Remember to always consult counsel before deciding on issues like what state to create your trust in.
For those looking to set up a trust, the best options may be far from home
By: Kristen McNamara
Wall Street Journal
About half a dozen states are actively vying to attract wealthy families' trusts, as well as the jobs and tax revenue that come from the companies that administer these estate-planning vehicles.
States such as Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming have modified their trust laws in recent years to make them more attractive to individuals and families, including nonresidents, looking to minimize taxes, shield assets from creditors and preserve family assets in the event of a divorce, among other things.
While the competition among states for trust business ultimately helps consumers, parsing the differences between state trust laws and separating hype from fact can be a challenge. "There's a whole lot of trash talking going on," says Richard Nenno, a managing director and trust counsel at Wilmington Trust Co. in Delaware. "It makes it difficult for people to cut through to what really matters."
When contemplating a trust—an agreement in which an individual or institution (the trustee) agrees to manage your assets for your beneficiaries—the first step is to determine with the help of an attorney what you are trying to accomplish. Next, examine which states' laws are best-suited to your needs. Because setting up a trust in another state can involve additional expenses, some families and individuals may not have enough wealth to make it worth their while. But for those who do, many trust lawyers say the only real requirement is that they choose an in-state trustee.
A state's tax laws and how long the state allows a trust to remain in existence are important considerations when deciding where to set up a trust. A minority of states, including Alaska, Nevada and South Dakota, don't tax trust income at all. Other states, such as Delaware, impose taxes only on in-state beneficiaries. New Hampshire lawmakers recently amended legislation to make clear that out-of-state trust beneficiaries aren't subject to state taxes.
About half of the states and the District of Columbia have abolished or modified their laws to allow trusts to last for long periods. That means assets in a properly structured trust can continue growing for hundreds of years, or indefinitely in some places, free of estate, gift and generation-skipping taxes, which can consume about half a trust's assets.
"At the end of the day, the taxation is a big factor," says Scott Baker, principal at Perspecta Trust LLC in New Hampshire, a state that is an aggressive participant in the trust race.
Among other factors to consider when shopping around for an attractive trust jurisdiction are flexibility to modify trusts and move assets between trusts, as well as state courts' familiarity with trust-and-estate cases.
Many people set up trusts to gain asset protection. Doctors and business owners, for example, may want to shield assets from creditors, while parents may want to ensure assets stay within the family if their children or grandchildren divorce.
"Creditor-protection techniques are becoming increasingly popular in the U.S.," says Nevada estate-planning attorney Julia Gold. "We live in a litigious society."
Companies responsible for administering trusts, investing trust assets and making decisions about distributions typically charge around 1% of assets for smaller trusts—say, those with a few million dollars. The percentage typically declines as the asset level increases.
Between 1985 and 2003, some $100 billion—about 10% of reported trust assets held by federally regulated financial institutions—moved to states that allowed long-term trusts and didn't tax trusts created by nonresidents, according to a study by Robert Sitkoff, a professor at Harvard Law School, and Max Schanzenbach, a professor at Northwestern University School of Law, published in the Yale Law Journal.
Since that study, states have tried to differentiate themselves further in an effort to attract more trust business.
According to Mr. Sitkoff, at least three states—Delaware, New Hampshire and South Dakota—have enacted laws that protect trustees from liability in the event the person who created the trust (the grantor) instructs the trustee not to diversify certain assets. Trustees in most states generally are required to diversify trust assets for risk-management purposes, though exceptions are made for illiquid assets like family businesses or real estate.
States also have different rules regarding trustees' obligations to disclose information to trust beneficiaries. Many senior family members worry that children and grandchildren who know they're going to receive significant sums of money won't be motivated academically or professionally, so they seek to keep the existence of a trust secret. Still, some attorneys and courts are uncomfortable with the withholding of information from beneficiaries, says Dana Fitzsimons Jr., a Virginia trust-and-estate attorney.
Really wealthy families—those with $100 million or more—might consider establishing a private trust company in states that allow them to do so, such as South Dakota, Nevada and Wyoming, say attorneys. The family then has a say in trust decisions and isn't limited to the investment products offered by a trust company.
"The whole issue is control," says Mark Merric, a Colorado estate-planning attorney, who along with Florida attorney Daniel Worthington published a journal article earlier this year on the most trust-friendly states. (Mr. Worthington serves on the audit committee and board for South Dakota Trust Co.)
Anyone contemplating an out-of-state trust can continue using an in-state attorney. The in-state attorney can draft trust documents and have a lawyer licensed in the more trust-friendly state confirm that they comply with and take full advantage of that state's laws.
If you ask about out-of-state options and your trust-planning professional gives you "a blank stare, I'd go elsewhere," Mr. Merric says.
Ms. McNamara is a former Dow Jones Newswires reporter. She can be reached at reports@wsj.com.
Monday, June 21, 2010
Thursday, June 17, 2010
Heir Fights Doggy for Trust Fund
Just some news of interest this morning.
Moms are so embarrassing, especially the ones who leave their pet chihuahua named Conchita a $3 million trust fund and the run of a Miami Beach mansion when they die. Bret Carr, however, the son of the recently deceased Gail Posner, is fighting his mom's last wishes challenging the legality of a will which left Conchita living, well, a dog's life. In a lawsuit, Carr is claiming household aides drugged his mother and forced her into giving them—and the dog—millions. According to Carr, the aides even convinced Posner to hire a doggy publicist to promote Conchita as "one of the world's most spoiled dogs." Carr, a filmmaker, is not without his own troubles, including an arrest for passing bad checks. The case, profiled in Thursday's Wall Street Journal, recalls the late Leona Hemsley who left $12 million to her pet Maltese named Trouble.
Moms are so embarrassing, especially the ones who leave their pet chihuahua named Conchita a $3 million trust fund and the run of a Miami Beach mansion when they die. Bret Carr, however, the son of the recently deceased Gail Posner, is fighting his mom's last wishes challenging the legality of a will which left Conchita living, well, a dog's life. In a lawsuit, Carr is claiming household aides drugged his mother and forced her into giving them—and the dog—millions. According to Carr, the aides even convinced Posner to hire a doggy publicist to promote Conchita as "one of the world's most spoiled dogs." Carr, a filmmaker, is not without his own troubles, including an arrest for passing bad checks. The case, profiled in Thursday's Wall Street Journal, recalls the late Leona Hemsley who left $12 million to her pet Maltese named Trouble.
Wednesday, June 2, 2010
How To Manage Your Death Portfolio
This story is about death and taxes—and estate planning.
If you don’t make appropriate financial plans, loved ones could pay unnecessary taxes, miss an inheritance, or wind up in a permanent rift. So, no matter what your net worth, you’ll need more than just a will to manage your death portfolio.
“Most people have the traditional legal documents, but they don’t have a simple Family Love Letter,” says Craig Silverman, retirement planning specialist with AXA Advisors in Melville, NY.
The letter that Silverman is referring to is a 50-page document, created by Jeff Scroggin, partner in Scroggin & Company in Roswell, Ga., and includes an inventory of advisors, assets and other information. It even contains details like account passwords, what frequent flyer miles you have, and if a neighbor owes you money.
While working on complicated tax documents several years ago, Scroggin realized nobody had ever thought of simple stuff like putting down whereabouts of a bank safety deposit box.
Scoggin learned the value of this the hard way. Scroggin's father, a decorated veteran, died with the wish that be buried in Arlington National Cemetery. Scroggin tried to fulfill the request, but realized he needed certain discharge papers. “I ended up finding them in a book mark in a book in his house,” he says.
A critical section of the Letter is the personal property list.
“There could be a million dollars of difference in inheritances and no one gets upset about that, but I’ve seen adult siblings shouting about a little yellow tweety bird that sat in their mother’s kitchen for forty or fifty years,” continues Scroggin.
Trust In Trusts
If you have a sizable estate or minor children to provide for, setting up a trust makes better sense for tax planning than leaving everything outright to your heirs, says Louis Mezzullo, Partner at Luce, Forward, Hamilton & Scripps in Rancho Santa Fe, California.
“The beauty of trusts is that they are as flexible as you want them to be,” adds Scroggin.
For example, if you want to distribute five percent of the annual income of a particular trust to your daughter every year, but no more, you can do that with a total return trust. On the other hand, if you don’t like required distribution, the trustee can be given absolute discretion of how, when and where. You can also specify that the money in a trust be spent only to educate children or grandchildren, and not on traveling through Europe.
Another reason that trusts are attractive, says Mezzullo, is that in many states, estate administration is time consuming and the probate tax is expensive, so many people try to avoid having their assets pass through probate by having them held in a revocable living trust (one that is set up when you are alive rather than when you die).
In addition to a will and trusts, Mezzullo and Scroggin agree that everyone should have medical directives, a living will and general power of attorney.
“The absolute number one rule is make sure that retirement account and life insurance beneficiaries are up to date,” says Herb Daroff, Registered Investment Advisor at Baystate Financial Planning in Boston, Massachusetts
This is important because beneficiary designations override your will. Retirement plan beneficiaries have become big issues, particularly in divorces. If the decree says the two divorcee’s assets are completely separate, but one dies in a car accident a year later and didn’t change his or her beneficiary designation, the ex gets the money.
Another thing which Silverman frequently finds is that there are no contingent, or second in line, beneficiaries. If, for example you name your wife as the beneficiary for your IRA life insurance, and don’t put your children second, it can go through probate if the first beneficiary is no longer around to collect.
"Today, the largest asset in most people’s taxable estate is going to be their retirement account, and you need to have adequate life insurance to be able pay the income taxes on these assets,” says Daroff.
Protecting Your Retirement Income
Here's why. Traditionally, people think of life insurance as something they need only during the pre-retirement period to pay off debt or cover expenses. However, Daroff suggests people have policies in place through the retirement years and arrange for their estate to apply the payout to the income taxes that the beneficiary will have to pay on retirement accounts.
Another life insurance tip, says Daroff, is that make sure that you are the owner of your own policy. In other words, it should be held outside the taxable estate in a proper trust. The reason is to protect your estate from the tax it will have to pay on the death benefit. Silverman recommends setting up an Irrevocable Life Insurance Trust (ILIT) when his clients are close to the estate tax limit.
If you are married, it is a good idea for tax planning purposes to split assets between yourself and your spouse. What frequently happens is that one partner tends to have more earnings and savings, as well as a bigger retirement account, and the overwhelming majority of the assets are in that person’s name. That preserves more of the potential inheritance.
Traditionally, estate planning has dealt with taxes, guardianship for minor children, and trusteeship for assets. However, these days people are considering how to manage the assets for the surviving spouse, kids, and grandkids.
You need to ask yourself what is the purpose of the money—is it just to provide income for your spouse, or is the money expected to run for several generations, or educate your grandchildren. Then, you need to decide if you want to restrict the kind of investments that fiduciaries can get into.
“People should do what they want, regardless of the tax consequence," says Mezzullo.
From: cnbc.com
If you don’t make appropriate financial plans, loved ones could pay unnecessary taxes, miss an inheritance, or wind up in a permanent rift. So, no matter what your net worth, you’ll need more than just a will to manage your death portfolio.
“Most people have the traditional legal documents, but they don’t have a simple Family Love Letter,” says Craig Silverman, retirement planning specialist with AXA Advisors in Melville, NY.
The letter that Silverman is referring to is a 50-page document, created by Jeff Scroggin, partner in Scroggin & Company in Roswell, Ga., and includes an inventory of advisors, assets and other information. It even contains details like account passwords, what frequent flyer miles you have, and if a neighbor owes you money.
While working on complicated tax documents several years ago, Scroggin realized nobody had ever thought of simple stuff like putting down whereabouts of a bank safety deposit box.
Scoggin learned the value of this the hard way. Scroggin's father, a decorated veteran, died with the wish that be buried in Arlington National Cemetery. Scroggin tried to fulfill the request, but realized he needed certain discharge papers. “I ended up finding them in a book mark in a book in his house,” he says.
A critical section of the Letter is the personal property list.
“There could be a million dollars of difference in inheritances and no one gets upset about that, but I’ve seen adult siblings shouting about a little yellow tweety bird that sat in their mother’s kitchen for forty or fifty years,” continues Scroggin.
Trust In Trusts
If you have a sizable estate or minor children to provide for, setting up a trust makes better sense for tax planning than leaving everything outright to your heirs, says Louis Mezzullo, Partner at Luce, Forward, Hamilton & Scripps in Rancho Santa Fe, California.
“The beauty of trusts is that they are as flexible as you want them to be,” adds Scroggin.
For example, if you want to distribute five percent of the annual income of a particular trust to your daughter every year, but no more, you can do that with a total return trust. On the other hand, if you don’t like required distribution, the trustee can be given absolute discretion of how, when and where. You can also specify that the money in a trust be spent only to educate children or grandchildren, and not on traveling through Europe.
Another reason that trusts are attractive, says Mezzullo, is that in many states, estate administration is time consuming and the probate tax is expensive, so many people try to avoid having their assets pass through probate by having them held in a revocable living trust (one that is set up when you are alive rather than when you die).
In addition to a will and trusts, Mezzullo and Scroggin agree that everyone should have medical directives, a living will and general power of attorney.
“The absolute number one rule is make sure that retirement account and life insurance beneficiaries are up to date,” says Herb Daroff, Registered Investment Advisor at Baystate Financial Planning in Boston, Massachusetts
This is important because beneficiary designations override your will. Retirement plan beneficiaries have become big issues, particularly in divorces. If the decree says the two divorcee’s assets are completely separate, but one dies in a car accident a year later and didn’t change his or her beneficiary designation, the ex gets the money.
Another thing which Silverman frequently finds is that there are no contingent, or second in line, beneficiaries. If, for example you name your wife as the beneficiary for your IRA life insurance, and don’t put your children second, it can go through probate if the first beneficiary is no longer around to collect.
"Today, the largest asset in most people’s taxable estate is going to be their retirement account, and you need to have adequate life insurance to be able pay the income taxes on these assets,” says Daroff.
Protecting Your Retirement Income
Here's why. Traditionally, people think of life insurance as something they need only during the pre-retirement period to pay off debt or cover expenses. However, Daroff suggests people have policies in place through the retirement years and arrange for their estate to apply the payout to the income taxes that the beneficiary will have to pay on retirement accounts.
Another life insurance tip, says Daroff, is that make sure that you are the owner of your own policy. In other words, it should be held outside the taxable estate in a proper trust. The reason is to protect your estate from the tax it will have to pay on the death benefit. Silverman recommends setting up an Irrevocable Life Insurance Trust (ILIT) when his clients are close to the estate tax limit.
If you are married, it is a good idea for tax planning purposes to split assets between yourself and your spouse. What frequently happens is that one partner tends to have more earnings and savings, as well as a bigger retirement account, and the overwhelming majority of the assets are in that person’s name. That preserves more of the potential inheritance.
Traditionally, estate planning has dealt with taxes, guardianship for minor children, and trusteeship for assets. However, these days people are considering how to manage the assets for the surviving spouse, kids, and grandkids.
You need to ask yourself what is the purpose of the money—is it just to provide income for your spouse, or is the money expected to run for several generations, or educate your grandchildren. Then, you need to decide if you want to restrict the kind of investments that fiduciaries can get into.
“People should do what they want, regardless of the tax consequence," says Mezzullo.
From: cnbc.com
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