How a Living Trust Protects Your Family¶

The effective protection and preservation of assets is based on a “strategy” of divesting yourself from the private ownership of your assets and organizing those assets into independent legal structures and separating those assets by their degree of liability risk. It is far better to manage your assets and enjoy them, than to personally “own” them and leave them vulnerable to all of the liability risks that we face in today’s litigious society. 

Let me offer an example. 

Assume you hold all your assets in your personal name, a Living Trust, or a fictitious business name (dba). All of your assets, both business and personal, are under one ownership... yours! If you were to accidentally hit a bike rider in your car... perhaps you were talking on the phone or tuning your radio...and didn’t see them; and if they were seriously injured and perhaps lost the use of their legs, or worse...most certainly a lawsuit would result and you would be responsible for any losses or injuries plus punitive damages which could amount to millions of dollars. Your private liability and auto insurance does not cover punitive damages... so who pays the damages? You do... with all of your assets on the line, you most certainly would lose everything you have worked your lifetime for to secure your future.

However, if you don’t “personally own” those assets they can’t be taken away from you because they don’t belong to you. Therein lies the effectiveness of this strategy. Constructing an “ASSET PROTECTION FORTRESS” that will protect your assets outside of your personal ownership and hold them safe from any losses due to any legal attacks against you personally. The fact is, if you don’t personally own the assets nobody can take them away from you.

However, you never want to hold all assets of every type in the same entity. Just as your investment advisor counsels you to diversify your investments, it is also imperative that you diversify your risk of loss. Consequently, we never advise you to put all your assets in one place. Always think in terms of minimizing losses if they occur. So here is the “strategy”... Separate your assets into different legal entities according to their potential for liability and loss. For example, never put your cash in the same entity with your car. If you hit or kill someone with your car, the owner of the car will be sued and you don’t want your cash in the same entity that owns the car and vulnerable to the lawsuit!

A strategy created on this model usually involves establishing more than one holding or operating entity, and

separating ownership of your assets into those entities by degree of risk. This allows maximum protection. If you own investment properties, you may need a Land Trust for each property. If you have stocks, bonds and cash, you may use separate Limited Liability Companies to hold and manage those particular assets because they don’t create any liability. If you have a lot of life insurance, you may need an Irrevocable Life Insurance Trust to protect your death benefit from the Estate Tax. If you own a business or tenant occupied investment property, you will want to isolate that liability from your personal assets because every employee, tenant, or customer is a lawsuit waiting to happen, not to mention product liability if you manufacture or sell a product or service. 

One of the main advantages to this strategy is your ability to manage the entities. You operate them like the CEO of a company. You are the one who decides what happens, you control the money, and you make all the important decisions. You personally own nothing, but YOU are in charge! You are the President of your financial company. If you have reason to start or buy a new business, you simply build another structure to hold it and keep it separate from your existing businesses and personal assets. If you acquire another investment that has liability risk, you separate it from your other assets by isolating it in its own entity.

The wonderful thing about this strategy is that this system is no more difficult to manage than what you are already experiencing with your existing business or system. You may have a couple more tax returns to file but the overall effect of this well-managed strategy tends to reduce taxes, making it well worth the extra effort and expense.

Before discussing the costs of creating a FINANCIAL FORTRESS, it’s helpful to put costs into perspective by discussing the cost of failing to protect your assets. 

If you are sued... and one in 13 American families are sued at least once in their lifetime, you will be compelled to defend that lawsuit regardless of its merit or you will default and lose automatically. This will require you to defend yourself by hiring a lawyer to defend you and pay all the associated legal expenses. Then if you lose the lawsuit, your assets will be in dire jeopardy if you have not protected them properly. Forget about transferring them to your kids to get them out of harms way or moving them after you have been served with a lawsuit, such maneuvers are not allowed by law, its called “Unlawful Transfer of Assets”, and it’s a crime. The average retainer and cost for an attorney to defend you is in excess of $20,000 plus court costs and it could be much higher depending on the lawsuits complexity. And, the attorney always gets paid whether you win or lose. When your assets are structured out of harms way, there is nothing to take away from you in a lawsuit giving you a real advantage in avoiding the lawsuit altogether. But most importantly, if you lose the lawsuit, you don’t personally own anything for them to take. This fact alone often discourages the lawsuit in the first place. If they can’t get anything by suing you...why would they sue you?

If you have deep pockets, (i.e. have accumulated a lot of wealth), your Estate Taxes can run into millions of dollars. The current Estate Tax exemption is over five million dollars per person, payable within 9 months of the death of the second spouse. Everything over that amount will incur a tax of 45% of the excess over $5 million.! A FINANCIAL FORTRESS will eliminate all Estate Taxes and allow your family or heirs to continue to manage your assets indefinitely beyond your lifetime without any Estate Tax consequences.

If your assets are exposed when you die... if you have a Will... or no Will at all, your entire estate will go into Probate and suffer costs as high as 15% of the GROSS value of your estate in Probate costs and additional attorney fees, and the Probate lockdown of your assets can last for years, making it impossible to liquidate assets the family may desperately need. Any one of the above situations could prove to be financially devastating to you and your family, and their losses could mount into the tens or hundreds of thousands of dollars.

An important step in the estate planning process is determining who will make decisions on your behalf if you’re unable to do so yourself. If you become incapacitated — or unreachable due to travel or other circumstances — a living or revocable trust will hold assets for your benefit while you’re alive and name the people you wish to receive your property when you die.

Additionally, naming a durable power of attorney to act on your behalf on financial and legal matters if you become physically or mentally disabled can help ensure that these decisions are made in your best interest. If you’re unable to make medical decisions for yourself, having a healthcare proxy, agent or power of attorney, HIPAA release and living will can help make sure that you receive the care you need and desire.

The most basic document of most estate plans is a will, which names an executor or personal representative who is responsible for the administration of your estate after you die and distributes property as you direct. If you have minor children, you can name guardians to oversee their care in your will. A revocable trust or personal property memorandum may also be helpful to supplement your will.

Certain assets such as life insurance, retirement accounts and annuities require you to name beneficiaries and therefore don’t need to be included in a will. However, these assets are often overlooked, so it’s important to coordinate their distribution with your other property.

Maximizing the wealth you transfer to your beneficiaries (and minimizing transfer taxes) can be an important component of the estate planning process. The Tax Cuts and Jobs Act of 2017 expanded the amount that individuals may give away at death — or during life — without triggering transfer taxes. The new law offers several advantages, including an increased exemption amount until 2026 and portability, which means spouses can share one another’s exemption. You can make annual tax-free gifts up to $15,000 in 2019 (and double this amount for married couples). Additionally, you can pay medical and educational expenses for someone else without incurring the gift tax.

If you have philanthropic goals — whether from a legacy, personal fulfillment, generational connection or tax-planning perspective — an estate plan can help make sure your objectives are met. Going through the planning process allows you to choose a charitable cause that’s important to you, select the assets you wish to give and determine the best way to make your gift.

Many wealth transfer strategies also have wealth protection benefits, which can be an important consideration for affluent families. Asset ownership, insurance, limited liability entities, irrevocable trusts and asset protection trusts are all methods designed to protect your assets from creditors in the event of frivolous law suits and claims. A wealth advisor or estate planning attorney can help you determine which of these options is appropriate for your circumstances.

Finally, preparing the rising generation to receive wealth can be very helpful in preserving family wealth in the long term. Developing an estate plan is often a good opportunity to establish wealth planning goals, facilitate conversations about what wealth means to your family, and educate adult children about financial concepts and ways they can become involved in creating and sustaining the family legacy.

Estate planning can be a daunting task, especially if you’re starting from scratch. If you’re unsure where to begin, working with a trusted advisor or estate planning attorney can help you develop the documents you need to give you peace of mind about your financial affairs.

Almost everyone needs a will, Randolph said. If you have children you need a will to name guardians for them in the unlikely event that you and your spouse die at the same time.

If you don’t have children, you probably need a will to ensure that your money and personal property go to the people you want it to go to.

And even if you rely on a trust instead of a will to specify where your assets should go (see “Is a trust for you?” below), you probably need a will to deal with any property you might forget to put in the trust.

If your wishes are simple and you’re articulate enough to state them clearly, you don’t need an attorney to write a will, Randolph added. In most states, including California, you can execute a do-it-yourself will by handwriting your bequests and signing and dating the document.

If you’d rather not take such a bare-bones route, will-writing software is inexpensive and easy to use. You also can buy forms that you can fill out to create your will.

But if you have complex desires or heirs with issues -- such as drug problems, an inability to handle their own affairs or just a failure to be responsible -- you’d be wise to have an attorney help prepare the document and consider bequeathing options.

The downside to a will is that it doesn’t keep your estate out of probate.

Many people decide to avoid probate because it’s time-consuming, costly and quite public.

It typically takes six to 18 months to probate an estate, said Ed Long, director of Healthcare and Elder Law Programs Corp., a Torrance-based nonprofit that aids seniors.

The cost varies by the estate’s size. Under California law, an estate with $150,000 in assets has to pay its attorney a $5,500 fee. The executor is entitled to the same amount. Add in miscellaneous expenses, such as appraisal and court costs, and probate can easily eat up close to 10% of the value of the estate.

The fees on bigger estates are smaller as a percentage of assets, Gaswirth of Proskauer Rose said, but there’s a catch. If you own a $1-million property with an $800,000 mortgage, you might figure you’d be leaving to your heirs a $200,000 estate. But probate court figures differently. It would value your estate at $1 million. The attorney and executor for an estate that size would cost as much as $46,000, leaving just $154,000 for heirs after the mortgage is paid.

If these costs seem high, remember that they’re set by law, not by a free market.

“The fees have nothing to do with the value being added to the estate,” Gaswirth said.

In addition, because probate is a court proceeding, it is a matter of public record. Anyone can view your probate file and learn how much money you had and to whom you left it.

So why wouldn’t you want to avoid probate? When there are lots of creditors and warring heirs, probate can be helpful.

“Probate can be a protective device,” Gaswirth said. “It’s designed to bring order out of chaos. Occasionally, freezing things and having a judge say to warring parties, ‘Sit down, shut up and we’ll get to you,’ can be an effective way to go.”

There are many ways to avoid probate, and the simplest methods are free.

To figure out whether you can avoid probate completely at no cost, you need to make a list of your assets.

With certain types of assets -- such as bank, brokerage, mutual-fund and retirement accounts -- you can keep them out of probate by simply filling out a form.

Let’s say you want to leave your certificate of deposit to your niece. You ask the bank for a “payable on death” form, fill it out and give back to the bank. If you die while the CD account is open, your niece needs only to show up at the bank with your death certificate and her identification, and she’ll get the money. The CD stays out probate’s reach.

An investment or retirement account or an insurance policy can be passed to heirs in a similar way by naming a beneficiary. As long as the beneficiary survives you, the assets go directly to that person, bypassing probate.

A word of caution: It’s important to keep your beneficiary designations up to date as your wishes change, Randolph said. The designations can’t be changed with a will or trust.

When one Arizona couple divorced, for example, the husband retained under the settlement some bank accounts that he had designated as payable on death to his wife. But he failed to change that designation after the divorce. When he died, his ex-wife got the money in those accounts -- not the result he envisioned. His will, which reflected his post-divorce wishes, had no jurisdiction over those assets.

What if you own a home? Keeping it out of probate can be tricky. Technically, you can pass real estate directly to your heirs by making them joint tenants -- co-owners of the property. But Randolph doesn’t advise it.

The reason: A joint tenancy is irrevocable. So you can’t change your mind and disinherit your joint tenant, no matter what the person does to show he or she doesn’t deserve to get the house. And if your joint tenant gets into legal or financial trouble or gets divorced, your property could be at risk. For example, the joint tenant’s creditors could demand that you sell your home to help pay his or her debts.

That’s not all. Want to refinance the property? You need the joint tenant’s permission. Want to sell? Same deal.

A handful of states allow “transfer-on-death” trust deeds to pass real estate to a beneficiary, but California isn’t one of them, Randolph said.

So what do you do if you own real estate and want to bypass probate?

One of the most popular estate planning tools is called a revocable living trust, a legal entity that you can make the owner of your assets. In the document that creates the trust, you spell out how your assets should be disposed of after you die and name a trustee (generally yourself), who manages the assets in the trust while you are alive and well.

You also name a “successor trustee,” who manages the assets when you can’t, including after your death. If you’re married, generally one spouse is the trustee, and the other spouse is the successor trustee. When one spouse dies, the survivor updates the document to add a child or trusted advisor to serve as the next successor trustee.

• It’s flexible, giving the trustee complete control of the assets and the ability to change the document at any time.

• All assets -- including your home and investment property -- that you put in a living trust pass to heirs without going through probate. This is particularly helpful for people who own property in several states because they could otherwise be subject to probate in multiple locations, Long of Healthcare and Elder Law Programs said.

• With a trust, only you, your trustees and heirs need to know details of your estate. Nothing is filed in court.

• A trust sets up a procedure to handle your finances in the event that you become incapacitated before you die.

• Creating a trust can also serve as a backdrop for some simple estate-planning techniques, which can save a well-heeled family a small fortune in federal income tax.

What are the drawbacks? Trusts can be costly to set up and maintain. You need an attorney to draft the document, and you’re likely to consult with this attorney (or another one) several times before you die to update the trust and to put newly acquired assets into the trust.

Barkelew of Torrance, for example, formed her trust in 1990 with her husband, costing them $1,300 to have the document prepared. They paid $350 to modify the trust 11 years later because a number of estate planning laws had changed. Two years later, they added durable powers of attorney and made a few other fixes for $650. This year, after Barkelew’s husband died, she amended the trust again to reflect a new successor trustee and make a handful of other changes, setting her back $1,250.

In today’s market, it’s likely to cost $1,500 or more to have a trust prepared -- considerably more if you have complicated wishes, a blended family or an estate worth more than $2 million. (People with big estates would be wise to set up a secondary trust, often called an A-B trust, to save on federal income taxes.)

Another note of caution: If you refinance your home or other real estate, most lenders require the property to be taken out of the trust and put back in your name, at least briefly. The cost isn’t significant, said Long. But forgetting to put the property back in the trust is. A home unintentionally left outside the trust must go through probate, defeating the purpose of creating the trust in the first place.

Even if you have a trust, you still need a will, in this case something called a “pour-over” will. It simply designates to whom any property you forget to put in the trust before you die should go. (That won’t necessarily save those forgotten assets from probate, but it will ensure that they’re divvied up as you specified in the trust document.)

One of the toughest challenges for heirs is ascertaining their benefactor’s assets and debts to ensure that the bills get paid and that money isn’t simply overlooked, Long said.

You can do your heirs a huge favor by jotting all that information down and giving that list to your trustee or attorney -- or simply telling your heirs where they can find the information.

Long also suggests that you fill out an advance healthcare directive, in which you designate someone to make decisions about your medical care in the event that you become incapacitated. The directive also allows you to specify your wishes under certain medical circumstances.