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Trust & Asset Protection Planning
A trust is a legal arrangement that transfers ownership of assets from a grantor, the person who establishes the trust, to a trustee. The trustee administers the trust and manages the assets for the beneficiaries according to terms of the trust document. Under legal systems that recognize trusts the trustees are not deemed to own the trust property and thus trust property cannot legally be used to satisfy debts or judgments of the trustees. Absent fraud or other unlawful conduct, parties to the trust contract are also not deemed to be liable for any debts incurred by the trust itself. Only the trust assets (of a properly set up and lawfully operated trust) can be used to satisfy trust liabilities. There are two primary categories of trusts:
Statutory trusts are created via acts of legislation and are subject to the statutes and associated regulations. Many kinds exist.
Non-statutory trusts are created independent of specific legislated acts. They are sometimes referred to as pure contract trusts, Unincorporated Business Organizations (UBOs), and other names. The legal foundation for these trusts is your right to enter into any contract that does not have unlawful purposes. They are generally refer to as Contractual Trusts
SFI offers trust and investment services tailored to meet the complex needs of high-net-worth individuals, businesses and charitable institutions.
Protect your assets through trust planning:
- A comprehensive trust plan protects your assets while establishing a clear method for their eventual use and distribution.
- A trust can establish a line of defense against imprudent spenders, lawsuits, transfer taxes, creditors and the event of divorce in any generation.
- A trust can reduce your estate taxes and ensure that your wishes are carried out after you are no longer here.
- A properly drafted trust will simplify the timing and the transfer of assets to the named beneficiaries.
- A trust can be used to avoid probate and to keep the details of your estate out of the public record.
Asset Protection
Asset protection is in your best interest: In protecting your assets you ensure that the assets are used productively by serving your chosen beneficiaries and purposes. In addition you prevent the assets from being used counterproductively, or from being taken by the next person playing the litigation lottery.
A start at asset protection is to implement a strategy that adds legal obstacles and provides privacy. The further you remove your assets from harm's way the lower the chance that they will have to be defended at all. A well designed strategy that will reduce your exposure to those who would take what you have involves changing the legal ownership, but not necessarily the parties who obtain use and enjoyment, of those assets and thereby disassociating your name from the property. This can be accomplished in more than one way. The most important points to remember are: 1.) They can not take away from you something you do not have, especially if it is outside their legal jurisdiction, and 2.) It is difficult to determine what assets you have an interest in if your name is not associated with them. But if they should be attacked one will be prepared, and not have to desperately shore up one's defenses at the last minute.
Once you have divested yourself of ownership of those assets, the most effective method of removing them from harm's way is to site the ownership of the property in an offshore venue. If your would-be adversary must travel to a foreign country, hire foreign attorneys, and persuade a foreign court to do what it is reluctant to do because of the damage it could cause to the haven, then he or she is likely to give up at the start. Ownership can be structured so that the property may be relocated on short notice, making successful pursuit more difficult still. Dividing your assets among a series of different holding entities adds further to the cost of pursuit.
An ancillary benefit of moving offshore is that one can start limiting the amount of information that one feeds to the multitude of commercial and governmental databases. Credit or debit cards issued by offshore banks do not, as a rule, automatically feed account transactions into a central database the way that a card issued by a U.S. bank would. An offshore credit card issued to a holder whose name is distinct from yours would provide an additional buffer.
Client Trust Services
Trust services offered through SFI are an integral component of a comprehensive wealth management strategy. We interact regularly with our client's advisors to ensure that their trust and investment strategies are coordinated to address planning objectives.
SFI offers:
- Discretionary Living Trusts
- Irrevocable Life Insurance Trusts
- Charitable Trusts
- Trusteed Individual Retirement Account
- Qualified Plans & IRA Rollovers
- Special Needs Trusts
- Future Will Appointments Pooled Income Funds
- Charitable Gift Annuities
- Real Estate Services
- Investment Management
- Endowment Management & Administration
- Estate Settlement
- Mineral, Oil and Gas Services
SFI's Role
We provide a full range of fiduciary and asset management services, while allowing clients the flexibility to choose the level of services that suits their needs. Depending upon the size and type of your trust we can provide the following:
- Managed Trust Accounts
- Managed Trust, Private Portfolio
- Managed Trust, Mutual Funds Option
- Directed Trust Account
- Agency Accounts
- Custody Account
- Investment Management Account
- Managed Agency Account:
- Private Portfolio Options (Equity Balanced and Fixed Income)
- Mutual Funds Option
Advantages of a Corporate Trustee
While you may want to consider including an individual trustee in your plan, there are a significant number of important advantages to choosing a corporate trustee. Overall, a corporate trustee provides permanence, acting on your behalf -- now and in the future. And, equally important to you, its decisions are made impartially to ensure the provisions of your trust agreement are followed precisely and in accordance with your wishes.
Stability
Unlike an individual trustee (or even several individuals named as successor trustees), a corporate trustee has the advantage of perpetual existence. It offers the assurance that the same trustee will be in operation continuously to develop and maintain the trustee-client relationship, to allow for ease and efficiency of administration and to objectively provide fiduciary services for generations to come.
Experienced Administration
A corporate trustee is staffed with a team of experienced professionals, armed with extensive knowledge of trust laws and taxation. Drawing on the collective resources of a staff of trust professionals, a corporate trustee can address unforeseen circumstances, such as changes in federal or state estate tax laws, which may go undetected by the average individual.
Security
A corporate trustee has the expertise and technology to maintain accurate trust and investment transaction records. This security gives you the added confidence of knowing your assets are being accounted for and appropriately safeguarded.
Expert Investment Advisors
Trust assets can be professionally managed and invested based on each client's objectives. A corporate trustee can access a number of money management resources to provide the professional investment advice you need. Thus, you can be assured that investment assets are being managed to best suit your current needs and future goals.
Accountability
A corporate trustee adheres to the highest standards of ethics and integrity in fulfilling its fiduciary responsibilities, and it operates within the strict guidelines of its national and/or state regulators. Trust company records are examined and audited at least once a year to ensure policies and safeguards are established and followed.
Bypass Trust (Often called Credit Sheltered Trust)
Designed for married couples, this trust serves to maximize the use of each spouse's estate exemption amount. Married couples are entitled to leave unlimited amounts of assets to the surviving spouse without incurring federal estate taxes. However, when the other partner dies, federal estate taxes are due on the surviving spouse's entire estate. The Bypass Trust enables each spouse to take advantage of the unified credit equal the amount protected by the estate exemption amount ($1,000,000 for 2002), so that when the first spouse dies, that amount is placed in a Bypass Trust. The assets in the trust are not taxed at this time, but are passed on to heirs estate tax-free. The surviving spouse has access to the income from the trust for life and can use the principal, if necessary, for his or her health, education, support or maintenance, as well as the needs of the other beneficiaries. At the death of the surviving spouse, the remaining assets pass to named beneficiaries (usually children).
Tax advantages
- Preserves both spouses' estate exemption amounts.
- Allows for estate-tax free transfer of up to $2,000,000 combined (for 2002) to children or other beneficiaries.
Client Profile
Married couples with an estate valued at $1,000,000 (for 2002) or more who want to:
- Fully utilize each estate exemption amount.
- Provide split interest, lifetime income to spouse with remaining principal to children at subsequent death.
- Allow for flexibility with respect to spousal support.
- Transfer up to $2,000,000 combined (for 2002) to children or other beneficiaries free of estate taxes.
Revocable Living Trust
As its name implies, this trust is established during your lifetime. This formal written legal document enables you to transfer ownership of your titled property and/or assets from your name to a trust account, which you control. You have complete control over the assets in the trust during your lifetime. No matter how much you want to give your family or charity, consider setting up a Living Trust. Living Trusts allow you to avoid probate, maintain privacy, and facilitate the transferring of assets.
Features and benefits
Lifetime of Grantor
- Gives full control of assets.
- Allows trust to be amended or revoked during grantor's lifetime.
- Provides investment management of assets.
- Offers bill paying if desired, generally if professional trustee is named.
- Permits grantor to "test" trustee and its handling of trust.
- Provides trust administration/recordkeeping services if professional trustee is named.
Incapacity of Grantor
- Handles financial affairs of grantor.
- Relieves family members of burdens of managing grantor's financial affairs
- Includes flexible powers to carry out grantor's wishes.
Death of Grantor
- Becomes irrevocable upon grantor's death.
- Assets in trust avoid probate and publicity.
- Provides asset management continuity after grantor's death.
- Includes flexible distribution alternatives.
Tax advantages
- None while grantor is alive.
- Assets are included in grantor's taxable estate.
- Trust can be structured to provide maximum use of estate exemption amount to save on estate taxes.
Testamentary Trust
You can create a testamentary trust as part of your Will. The trust becomes effective only at the time of your death and directs the transfer of legal title of property from your estate to a trustee to administer under the terms of your Will. A testamentary trust is always irrevocable, since grantor is deceased. The terms of trust may be revoked/changed during grantor's lifetime by codicil to the Will.
Tax advantages
- None while grantor is alive.
- Trust can be structured to provide maximum use of estate exemption amount to save on estate taxes.
- Assets are included in grantor's taxable estate.
Profile
Most individuals/married couples who want:
- To begin planning their estate and have an estate valued at (but not limited to) $500,000 or more.
- Control of the distribution of assets after death.
- Professional corporate trustee administration after death.
Qualified Terminal Interest Property Trust (QTIP)
A QTIP trust enables you to provide lifetime income for your surviving spouse while reserving principal for beneficiaries you select - rather than beneficiaries your surviving spouse might select upon your surviving spouse's later death. It is a trust that allows couples to reduce or avoid estate taxes. Each spouse puts his or her property in a credit shelter trust. When the first spouse dies, his or her half of the property goes to the beneficiaries named in the trust commonly, the grown children of the couple, with the crucial condition that the surviving spouse has the right to use the property for life and is entitled to any income it generates. The surviving spouse may even be allowed to spend principal in certain circumstances. When the surviving spouse dies, the property passes to the trust beneficiaries. It is not considered part of the second spouse's estate for estate tax purposes. Using this kind of trust keeps the second spouse's taxable estate half the size it would be if the property were left directly to the spouse. This type of trust is also known as a marital life estate trust or AB trust.
Tax advantages
- Avoids estate tax on death of first spouse due to unlimited marital deduction.
- Taxed in surviving spouse's estate but beneficiary payment will utilize estate exemption amount.
Profile
Married couples with children from former spouse(s) who:
- Want to provide for surviving spouse but control the ultimate distribution of the trust, typically for the grantor's children from a previous marriage.
- Are remarried and want to give assets to children of former spouse yet provide income for later spouse.
Qualified Personal Residence Trust
Individuals or couples can use a Qualified Personal Residence Trust to move a home out of their estate and give ownership of the property to their heirs with reduced gift tax consequences. They will continue to retain the right to use the home for a period of years. Because the heirs do not take title to the property for a number of years, the present value basis of the gift is smaller than when the property was placed in the trust. The benefit is that the children or heirs own the property, the parents can retain the right to live in the house and an appreciating asset is out of the estate.
You may establish a QPRT to hold title to a residence for a term of years you select. At the end of the period, your trust will terminate and the title will go to your remainder beneficiary(ies), typically family members or a charity. During the term of the trust you would have rent-free use of the residence. Upon completion of the trust term, you could arrange to continue to live in the residence and pay rent.
Tax advantages
- For gift tax purposes, the fair market value of the home is discounted to reflect the terms of the transfer.
- Removes part of the value of the residence and all future appreciation of the residence from the grantor's estate, thus saving on estate taxes
Profile
Individuals and/or married couples with an estate valued at $1,000,000 (for 2002) or more who:
- Want to reduce the value of their estate to save on estate taxes.
- Have children who they want to leave a residence or vacation home to but without having them incur estate taxes because children do not have the liquidity or other resources to pay the estate taxes.
- Have real estate that is expected to appreciate in value through the term of the trust.
Irrevocable Trust
With an irrevocable trust, you specify who your trust will benefit, how it will operate and who will manage its assets. The trustee will eventually distribute the assets as directed. This type of trust cannot be altered, amended or revoked. It is often utilized because it can provide income and/or estate tax benefits.
Tax advantages
- Assets transferred to trust are considered taxable gifts but are exempt from federal gift tax if value is less than gift tax exemption amount.
- Additional appreciation of assets is taxable at beneficiary's or trust's rate, not the rate of the grantor.
- Assets transferred to most irrevocable trusts are not counted as part of grantor's taxable estate, thus reducing estate tax liabilities
- Can provide income tax deduction.
Profile
Individuals/married couples with an estate valued at $1,000,000 (for 2002) who want to:
- Reduce the value of their estate.
- Gift highly appreciated assets, especially if they are expected to continue to appreciate.
- Control the distribution of trust assets.
Grantor Retained Trusts
A grantor retained annuity trust enables you to transfer a remainder interest in trust assets to beneficiaries on a tax-favored basis. Should the assets appreciate and exceed the amount you specify, the excess would be paid back to you. The term of a grantor retained annuity trust is usually equal to the number of years left in the grantor's life expectancy.
Tax Advantages
- Significant gift tax savings on assets being given to beneficiaries.
- Helps to reduce grantor's estate (if grantor survives the term) thus saving on estate taxes.
Client Profile
- Individuals/married couples with an estate valued at $1,000,000 (for 2002) or more who want to:
- Retain assets in family.
- Reduce the value of their assets.
- Freeze value of assets that are likely to appreciate.
- Retain fixed-income stream for the term of the trust.
There are two types of Grantor Retained Trusts
Grantor Retained Annuity Trusts (GRAT) - The grantor retains an income interest in the trust, which is paid as a fixed amount stated in dollars or as a percentage of the trust's initial investment fair market value. The GRAT is typically the more frequently used strategy.
Grantor Retained Unittrust (GRUT) - The grantor retains an income interest in the trust, which is paid as a fixed percentage of the trust's principal, revalued each year. Protect the income stream against inflation.
Generation Skipping Trust
A generation-skipping trust is typically created for the benefit of children and grandchildren. Often, this type of trust is created to avoid estate tax in a child's estate when grandchildren have parents who are either financially secure or financially irresponsible. You may arrange to have trust income paid to your children and principal to your grandchildren, or you may arrange for the trust to pay only your grandchildren.
Tax advantages
Individual can make gift of up to $1,060,000 ($2,120,000 for married couples) before generation-skipping tax (flat 55%) is applied.
Profile
High net worth individuals who want to:
- Transfer up to $1,060,000 ($2,120,000 for married couples) to grandchildren.
- Skip transferring funds and resulting estate tax to financially stable or spendthrift children and instead transfer funds to grandchildren.
- Take advantage of multi-generational estate planning benefits.
Dynasty Trust
The Dynasty Trust also known as a Perpetual or Legacy Trust is an estate-planning tool that helps individuals and families leverage tax exclusions and credits to maximize the assets that are transferred to future generations. Because the federal estate and gift tax applies to each generational transfer of wealth, these taxes can significantly erode the amount that is passed on. The Dynasty Trust attempts to limit the occasions when the estate tax is imposed on assets as they pass on to heirs by holding assets in trust for as long as the law allows. Dynasty trusts can survive 21 years beyond the death of the last beneficiary alive when the trust was written. If you were setting one up today, and you had a 2 year-old grandchild, your dynasty trust could last well over 100 years. This reduces the number of taxable transfers while providing financial support to a range of family beneficiaries over two or more generations. A Dynasty Trust provides income and support to unlimited generations of your family. Income and appreciation is free from future estate, gift and generation-skipping transfer tax.
The benefits of a Dynasty Trust
- The assets in a Dynasty Trust are not subject to estate tax, so long as the assets remain in the trust.
- Gift tax may be avoided on transfers into the trust, depending on the terms of the trust, size of the transfer and other taxable gifts the transferor has made.
- With proper planning, the trust may be eligible to receive annual exclusion gifts of $11,000, multiplied by the number of beneficiaries.
- The estate and gift tax exemptions will also apply to appreciation of assets in the trust.
- The assets will continue to grow, undepleted by the estate and gift tax, for the benefit of future generations.
- Some states have a Rule Against Perpetuities, which limits the life of a trust to no more than 21 years after the death of the last beneficiary alive at the time the trust was created a duration of about 80 to 110 years. It is possible to establish a Dynasty Trust in a state that has abolished this rule, no matter where you reside.
- Gain future tax advantages
The estate tax savings can be enormous. For instance, suppose you have $1.00 now. Assuming an estate tax rate of 55%, that $1.00 would shrink to 45 cents before it ever got into your children's hands. Now assume that their estate tax rate is 55% also. When your children die, that 45 cents will shrink to 21 cents! By the time your grandchildren see the benefits of your lifetime of hard work, $1.00 will only be worth $0.21. To pass $1 million on to your grandchildren, you would have to start with close to $5 million. That's where the dynasty trust comes in. That $1.00 is not consumed by estate taxes, and is able to keep working for your heirs. In fact, let's assume a modest 6% annual rate of return. If your dynasty trust lasts for 100 years (which happens often), that $1.00 would turn into $339.30.
Limits on the Dynasty
In 1986, Congress (recognizing Uncle Sam was losing billions in estate taxes) attempted to thwart these transfers by creating the "generation-skipping transfer tax" (GSTT). The GSTT is applied to dynasty trust by assuming that the trust's beneficiaries own the assets in the dynasty trust outright. However, Congress did include a significant exemption in the law. Every person has a GSTT exemption of $1 million ($2 million if married). That means each person can transfer up to $1 million inside a dynasty trust, without any GSTT. Dynasty trusts of $1 million or less offer the same gift and estate tax advantages of similar trusts created before 1986.
Starting a Dynasty Trust
A dynasty trust must be properly drafted. A knowledgeable attorney, who understands the grantor's situation, can also create discretionary clauses. Discretionary distributions can be conditioned on each beneficiary being able to support himself or herself on their own. With some many options, dynasty trusts can be tailored any way you choose. The trust itself can be created during a grantor's lifetime, or a portion of the grantor's estate can be used to fund the dynasty trust at death. Creating a dynasty trust while alive allows the grantor to leverage his or her $1 million GSTT exemption. The dynasty trust will shelter not only the value of the assets transferred inside it, but also any appreciation of those assets.
Funding The Trust
Dynasty trusts should only be funded with certain types of assets. The IRS taxes the income from these trusts very heavily (a flat 39.6%). As a result, the assets placed inside the dynasty trust must be tax-free, so as not to incur an annual tax bill. Non-dividend growth stocks, tax-free municipal bonds, and cash rich life insurance are suitable choices.
Many grantors choose to use their dynasty trust as an irrevocable life insurance trust. The trust is funded with insurance on the life of the grantor. When the grantor passes away, the proceeds of the policy pay any estate taxes on other assets in the grantor's estate. The cash-rich life insurance also provides an immediate death benefit and is self-completing. Using the dynasty trust as an irrevocable life insurance trust can provide excellent peace of mind.
Delaware Dynasty Trusts
Delaware has partially repealed the Rule Against Perpetuities, allowing Dynasty Trusts holding personal property to continue indefinitely, so long as they meet certain requirements. Delaware Dynasty Trusts are generally exempt from the payment of Delaware state income and capital gains tax provided that none of the trust beneficiaries reside in Delaware. Certain Delaware trusts may be subject to Delaware income tax, but only if the income is generated from real estate, personal property or a trade or business held by the trust and located in Delaware. A Delaware Dynasty Trust must have a substantial relationship to Delaware. Non-Delaware residents can satisfy this requirement by naming as their trustee SFI Trust Company, FSB, which administers Delaware Dynasty Trusts in Delaware.
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