Pour Over Will | Durable Powers of Attorney Health and Assets | Revocable Trust | Irrevocable Trust | Private Annuity 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. 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 at fair market value. 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.