Estate Planning and Asset Protection Explained by a Reno Corporation Lawyer
*We no longer practice estate planning but can refer you to an estate planning attorney if you call us at 775-824-0300.
Estate planning is the process of arranging, during your life, for the distribution of your estate. Asset protection is the process of protecting your assets so that you can securely benefit from them during your lifetime and distribute them upon your death. When combined, estate planning and asset protection strategies can be very productive. When it comes to estate planning, you have several choices, speak to a Reno estate planning lawyer today!
1. You can do nothing.
If you die “intestate” (without a will), the state will make choices for you as to where your estate will go – to children, spouses and eventually the state itself. You may not like these choices.
2. You can prepare a will.
A will is a written legal document that comes into effect upon your death. Your executor, usually a family member who is named in your will, oversees the process.
The problem with intestate estates and estates with wills is that they both must go through probate – a court supervised review of the distribution of assets. Probate is public (everyone can view your filings), time consuming (it can take a year or longer) and expensive (attorneys do quite well on the court-approved fees).
3. You can prepare a trust.
There are several types of trusts. All involve a valued and trusted relationship whereby one party – a grantor (also called a “trustor” or “settlor”) – gives another – a trustee – the right to hold assets for the benefit of one or more beneficiaries.
The three main types of trusts are:
Living Trust (also called a revocable living trust or inter vivos trust). This is a trust that is in effect during the grantor’s life and can be changed by the grantor during the grantor’s life.
Testamentary Trust. This is a trust created through the will or living trust of a now deceased person.
Irrevocable Trust. This trust is set up during the grantor’s life and cannot easily be changed. There are several types of irrevocable trusts. For more information on one type of valuable irrevocable trust through which you can protect your assets against creditors, known as a Nevada Asset Protection Trust, click here.
By preparing a living trust, you can avoid the probate process. When a living trust is properly funded, because title to assets is already in the trust’s name (and not your individual name), there is nothing for a court to probate. Your assets are distributed more quickly and with less expense than with a will or intestacy.
“But,” you say, “I have used Sutton Law Center and Corporate Direct to set up my asset protection entities. The assets aren’t in my name right now.” Perhaps technically they are. Please know this common situation is easily amended with a living trust.
An example helps to explain. Doug owns a duplex in Salt Lake City through a Utah LLC and a fourplex in Chicago through an Illinois LLC. Both LLCs are owned by a Nevada LLC, which is owned by Doug:
If Doug were to pass away without a will (intestate), his interest in the Nevada LLC would have to go through probate. Granted, we wouldn’t have to change title to the Utah or Illinois LLCs, since they are owned by the Nevada LLC. But the Nevada LLC is in Doug’s individual name and so the interest must be probated. An easy fix for this probate problem is to have the Nevada LLC owned by Doug’s new Living Trust. As such, the structure chart appears like this:
Because title to the Nevada LLC is in the name of the Living Trust, we can avoid probate. The Living Trust determines who inherits Doug’s interest in the Nevada LLC, and by extension the Utah and Illinois properties. (See Question #9 for more information.) If Doug had to go through probate and the real estate was worth $1 million, the probate fees could easily exceed $25,000. By spending only one-tenth of that amount for a living trust, those probate fees are avoidable, and better spent on Doug’s heirs.
Two Living Trust Keys
There are two keys for making a living trust work properly for you.
The first key is to actually “fund” the living trust. “Funding” the living trust means that once the trust document is signed and finalized, you need to put title to your assets in the name of the trust. LLCs in your name, brokerage accounts and the like must all be held in the name of the trust. Assets that you leave outside of the trust in your individual name – even if you have prepared a trust – must still go through probate. You’ve just set up a living trust to avoid that. So be sure to fund the trust.
The second key for making the living trust work properly for you is to know that living trusts offer zero asset protection. Beware of promoters telling you otherwise. A living trust is revocable, meaning it can be easily changed. Because a living trust is revocable and you can change and control it, a creditor coming after you can easily reach such an asset. So you must use LLCs and other protections in connection with your living trust. Living trusts and LLCs dovetail as follows:
If you own a duplex in the name of your living trust, a tenant suing can not only get the equity in the duplex, but everything else you own. The living trust offers no asset protection. Instead, if the duplex is held in an LLC, the tenant can only get the equity (if insurance doesn’t cover you), but can’t get beyond the LLC to your other assets. Don’t tempt fate by holding title to valuable assets in the name of your living trust. Instead, have your LLCs and Living Trust work together to give you both asset protection and probate avoidance.
Ten Commonly Asked Questions About Living Trusts
Please find following a number of common questions about living trusts. After reading these, please consider calling our office at (800)700-1430 to see if your estate planning and asset protection strategies are working in concert.
1. Do I have control with a living trust?
Yes, during your lifetime you are in absolute control. You put assets into the trust and you are the trustee, meaning you have free reign to manage those assets. You can sell them at will. Taxable events appear on your personal tax return. Until you pass, no trust tax returns are needed. During life, there is usually very little difference between having properly funded living trust and not having one.The benefits of having a living trust come upon passing away.
2. Can I change beneficiaries during my lifetime?
Yes. Your beneficiaries – the people and/or charities who will inherit your estate – can be changed by you at any time before your death.
3. What if I become incapacitated?
Your living trust will appoint one or more successor trustees. If you become unable or unwilling to manage your trust’s assets, the successor trustee(s) will step in and do so. Without a living trust, a court proceeding would be needed for this transition. Such conservatorship procedures can be contentious and expensive. The living trust packages prepared by our office generally include powers of attorney for financial and health care decisions, health care declarations, and other documents to cover you in the event of difficult circumstances involving poor health and incapacity.
4. Who should be the trustee of my living trust?
During their life, most people act as their own trustee (and thus maintain complete control). Upon incapacity or death, a successor trustee named in the living trust steps in to manage things. Successor trustees are usually a spouse or an adult child, and sometimes are business associates or a professional fiduciary such as a bank or trust company. You want a trustee who is competent and can avoid any conflicts with other family members.
5. Are there any disadvantages to a living trust?
In some cases. If you do not have a successor trustee you can rely on to act ethically, you could be taken advantage of since there is no court supervision of distributions. In that case you may be better off with just a will and a court’s probate review. A will also is less expensive to prepare than a living trust. But when you factor in probate fees, the living trust in many cases is going to be more cost effective in the long run.
6. If I have a living trust, do I still need a will?
Yes. Living trust packages prepared by our office include a “pour-over will.” In the event any assets are not funded (or titled) in the name of the living trust (and remain in your name) during your life, upon passing away your will then “pours” those assets over to the trust. Your successor trustee will still have to probate any unfunded assets. (Which is why, again, funding the living trust is so important.)
7. What is an Advance Health Care Directive?
As part of our living trust package, we prepare an Advance Health Care Directive (in Nevada there are two separate documents called a “health care power of attorney” and a “declaration to physicians”). This document allows another trusted person to make health care decisions for you when you can no longer do so. This directive also allows you to state your wishes on organ donation, life-sustaining procedures and the like.
8. Are there other trusts used with a living trust?
Yes. Several common trusts used with a living trust are the IRA trust (click here) and the Irrevocable Life Insurance Trust (or ILIT) (click here). As well, some people set up a pet trust (click here) for their special pets.
9. How does the Living Trust distribute asset protected LLC ownership interests?
An illustration explains this process.
During our lifetime, we want our assets (real estate, brokerage accounts, precious metals) held in LLCs for the asset protection benefits. The LLCs are then owned by a living trust to avoid probate. Upon your death, the successor trustee then transfers the membership interests in the LLC according to directions contained in the living trust. If a beneficiary has special needs or is a spendthrift (spends recklessly), an irrevocable trust can be set up to hold and administer their interests.
10. How can I get started?
We no longer practice estate planning but can refer you to an estate planning attorney if you call us at 775-824-0300.