LLC | LP | Corporations | Pension Plans, IRAs, or any Self Directed Retirement Fund | Real Estate, Personal and Investment | Irrevocable Trust | Triangle 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. Because the Ultra Trust is treated as an Irrevocable Trust for asset protection purposes, 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. The obvious decision that a client needs to make is to decide which of the client's assets they would want to place into the Ultra Trust's unique provisions. If the client decides to put any or all of their real estate within the Ultra Trust, the client will sell the selected real estate to the Ultra Trust. For personal real estate the client will maintain possession and control over the real estate by leasing them back from the Ultra Trust. The lease payments can remain in the Ultra Trust and be invested if desired, or they can be distributed to the client as one of the beneficiaries of the Ultra Trust. 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. If the client makes a gift of the client's assets to the Ultra Trust, the client may have adverse Federal gift tax consequences and may not achieve complete asset protection for those assets. For this reason, it is recommended that the client sell the client's assets to the Ultra Trust. One of two types of transactions is generally utilized to sell the client's assets to the Ultra Trust. The first type of transaction involves the sale of assets to the Ultra Trust pursuant to one or more self canceling installment notes. The second type of transaction involves the sale of assets to the Ultra Trust pursuant to a Private Annuity. The sale of the client's assets to the Ultra Trust removes the assets from the client's estate for Federal Estate Tax, probate, and asset protection purposes. Since the installment notes are self canceling at death, they are not included in the client's estate for Federal estate tax and probate purposes. Similarly, since the Private Annuities cease upon the client's death, they are not included in the client's estate for Federal Estate Tax and probate purposes. In addition, payments on the Private Annuity have zero tax recognition. As previously discussed, both of these transactions allow the client to defer recognizing any gain realized on the sale of the client's assets for a substantial period of time. The concept of a Private Annuity is actually very simple. A Private Annuity is nothing more than a contract between the client and another party (in this case the Ultra Trust) that states that in exchange for the receipt of assets, the receiving entity promises to pay the client a stated amount at some time frame. The payment can be deferred to a future date. 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. NEVADA ASSET PROTECTION TRUST The Nevada Asset Protection Trust is a trust created in 1999 by the Nevada legislature. Nevada is the one of several states that passed special legislation that mimics an Offshore Trust in providing asset protection but no tax planning. The official name of the legislation is the Spendthrift Trust Act of Nevada and is found in Chapter 166 revised of the Nevada Statute. Even though the trust is called the Nevada Asset Protection Trust it can be utilized by any person living anywhere. The Nevada Asset Protection Trust is by statute an irrevocable trust. However, unlike most other "irrevocable trusts" the grantor, beneficiary and one of the trustees can be the same person. One of the trustees of a Nevada Asset Protection Trust must be a Nevada resident. The Nevada trustee can be an entity established in Nevada. SOME QUESTIONS AND ANSWERS ABOUT THE NEVADA ASSET PROTECTION TRUST Earlier you mentioned a Spendthrift Trust. What is a Spendthrift Trust and how does it differ from other trusts? Basically trusts are contracts between three groups: The ones who put in the assets, called Settlors/Trustors/Grantors, The ones who receive the benefits from the trust who are called Beneficiaries The ones who manage the assets of the trust who are called Trustees. Members of these groups can be real people or artificial people created by the legislature. The trust document spells out what can be done with the assets of the trust. One of the provisions that most planners like to add to a trust is called a spendthrift provision. 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? No. There are several states that have passed similar legislation. Some of these states are: Nevada Alaska Delaware Rhode Island Actually there is an advantage to having your trust domiciled in a state other than the state in which you are domiciled. Does a Nevada 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 a Nevada 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 a Nevada Asset Protection Trust eliminate probate? Yes. Can I put my personal residency in a Nevada Asset Protection Trust? You could, however, we would not recommend that transaction. For tax purposes what kind of a trust is the Nevada Asset Protection Trust? For tax purposes this is considered a grantor trust. That means the trust files an information return with the IRS and the trust profits/losses are passed to the grantor in the year in which the profits/losses occur. Is the Nevada Asset Protection Trust bullet proof? Under the legislation there are two situations where the trust is vulnerable. 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. 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 a Nevada Asset Protection Trust? There are two basic methods for getting assets into the trust: Gift - simply retitle the asset into the trust. Advantage - costs nothing Disadvantage - would use up part of your lifetime gift amount, Sell for an Installment Contract Advantage - arms length transaction, hence the sale would be hard, if not impossible to reverse, Disadvantage - cost; could have an estate tax implication. SUMMARY OF BENEFITS OF THE NEVADA ASSET PROTECTION TRUST You can control your assets 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