Source: https://irrevocable-trust.ultratrust.com/category/irrevocable-trust/
Timestamp: 2019-04-20 17:03:31+00:00

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Many couples consider using a life estate to protect their homes rather than transferring property into a trust. Creating a life estate requires executing a deed that transfers ownership of the property to the grantee, yet gives the owners the legal right to live on the property as long as either of them lives. This approach can ultimately protect homeowners from having the property taken to pay for long-term care, but can also create huge unnecessary problems.
If the children experience financial difficulty during the life of the parents, creditors may be able to put a lien on the residence. They could not force a foreclose on the lien while the parents were alive, but the existence of the lien would still cause problems for the children when the property transfers following the death of both parents. If a child gets divorced, the house in a life estate is considered a marital asset and the ex-spouse could get half.
A life estate also means that the parents cannot sell the home without the consent of all children that hold the remainder interest. A child that wants to keep the home in the family can stop the parents from selling.
If the parents sell after transferring the property to their children, the children would be assessed a capital gains tax. In 2013, the capital gains tax rate on real estate is 25%. The tax is based on the difference between the purchase price of the house and the sales price. Consider the hypothetical Massachusetts couple with two children and a house worth $500,000. Assume the property cost $100,000. If the parents transfer the property to their children, retaining a life estate, and later decide to sell, all four individuals are considered owners. The children would be assigned approximately 50% of the cost basis in the property and approximately half of the sale proceeds. That means that each child would be assumed to have earned income of $100,000 from the sale, minus $25,000 of the cost basis, which leaves a capital gain of $75,000. Each child would then have to pay approximately $18,750 in capital gains taxes on the parents’ home.
This unjust outcome becomes even more unfair when the capital gains tax exclusion is factored into the equation. The law allows a capital gains tax exclusion of up to $500,000 for a married couple on a person’s primary residence. That means, if the parents lived in the property and used it as their home for at least two years during a five-year period before the sale, they are allowed to exclude up to $500,000 of the sale’s proceeds from being taxed. Since each parent’s share of the sale proceeds is only $100,000, they pay no taxes – yet their children get a tax bill solely because the parents transferred the property to them before selling it. Also bear in mind that, had the parents not transferred the property to their children, their capital gains would have been $400,000, and no capital gains taxes would have been owed. When looking at these numbers, it is clear that transferring the property to the children and retaining a life estate may not benefit the children. It may also cause strife if the children refuse to sell because of the potential tax liability. Remember that the parents cannot sell without the children’s agreement.
If the couple decided instead to transfer the home to an irrevocable trust, they could still retain a joint life estate. However, the remainder interest would belong to the trust. In this scenario, the parents could sell the home without their children’s consent and without facing the capital gains tax issues in the prior example. The couple would be considered the owners for income tax purposes and could take the full benefit of the capital gains exclusion following a sale. They would pay no capital gains tax. In addition, creditors of the children would have no access to the property during the parents’ lives and the trust would give the couple some protection against their own creditors.
In Article I on protecting the family home we discussed strategies that don’t work on protecting the personal residence: the homestead exemption, tenants by the entirety, tenancy in common, and joint tenancy. In article II we discussed the Revocable Living Trust, the Qualified Personal Residence Trust (QPRT), Limited Liability Companies (LLC), Limited Partnerships, family Limited Partnerships (FLLP), and Corporations as additional methods that don’t work. The final segment, article III we will discuss the more practical approaches to protecting the personal residence: Equity Stripping, Equity Vesting, and Irrevocable Trusts.
The words sound exotic, it means to simply take out large amount of debt on an important asset or to encumber the asset secured by the underlying asset. The theory is simple; if an asset is riddled with debt, then the creditor is unlikely to bother with trying to sue the owner for the asset, thus, asset protection.
Equity vesting, is the repositioning of your vested equity in your home or other commercial real estate through equity mortgage refinancing. Your borrowed cash is then used to buy wealth building cash-value life insurance to fund your tax-free retirement. The benefit is tax-free growth within an insurance company guaranteed rate of return and tax-free withdrawal through insurance policy loans.
The concept isn’t difficult. Experts like Doug Andrews, author of Missed Fortune 101, and Roccy DeFrancesco, author of The Doctor’s Wealth Preservation Guide and The Home Equity Management Guidebook, (get a free copy of this book by Google+ this page) define Home Equity Harvesting as “removing equity” from a personal residence through refinancing (or a home equity loan) where the money borrowed is placed into cash value life insurance. I know it sounds weird. Who in their right mind would want to take a loan out on their home in order to purchase life insurance? Here’s your answer: Think of life insurance as a tax free savings account. A properly structured cash value life insurance policy can grow “tax-free” (no income taxes on capital gains, interest and dividends) and be removed tax-free via policy loans, and when properly structured will distribute tax-free to heirs at the time of death. To properly structure the policy, it must be over funded with cash using the minimum allowable death benefit that will allow the client to borrow from the policy tax-free. You can read more on how to monetize your real estate by using widely accepted leverage on real estate form a well known author Roccy DeFrancesco, J.D. by getting your free book.
An example: Mr. Smith is 45 years old, married and has a home with a fair market value (FMV) today of $400,000. He has 2 children and a spouse where their combined household income is $78,000 a year. Assume the Smith’s purchased the home for $185,000 seven years ago and that the current debt on the home is $125,000. Assume the current home loan is 6.5% with mortgage payment of $935 a month.
Mr. Smith will use a home equity line of credit (not a refinance) and will remove $76,500 of equity from the home over a five year period (which creates a 50% debt to value ratio on the property).
Equity Vesting is removing equity from a home to reposition it into cash value life insurance. Therefore, Mr. Smith will access his new line of credit in the amount of $15,300 every year for five years to fund an over funded/low expense cash value life insurance policy.
It is assumed that the life insurance policy used is and equity indexed life insurance policy that has a 1% guarantee rate of return on the cash value, has its growth pegged to the S&P 500 index and locks in the gains annually. It is also assumed that the policy will return 7.5% annually (which is conservative since the S&P 500 has averaged over 11% for the last 20+ years).
Mr. Smith will retire when he is 65 years old and will withdraw money tax-free through policy loans from his cash value policy from age 66-90 (25-years). Mr. Smith would be able to take $23,000 each year for 25 years for a total amount of $575,000.
If Mr. Smith had a home where they could harvest $200,000 of equity to reposition into a cash value life insurance policy. Using the same assumptions from the above example Mr. Smith could borrow tax-free from his life insurance policy starting at age 66? $61,000 each year for 25 years for a total amount of $1,520,000.
FULL DISCLOSURE: the above Equity Vesting examples have used optimum data as an optimum example. Your particular situation will be different based on your age, your health, borrowing capacity, level of interest rates, deductibility and limitations of your interest deduction on mortgage, and other factors. Please contact us to run your numbers based on your facts. We can be reached at 508-429-0011 or contact us through the contact form using the above link (click the link at the top of the page beside the telephone icon).
While equity vesting is not for everyone, the personal residence is best suited for an irrevocable trust with an independent Trustee. A simple “revocable” trust, also sometimes referred to as a land trust, will not protect your home from potential lawsuits, divorce, Medicaid/Nursing home. You must “divorce” yourself from owning your personal residence or for any other valuable asset you wish to transfer to your irrevocable trust. As in a typical divorce decree spelling out the terms of settlement, so too your Trust Agreement must spell out the terms and conditions of the Grantor (the owner) relinquishing his ownership to the Trustee for the benefit of the Grantor and his heirs. The Trustee cannot be the Grantor, his spouse, his children, or any one related to the original owner by blood or marriage. The Trustee “must be independent” and must act independently in decisions and actions. The independent Trustee’s sole fiduciary duty is to protect the assets transferred at all costs and must grow the assets in order to fund future expectations of the Beneficiaries.
To learn more about repositioning assets for wealth building, implementation of precise asset protection systems, tax minimization strategies, elimination of the probate process, and elimination of the only voluntary estate tax system, and tax efficient transfers to your next generation email us.
The case study of re: Brown, Banktuptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012) wherein his irrevocable trust failed. But why did his irrevocable trust fail? We look at the causes of why his irrevocable trust was open to creditors.
Brown, Bankruptcy No. 09-22962 Case Study: Why did his Irrevocable Trust Fail?
On May 30th, 2012, a federal bankruptcy court in Utah decided a case involving several irrevocable trusts ostensibly controlled by Douglas Brown [In re: Brown, Bankruptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012)]. Because of the mismanagement of the trusts, the trusts did not survive the attack.
An irrevocable trust is simply a sort of holding tank where one can place assets, thus becoming property of the trust, that are controlled by a trustee in accordance with the written rules of the trust. Once an individual places assets in the holding tank, the individual does not own the assets anymore; the trust does. This keeps the assets safe from anyone trying to acquire assets from the individual (although sometimes there is a look-back period) because the individual doesn’t own them anymore. Put simply, a creditor cannot take what a debtor doesn’t own. Assets in a trust are then safe for future generations.
In the event of a lawsuit or bankruptcy, creditors increasingly search for a chink in the armor of these trusts. A solid trust is a great start, but you need ongoing support from someone who knows what you need to do to honor the trust,” warns Mr. Beatrice. If a trust creator missteps and creates a situation where there is some doubt as to whether the trust is real or a fiction on paper, the trust could be in jeopardy.” Mr. Beatrice believes that many lawyers draft a trust and then don’t sufficiently explain how they work or what is needed for them to remain intact and do not follow up with the client.
In Douglas Brown’s case, while being investigated and tried by the IRS for back taxes, Mr. Brown created several trusts in which he placed a vacation home and a business. Mr. Brown then filed for bankruptcy and claimed that he did not own these assets, rather they were owned by the trusts.
Mr. Brown lost his case, because although the assets were in the trusts on paper, he was still controlling the assets as if they were not. The trustee allowed him to do as he pleased and did not participate in the management of the assets. The bankruptcy court gave Mr. Brown’s creditors access to his assets. Even if Mr. Brown had not treated the assets as his own, ignoring the trusts, he would have had to deal with the issue of fraudulent conveyance,” explains Mr. Beatrice.
Homesteading is useless in most situations for example it does not apply to Medicaid, Probate, or the Estate Tax. ALL assets titled in your name, real estate, cash, CD’s,…is subject to MEDICAID CONFISCATION for the purpose of “Medicaid” or “Medicaid Estate Recovery” (Federal Medicaid Act 42 USC ss 1396 et seq. and successor legislation(s) and other federal and state “enabling acts” and their successor acts), immediately upon entering a nursing home, or the filing of an application for Medicaid eligibility.
DISCLAIMER: This statement is required by IRS regulations (31 CFR Part 10, §10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
DISCLAIMER 2: Laws are dynamic. You need to check with your attorney in your state, before relying on the chart below. We have attempted to provide you with information we believe to be reliable but you should not rely on our information for your state because laws are dynamic and can be changed by any judge using his discretion by setting new precedence or even striking down legislative intent.
Florida Homestead Unlimited for 160 acres rural or 1/2 acre urban. — Fla. Stat. Ann. §§ 222.01, 222.02, Fla. Const. Art. X, § 4.
Minnesota Homestead Up to 160 acres. $750,000 rural; $300,000 urban. Minn. Rev. Stat. Ann. § 510.01.
FWhen you purchased your home, your lawyer probably had you sign a homestead form along with the hundreds of other pieces of paper that were stacked in front of you. If your lawyer did explain it to you, he probably just told you that it would protect your home should you have a debt. Although declaring your homestead may offer some minimal level of protection, homestead laws vary dramatically from state-to-state in the protection they provide from unsecured creditors. Protection can vary from “none” to “unlimited” protection.
The theory of homesteading is to protect “your homestead amount (equity amount)” on your primary residence from a forced sale for the benefit of unsecured creditors. Homestead applies only to your primary residence and only to the person claiming the homestead who must file a state prescribed form in the same registry of deeds where your primary residence deed is recorded.
It’s limited to the Federal Bankruptcy amount of $20,000 (11 U.S.C. § 522(d)(1)) and further complicated by the amended Federal Bankruptcy Act of 2005.
Homestead does not apply to Medicaid protection or state enabling confiscation acts under Medicaid.
Homestead does not avoid probate or estate taxes.
Homestead does not deter your bank from foreclosing if one does not pay the mortgage.
Some states “opt out” of Federal Bankruptcy protection.
Homesteading only applies to your primary residence, not to your rental unit, or vacation home. So, if you live in Florida part-time (up to 6 months) you forfeit your homestead protection, and in some states the part-time number of days is cumulative from year to year.
The homestead designation applies only to the declarant and in some states your spouse and/or children in their minority years. The homestead designation does not apply to a surviving spouse if remarried.
The homestead designation terminates on sale or transfer, or if your property ceases to be your principal residence.
There is no homestead protection in states like: Maryland, New Jersey, and Pennsylvania.
States like Arkansas, Florida, Iowa, Kansas, Minnesota, Oklahoma, South Dakota, and Texas have no significant value limit on the protection.
Other states like Alabama, Kentucky, Ohio, and Virginia have only $5,000 in protection.
Is it worth the filing fee?
In Arkansas, Florida, Iowa, Kansas, Minnesota, Oklahoma, South Dakota, and Texas, the answer is yes, but… Just remember that homesteads can and will be challenged if you are abusing the objective of your state’s homestead act. If you are being actively sued, or you are expecting a potential lawsuit (you know it’s coming) and you sell your real estate then move to Florida for the purpose of availing yourself of the unlimited homestead, you will not succeed because your transfer is fraudulent. The state of Florida is not going to aid and abet a criminal event. In Havoco of America, LTD., v. HILL No. SC99-98. Supreme Court of Florida. (2001), Mr. Hill bought a new home. The problem being that several years before, Havoco of America had brought a suit against him. Mr. Hill attempted to declare his house a homestead, but even ten years later when the suit was settled, the court reasoned that Mr. Hill was attempting to avoid paying his debts. The court ruled that Mr. Hill’s home was not protected by the homestead declaration.
Not only can transfers be found to be fraudulent, sometimes homesteads can be confiscated. In the case of Butterworth v. Caggiano, 605 So.2d 56 (Fla.1992), Caggiano was convicted of racketeering charges. The state sought civil forfeiture of his home. The court found for the state stating that Caggiano racketeered in the house and that the homestead law did not apply to criminal acts committed using the property.
Homestead also can only protect one property at a time. If you have more than one property you cannot protect all of them. In the England v. Federal Deposit Insurance Corporation, No. 91-7381 U.S. Court of Appeals, 5th Cir. (1992) England and his wife sold their home, filed for bankruptcy and then purchased a new home. England attempted to be creative and claim the money from the sale of the first home as a homestead exemption linked to the first home and then claim the second home as a homestead. The court found that this would be two homesteads which is prohibited by the Texas state laws. Because of this, the court ruled that the proceeds from the first residence were not protected by homestead exemption, but the second home was.
Creating a “third party owner” such as an UltraTrust® Irrevocable Trust for your primary residence and all your other valuable assets is better than any homestead even in states with unlimited homestead. A third party owner is anyone not related to you by blood or marriage. This independent person or legal entity has no underlying linking or subservient relationship to you, your spouse, or your blood relatives but has a “fiduciary” relationship.
What is a fiduciary relationship? The word fiduciary comes from the Latin word fiduciarius, fides (faith), in fiducia (in trust), meaning holding in good faith and trust. A written legal relationship created between two or more parties entrusting “in good faith” acts and deeds created by a contract is a Trust Agreement.
A well written Irrevocable Trust Agreement between the Grantor (guy with the assets) and an Independent Fiduciary Trustee (guy who watches over your assets for safe keeping) for the benefit of your Beneficiaries (you, wife, children, grandchildren, girlfriend, and/or anyone you wish) is significantly better than any homestead even in states with unlimited homestead. Period.
A fiduciary duty imposed on your Independent Trustee is the highest standard of care within the law. A fiduciary is legally expected to give extreme loyalty to the person to whom he pledged his loyalty to the point of defending, even with his own funds if necessary. The fiduciary is contractually obliged to defend your assets to the farthest extent of the law. If they fail to do so, they may be responsible for any assets lost. The Ultra Trust® is a contract that contains just such language.
The Ultra TrustÂ® Irrevocable Trust is part of one of the strongest asset protection strategies for business owners (www.ultratrust.com/asset-protection-strategies-for-business-owners.html) that is specifically designed to give you a high level of protection. In order to grow with your changing needs, your new financial goals and cover every possible life event (getting married, having a new born or adopted child, divorce, death, etc) the Ultra Trust® is designed as a sophisticated, yet fluid document. In fact, the document’s length usually falls between 35 to 45 pages, so you know that it is sophisticated enough to protect your assets while flexible enough to grow with your changing needs. Speaking of protecting your assets, the Ultra Trust® has successfully withstood attacks from your largest creditors: the IRS, Attorney Generals, the Justice Department, banks, and common creditors like yours, so you know that your planning will work regardless of who dares to challenge your asset protection planning.
When you follow our instructions in a timely manner, your estate plan will virtually eliminate your risks and problems. We have a 100% success rate with clients using our strategies over the last 30 years. Our clients range from high profile individuals to local businessmen and from clients of moderate to extreme wealth.
Eliminate the need of Homesteading and avoid its shortcomings.
Reduce the risk of, if not completely eliminate, frivolous lawsuits.
Avoid fraudulent conveyance and civil conspiracy claims by your past, present, and not yet born creditors.
Eliminate probate, which is triggered by the possession of assets on date of your death.
Eliminate estate taxes. Estate taxes are the only voluntary tax in the entire IRS code. These potentially high taxes are based on what you own (titled in your name) on the date of your death.
Eliminate Medicaid and State Medicaid Enabling Acts.
Furthermore, we create checks and balances that you are not going to find elsewhere such as a Trust Protector to oversee the Trustee for your protection.
If you “own nothing” (but still enjoy life the same as you are now) you will eliminate many complexities of ownership. Ironically, the only guaranteed success and protection is to own nothing. The only legal means of owning nothing is through an Irrevocable Trust with an Independent Trustee. Our Ultra Trust® goes beyond your expectations, with the added security of a Trust Protector.

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