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Trusts exist in many varieties. Often the key to a properly planned estate is the formation of the property type of trust, funded with assets intended to be transferred upon death without the need of probate. The use of trusts for estate planning offers many advantages.
You may be able to greatly reduce your estate tax burden by funding a trust with assets that will not be included in the estate inventory upon admission to probate. The Federal Estate Tax is 55% with an exemption of $1,000,000. Keep in mind that for calculation purposes, life insurance proceeds are included making the $1,000,000 threshold must more likely to be met. Anyone with a life insurance policy of $1,000,000 means that the rest of their entire estate will be subject to estate taxes. These can be drastically reduced or eliminated completely, with the proper use of trusts.
Trusts: Asset Protection The purpose of asset protection planning is to shield assets that would otherwise be within reach of creditors. Generally, a creditor can access any assets owns by a debtor. However, a creditor cannot access assets not owned by the debtor. This is accomplished through the proper use of trusts.
Recent changes in the laws of a few states now allow the trust maker to remain the beneficiary of a trust and still protect the trust assets from the trust maker's creditors, provided the transfer was not for the purpose of defrauding creditors. Previously, the only manner in which a trust maker could be remain a beneficiary was to utilize foreign jurisdictions, often referred to as so called "off shore" trusts.
Now, states including Alaska, Delaware, Nevada, Rhode Island, South Dakota, and Utah, now allow Domestic Asset Protection Trusts. These allow a trust maker to transfer assets to an irrevocable trust and remain a beneficiary while still protecting trust assets from the trust maker's creditors. One key element of these irrevocable trusts is that an independent trustee must have the discretion to distribute trust assets and/or income. This is true because of the general rule that a creditor steps into the shoes of a debtor to recover assets and if a debtor has the ability to direct the trust to distribute the assets to the beneficiary, so too will the creditor in the debtor's place. Be aware that asset transfers to defraud or hinder creditors do not receive any legal protection regardless of the existence of a trust.
The trust maker's creditors are not the only creditors to whom consideration should be given. Frequently, heirs are overextended resulting from poor financial management and high debt loads. Any asset that is transferred to the trust can remain a trust asset even after the trust maker's death. The trust document can prohibit the trustee from distributing the res (i.e., assets held in trust) to the beneficiaries. Any income distributed from the trust to the beneficiaries will still be subject to creditors' claims; however, the beneficiaries' creditors will not be able to force the liquidation, sale, or untimely distribution of trust assets or income.