Are trusts gaining in popularity? Are more people
using trusts? Are trusts being used to accomplish new
objectives?
A recent increase in the total value of assets held in
personal trusts reflects the growth of asset values in
general without explaining how many new trusts are
being created, what types of provisions they include, or
what is motivating the grantors. Even when there is
more data to go on (years after the fact), the results
will remain debatable.
But there is anecdotal evidence that trusts are very
much alive and well. In particular, irrevocable living
trusts are capable of implementing the most effective
gift transfers for tax purposes. However, a variety of
provisions, including "trust protector" clauses, may be
used to retain far more flexibility than many people
realize.1
Let’s review how classic trusts are being adapted to
the rules and circumstances that are now being
transformed around us.
In particular, there has been a great deal of the
recent interest focused on the Inheritor’s TrustTM over
the past two years. One of the principals behind this
arrangement, attorney Richard A. Oshins, was most
generous in providing insights about the technique as
well as its reception.
Change in Focus
It might be argued that as we draw closer to the
repeal of the estate tax, there is a shift away from
trusts which concentrate merely on minimizing
transfer taxes and a rise in those arrangements which
address long-term asset protection.
As with any trend that evolves over time, it
becomes impossible to pinpoint the exact time when
things began to change or to identify a specific
triggering incident, but there were certainly major
changes that were already in motion prior to the
enactment of the estate tax repeal in 2001.
For example, the Taxpayer Relief Act of 1997
would have increased the estate tax exemption to
shield $1 million of an estate by 2006. That law also
introduced a $1.3 million exclusion for small-business
owners.
Dynasty trusts and other long-term asset
protection trusts were becoming increasingly popular.
A critical factor of planning was the incorporation of
flexibility into long-term irrevocable trusts. In
“Making Irrevocable Trusts Flexible,” the June, 1997
issue of The Estate Analyst recapped the many powers which can be given to trusts:
· Power to invade principal
· Power to amend the trust
· Power to change trustees
· Power to change trust situs
· Power to substitute charitable beneficiaries
· Power to correct drafting errors
· Power to invest in grantor’s family business
· Power to invest more aggressively
· Power to protect Medicaid eligibility
“Trust protectors” had come into vogue by then.
The trust protector concept had been employed in the
United Kingdom and off-shore tax haven jurisdictions
for many years. A trust protector could simply be a
separate trustee who would be empowered to exercise
one or more powers, such as those listed above.
A Change in Context
In 2001, Lawyer’s Weekly noted the growing use of
trust protectors by trust draftsmen and attorneys in
standard, garden-variety trusts. By that time, the
likelihood of significant tax reforms, including an
estate tax repeal, had made trust flexibility of
paramount importance.
If you will indulge a tangential observation
concerning the growing reliance on health-care
proxies to be used in conjunction with living wills, one
may wonder if there has been a crossover effect.
Like a trust protector, a health-care proxy, i.e., an
individual holding a power of attorney for health care,
is a way of protecting an individual’s preferences in
the future by appointing a representative who can
review changed circumstances and take appropriate
action. Whether in the context of living wills or
investment trusts, the flexibility of having a “trust
protector” or a “health-care proxy” is simple, practical,
and effective.
Changes to the Bankruptcy Code which will take
effect in October may also play a role in the evolution
of trust planning. There will be a 10-year limit on
assets transferred to a self-settled domestic asset
protection trust (DAPT).
With more restrictions on the bankruptcy solution
to creditor problems in general, a variety of
alternatives must be considered. Establishing a
long-term, beneficiary-controlled trust that will be set
up long before any potential bankruptcy (or divorce, or
litigation) avoids such worst-case scenarios.
Disclaimer trusts are another useful feature being
added to wills in states which may or may not decouple
from Federal law and adopt or modify state death
taxes or state death tax exemption levels.
Dynasty Planning
A new generation of well-informed estate planning
professionals have implemented multi-generational
planning in thousands, if not millions, of estates.
These may be called “dynasty trusts” in certain
respects. And they are well equipped to protect not
only against estate and transfer taxation but also
creditors and divorce.
But the Inheritor’s TrustTM, has added an extra
dimension to dynasty trusts. It moves the starting
point from the plan back from the client’s estate to the
previous generation, i.e., to assets that have not yet
been inherited.2
We are talking about the largest bulge of wealth to
be transferred in history. It is the life savings of “the
greatest generation” which are about to pass to “the
baby boomer” generation.
The Inheritor’s Trust TM
Any hope of long-term planning depends squarely
on the positioning of the influx of wealth in the system
that is about to embark on an inter-generational
journey. Will those funds simply travel one single
generation in a direct outright transfer? Or will they
transcend multiple generations and remain flexible
for many years into the future?3
With these goals in mind, the Inheritor’s TrustTM is
just in time and may end up becoming the paradigm of
21st century planning.
Until now, dynasty-style planning has taken a
client’s estate as a starting point and looked
prospectively, as far into the future as possible, to
exploit the dependable growth of assets that are
unfettered by transfer taxation and shielded from
liability and serious threats over many years.
The Inheritor’s TrustTM takes a step back in time. It
looks “upstream” to take better advantage of assets
that the client has not yet inherited.
Intercepting an inheritance and directing it into a
separate trust before the assets can be received by the
client’’s estate has impressive advantages.
The funds are directed in anticipation of what the
client would have done. The client exercises great
influence over the funds under the terms of the trust.
Yet the assets, having never belonged outright to the
client, avoid exposure to debts and liabilities.
Consider the other benefits:
· Even if the inherited assets are relatively
small, they can have a major role if they remain in a
separate trust that can continue for many years and
remain out of the reach of creditors.
· Having a separate pool of assets to use as
“seed money” in several contexts. Wealth-earning
opportunities can be shifted to the trust at their
inception so that future earnings are kept out of the
client’s estate.
· A separately funded trust can also
purchase life insurance, the benefits of which will not
be included in the client’s gross estate.
· The Inheritor’s TrustTM can become the 1%
general partner of an FLP. A relatively small amount
of assets is needed, and if the funds are derived from a
separate source, i.e., anyone other than the client, the
trust will retain the controlling interest. The client
could retain control over the FLP in a fiduciary
capacity on behalf of the trust, yet his estate would
only possess non-controlling interests in the FLP.
· The trust can be designed to be
“intentionally defective,” i.e., in violation of grantor
trust rules. Trust income can be accumulated, but if
paid to beneficiaries is taxed to the grantor, allowing
him to further reduce his estate.
Positioning a client as an “inheritor” and setting up
a trust that keeps inheritable assets separate is a
strategy with potential benefits for any estate. It can
be coordinated with a generation-skipping GRAT, a
buy-sell arrangement for buying out a business,
state-income tax strategies, and many other
techniques in an array of useful variations.
Looking Ahead
A trust for an inheritor/client certainly gets a
long-term estate plan off to an excellent start. It is
dynastic in its durability, yet practical enough to
benefit a moderately sized estate.
In many respects, it creates the same trust
arrangement that the estate owner could have set up
for his heirs, yet because it is set up by the estate
owner’s parents, the assets can be protected far
earlier, and far longer.
Editor’s Note: The Inheritor’s TrustTM is a trademark of
Richard A. Oshins, Steven J. Oshins, and Noel C. Ice. This
publication is not endorsing any product or attorney or
providing specific legal or tax advise. It is merely making
readers aware of a potentially useful strategy.
©) R. Moshman 2005.8
|
SECTION
