Can Be Tricky

Maybe you grew up without much. You worked hard. You earned a good education. You succeeded in life even though the streets were not paved with gold where you grew up. Maybe you even grew up in a very impoverished, oppressed community.

Now you (and your spouse if you are married) have accumulated enough so you are comfortable. Maybe you are not a billionaire, but you feel like you have achieved a reasonable level of material success. After your death, you would like to provide for your loved ones so they can be a step up the ladder of financial stability and so they can get a good education and get a good start in life.

Deciding to whom you want to leave your assets is often the easy part. Often the difficult decision is determining the best way to leave them your assets. Let us say you want to leave your assets to your children at your death. What is the best way to do it?

You could leave your assets to them outright. That might be the right solution sometimes, but all too often, that is not the right solution. This is the first in a series of blogs that will examine different ways to leave assets to a beneficiary and when and why that might be appropriate.

The first way is similar to giving the assets to them outright after your death. It would be to give them the assets in a trust set up after your death from which they could demand the assets at any time they want. This type of trust is often called a “Divorce Protection” Trust or an “Access” Trust. From an income tax standpoint, this trust is treated the same as the beneficiary. In other words, no separate tax ID number is needed for that trust. It can use the beneficiary’s social security number for reporting.

If they can withdraw the assets whenever they want, then what is the benefit of the trust? The assets will retain their character as the beneficiary’s separate property and will not get comingled with their marital assets. Of course, since the beneficiary could withdraw the assets at any time, the asset would be subject to the beneficiary’s creditors. This type of trust would not be a good choice for a beneficiary who had creditor issues or who was irresponsible. But it might be a good choice for a beneficiary who was responsible and whom you just wanted to keep the assets separate in case they get divorced down the road (even if they’re not now married).
While the trust would keep the assets separate, in some states the court could consider these separate assets in making an asset allocation between spouses upon divorce or in awarding child support or alimony.

So, be careful with which trust vehicle to use and which is most appropriate for your situation.

Assignment and Nominee

Funding a trust is critical when you have a trust-based estate plan. A trust is a receptacle, like a box. Before you fund the trust, it’s like the box is empty.

You fund a trust by retitling assets into the name of the trust. Let’s say you have several items that you want in the trust. Let’s say you have items A, B, C, and D that you want to go to the trust. Let’s say you fund assets A, B, and C to the trust, but forget about item D. Maybe it’s an asset you don’t see frequently and it completely slipped your mind. Assets A, B, and C are in the trust and will avoid probate. Item D isn’t in the trust and will need to go through the probate process (assuming no non-probate transfer process applies to it, such as a beneficiary designation).

In some states, probate can be a costly and time-consuming undertaking, depending upon the nature and extent of the assets subject to probate. Typically, if it’s not real estate, a small amount of assets (which varies by state but typically is less than $100,000) can pass through probate using the express lane of “summary” proceedings where the formalities are loosened. In some states probate even above these levels isn’t as costly or time-consuming. It just depends upon your area.

But, if your trust is fully funded, the assets don’t need to go through the probate process. The Assignment and Nominee agreement is one way used by attorneys to fund the assets into the trust. Here’s how it works.

An Assignment and Nominee agreement has two parties, the “Trustee” and the “Trustor” (also known as the “Grantor” or “Settlor”). The Trustee is the person in charge of the trust assets. The Trustor is the person who sets up the trust. Sometimes they are the same person. In fact, most commonly they are the same person.

Let’s say Mike sets up a trust, so he’s the Trustor. He also names himself as the Trustee to manage the trust. So, he’s wearing both hats. With an Assignment and Nominee agreement, Mike as the Trustor assigns assets to the trust, thus transferring them to it. Then Mike, as the Trustee who manages the Trust, sends them back to Mike, in his individual capacity, (i.e. as Trustor), to hold the assets for the trust for safekeeping. So, even though the asset is back in Mike’s hands, it is owned by the trust and for the trust.

Typically, you’re going to transfer most items by some other method, such as changing titles on each asset directly. But when you’ve forgotten about an asset, the Assignment and Nominee agreement can be a belt and suspenders approach to move that forgotten asset into the trust.

The Assignment and Nominee agreement is not a panacea, rather it is a backup to traditional methods of transferring assets into the trust. Also, the agreement by its own terms doesn’t apply to some assets, such as retirement plan assets.

Funding a trust is essential. Otherwise, the trust is like an empty box. The Pour-Over Will might move the assets into the trust at death, but that would be through the probate process. Also, you would have lost any lifetime benefit of the trust, such as management of the assets during a period of incapacity.

An Assignment and Nominee agreement can act as a backstop on the important funding process.