Revocable | Irrevocable | Life Insurance Trust

The Intentionally Defective Domestic Grantor Trust ("Ultra Trust")

USE - Estate Planning
Asset Protection

The Ultra Trust is a structure that is used because of its overall planning advantages. This is one of those examples where as few as fifteen years ago, the Ultra Trust was simply not commonly used. Today we see it used more and more as an active planning structure.

The Ultra Trust Program is designed to help eliminate Federal Estate Taxes, the probate process, as well as give tremendous asset protection. The Ultra Trust has a number of characteristics that are similar to the Foreign Security Trust or as it is more commonly known, the Asset Protection Trust. In essence, the Ultra Trust is treated as a "Revocable Trust" for Federal income tax purposes, and an "Irrevocable Trust" for asset protection and Federal estate tax purposes. Because of this, the Ultra Trust is Federal income tax neutral. The Ultra Trust generally provides the best of both worlds.

Unlike some other structures, there is no loss of the Federal income tax benefits associated with real estate by placing real estate in an Ultra Trust. The Ultra Trust is treated as an Irrevocable Trust for asset protection purposes, so it also provides significant protection for the assets that are placed within the Ultra Trust.

Because of its Federal income tax attributes, the Ultra Trust is a suitable structure for ownership of Subchapter "S" stock and provides significant asset protection.

We would like to emphasize that the Ultra Trust has been carefully drafted to accomplish a number of objectives. The Ultra Trust will be classified as a "Grantor Trust" for Federal income tax purposes. A client will therefore be able to claim the Federal income tax benefits associated with the client's real estate or other appropriate assets transferred to the trust as if the client were the true owner.

Conversely, for probate avoidance purposes, Federal Estate Tax purposes, and asset protection purposes, the Ultra Trust will be treated as the separate owner of the assets it acquires. The Ultra Trust has also been designed to allow the client to make gifts of the client's life insurance policies to the trust. The proceeds from those policies, upon the client's death, will not be subject to Federal Estate Tax. If the Ultra Trust is utilized for holding title to life insurance policies, it may not be necessary to utilize a separate Insurance Trust.

The Ultra Trust is usually established by an initial gift from the client or someone else (of not less than $2,500) to the trust. The trustee of the Ultra Trust must be an independent trustee who is usually a close and trusted friend or may, under certain conditions, be a family member. The function of the trustee is to administer the trust for the benefit of the trust's beneficiaries. Generally, the beneficiaries are the grantor and the grantor's family.

Once the client has decided to use the Ultra Trust, it is important to carefully structure the transfer of the client's assets to the Ultra Trust.

Keep in mind what the Ultra Trust accomplishes. The Ultra Trust can virtually eliminate any Federal Estate Taxes. A possible potential down side of this planning is ensuring that any state excise taxes or transfer (stamp) taxes due as a result of any of the transfers are not out of proportion to the expected benefits. If there is a state excise or transfer (stamp) tax as a result of transferring assets, you will need to review the use of the Ultra Trust within the plan.

Click here to view flow chart.

This is a trust that was created in the late 90s by many state legislators. The trust is principally used to achieve a situation where assets are placed in a protective environment. The legislation we like best is Statute 166 of the Revised Nevada Statute.

All true asset protection trusts are irrevocable. In most situations this means that the grantor and the beneficiaries must be independent of the trustee. However, because of special language found in the Nevada Statute, the beneficiaries of a Nevada Asset Protection Trust may also be a trustee.

In addition to offering asset protection, this trust offers “spendthrift” protection. Simply said this provision allows the trustee to refuse to make a distribution not deemed to be in the best interest of the beneficiary. Hence, a beneficiary with a judgment against them could receive from the trust the payment of bills, groceries, utilities, even debts but the payments would not be made directly to the beneficiary. Rather, the trust would make the payments on behalf of the beneficiary. Hence, the term Spendthrift since the trustee provides for the beneficiary yet does so in a way that a creditor cannot seize the amounts paid. However, for the Spendthrift provision to be enforceable at least one of the trustees must have a Nevada domicile. We have a Nevada company that will provide the service of acting as co-trustee with the client for a yearly fee.

I live in California. Is there a California Asset Protection Trust?

Actually there is an advantage to having your trust domiciled in a state other than the state in which you are domiciled.

Does an Asset Protection Trust solve all my asset protection problems?

Probably not. In building any asset protection plan it is generally recognized that like assets belong with like assets. Hence, you do not want the ownership of a fast sports car to be in the same ownership as your house. An empty lot has less liability than a 24 unit apartment house. So in many instances the asset protection planner will put the asset into an entity - Limited Partnership, Limited Liability Company - and then have that entity owned by the trust.

Does an Asset Protection Trust solve estate tax issues?

We believe that the answer to that question lies in who is acting as trustee. If the grantor/beneficiary/trustee are all the same person(s), then we believe the IRS position will be that this trust, for estate tax planning, is treated like a revocable trust. If however, the trust has a truly independent trustee, then we believe that the trust might qualify as a true irrevocable trust and everything owned by the trust could pass with no estate taxes.

Does an Asset Protection Trust eliminate probate?

Yes.

Can I put my personal residency in an Asset Protection Trust?

You could, however, we normally would not recommend that transaction. The exception to that statement is when the trust is being used for certain VA or Medi programs.

Is the Asset Protection Trust bullet proof?

Under the legislation there are two situations where the trust is vulnerable.

1) Creditors existing at the time of the creation of the trust have a two (2) year window to access or encumber assets or they have six (6) months after they discover the conveyance.

2) After two (2) years the trust offers good asset protection assuming that nothing has been done to void the trust.

How do you get assets into an Asset Protection Trust?

There are two basic methods for getting assets into the trust:

SUMMARY OF BENEFITS OF THE ASSET PROTECTION TRUST

• Your beneficiaries can act as trustee
• You can protect any amount of assets from creditors
• May be used by residents of all 50 states
• \ Less expensive than Offshore Asset Protection Trust
• Not prone to IRS audits and investigations
• Can protect future generations’ assets
• Trust assets may be protected from becoming marital or community property in the event of a future marriage
• May be stacked to build firewalls around different types of assets

MULTIPLE USE IRREVOCABLE TRUST PACKAGE

USE - VA Aid and Attendance Monthly Pension
           Medi Program Qualifying

VA Aid and Attendance Monthly Pension

The Veterans Administration offers, to those who qualify, a monthly pension which is available to pay for assisted living, board and care. The pension amount is determined by the status of the individual. The three (3) status categories are:

Married with Spouse
Single Veteran
Surviving Spouse.

To qualify for the program there must be no excess assets in the name of the veteran or the person who applies. Unlike the Medi programs this program has no qualifying look back time period.

Medi Programs (Medicaid/Medi-Cal/Other Similar Programs)

These are Federally funded programs that are administered by the various states under Federal guidelines. Medicare, the basic health care program for those over 65, only pays for 100 days of skilled nursing. After Medicare runs out the program that might offer assistance is Medicaid. However, Medicaid programs are programs that have an asset test. In addition to an asset test, these programs also have look back rules. As a general rule the look back is 60 months. Any asset over the allowable amount or type that has been disposed of within the look back period will cause the applicant to be ineligible for assistance for a period of time that the value of the disposed of asset would have paid the cost of assisted living. Hence, if an asset with a $50,000 value was disposed of within the 60 month period and if the cost of assisted living was $5,000 a month, the disposed of asset would cause a 10 month delay in receiving Medicaid skilled nursing benefits.

Under current law to qualify for Medicaid skilled nursing care you may have the following assets:

*1 This amount is indexed and may change from year to year.
*2 To keep a home when you are receiving Medicaid assistance you must state that it is your intention to return to the home.

The Multiple Use Irrevocable Trust Package was specifically designed to accomplish the goal of qualifying for these assistance programs and at the same time providing for the family to achieve access to the previously owned assets.

Trust Assets

Once assets are titled in the name of the irrevocable trust they are no longer considered to be owned by the client. Hence, for VA purposes the client has no assets. For Medicaid qualification purposes the clock has started to run on the 60 month look back.

Trustee

This is a true irrevocable trust so the trustee must be independent. The trustee may not be:

1)      A beneficiary of the trust
2)      Subservient to the grantors.

How are Assets Transferred to the Trust?

That depends on the type of program that is being pursued.

Benefits Eligibility

Beneficiaries of Trust

The grantors of the trust determine:

a)      Who will be the beneficiaries of the trust
b)      When the beneficiaries will get trust assets
c)      How much of the assets each beneficiary shall receive.

What is a SCIN?

It is a Self Cancelling Installment Note. It may be used in the Medicaid scenario so long as:

a)      The trust assets generate enough income to support such a note
b)      The pay out period ends prior to the end of the look back window of 60           months.

Questions and Answers