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Domestic Asset Protection Trusts -Part 4 - The RLT

By Michael B. Nelson, Esq. - Email Editor

July

Dear Valued Reader,

The Trust term "Revocable" means that the Settlor/Trustor retains the dominion and control over the trust, trust terms and conditions, trust deed, and the assets within the Trust. The Settlor is generally also the initial Trustee of the RLT. The Settlor has absolute dominion and control over the trust allowing the Settlor to revoke transfers of assets into the trust, alter the Trustee powers, amend subsequent Trustee(s), add or delete beneficiaries and even revoke the entire trust. The critical purpose of the RLT is for the decedent's estate to avoid probate upon death of the Settlor. Once the Settlor dies, the initial Trustee is automatically replaced with the first subsequent Trustee or the Co-Trustee if both spouses are incorporated into on RLT as Co-Settlors and initial Co-Trustees. Usually the RLT is preceded with a legal document termed a Pour-Over Will, followed by two other documents: (i) Durable Power of Attorney for Health Care and (ii) Durable Financial Power of Attorney. The Pour-Over Will is every bit as legal, enforceable and procedural as other Wills that addresses the passing of assets at death by: (i) specific assets to specific beneficiaries; (ii) groups of assets to specific beneficiaries; and (iii) the remainder of all other assets to specific beneficiaries. However, the Pour-Over Will acts to allow the decedent to pour over all or part of the assets of the decedent's estate to the RLT. This pour-over procedure places the decedent's assets into the RLT and, therefore, outside of the decedent's estate. With the assets outside of the estate, these pour-over assets are not subject to probate which then expedites the transfer of assets into the Trust. The assets then are distributable to the Trust's beneficiaries while avoiding significant fees and costs of court, attorneys, accountants, appraisers and other costly expenses. The circumventing of these costs leaves a larger estate to pour-over into the Trust and become distributable assets to the Trust's beneficiaries.

GENERAL MISCONCEPTION:

A Revocable Living Trust, RLT, is often mistakenly viewed as a type of asset protective trust. Assets within an RLT are not assets within the decedent's estate; nor are they assets subject to probate Although an RLT is a Trust, it offers no real asset protection from creditors by the very nature of its name "Revocable", but it does protect the Settlor's estate from the heavy burden of Probate Court which can take years to close via an administration by a Probate Judge or Commissioner. The other salient element of the RLT is in the area of privacy. A Will is a public document and will be published in the decedent's area of last residence shortly after the date of death. A RLT is not published as a public document either during the individual's lifetime or at date of death. Only the beneficiaries of the RLT have a right to a copy of the RLT.

DEFECTIVE REVOCABLE LIVING TRUSTS:

All across the United States of America, individuals who have accumulated assets over their lifetime and therefore, harbor concerns about protecting these assets, are having appointments with lawyers to better decide how and when to implement estate planning mixed with some level of asset protection. Unfortunately, far too often, estate lawyers are only going to be able to help the clients with very basic domestic estate and asset protection planning. During the initial interview, the client will be asked to complete a pre-printed interview form requesting general information which will allow the attorney to prepare a standard Pour Over Will, RLT, and the two aforementioned Power of Attorney forms. You will need to be careful at this point; not simply because many estate planners lack the current knowledge to properly advise their clients, but because there are predatory individuals and so called "trust companies" that are known by law enforcement as part of the ever growing yet elusive "Living Trust Mill" industry that has gained the eye of various state governments and their Attorney General Offices. Regrettably I have personally seen far too many of the results from these unlicensed, unprofessional, and predatory practices towards unaware individuals who only wanted to keep their assets safe but are now at significant risk. Usually these Living Trust Mills will solicit unsuspecting accounting firms, financial planners, and even law firms with the promise of bringing in new clients and servicing existing clientele. The final product is a binder, usually with a zipper to keep the alleged valuable legal documents safe, with the company name on the front cover and only sparse documentation within. Outdated documents are used and, many times, the client's name and address are hand-written in to the documents without the proper funding of the Trust. Even if there is a memorialized initial funding, the actual transfer oftentimes has not been completed. Normally, these unscrupulous firms and individuals allude to being lawyers, but they are not. They also put the person's residence into the Trust, but fail to actually prepare and file the Deed of Trust evidencing the completed transfer of the residence from the individual's name to the Trust's name. This, of course, leaves an expensive nightmare for the client and/or the client's ultimate beneficiaries if the error is not detected before death. If you have such a binder, run- don't walk- to a licensed attorney that practices estate planning and that has years of experience and current skills.

California's Attorney General Office issued this warning:

Companies advertising "living trusts" sometimes misrepresent the advantages of living trusts. But the most serious problem is the misuse of the financial information sales persons obtain to prepare a living trust….
To give themselves a cloak of legitimacy, these sales agents pretend to be experts in living trusts. In their solicitations, these sales agents often pose as expert financial or estate planners. They pass themselves off as a "trust advisor," "senior estate planner" or "paralegal," and schedule an initial appointment with seniors in their homes. Under the guise of helping set up or update a living trust, the sales agents find out about seniors' financial assets and investments. They sometimes work in assisted living centers, churches and other places where seniors gather, hooking elderly victims through free seminars and other sales presentations.

Minnesota's Attorney General Office also issued a warning:

Minnesota Attorney General Lori Swanson is suing two California companies, American Family Legal Plan and Heritage Marketing and Insurance Services, Inc., for operating a "trust mill" that preys upon Minnesota senior citizens. Swanson said that American Family Legal Plan initiates a "trust mill" scheme through a direct mailing to senior citizens, telling them that the company has special expertise in estate planning and can advise clients on how to avoid estate taxes and probate fees. If the senior citizen responds positively, Swanson said an agent posing as an estate planner meets the senior citizen at home and sells the person a plan for $2,000 or more. Swanson said that during this meeting, the agent will distort and misrepresent the impact of probate fees and estate taxes, causing the senior citizen to buy the trust out of fear that their heirs will lose the estate. "These companies deceptively sold boilerplate living trusts to senior citizens regardless of whether those trusts were suitable for the seniors' estate planning or financial needs," Swanson said.

FUNDING THE RLT:

The RLT, also known as a Living Trust, Family Trust or Inter Vivos Trust, legally provides an individual with the mechanism to transfer assets into a trust during the individual's lifetime for the express purpose of avoiding probate upon death. Living trusts have become extremely popular in recent years. However, RLTs do not magically resolve all problems for all people. If your wishes and assets have been put in the trust document like a round peg in a square hole, then it is absolutely necessary to revisit your trust documentation. I have noticed several existing RLTs always have the client's primary residence as the initial asset funding the trust which is not necessarily the correct asset to initially or subsequently place within the RLT. Care and consideration should precede the initial and subsequent funding over the life of the RLT. Remember that each asset transferred into the trust will also require a change to the ownership registration or re-titling, such as: deeds, brokerage accounts, bank accounts, collections and/or cars. Retitling or re-registering then changes the legal title to the trust.

Once assets begin to fund the RLT, you need to keep in mind that the trust is now the owner of the transferred asset(s); retitling or re-registration must occur immediately after the transfer. You will sign on behalf of the trust, not as an individual, but rather as the Trustee. With this stage of finalization, the clients want to have their names as part of the official trust name. I do not encourage this naming of yourselves as the Trust, such as; "Richard S. Smith and Jane D. Smith Revocable Living Trust August 1, 2010". As you retitle property into the trust name, an internet search or county recorder's office search will turn up these assets that bear your name, but within the overall trust name. I believe it is important that clients to have the option of using a different name other than their legal name to add a layer of privacy that otherwise would not exist under most traditional estate planning.

ARE YOU KEEPING YOUR SEPARATE PROPERTY SEPARATE?

I experienced such a situation with a new client just recently. Briefly, the client, wife, was married for more than two decades to what appeared to be a solid and stable individual who provided most of the income for the couple. He had a secure high paying government position; life seemed good for them. For many years the couple worked with a CPA for their taxes and a Financial Planner for their investments to help then plan for retirement. The Financial Planner suggested retaining a reputable tax/estate attorney to help with a RLT. As is too common, both the well-adjusted couple met with the attorney who advised them to set up a single RLT and to fund it with their residence, the wife's inherited money and her retirement account. Now, about 10 years later, the husband has decided to begin a new family without my client. Lengthy and massively expensive divorce proceedings have begun. It is now over a year into the legal proceedings and very little has been accomplished. The home can not be sold, refinanced, rented or exchanged because both soon-to-be ex-spouses are in litigation and my client's 50% interest in the home were deeded into one common trust, a Single Revocable Living Trust, SRLT. If this is not bad enough, the money inherited by my client over 8 years ago and regarded as her "separate property" was put into this common SRLT which implies that she made a gift of half to the husband. Of course, with these two huge assets within the SRLT, my client can not gain access to the funds for daily living costs nor can she obtain the large funds necessary to retain her legal counsel. As if the divorce was not of such concern and stress, now to have financial worries on inherited money and her home is just too onerous. The husband is the major wage earner, so he still has the funds to prolong the already protracted divorce action and probably hope he can starve my client to an early unfair settlement and take half of her inheritance.

SHOULD YOU PUT YOUR CAR(S) INTO THE RLT?

Transfers of assets into the Trust must be completed, similar to a sale between yourself and an unrelated third party buyer, with registration or title passing to the Trust. If you are putting an automobile into the trust, then the title, registration, and insurance needs to reflect this change of ownership. You may want to rethink putting in an automobile that is used regularly since the act of having a Trust, as the owner, places your insurance policy in the commercial vehicle category and, usually, the annual insurance premium will increase significantly. Usually, a commuter car is viewed as a personal vehicle not capable of being used commercially, such as a van, pickup or freight truck. Even though the trust is viewed by the courts and the Internal Revenue Service as your alter ego and an extension of yourself, the insurance industry views the transfer into your RLT as a true change of ownership. They take the position that the transfer is now a transmutation of a commuter car to the level of a commercial vehicle. The Department of Motor Vehicles does not view this transfer as a sale requiring the charge of sales tax on the transfer. The county records offices do not view transfer between the individual and the RLT as requiring a reappraisal and new tax base. And yet, the insurance industry is not swayed by this line of argument or reasoning.

Even with the oddity of the insurance treatment of transfers, the act of transferring property into the RLT does legally cause the trust to be the owner of the transferred assets. The IRS' position for most Revocable Trusts is that the property continues to be the transferee's property for taxation. For this reason, if an individual does place a residence into a typical Revocable Trust and the individual continues to reside within the property, the IRS does not assess the trust for rental income from the tenant, you. If, on the other hand, the assets generate income, such as interest on a savings account, then this taxable income must be reported as income attributable to the trust. Generally, the trust would need to obtain an Employer Identification Number, EIN, for purposes of filing a Trust tax return and notifying payees of taxable income to the trust that should be reported to the IRS as trust income. An exception is the RLT, since the IRS views the RLT and the Settlor as the same taxpayer and the taxable income will be reported on the individual's tax return. Under the IRS rules for sale of a residence and the exclusion of $225,000 of gains from sale, if all the conditions are met for receiving this exclusion, it will still be allowed to the individual even though the residence was transferred into the trust.

DRAWBACKS TO A RLT?

Although properly setting up a RLT may be time-consuming and a fundamental "pain", the big benefits are at the death of the Settlor. Funding the trust now instead of the traditional method of some initial funding with the remainder of the funding to occur at death through the Pour-Over Will mechanism, as discussed above, has its drawback. As I mentioned previously, a Will is a public record and the Trust is not subject to publication. If the assets in the Will are poured over into the trust, then the trust identity must be named in the Will, which is published. To mitigate this breach of privacy, remember that the Will is published only at the date of death of the Settlor and subsequently, if the Will is contested, then the trust and its assets become part of the public records for all to see. So the period before death of the Settlor allows the trust to still be private. The decision to place all determinable assets into the trust and make no provisions for pour-over in the Will to the trust must be made with heavy thought and planning with your estate attorney. Even with this well-thought-out transfer planning, some states require the transfer of specified property in the trust, such as real estate, securities, or a safe deposit box to be "registered" as assets within the trust that will then create a public record. One method of not creating a public record is through the utilization of a nominee partnership.

WHAT FACTORS SHOULD YOU CONSIDER?

As you approach the following decisions about utilizing a Will, Pour-Over Will, RLT, or Probating the Estate; your competent estate attorney will help guide you through the process:

If you are considering a subsequent trustee to administer your trust as well as act as the executor of your estate, a RLT may be preferred since some states have residence requirements for executors, but not of trustees.

If you own real property in a state other than your state of residency, consider creating a RLT in that other state to hold the real property and expedite the estate/trust administration by not being slowed down with complex ancillary probate procedures.

If part of your objective to is save costs and fees up front by not retaining an estate attorney, you may find significantly larger fees when you or your executor/trustee is forced to retain competent counsel for representation in probate, registration fees, tax compliance and filings, and a myriad of other incidental costs and fees incurred in trying to undo a badly thought-out estate plan.

The administration of an RLT does not afford the same protection as an Offshore Asset Protection Trust, OAPT, since the RLT will have to file any issues that arise from disputes over the drafting of the trust language or other issues of fact with a local court for settlement that will be timely and financially onerous.

HOW DOES AN RLT HOLD UP IN A DIVORCE PROCEEDING?

RLTs are not automatically revoked or amended during the period of divorce. With lengthy contested divorce cases lasting for well over two years, finding yourself joined at the hip with your soon to-be-ex-spouse is indeed unfortunate since your residence may be the first asset placed in the trust.

Just this type of decision was made by another client of mine whose mother had set up a SRLT several years ago. The mother put her residence in the trust to fund initially, but that was the end with no mention made of making annual funding. The attorney drafted the SRLT and advised the mother that the automatic provision of the Pour-Over Will would fund the trust at her death. Now that the mother has passed, her business's bank accounts have been closed by the banks since the procedure within the banks are to determine if the balances are over the probate value threshold limits. In California, if the value is over $100,000, then the banks immediately close the accounts. Now the client has the dilemma of trying to run the business her mother passed to her without any bank account funds or even a business bank account! In acting for the client, we are filing the Letters of Testamentary with the Probate Court to allow the bank to open the bank accounts but without all beneficiaries signing and immediate court approval of the Letters, the inherited business will suffer immeasurably. The banks are not concerned with the automatic provisions of a Pour-Over Will into the trust and their in-house legal departments are not allowed to talk to me, but they will consider a mailed letter only!

CONCLUSION:

The above is just a brief touch on RLT; a discussion of some of its uses and applications to an individual's needs and asset base. The laws of each state on RLT are different and you will most certainly need the assistance of a highly skilled estate attorney. Issues of incomplete RLT come up too frequently. Today, not unlike other days, a new client called to say her Mother had died and the bank was closing all of her accounts and the business's merchant accounts that are the lifeline of the business she and her Mother ran for 30 years. It seems that she was not put on the bank signature card or if she was the bank is not interested in finding the card, only following bank procedures of closing all bank accounts even with evidence of a valid Pour-Over Will and RLT. The bank's legal counsel will not talk to me and now it seems that the business will suffer until a solution can be reached, but that will probably be with the Probate Court with a potential hearing date more than three weeks away. It matters like this, it may be prudent to review the signature cards with your banking facilities and also to open Payable On Demand accounts, see my article on POD accounts dated April 2010 for further information.

If you need additional protection, an OAPT should also be considered as part of the estate planning solution. I will be discussing OAPT in my next article.

Call 888.916.7070 or email info@trustmakers.com

By Michael Nelson

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