This column presents general information regarding estate and disability planning and probate. It is not intended to create an attorney-client relationship or constitute legal advice to readers. Individuals with legal concerns should consult with an attorney for advice regarding their specific circumstances.

By Jessica L. Estes

If you have read my articles in the past, you know how to protect your stuff in three easy steps: 1) know the rules; 2) know your predators; and 3) know your options. Easy, right? But, knowing is only half of the equation. Now, it is time to: Assess your needs; Create what is missing; and Tie in your plan. In other words, you must ACT!

Protecting your stuff starts with an assessment of your needs, which, in turn, requires careful consideration of your goals and values. Typical goals of an estate plan include maintaining control and not becoming a burden to loved ones, all the while keeping it as simple as possible. Although no one wants to think about their future long-term care needs, it is an essential part of this analysis. And, most people would agree that protecting their stuff from future long-term care costs, is important to them. That way, they maintain control of the assets, protecting them after they are gone for the benefit of their loved ones, while at the same time, minimizing the costs of such long-term care and the burden to their family while they are alive. 

Moreover, everyone without a plan has assets at risk. With the right trust, though, you can create a plan with your own rules that will protect those at-risk assets. Utilizing an irrevocable asset protection trust allows you to do just that. Uh oh, I said the word “irrevocable.” For some reason, everyone gets nervous when they hear that word; it sounds so definite. However, it is very simple – you must only give up your right to that which you want to protect. Thus, if you are concerned about asset protection and want to protect your stuff, then you must give up your right to access that stuff. But, you do not give up all your rights.

So how, exactly, does an asset protection trust work? First, there are three parties to a trust – the grantor, trustee and beneficiary. The “grantor” is the person who is transferring his or her assets to the trust. The “trustee” is the person who manages and administers the trust in accordance with the trust provisions. The Trustee is responsible for making all decisions regarding the trust, including any management or investment decisions, as well as deciding whether to make distributions from the trust. The “beneficiary” can be a single person, multiple people or an entity such as a church or charity. There are two types of beneficiaries: “lifetime” beneficiaries and “residuary” beneficiaries. “Lifetime” beneficiaries are those individuals named by the grantor who are entitled to receive distributions of income and/or principal during the grantor’s lifetime. The “residuary” beneficiaries are those individuals named by the grantor who are entitled to receive distribution of the trust assets after the death of the grantor.

Next, after the trust is established, your assets must be transferred to the trust and the trust will become the owner of the assets. Even though you will no longer own the assets, you maintain control of them because you are the trustee. Also, you may retain the right to receive all income from the assets for the remainder of your life, as well as the right to change trustees, bequests or beneficiaries. The plan must, of necessity, though, limit direct access to the principal to ensure that creditors, predators and lawsuits do not obtain access to it. Still, the trust can provide indirect access to the principal during the remainder of your life through your designated lifetime beneficiaries. 

Additionally, for tax purposes, any assets transferred to the trust will be identified by your social security number so the trust will not have to file a separate tax return. Similarly, any assets that you transfer to the trust are incomplete gifts for tax purposes so there is no gift tax return required unless the trustee makes a distribution from the trust to an individual in an amount exceeding the annual exclusion amount.

Finally, upon your death, and because the trust is a separate entity, any assets owned by the trust would bypass probate and could be distributed immediately to your residuary beneficiaries. Overall, irrevocable asset protection trusts are not only a great way to protect your stuff, but also can be very flexible and easily customized to meet your individual goals. 

Jessica L. Estes is an elder law and estate planning attorney at ERA Law Group, LLC in Annapolis. She can be reached at (410) 919-1790 or via email at jestes@eralawgroup.com.

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