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May 2015 Archives

Asset Protection Benefits from Retirement Plans

I was recently talking with a CPA in my network, and he told me how he attended a continuing education seminar on how "retirement plans are the best form of asset protection available." Although retirement plans offer some asset protection, and should be a part of everyone's asset protection strategy, they are not the end all be all of asset protection. Nor are they the best form of asset protection available.

Here's how High Net-Worth People can save money on State Income Tax

The Delaware Incomplete Non-Grantor Trust (DING, aka NING-for trusts settled in Nevada) is a sophisticated irrevocable trust that functions as follows: Grantor, an Oregon resident, has a substantial amount of stock with a low cost basis. Grantor settles a non-grantor trust [FN1] funded with an incomplete gift [FN2] in a state that has no income tax, such as Nevada or Delaware. Grantor is a beneficiary of the trust along with his children. For our example, lets say he settles the trust in Nevada. Grantor sends the stock certificates (or otherwise transfers ownership) to the NING trustee in Nevada. The Nevada trustee sells the stock, pays federal capital gains, but no state income tax on the gain. Over time, the trustee distributes some of the sale proceeds to Grantor in Oregon. Although Grantor must pay state income tax on the distributions received, the trust funds that stay in Nevada are not subject to Oregon state income tax. When grantor dies, the remaining trust funds are distributed to Grantor's children (inheritances pass free of income tax altogether).

Can my IRA pay into a Trust?

As you may be aware, if your child inherits your IRA, he can "stretch" out the withdrawals in order to continue the deferred tax growth for a number of years. Naming your child a beneficiary of your IRA can be a problem if: (1) your child is a minor and you don't want him to inherit a large amount upon turning 18 (the legal age of majority in Oregon); or (2) your child has creditor problems (or may have creditor problems in the future). Most people are unaware that if you have one or both of the above mentioned problems, you can still have your IRA pay into a special kind of trust (called a "See Through Trust"), and limit distributions to your child until he reaches a certain age, or prevent your IRA money from going to your child's creditors, while still benefiting from the stretch provision. See Through Trusts can be further categorized as either "Conduit Trusts" or "Accumulation Trusts." In a nutshell, Conduit Trusts must make the Required Minimum Distributions (RMD) each year, and Accumulation Trusts allow the trustee to accumulate the RMD for a later distribution. To qualify as a See Through Trust, certain specific requirements must be met. Because of these strict requirements, your typical revocable living trust will not qualify; another trust must be settled specifically to be the beneficiary of your IRA.

Gun Trusts in Oregon

A Gun Trust is a trust specifically established to purchase, own, and convey firearms at the grantor's death. Gun Trusts are usually established to purchase "Title II firearms", which include, but are not limited to machine guns, short-barreled rifles, and silencers. In order to transfer a Title II firearm, the ATF needs (among other information) fingerprints and a photograph of the transferee, and the signature of the Chief Law Enforcement Officer (CLEO) of the jurisdiction in which the transferee resides. The CLEO signature can be particularly burdensome to get, sometimes impossible. When an entity such as an LLC, corporation, or trust purchases a Title II firearm, no photograph, fingerprints, or CLEO signature are required. A trust is the entity of choice because no annual fees are required as with an LLC or corporation. Because the ATF does less investigatory work with a Gun Trust than an individual, the ATF tends to approve transfers much quicker. Furthermore, when an individual purchases a Title II weapon, the owner must possess it at all times; thus, the owner cannot lend it to his brother, spouse, or anyone else. With a gun trust, the trust can have multiple trustees (which are the legal owners); thus, multiple people can possess the Title II weapon. The grantor of the trust can amend the trust as to add or remove trustees at anytime.

Basic Business Transition Planning

The most common type of business transition for small business uses a buy-sell agreement and irrevocable life insurance trusts. Below is a diagram explaining the fundamentals.

What is a Grantor Trust?

Every trust has a grantor. So why are some trusts called "grantor trusts" and others called "non-grantor trusts"? The phrase "grantor trust" is actually referring to an IRS term that means the grantor of the trust is treated as the owner of trust property for income tax purposes. For example, Grantor has a grantor trust that holds some investment property. The income that the investment property makes is passed onto the grantor instead of the trust entity paying the tax itself (as a non-grantor trust does).

Spousal Lifetime Access Trust

The Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that holds a life insurance policy on the grantor's life. The SLAT has two tiers of beneficiaries. The initial beneficiary is the grantor's spouse; the secondary beneficiary is the grantor's child[ren] (or whomever or whatever the grantor chooses). The grantor is not a beneficiary of the SLAT. As long as Grantor's spouse is alive, she is the only beneficiary. After Grantor's spouse dies, the secondary beneficiaries receive distributions of trust property as dictated by the grantor. If Grantor's spouse predeceases Grantor, the trust assets and the future death benefit will be held in trust for the second tier of beneficiaries. A SLAT can be funded with a lump sum or annual payments using the grantor's gift tax exclusion ($14,000 per person each year). An ideal arrangement for many couples would be to have the trustee of the SLAT purchase a whole life insurance policy. Over the years, the cash value of the policy accumulates.

Who can be Trustee of my Irrevocable Trust?

Irrevocable trusts are complex and have endless variations. The following flow chart is meant to be a general guideline for the average irrevocable trust (if there is one) with an Upjohn Clause*, designed to keep assets out of the settlor's estate.

What is a Digital Estate?

As technology advances rapidly, people's digital assets become more and more important. Paying bills and taxes, storing important documents as well as media files, communicating with friends and loved ones are some of the things that people do online. Contact information for friends and family is no longer stored in a black book, but on a "cloud" somewhere. So what happens when you die? How is your executor going to even know what bills have to be paid or how to contact your friends?

Gift Tax Versus Estate Tax

This is a follow-up entry to the entry titled "A Primer on Gift and Estate Tax in Oregon." Even though the gift tax rate and estate tax rate are the same and have the same exemption amounts, money can be saved by gifting instead of letting the assets pass testamentary. Let me demonstrate:

A Primer on Gift and Estate Tax

An Oregon resident must worry about federal gift tax, federal estate tax, and Oregon estate tax. Federal estate tax is assessed at 40% of a person's taxable estate over $5.34 (2014 number-adjusts for inflation). So if an Oregon resident has a $10 million taxable estate when he dies, his estate is left with a tax bill of $1.864 million (there is a deduction for state estate tax paid, but that is beyond the scope of this entry).

Gift Tax Versus Estate Tax

This is a follow-up entry to the entry titled "A Primer on Gift and Estate Tax in Oregon." Even though the gift tax rate and estate tax rate are the same and have the same exemption amounts, money can be saved by gifting instead of letting the assets pass testamentary. Let me demonstrate:

What is an ILIT?

In simple terms, an Irrevocable Life Insurance Trust (ILIT) is a irrevocable trust that holds a life insurance policy, generally on the grantor's life. The policy can be either term or permanent. Generally, the grantor will make cash gifts to the ILIT, and the trustee of the ILIT will use that money to purchase life insurance. Although the concept of the ILIT is fairly simple, the trust document must be drafted by an experienced attorney and the trustee must be chosen carefully in order to cause adverse tax consequences.

Avoiding Probate Without the use of Trusts

Probate is a court process whereby the court oversees the administering of the decedent's estate. Probate is meant to give the decedent's creditors a chance to make a claim on the decedent's property, and then to clear the title after the creditors have had sufficient notice and time to respond (usually 4 months). The probate process generally requires a lawyer's assistance and several months of time, occasionally longer. For that reason, many people use Revocable Living Trusts (RLT) to bypass probate. And while a RLT is beneficial to many people, a RLT can be costly to settle and may not be worth it for other people. I am going to tell you how an Oregon resident can avoid probate without the use of RLTs. Property is categorized into two major subsets: real property and personal property. Personal property is further divided into two subsets: tangible and intangible personal property. (See below.)

What is Asset Protection?

Many people are familiar with the phrase "asset protection" but are not aware of exactly what it is or how they can benefit from it-so I'll tell you a little about it.