estates Estate planning is just that, planning in advance the distribution of your wealth, real estate and assets for the well-being of your family and loved ones. When unprepared events can consume assets accumulated over a lifetime of work, you need to consult an attorney who can advise you of your options. .

Careful estate and trust planning protects you, your family and your assets. Whether you are launching your professional career or a commercial enterprise, are in the accumulation and wealth building stage of life, or you are entering your retirement years, proper estate planning safeguards your family.Without an estate plan in place, unexpected and sometimes tragic events can quickly decimate a lifetime of accomplishments leaving those you love and your business at risk.

Limited Term Trust

A Limited Term Trust is designed to last for a specified term of years with the trust assets returned to the settlor at the end of that period. For instance, Dr. X is forty-five years old, married with two young children, and earning a comfortable living. He has $2 million in savings and doesn’t currently need the income generated from these investments.

His primary goal is to protect his savings from any type of lawsuit or claim, and he wants to make sure the funds are available for his planned retirement in twenty years.

Life Insurance Trust

One of the most popular and effective estate planning and asset protection strategies is to use a Life Insurance Trust to hold one or more policies on the life of either parent.

An important purpose of this trust is to exclude the proceeds of a policy from estate tax. Simply put, if you own an insurance policy on your life, the proceeds are subject to estate tax. If your total property exceeds the exemption amount ($1.3 million), 50 percent or more of the policy proceeds can be lost to estate taxes. If you have $1 million of assets and an insurance policy for $1 million, you would pay approximately $300,000 in estate taxes.

The simple solution is to create a Life Insurance Trust to own the policy. A properly drawn trust keeps the proceeds out of your estate—free of estate tax—so that the entire amount of the proceeds are available for your family.

When a policy is held by the trust, the cash value and the proceeds are also protected from potential lawsuits and claims. A portion of family savings can be transferred to the trust each year and that amount can be used to fund a policy. Amounts invested in the policy are permitted by favorable tax laws to accumulate, free of income tax. In this manner, large amounts of value can be built up over a period of years.

As an example, a 45-year-old client of ours had a good income and was saving about $50,000 per year. We set up a Life Insurance Trust with a plan to transfer $20,000 per year into the trust. He achieved these significant benefits:

All amounts transferred into the trust and plan proceeds were fully protected against potential claims and lawsuits.
Investment earnings grew and compounded without annual income taxes.
The cash value of the policy could be withdrawn or borrowed for any needs of the trust.
Plan proceeds of $5 million dollars would be available for his family—free of income and estate taxes—upon the client’s death.

The Life Insurance Trust is an important foundation of any asset protection and estate plan where the value of the estate is likely to exceed the exemption amount. Proper planning in this manner can prevent a significant loss of 50 percent or more of your accumulated wealth from taxes and can protect assets from future claims.

Estate Freeze Trust

A trust can be created as a part of an overall plan to avoid estate taxes on future appreciation of particular assets. If it is anticipated that certain property will appreciate in value over the years, it often makes sense to transfer full or partial ownership to an Estate Freeze Trust—to avoid estate taxes on the asset.

A client in his mid-forties owned Microsoft stock with a value of about $2 million. We calculated that if the value of his portfolio increased at about 7 percent per year, at age 75 the stock would be worth $16 million. The potential estate tax liability was roughly $9 million. Also, of immediate concern, the entire amount of his savings was exposed to lawsuit risks from his business.

To solve both problems, we put the stock into a Family Limited Partnership. The client and his wife were the general partners—retaining control over the assets. The Limited Partnership interests were transferred to the Estate Freeze Trust. The $2 million value was discounted for tax purposes so that the total amount of the gift was equal to the exemption amount. (After the discount was applied to the $2 million, the gift was valued at $1.3 million.) The stock was fully shielded from any potential claim, and the entire value of the asset was removed from the client’s estate. If the value of the stock appreciates even slightly, millions of dollars in taxes will be saved for the family.

The same principle would apply to ownership in a start-up company which you believe will increase in value over a number of years. When you start a business, the initial value is generally low. That presents an opportunity to transfer ownership and remove future appreciation from your estate without creating a taxable gift or using a portion of your lifetime exemption. A real estate investment, which has little initial equity but has potential to appreciate, is also a good candidate for the Estate Freeze Trust.

The Privacy Trust

The Privacy Trust is a descriptive name for the legal strategies designed to achieve financial privacy goals—a legitimate concern for many individuals. The Privacy Trust successfully conceals ownership of bank and brokerage accounts, the family home, rental properties, and interests in other entities. If you have established a corporation, Family Limited Partnership, or Limited Liability Company for business or asset protection purposes, the Privacy Trust adds a desirable level of confidentiality to your personal affairs. Depending upon the particular features included in the trust—in addition to the privacy advantages— formidable asset protection and estate planning benefits can be created.

The Delaware Trust > Overview

Overview

Asset Protection Trusts, with many of the same features as the typical offshore trust, can now be created in the state of Delaware. Effective July 1, 1997, Delaware has enacted new trust legislation which allows individuals to legally shelter assets from potential creditor claims without the cost and complexity usually associated with the offshore structure.

The significant benefits available under the Delaware law must be understood in the context of the prevailing U.S. law and the asset protection strategies which are currently available.

For at least the last five hundred years, creditor friendly English and American common law and statute have severely restricted the ability of an individual to shield his personal assets from either existing or future creditors. Existing and known future creditors are protected by laws against fraudulent transfers. Future potential creditors have benefited by laws in every state making most trusts inconvenient or useless as vehicles for safeguarding personal assets.

For example, many individuals use a revocable living trust to create a variety of estate planning advantages such as probate avoidance and estate tax minimization. However, these trusts provide no protection of assets from claims by potential creditors. In the event of a lawsuit assets in these trusts can be seized by a successful claimant. Similarly, if an individual creates an irrevocable trust in which he has the right to distributions of income or principal all of the assets are available to satisfy a judgment. The only type of U.S. trust which will protect assets is a trust in which the individual retains no power to revoke the trust and no ability to receive any distribution of income or principle. In essence, the assets must be effectively gifted in order to achieve the desired protection. In our experience we have encountered very few clients willing to irrevocably part with all of their possessions to protect against a future unknown event.

APT or Offshore Trust

A variety of sophisticated features can be added to the strategies we have discussed by taking advantage of laws designed to encourage asset protection and privacy goals. In this section, we will discuss a popular planning option known as the Asset Protection Trust (APT) or the Offshore Trust, and show you the opportunities for enhancing the structure of your overall plan.

A recent report by the U.S. Department of the Treasury stated that in response to concerns about litigation the market for Offshore Trusts are "exploding." The Treasury Department estimates that assets worth "tens of billions of dollars" are currently in these types of trusts with the number and amount growing rapidly each year. An article in the American Bar Association Journal stated, ironically, that lawyers are seeking protection from the hazards of their profession by setting up Offshore Trusts for themselves. As one attorney quoted in the article put it, "I don’t want someone doing to me what I do to them all day in court."

The reason for the popularity of this technique is that it acts as an ultimate safety valve—providing an additional layer of protection for plans designed to avoid frivolous "deep pocket" litigation. Many individuals, wary of the potential for abusive lawsuits and frustrated by widespread violations of personal privacy, view the Offshore Trust as an important component of a sound financial plan.

Equity Overview

Equity stripping combined with an Equity Reduction Plan (“ERP”), is a highly effective and sophisticated form of asset protection. Depending on the circumstances and the type of assets involved, an ERP can be used by itself or in combination with other techniques.

An ERP is designed to protect equity in real estate or business assets from a potential future claim.

Real estate assets are always vulnerable to a lawsuit. During the last 10 years there has been a dramatic increase in the value of most properties. A significant portion of your net worth may have shifted from stocks to real estate equity. Physicians and other professionals have additional value locked inside their practice in the form of accounts receivable and equipment. A lawsuit against the practice from a patient or employee exposes these assets to risk of loss.
Business owners may have inventory, equipment, patents, and trademarks in addition to accounts receivable. If these assets have value it is logical and prudent to protect them from the risks of the business. In many situations, where movement of an asset is impossible or impractical, equity stripping within an ERP can move the equity or the value of an asset into a protected position. Ownership of the underlying property remains the same and need not be transferred. This is a clear advantage in many situations:

Those who own multiple properties can avoid the inconvenience and cost associated with forming several Limited Liability Companies. An ERP protects the equity in a property from a claim arising out of the property itself (an “inside” liability). This cannot be accomplished with an LLC or any other entity. An ERP avoids a transfer of real estate ownership and potential problems with increased property taxes, transfer taxes and due on sale clauses from a lender. Accounts receivable usually cannot be transferred out of a professional practice because of accounting problems and insurance company restrictions. An ERP is the only technique available to insure the protection of the cash flow cycle of billing and collection. Similarly, the inventory, equipment and intellectual property in a business are essential for operations and future success. An ERP is designed to avoid disruption or loss of the business by protecting these assets.
Valuable but unproductive equity in real estate, accounts receivable and business property can be leveraged for business or investment purposes. These dormant assets can be put to work in an ERP, enhancing asset protection and generating additional income.