Asset protection works best when you start before you have a significant number of assets that need protection. You have to fix the roof before it rains to get in. The sooner a trust is created, the greater the benefits.
The time you usually worry about your assets—when you’re facing a divorce, a lawsuit, creditor lawsuits, or a tax lien—is when you can say goodbye to your stuff. If you haven’t secured it by then, you don’t own it. It belongs to whoever the judge says it belongs to.
Trusts used to be the last thing a middle-class taxpayer had to worry about. Estate taxes were the problem of the rich. A trust, along with the proper use of corporations and limited liability companies, means never again having to give your property to the ex-nobody.
As they stand now, with modest homes in many parts of the US fetching well over $1 million, trusts are the most powerful asset preservation device available. Additionally, all gifts and bequests must be made and held in trust rather than given outright.
What we call a BCT (Beneficiary Controlled Trust) goes by a more accurate description of “Wrongful Grantor Defective Wasteful Trust”.
Crummey is the name of a person who challenged the IRS and won, it is not a description of the quality of the trust. For that alone he deserves your respect and admiration.
In our beneficiary-controlled trust, the beneficiary also acts as trustee, hence control. The Crummey powers are handled by the second trustee, known as the Distribution Trustee, but all control and decisions remain with the beneficiary/trustee.
The BCT is designed to:
1. Give the beneficiary beneficial use and control of the trust assets without having the property that can be seized by creditors or distributed by a judge in a divorce case. You cannot lose property in a divorce settlement if you do not own it.
2. Not have negative gift or succession taxes for the beneficiary or the person creating the trust (Grantor).
3. Owning businesses in the form of corporations or LLCs to provide protection against personal liability for debts or judgments against the business entities.
4. Pass the income earned by the trust to the beneficiary to be taxed at lower individual tax rates.
5. Provide a way for parents to use their annual gift tax exemption to pass estate to children or grandchildren without estate tax issues for either grantors or beneficiaries.
6. Restrict income and capital distributions to HEMS (health, education, support and maintenance) only. Distributions are discretionary, not mandatory. HEMS meets IRS standards to ensure that assets are not included in your estate and cannot be accessed by creditors.
7. Gives you the right to replace the Distribution Trustee (2nd Trustee) at any time. While this may not seem important at first, this is one of the few irrevocable trusts that can be “rewritten.” The trust can continue for the life of the beneficiary and for successive generations. The only caveat is that the beneficiary/trustee cannot rewrite in such a way as to increase his or her own benefits.
8. Our BCT has special probate powers of appointment that allow you to direct who receives trust assets upon your death. To prevent assets from becoming part of your estate, the BCT will prohibit you from turning over any property to creditors, your estate, or the estate’s creditors. Now you can pass the assets of the trust to your family, charities or anyone you choose.
9. For parents who want to help their children start a new business, funds awarded to the individual child are exposed to claims by creditors or ex-spouses. Initial capital contributions to the trust can be used to form a corporation or to organize a new limited liability company. An LLC owned 98% by BCT and 1% owned by two individuals, such as the parents, is the structure we have found to provide superior asset protection. The LLC can then acquire assets 98% owned by the trust. An alternative is to use a corporation with no assets as the manager of the LLC and have the trust own 99%.
10. The beneficiary has no enforceable right to demand income or principal from the trust, so creditors cannot step into the beneficiary’s shoes and force a distribution. In bankruptcy, the trustee may not voluntarily or involuntarily assign his or her interest in the trust for the benefit of creditors.
If you have full ownership of the property, creditors, spouses, and the IRS can all come after you. Failure to exploit the trusts to their maximum advantage puts a bull’s eye in your chest.
When distributions are subject to the sole discretion of the Independent Distribution Trustee, even though the beneficiary may replace that Independent Trustee, they now have unequal divorce and creditor protection.