Posted by admin on Friday, January 31st, 2014 at 4:59 pm
Many revocable trusts contain by-pass planning. This type of plan captures the assets owned by, in whole or part, a deceased spouse in a trust for the survivor instead of simply giving the survivorthe assets outright.
One primary purpose of this type of planning is to preserve the federal and tax exemptions that would otherwise be forfeited. These trusts are referred to in many ways, including Family Trusts, Credit Shelter Trusts, and Residuary Trusts.
These trusts incur millions of dollars each year complying with tax and other reporting requirements and often result in a higher income tax bill than if the spouse owned the assets outright.
Now that only an estimated .14 percent of estates will owe a tax, many couples and surviving spouses are asking the questions, “Should I eliminate this type of planning in my revocable trust?Can an existing Family Trust be terminated?”
Most states allow a trust to terminate if “the material purpose of the trust no longer exists.” For many families, the only purpose of the by-pass trust is to reduce or eliminate federal estate taxes. If the surviving spouse has an estate of less than $5,340,000, even after adding the amount of the by-pass trust, the trust may no longer serving its original purpose.
Should it be terminated?
Arguments for Termination or Elimination
If all parties agree, including the trustee and the current and future beneficiaries, the trust could be terminated before the death of the spouse. The advantages include:
- There will be no annual tax return to file;
- The trustee will no longer be obligated to comply with administrative rules such as sending notices;
- The assets will get a step-up in basis at the spouse’s death (assets in a by-pass trust are not stepped up).
Reasons Not To Terminate
The reasons to terminate are compelling but there are also solid reasons not to terminate a by-pass trust, including:
- The spouse could decide to give the assets to someone else;
- If the spouse is married (or later remarries), these assets are subject to the marital rights of the new spouse if not waived in writing;
- A typical by-pass trust is creditor protected; and
- If all of the assets are distributed to the surviving spouse, the other trust beneficiaries (current and/or future) may be making a taxable gift to the spouse.
Dumping the Family Trust may work for some families and may save both administrative costs and income taxes, but all of the factors should be taken into consideration before doing so. You should consult with an advisor for more information.
Posted by admin on Thursday, January 2nd, 2014 at 5:35 pm
Historically, estate planning centered on wealth transfer. But an increased exemption and portability of the federal estate tax exemption, coupled with laws that capped damages in injury cases being struck down across the country, has caused many families and their advisors to look at wealth preservation.
Wealth preservation is not just for the wealthy or for people in high risk professions such as doctors and lawyers. Consider the laws of California, Florida and other states that make parents financially liable for motor vehicle injuries caused by a minor child, or the laws that make you responsible for a fall on your sidewalk.
Wealth preservation, or “asset protection” as it’s commonly called, consists of three primary strategies: asset ownership, insurance and trusts. In this segment we’ll focus on asset ownership.
Creditors’ rights differ by state, but in general how you own your property affects a creditor’s ability to seize or garnish it. Generally, if you own property with another party, some or all of the ownership may be protected from your creditors.
Jointly Owned Property
There are three ways to own both real and personal property jointly with another: tenants in common, joint tenants with right of survivorship, and tenancy by the entirety.
Tenants in Common
There is little or no asset protection under this form of ownership. Each tenant owns an equal, divisible interest. Any co-tenant or a creditor can force a sale of the property and a creditor can seize the property or the proceeds of a sale.
Joint Tenants/Joint Tenants with Right of Survivorship
Each joint tenant owns a divisible interest in the whole property. As with tenants in common, a creditor of a joint tenant may execute upon the proportionate interest owned by that tenant. Generally, unless stated otherwise, the percentage of ownership is proportionate to the number of owners. In some states if a joint owner can prove that he contributed all of the funds, a creditor has no claim.
Side Note: Take care before creating a joint account. Not having a legal claim doesn’t stop a creditor from garnishing an asset and sometimes seizing the whole thing. For example, if you add your son’s name to your bank account so he can “pay the bills” if you are unable to or to avoid probate without a trust, and your son owes child support to the state and the state finds the account and sends a garnishment order to the bank, your bank is obligated to follow the directive. Your account will be frozen and may even be sent to the state agency forcing you to fight the government to get it back.
Tenancy by the Entirety
Tenancy by the entirety is a special form of joint ownership, available only to husband and wife and only in about 13 states. Unlike joint tenancy or tenancy in common, each tenant owns an interest in the entire property, not just a proportionate share. Consequently, a creditor of only one spouse cannot execute on any part of the property. One issue to note is that although this protection is guaranteed by statute where available, if your spouse dies or you divorce, you no longer qualify for this type of ownership.
Some spouses opt to create a joint revocable trust. With a joint trust, both spouses create the trust and transfer assets to the trust. Only a handful of states have addressed the issue of whether property held in a joint revocable trust has the same creditor protected status as tenancy by the entirety.
For example, in Virginia, tenancy by the entirety is extended to a joint trust or the separate trusts created by husband and wife. In Florida, case law suggests that this protection may be available, but it is not definite. In Missouri, spouses can use a “qualified spousal trust,” statutorily created for this purpose.
A self-settled trust, also called a domestic asset protection trust, is an irrevocable trust designed to protect assets from the creditors of the settlor even though he or she remains a beneficiary of the trust. Historically, public policy has prohibited these types of trusts, but at least 12 states have adopted a form of a self-settled trust (available to residents and non-residents alike). The IRS recently examined such a trust and found that it could also shift income tax liability from the grantor to the trust (a valuable shift for grantors in high tax states).
Understanding how the title or ownership of your assets affects the rights of your creditors and those of your joint owner is a vital part of wealth preservation. You should consult a knowledgeable attorney and financial advisor to assist you with this important part of your wealth strategy.
WorthPointe’s Chief Investment Officer Christopher Van Slyke discusses how high fees kill returns in managed futures with Bloomberg TV
Posted by admin on Friday, November 8th, 2013 at 10:03 pm
Posted by admin on Wednesday, November 6th, 2013 at 3:43 pm
In a recent article for USA Today, investor Warren Buffett shared what he feels are the three biggest mistakes that investors make. To read this list, and the article in full, click here.
Posted by admin on Friday, November 1st, 2013 at 9:15 pm
by Charles L Stanley CFP® ChFC® AIF®
When entering retirement, having a big, fat IRA feels good. It provides a certain sense of security —and that’s a good thing. However, when you consider estate planning for a family with a taxable estate in excess of $5.25 million, that big, fat IRA is a horrible asset to own. Why? Because at the death of the IRA owner, the IRA will be subject to both income tax and estate tax. Depending on the details of the case, it’s entirely possible to lose 75% or so of the value of the IRA to taxes. So, what should you do to avoid this extreme taxation?
Give it away
Actually the give it away strategy is only fully effective if the owner is already planning to make charitable gifts anyway. It’s just much more efficient to make those gifts directly from the IRA to your chosen charity [501(c)(3) organization]. Making charitable gifts directly from an IRA avoids income tax on the distribution and reduces the taxable estate. This reduces the after-tax cost of the gift by quite a margin.
Posted by admin on Monday, October 28th, 2013 at 4:10 pm
by Scott O’Brien, CFP®
Director of Wealth Management
We are thrilled to share news that University of Chicago Professor and Dimensional Fund Advisors board member Eugene F. Fama has been named a co-recipient of the 2013 Nobel Prize in Economic Sciences, in recognition of his contributions to the “empirical analysis of asset prices.”
It’s about time we had some wonderful investment news to celebrate! It’s also about time that Professor Fama has been tapped to receive one of the highest academic honors available. Dr. Fama’s groundbreaking work in capital market theory has unquestionably enhanced our ability to assist each of our clients in achieving their personal long-term investment goals – whether the contribution has been realized or unsung.
Posted by admin on Wednesday, October 16th, 2013 at 4:48 pm
After a great meal, we generously tip the waiter. The dentist soothes our toothache and we happily pay for the relief. We don’t mind paying for services when the benefits justify the cost.
Similarly, we don’t mind paying investment fees if performance warrants the expense. However, there are two reasons why brokerage fees are rarely defensible:
- Historical evidence indicates that the markets are so efficient, beating a simple index fund is next to impossible over time.
- The brokerage industry is so adept at camouflaging their fees most investors have no idea what they are paying for portfolio management.
It’s logical to conclude that reducing expenses will increase returns. But how do you do that when most of the expenses are buried deeper than an Egyptian Pharaoh?
Posted by admin on Monday, October 14th, 2013 at 9:12 pm
All of us here at WorthPointe wish to congratulate Prof. Eugene Fama for winning the Nobel Prize in Economics. Most of our clients won’t remember us mentioning Prof. Fama’s work as we described the theoretical underpinning of our investment philosophy but, Eugene’s ideas (including the efficient market hypothesis and small, value, profitability stock premiums) underly most all of our success as investors. Thank you Prof. Fama!
Posted by admin on Friday, October 4th, 2013 at 9:54 pm
Scott W. O’Brien, Director of Wealth Management
According to Morningstar, in May the average bond fund dropped in value by nearly 7% when interest rates spiked. This followed much speculation about the possibility and timing of when the Federal Reserve may end their bond-purchasing program. The timing is important, as this program and the quantitative easing programs before it have been holding interest rates down in an effort to stimulate the economy.
The investment philosophy at WorthPointe Wealth Management is to hold fixed income assets (bonds) that are shorter term and higher quality. By short term, we mean 5 years or less in duration, which is a measurement of interest rate risk.
Posted by admin on Tuesday, October 1st, 2013 at 3:30 pm
The October 2013 issue of WorthPointe‘s Trust Connection covers a very important issue in financial planning: ensuring that your pet or pets are properly cared for in a range of different circumstances. Whether a disaster strikes, you become disabled, or you should pass, there are steps you can take to see that your pets are properly cared for, such as establishing a pet trust. Pet trusts are extremely helpful tools that can ensure that your pet does not end up in a shelter or on the streets in the event that something should happen to you.
To learn more about this important topic, you can read the October Trust Connection in full by clicking here.