Search Results for: wealth protection plan

How Can Trusts Shield My Wealth from Legal Disputes?

Trusts stand as a bulwark in the preservation of family wealth, particularly against legal disputes. Focusing on the Personal Asset Trust™ and IRA Inheritance Trust™ offers a nuanced view of how these instruments can fortify an estate planning strategy. The key to a successful estate plan is understanding and implementing a plan that takes advantage of the difference in leaving assets “For” your loved ones and not leaving assets “To” them.

Personal Asset Trust™: A Fortress for Beneficiaries

The Personal Asset Trust™ (or PAT) is a revolutionary tool designed to extend beyond the basic protection offered by traditional trusts. It ensures that assets passed to beneficiaries remain secure from potential creditors, legal judgments, or even divorce proceedings. This trust acts as a robust barrier, offering a way to protect the inheritance from external claims without compromising the beneficiary’s access to their inheritance assets. In essence, with the PAT you choose to leave assets in a trust for your heirs, yet allowing the primary beneficiary to be in control of the trust share s/he inherits.

IRA Inheritance Trust™: Safeguarding Retirement Assets

The IRA Inheritance Trust™ offers a strategic means to protect retirement assets inherited by beneficiaries. Instead of naming the beneficiaries as the direct recipient, retirement funds name the IRA Inheritance Trust™ as the beneficiary, again, offering a protective shield against creditors and legal disputes. This not only secures the retirement assets but can also manage the distribution according to the grantor’s wishes while at the same time giving control to the beneficiary, providing both protection and financial advantage. Similar to the PAT, by naming a trust as the beneficiary of a retirement account, you are giving your loved ones a way to protect the inherited retirement account, because it does not belong to the beneficiary. Instead it is held for the beneficiary by the trustee (who is often also the beneficiary).

LLCs: Complementary Protection

Incorporating Limited Liability Companies (LLCs) into an estate planning strategy can add another layer of protection. LLCs can be especially helpful when leaving the family vacation home to the next generation. LLCs can also be used to segregate personal assets from business ventures, minimizing the risk to personal wealth from business liabilities. This separation is crucial for affluent families involved in business activities, ensuring that the family’s wealth is insulated from potential business-related legal challenges.

Do I Have to Be Proactive About Estate Planning?

Estate planning goes beyond dictating the distribution of assets posthumously; it is a strategic approach to managing assets throughout one’s life. It ensures that, upon death, assets are allocated as wished while safeguarding them from potential legal threats. Given the substantial assets affluent families possess, they are often more vulnerable to high taxes and legal disputes arising from creditor claims, divorce, or other legal proceedings. The Vanderbilt family is an example: Cornelius Vanderbilt, once considered the richest American, was worth around $95 million when he died in 1877. Less than a century later, when his descendants gathered for a family reunion in 1973, there was not a single millionaire among them.

The essence of effective asset protection lies in anticipation—setting up defenses before legal disputes emerge. Once a dispute is imminent, asset protection may be impossible. Early planning facilitates the strategic relocation of assets into protective entities such as trusts, greatly reducing the chance of legal entanglements. And in most states, an heir is not permitted to implement a plan to protect inherited assets from the claims of creditors or divorcing spouses once the inheritance is received.

How Do I Integrate Trusts and LLCs into a Comprehensive Estate Plan?

In the grand scheme of estate planning, incorporating Personal Asset Trusts™, IRA Inheritance Trusts™, and LLCs is not merely a defensive strategy—it is a forward-thinking approach that ensures your family’s wealth is preserved and passed on according to your wishes. Understanding the practical considerations and benefits of these tools can empower affluent families to make informed decisions about their estate planning endeavors.

Practical Considerations:

When integrating these asset protection tools into your estate plan, consider the nature of your assets, your family’s future needs, and potential legal vulnerabilities. For instance, the Personal Asset Trust™ is particularly beneficial for families with significant real estate or investment holdings, offering a way to protect these assets while providing for future generations. Similarly, the IRA Inheritance Trust™ is crucial for those with substantial retirement accounts, ensuring these funds are protected from divorces and creditors, and, if needed, that the funds are managed according to the grantor’s wishes.

It’s also worth developing plans to fight small claims lawsuits that may be brought against you by creditors. While these cases may not seem too financially concerning, they can be time-consuming and set a precedent for additional claims. Services like JusticeDirect provide useful resources to help asset holders navigate small claims issues.

Benefits of a Holistic Approach:

Adopting a holistic approach to estate planning by utilizing these trusts and LLCs offers several benefits:

Enhanced Protection: These tools collectively provide a robust defense against potential legal threats to your family’s wealth.

Flexibility and Control: They allow for greater control over how and when assets are distributed to beneficiaries, ensuring your legacy is honored.

Peace of Mind: Knowing that your estate plan includes comprehensive measures to protect your family’s assets can offer unparalleled peace of mind.

By thoughtfully integrating Personal Asset Trusts™, IRA Inheritance Trusts™, and LLCs into your estate plan, you are not just safeguarding assets—you are securing your family’s future and ensuring that your legacy endures through the generations. With the guidance of experienced estate planning attorneys, affluent families can navigate the complexities of asset protection with confidence, crafting a legacy that withstands the test of time.

Trusts in Action: Real-World Applications

Protecting Inheritance from Creditors

Consider a family wanting to protect their estate from potential future creditors of their heirs. By establishing a Personal Asset Trust™, they can ensure that their children’s inheritance is shielded, allowing the heirs to benefit from the assets without the risk of future financial disputes affecting their inheritance. While most families have confidence in their childrens’ ability to manage an inheritance, a simple accident can create significant liability – often for millions of dollars, placing any inheritance at risk.

Securing Retirement Benefits

For a family wishing to protect retirement funds, the IRA Inheritance Trust™ becomes a pivotal tool. It ensures that upon the grantor’s passing, the retirement assets are transferred into this trust, giving families a tool to safeguard them from claims and allowing for controlled distribution to beneficiaries.

Do I Need Expert Guidance?

The complexity of trust planning and asset protection necessitates professional advice. Estate planning attorneys navigate the legal intricacies, tailor strategies to specific family needs, and anticipate and mitigate risks. In a constantly changing legal and financial environment, having an experienced attorney by your side offers not just a strategic advantage but peace of mind.

As the landscape of asset protection evolves, so too must the strategies employed. The advent of digital assets and changing legislation highlight the need for flexibility and adaptability in estate planning. Regular reviews and adjustments with the guidance of experienced attorneys ensure that asset protection measures remain effective and aligned with the family’s goals.

Trusts, particularly the Personal Asset Trust™ and IRA Inheritance Trust™, along with the strategic use of LLCs, offer affluent families robust solutions to protect their assets from legal disputes. Partnering with experienced attorneys ensures that these tools are effectively utilized, safeguarding the family’s wealth and legacy for future generations. To start working on a comprehensive asset protection strategy today, reach out to the Law Offices of Boyd & Boyd.

The beginning of 2024 gives an opportunity to review opportunities for the year ahead. Here are a few of the planning opportunities and defensive strategies that we will be looking at for our clients over the course of this year. This is the first of a three-part series.

Estate Planning Opportunities in 2024 and 2025:

Maximizing Benefits Before the Sunset of the Tax Cuts & Jobs Act

In the ever-evolving landscape of estate planning, staying informed and proactive is key to effectively managing and preserving wealth for future generations. As we navigate through significant tax law changes, particularly with the anticipated adjustments to the federal estate tax exemption, it becomes increasingly important to explore and implement strategic estate planning techniques. The following article provides a comprehensive guide to navigating these changes. The first part of this article focuses on the unique opportunities presented in the years 2024 and 2025 before the sunset of the Tax Cuts and Jobs Act, highlighting strategies such as Roth Conversions and the use of trusts like DAPTs and SLATs. The second part of the article delves into additional estate tax avoidance techniques, emphasizing the importance of preparation for the forecasted reduction of the estate tax exemption to between $6 to $7 million. Together, these techniques offer a thorough understanding of the current estate planning environment and practical approaches to safeguarding one’s financial legacy amidst these impending changes. We recommend that you consider implementing Roth Conversions as soon as possible. Please consult with your financial advisor and/or your accountant/tax advisor and get their input. But overall, Roth conversions offer an opportunity to pat the income taxes trapped within your Traditional IRA, 401(k) or other qualified plan before tax rates increase by 2-4% automatically on January 1, 2026. Asset Protection techniques, like DAPTs or LLCs, should be implemented as soon as you understand the technique. Let us know if you would like to discuss these techniques. We usually charge a fee for the meeting, but the fee is waived if we are retained to create a DAPT or other asset protection device. Currently, we recommend that you learn about estate tax avoidance techniques now, but wait until 2025 to hire us to create them.

Section I

As we approach the sunset of the Tax Cuts and Jobs Act (TC&J) at the end of 2025, there exists a unique window of opportunity for strategic estate planning. This period is critical for individuals and families seeking to maximize the benefits of current lower income tax rates and prepare for potential increases in tax liabilities. This article delves into the key estate planning techniques, including Roth Conversions, Domestic Asset Protection Trusts (DAPTs), and Spousal Lifetime Access Trusts (SLATs), that individuals should consider to optimize their financial legacy in light of the impending changes.

Roth Conversions: Capitalizing on Lower Income Tax Rates

A Roth Conversion involves transferring assets from a Traditional IRA or 401(k) into a Roth IRA. This strategy is particularly attractive before the expiration of the TC&J due to the existing lower income tax rates. When assets are converted to a Roth IRA, the amount transferred is taxed as ordinary income. Therefore, executing conversions during these years of lower tax rates can result in significant tax savings.

The long-term benefit of Roth IRAs cannot be overstated. Roth IRAs grow tax-free, and unlike Traditional IRAs, do not require minimum distributions, allowing for more extended growth and a more flexible estate planning tool. Beneficiaries inheriting Roth IRAs also receive distributions tax-free, making it an excellent vehicle for wealth transfer.

Domestic Asset Protection Trusts: Shielding and Reducing Estate Size

DAPTs offer a robust asset protection strategy while facilitating estate size reduction. They are irrevocable trusts set up under the laws of states that permit self-settled asset protection trusts. The grantor, in this case, can be a discretionary beneficiary, providing a layer of asset protection against creditors, lawsuits, or divorces.

For estate planning, the use of DAPTs before the TC&J expires is a strategic move. By placing assets into a DAPT, the grantor effectively removes them from their estate, potentially reducing estate tax liability when the federal estate tax exemption lowers post-TC&J. Moreover, the growth of assets in the DAPT occurs outside the grantor’s taxable estate, fostering a more efficient wealth transfer process.

Spousal Lifetime Access Trusts (SLATs): Balancing Access and Transfer

SLATs offer a unique advantage for married couples. One spouse establishes the trust for the benefit of the other spouse, transferring assets into the trust and utilizing their gift tax exemption. The beneficiary spouse can have access to these trust assets, providing financial flexibility.

This strategy is particularly beneficial in anticipation of the TC&J’s expiration, as it allows for the use of the higher federal estate tax exemption before it potentially decreases. Assets transferred to a SLAT, along with their appreciation, are removed from the couple’s estate, mitigating future estate taxes. Given the lower income tax environment pre-TC&J expiration, SLATs can be funded with income-producing assets, maximizing the tax efficiency of transferred assets.

Implementing These Strategies: Considerations and Timing

When considering these strategies, timing and individual circumstances play pivotal roles. For Roth conversions, the ideal timing would depend on current income levels and the projected income tax environment post-2025. DAPTs and SLATs require careful planning, especially around state laws for DAPTs and the structuring of SLATs to ensure compliance and effectiveness.

Professional guidance is crucial in these endeavors. Estate planning attorneys and financial advisors can provide tailored advice, considering factors such as state laws, current and future tax implications, and individual and family financial goals.

Conclusion: Proactive Planning as a Necessity

The lead-up to the expiration of the TC&J presents a critical juncture for proactive estate planning. Techniques like Roth Conversions, DAPTs, and SLATs are not merely opportunities but necessities for those seeking to optimize their estate planning in this transient tax environment. By taking strategic actions now, individuals and families can secure their financial legacy, maximizing benefits for generations to come.

As we navigate these final years of the TC&J, it’s imperative to engage in comprehensive planning, leveraging the current favorable tax landscape to build a robust and flexible estate plan that can withstand the impending changes in the tax environment.

Section II

Navigating the Changing Landscape: Estate Tax Avoidance Strategies in the Face of Lowered Exemptions

The estate planning arena is facing a significant shift with the anticipated reduction of the federal estate tax exemption from the current $13.61 million to a projected range of $6 to $7 million post-2025. This adjustment necessitates proactive measures for individuals with estates over $6 million to mitigate potential tax impacts. This article explores key estate tax avoidance strategies that should be considered and implemented before the end of 2025.

Lifetime Gifting: Utilizing the Current High Exemption

One of the most straightforward strategies is to take advantage of the current high exemption by making lifetime gifts. This involves transferring assets to beneficiaries now rather than waiting until death. By doing so, individuals can significantly reduce their taxable estate. It’s essential to consider the lifetime gift tax exemption in conjunction with the estate tax exemption, as they are often linked under the unified tax credit system.

Family Limited Partnerships (FLPs) and LLCs: Reducing Estate Value

Creating a Family Limited Partnership (FLP) or a Family Limited Liability Company (LLC) can be an effective way to lower the value of an estate for tax purposes. These entities allow you to transfer business interests or other assets to family members at a reduced tax cost. The value of the transferred interest can often be discounted for lack of marketability and minority interest, further decreasing the taxable estate.

Irrevocable Life Insurance Trusts (ILITs): Securing Liquidity Outside the Estate

An ILIT is a trust designed to exclude life insurance proceeds from the taxable estate. The trust becomes the owner and beneficiary of the life insurance policy. Upon the grantor’s death, the trust receives the insurance proceeds, which can then be used to provide liquidity for estate taxes, debts, and other expenses without increasing the taxable estate.

Grantor Retained Annuity Trusts (GRATs): Transferring Appreciated Assets

A GRAT is a financial tool used to transfer appreciated assets out of an individual’s estate at a reduced tax cost. The grantor transfers assets to the GRAT and retains the right to receive an annuity for a term of years. After the term, the remaining assets pass to the beneficiaries. The key benefit is that the appreciation of the assets over the annuity payments can be passed on tax-free.

Charitable Lead Annuity Trusts (CLATs): Combining Philanthropy with Tax Planning

CLATs allow individuals to make significant charitable contributions while also transferring assets to heirs with little or no gift and estate tax. The trust makes annual payments to a charity for a set period, after which the remaining assets pass to non-charitable beneficiaries. This strategy provides a charitable deduction and removes the asset’s appreciation from the estate.

Dynasty Trusts: Extending Wealth Across Generations

A Dynasty Trust is designed to hold assets for multiple generations while avoiding estate taxes at each generational transfer. These trusts can be structured to provide for descendants while keeping the assets within the trust and outside of each beneficiary’s taxable estate.

Conclusion: Proactive and Strategic Planning is Key

With the impending reduction in the federal estate tax exemption, it’s critical for individuals with estates over $6 million to act now. Employing strategies like lifetime gifting, FLPs/LLCs, ILITs, GRATs, CLATs, and Dynasty Trusts can significantly mitigate the impact of higher estate taxes. Each individual’s situation is unique, and these strategies should be tailored to fit specific needs and goals.

Given the complexity of estate tax laws and the nuances of each technique, consulting with estate planning professionals is crucial. A well-crafted plan will not only leverage the current favorable tax environment but will also establish a flexible framework that can adapt to future changes, ensuring the preservation and smooth transfer of wealth to future generations.

Protecting Stepchildren and Others With Estate Planning

Blended families are extremely common today. Around 50% of families in America include remarried or recoupled individuals, many with children from previous relationships. However, the law doesn’t always protect the interests of those children in the same way it does the interests of biological children, especially when it comes to matters of intestacy.

For example, stepchildren, foster children, and children who are in the adoption system all have different inheritance rights than the biological or legally adopted children of an individual. If you want to provide for children in a blended family once you’re gone, you may need to plan for estate administration now and use tools such as trusts to ensure your assets go to the beneficiaries you choose.

Stepchildren Don’t Have Inheritance Rights

Intestacy laws in Massachusetts don’t cover rights for stepchildren. They start with rights for the surviving spouse. If there is no surviving spouse, or if all assets don’t go to the surviving spouse, Massachusetts law covers individuals who survive the decedent who are not the surviving spouse. They are listed as:

• The decedent’s descendants, meaning biological or legal children, grandchildren, or other descendants of the person who passed away
• The surviving parents of the decedent
• The descendants of the person’s parents, if there is no surviving parent

So, consider a situation in which a man and his second wife are both killed. He has a stepchild from that marriage but no other children. He does not have surviving parents, but his brother is alive. In this case, if there is no estate planning beforehand, the intestacy laws of Massachusetts might mean that the assets of the man’s estate go to the brother and not to the stepchild.

How Can You Leave Assets for Stepchildren?

The fact that stepchildren don’t have inheritance rights in Massachusetts doesn’t mean that you can’t leave assets for them. It means that if you do nothing to plan for this eventuality, they will have no rights according to the law. Instead, you must take action early to ensure your assets are managed and distributed as you desire.

You can do this via estate planning. Some options for ensuring your stepchildren can inherit the assets you want them to inherit include leaving a will that names them as beneficiaries or creating a trust that includes them as beneficiaries.

Protecting Inheritance for Your Children

Blended families and the increased likelihood of divorce and remarriage create another important consideration for those who are looking to protect familial wealth and pass down legacy assets to descendants. In many cases, you may want to protect the assets you leave your family from claims by their current or future spouses. Should your children experience a divorce, without proper planning, the gift you leave (or at least half of it) will be at risk of ending up with an ex-in-law, instead of with your children and grandchildren.

Another common problem occurs when a couple marries and each of them has children from a prior marriage.  When one spouse dies, everything is usually left to the surviving spouse by will or joint property. When the surviving spouse dies, it is common for everything to be left to the children of the surviving spouse, excluding the children of the first spouse to die. This problem can be fixed through the use of trusts combined with a Contract to Plan, where each spouse promises to leave an agreed upon portion of the estate to the children of the other spouse. A Contract to Plan is specifically authorized by statute in Massachusetts.

In another example, imagine a scenario where a woman has two married children. Each of these children has two children, so the woman has four grandchildren. If she plans to simply leave assets directly to her two children, those assets could be up for grabs in a future divorce or be divided among future spouses and stepchildren as well as the woman’s grandchildren.

If the woman wants to ensure a legacy for her grandchildren despite any remarriage situations that may come up, there are options for doing so. She might create a trust that does not use outright distribution, such as an asset protection trust or a multi-generational trust. In this case, the assets in the trust are owned by the trust and do not transfer to her adult children. That means those assets would not be part of her adult children’s estates and could not then be left in a will or via other means to stepchildren or others if the woman named only her grandchildren as the trust’s beneficiaries.

How Adoption Can Impact Inheritance Rights

Adoption can impact inheritance rights because it creates a new legal relationship between parents and children. Legally adopted children do have inheritance rights from their adoptive parents. However, children who have been adopted do not have any inheritance rights related to their biological parents. Children who are in foster care do not have inheritance rights from their foster parents. Children whose adoption decree has not been issued do not have inheritance rights from their adoptive parents.

Depending on your situation, you might want to consider your relationship to the children in your life and how you support them currently. If they are not your biological children and you haven’t yet finalized an adoption—but you know you want to provide for them even if you’re no longer around—you may need to engage in estate planning.

Work With an Estate Lawyer to Understand Your Options

Even if you only have biological children in your life you want to provide for after you’re gone, estate and legacy planning can be an important step. Whether you want to protect dependent minor children via tools such as guardianships and conservatorships or you want to protect your legacy for future generations via trusts, working with an experienced estate planning lawyer can be a good idea.

At the Law Offices of Boyd & Boyd, P.C., we can help you plan ahead to protect your wealth legacy while leaving assets for the benefit of the heirs you choose. We’ll work with you to understand your goals now and for the future and create trusts and other tools that support those objectives. We can also help you manage your estate and planning process throughout your life to account for any changes that might come up, such as births, marriages, divorces, and adoptions. To find out more about how we can help, give us a call at 508-444-9688.

Irrevocable vs. Revocable: Understanding the Two Major Categories of Trusts

While there are many types of trusts—and each serves various needs and purposes—all trusts fall within one of two major categories. They are either revocable or irrevocable.

Which option you choose should depend on your goals for the trust. Whether a trust is revocable or irrevocable has a major impact on trust administration and, potentially, your beneficiaries, so it is important to consider this decision carefully.

Trusts are the cornerstone of the modern estate plan. They can have many tax and financial implications. It’s not an ideal choice to DIY trust creation, so working with an experienced trust attorney is typically a good option. Find out more about irrevocable and revocable trusts below.

What Is a Trust?

A trust is really nothing more than a contract among three parties. It involves a fiduciary relationship. The word fiduciary means some level of trust and a responsibility to handle matters in keeping with the best interests of someone else.

In the trust arrangement, the parties typically include:

• The Donor. This is the person behind a trust’s creation – the person who creates the trust and gives property or assets to the trust. The Donor, usually with the help of a qualified estate planning attorney, will decide what terms and conditions will be included in the trust agreement (the contract). The provisions of the trust agreement define how assets in the trust should be managed and when and how they should be distributed to beneficiaries. The Donor is often the person who contributes assets to the trust, though trusts can be set up to allow for third-party contributors. Some trusts will have more than one Donor. It has become common for married couples to create a Joint Trust, in which case they are both Donors of the trust. The Donor can be known by other names. The IRS prefers the term “Grantor”. Some states use the terms “Trustor” or “Trust Maker”. Regardless of which title is used, this party is responsible for trust creation.
• The Trustee. This is the person or entity that manages the assets owned by the trust. Think of the Trustee as the equivalent of the CEO of a corporation. The Trustee is tasked with fiduciary responsibility for the trust. The Trustee must manage the trust assets, protect the assets of the trust, make appropriate decisions about investing or using those assets in keeping with the desires of the trustor and the interests of any beneficiaries, and distribute assets to beneficiaries as dictated by the provisions of the trust. The Trustee is responsible for proper trust administration.
• The Beneficiary. This is the person or persons who benefit from the trust. The Beneficiaries get to use and enjoy whatever it is that the trust owns.

It is possible to create some trusts where the Donor, the Trustee and the Beneficiary are, at least initially, all the same person. But in order to have a valid trust, all trusts must have at least one other person involved as at least one of the other parties in the contract. Most trusts created for estate planning purposes will have at least one future interest beneficiary – someone who will be the beneficiary after the Donor has passed away. If the Donor is named as the initial Trustee, most trusts will provide a list of successor trustees who can take over if the initial Trustee becomes incapacitated or dies.

What Is an Irrevocable Trust?

The word irrevocable means that something can’t be changed or cancelled – at least not by the Donor. That’s the idea of an irrevocable trust in spirit. These types of trusts are typically designed so that once the trust is created and assets are put into it, the Donor cannot change the trust terms or have a gift returned. Today, most irrevocable trusts are written with a great deal of flexibility. While the Donor may not be allowed to amend or change the terms of a trust, it is common to give the ability to amend the trust to someone else. Additionally, the Donor may be given the right to “swap” assets with the trust, so that an asset that was given away can be returned for something of equal value. While there can be important tax consequences to including these types of provisions in an irrevocable trust, a properly written irrevocable trust can give enormous flexibility to both the Donor and the Beneficiary.

Keep in mind that a revocable trust, meaning the Donor has reserved the right to amend or cancel the trust, will become an irrevocable trust when the Donor dies. That is because after a death, the Donor can no longer amend or cancel a trust. So once the Donor has passed away, normally the trust will automatically become an irrevocable trust.
Whether or not a trust is irrevocable is determined by state law as well as the wording of the trust itself. If trust documents don’t speak to revocability at all, the IRS notes that most states consider the trust to be revocable.

As mentioned, it is often possible to amend an irrevocable trust. Typically, there are at least four methods to amend an Irrevocable trust. In most states, it is possible to file a court proceeding to amend an Irrevocable Trust. But because court proceedings can be very expensive, it is often the least desirable approach. Under the laws of some states (or if the trust terms permit), irrevocable trusts may be amended by agreement of the Donor (if available), the Trustee and all of the Beneficiaries. More sophisticated trusts may include provisions for a special kind of fiduciary called a Trust Protector. Trust Protectors are often given the ability to amend a trust. But, depending on how the trust is set up in the first place, your options may be limited. Finally, some states permit a method of changing a trust called “decanting”. With this method of changing an irrevocable trust, the assets are removed from the original irrevocable trust and transferred to a new irrevocable trust with improved terms and conditions. Decanting has many rules and restrictions and should only be done with the help of a qualified trust attorney.

Potential Pros and Cons of Irrevocable Trusts

Generally, irrevocable trusts are NOT all-purpose trusts and are not a good tool to use as a Will substitute. Each type of irrevocable trust is used for a very limited, specific purpose. Irrevocable trusts are to estate planners what a toolbox is to a carpenter. Just as a carpenter carries different tools for different woodworking tasks, an estate planner will use the various types of irrevocable trusts as a collection of legal tools tailored to specific financial needs. It’s like having a toolbox filled with saws, hammers, and measuring tools, enabling the carpenter to tackle various projects with expertise and accuracy.

Because the Donor, in his or her capacity as a Donor, doesn’t have direct control or access to the assets in an irrevocable trust—aside from what is written into the trust provisions—this form of trust can provide additional protection against creditors and taxes. This type of trust can even provide potential protection against certain types of future legal claims, such as medical malpractice lawsuits.

However, the same control limitations that can protect you in one circumstance might become a burden in another. If you experience a shakeup in your financial status and suddenly need the assets in your trust to pay for everyday expenses or bills, you may not be able to easily access them.

What Is a Revocable Trust?

The word revocable means that something can be changed or reversed. It’s the opposite of irrevocable, and in many ways, a revocable trust is the opposite of an irrevocable trust. These types of trusts are much easier to amend.

You still transfer assets into the trust and they are still managed according to the trust provisions by a trustee. If you create a trust during your lifetime with yourself as the beneficiary, you can make yourself the trustee or choose to have someone else manage the assets on your behalf, according to your direction, and for your benefit.

Potential Pros and Cons of Revocable Trusts

Revocable trusts provide a lot more control and flexibility. You don’t typically need to go through as much work to make a change to such a trust, and your options for amending a revocable trust are much wider than they are for amending an irrevocable trust. Revocable trusts are the “all-purpose” trust in an estate plan. Revocable trusts are like a Swiss Army knife. They can accomplish many goals with one document. For that reason, they are a great substitute for the traditional Will.

However, revocable trusts won’t provide asset protection to the Donor like an irrevocable trust can.

Which Type of Trust Is Right for You?

The type of trust that is right for you depends on your goals and needs. If you are looking to: (1) pass wealth at death; (2) provide for the right people to be in charge upon your incapacity; (3) avoid the probate process; (4) reduce estate and income taxes; and/or (5) provide protection from divorce, lawsuits, bankruptcy, and future estate taxes on the assets you will leave to your loved ones, then a properly drafted revocable trust might be the right fit for you.

Do you want to protect your assets against your future creditors, reduce your tax burden, or provide funds for beneficiaries that they can only use for specific purposes? Then an Irrevocable Trust might be a better choice. These are just a few common goals related to trust creation, and most people have several goals in mind.

Get Professional Help with Trust Creation and Administration

The best way to understand the type of trust or other estate planning that might be right for you is to speak with an experienced trust attorney. Your legal team can help you explore all your options and make educated decisions about protecting your assets, creating a legacy for the future, and supporting your beneficiaries. Remember that trust creation is only the first step. You want to be sure that the team you choose to help you and your family will have the experience and expertise to help you with trust administration after your trust is signed.

For more information about trusts and to get started on creating yours, reach out to the Law Offices of Boyd & Boyd, P.C., at 508-444-9688.

Is an Irrevocable Trust Truly Unchangeable?

Trusts, both revocable and irrevocable, are incredibly flexible tools that can be used for estate planning, wealth generation, protection, and transfer. They are often the best tool for creating and leaving a legacy that can live on for many generations and can adapt to changes that occur over time, even after you die. But when an estate planner brings up irrevocable trusts, many people wrongfully fear flexibility will be lost. Although the word irrevocable means unable to be changed or revoked, should you take that definition literally when it comes to irrevocable trusts? As with many things involving legal matters, the answer is not what you might think.

All trusts are contracts — agreements among three (3) parties:

All trusts are contracts — agreements among three (3) parties:

(1) A Grantor (our firm uses the term “Donor,” but the IRS prefers grantor; other synonymous terms include “Trustor” and “Trust Maker”). This is the person who creates a trust and gives assets to the trust.

(2) A Trustee. This is the person who manages the trust and the assets it owns. A trustee is to a trust what a CEO is to a corporation.  

(3) A Beneficiary. This is the person who gets to enjoy what the trust owns.

As with any contract, if it is properly designed and drafted, it can have enormous benefits for all of the parties to the contract, while at the same time preventing non-parties (like creditors, divorcing spouses, and even the tax authorities) from having the ability, now of in the future, to interfere with the agreement. 

Discover the difference between a revocable trust and an irrevocable trust below, and learn whether there are any situations that allow for amending or making changes to an irrevocable trust. Then find out how an experienced legal professional can help with trust administration and other tasks.

Revocable vs. Irrevocable Trusts

A revocable trust may be revoked or changed by the grantor. The only requirements to do so are that the grantor must be alive to make the change and must be deemed competent to do so. For example, a grantor who is currently experiencing late-stage dementia may not be able to make changes to a revocable trust because they may be deemed not competent to do so because of their cognitive and memory issues. We often solve this problem by authorizing an attorney-in-fact under a valid durable power of attorney, which gives estate planning powers to amend a revocable trust when the grantor is incompetent.

In comparison, an irrevocable trust appears to be less flexible. Generally, a grantor can’t make any changes to this type of trust. One trade-off is that an irrevocable trust provides more shelter for assets against taxes and creditors than a revocable trust. Most families use irrevocable trusts for specific purposes. Irrevocable trusts are like hex wrenches. Each one works great on the hex nut that it fits and not so well, if at all, on the ones that it doesn’t fit. Certain irrevocable trusts help reduce capital gains taxes; others provide asset protection; and still others are great for making gifts to minors. But an irrevocable trust for gifting to a minor won’t help with your capital gains taxes.

Is It True You Can Never Amend an Irrevocable Trust?

The IRS’s definition of an irrevocable trust is one that “cannot be modified, amended, or revoked.” However, that’s not accurate. An irrevocable trust cannot be modified, amended, or revoked by the grantor. Amending or changing most irrevocable trusts is really very easy – if the trust is built correctly. It just can’t be done by the grantor.

Under What Circumstances Might You Be Able to Change an Irrevocable Trust?

You can always petition the court to approve an amendment to an irrevocable trust. But this is the most expensive and often the least desirable method of amending a trust. The rules for amending through a court petition are usually set out in state statutes or outlined in case law. Generally, all parties related to the trust, including all beneficiaries, must agree to the changes before the court will approve the action. Courts also typically won’t approve changes that clearly fly in the face of the original intent of a trust. That means that beneficiaries of a trust can’t generally conspire to change the trust in such a way that it negates the grantor’s wishes.

Some situations under which the court may consent to the amendment of an irrevocable trust include:

• When circumstances have changed significantly enough that the current trust is creating an undue hardship
• When the trust, as it stands, has requirements that make it exorbitantly expensive and unreasonable to administer
• When federal or state laws have changed and the trust must be amended in order to comply with those laws
• When a mistake was made in trust law when the trust was created and an amendment is required to bring the trust in line with the law

In some states, the laws have authorized amendment by agreement. In states where amendment by agreement is not available by statute, the trust terms may, and often should, include a similar authority. The trust documents can include specific authority for changes if beneficiaries and other parties (such as the grantor or trustee) agree — without the need, cost, and delay of obtaining court approval.

Amendment via a Trust Protector

In some cases, the irrevocable trust includes the option for a Trust Protector. A Trust Protector is given certain authority, as defined by the trust document, and that can include the power to make specific types of changes to the trust.

The Trust Protector typically has limited ability to make changes to the trust. Common authority given to Trust Protectors includes the ability to remove or change trustees or successors, fix a trust so that it is more tax efficient, amend a trust to handle future changes in the law or family situations (like tax changes or a beneficiary who develops an addiction), modify how assets are distributed to beneficiaries in certain situations, and make any amendments to a trust required to satisfy requirements of law.

The Trust Protector may be named specifically in the trust paperwork. Or, the option to name a Trust Protector may be documented in the trust paperwork so that the position can be filled in the future.

Is Moving the Assets the Trust an Option?

Sometimes there are options for funneling assets from one trust into another. Some states permit something called trust “decanting.” In concept, this is similar to decanting a bottle of fine wine. The contents of the wine bottle are transferred to a decanter.

This aerates the wine to make it more enjoyable. Similarly, when an old trust document is not working well for the beneficiaries, the assets may be “decanted” into a new trust document with better terms and conditions by the trustee.

Several states have adopted decanting statutes that set up the rules for how decanting can work. In Massachusetts, we do not have a state law to guide trustees. Instead, we have Morse v. Kraft, 466 Mass. 92 (2013). As a result of the Kraft decision, decanting is possible for Massachusetts trusts. But the terms of trusts written after the Kraft decision must include authorization for the trustee to decant.

The Best Way to Amend an Irrevocable Trust

Ultimately, the best way to amend an irrevocable trust is with help from an experienced legal professional. A trust attorney can help you understand whether an irrevocable trust can be amended and work with you to make changes that are in line with the law and your goals for the future.

If you’re dealing with an irrevocable trust that isn’t properly serving the needs of yourself or other beneficiaries, we can help. The Law Offices of Boyd & Boyd, P.C., can also help you create trust structures meant to protect your assets now and in the future. Contact us at 508-406-9319 to find out more about our services or make an appointment.

If you reside in a state other than Massachusetts but own real estate or tangible personal property in the Commonwealth, your property here will probably be subject to the Massachusetts estate tax – unless you have sound planning advice and guidance from a Cape Cod estate planning lawyer.

A change of residency can often help you reduce the income tax liability you face as a Massachusetts resident. However, just because you are no longer a resident subject to the state income tax, non-residency does not necessarily mean you are no longer subject to the Massachusetts estate tax.

How does the estate tax in Massachusetts work if you are not a resident but you own real estate or tangible personal property in this state? Is there a way to avoid the estate tax? If you own property in Massachusetts but are not a resident, keep reading to learn the answers to these questions.

How Does the Massachusetts State Estate Tax Work?

The current Massachusetts estate tax exemption is $1 million. For an estate valued at less than $1 million upon the owner’s death, there is no estate tax. For an estate that is valued at or above $1 million, the tax must be paid before any assets may be transferred to the beneficiaries. As with any inheritance, debts and taxes must be paid before an heir may inherit.

However, the state’s estate tax applies to the full value of the estate, not merely to the part of the estate that exceeds the exemption amount. If an estate is worth $3 million, the entire estate – not just the $2 million above the exemption amount – is subject to the estate tax in Massachusetts.

If the value of your estate hovers around the $1 million figure, the wrong estate planning strategy could impose a crushing tax burden on your beneficiaries, but an astute Massachusetts estate planning lawyer can suggest several ways to keep the value of your estate below $1 million.

If your estate is subject to the estate tax in Massachusetts, how much will have to be paid to the state? It’s a complicated question, and the answer to that question is, “It depends.” However, as of 2022, the Massachusetts estate tax rate is a graduated rate that begins at 8% and works up to the highest rate of 16 percent.

How Does the Estate Tax in Massachusetts Apply to Non-Residents?

By statute (MGL ch 65C sec. 4), Massachusetts has the right to tax a resident of another state if they own real estate or tangible personal property located within the Commonwealth of Massachusetts.

Section 4. (a) A tax is hereby imposed on the transfer of a nonresident decedent’s real and tangible personal property having an actual situs in Massachusetts, if such property would have been included in the Massachusetts gross estate had the decedent been a resident.
(b) The tax imposed under subsection (a) shall be an amount which bears the same ratio to the tax that would be due if the decedent had been a resident as (i) the value of all real and tangible personal property, diminished by any mortgage or lien thereon, having an actual situs in Massachusetts, the transfer of which is subject to tax under said subsection (a) bears to (ii) the value of the decedent’s Massachusetts gross estate, diminished by any mortgage or lien or property included therein, determined as if he had been a resident.

Here’s how the Massachusetts estate tax applies to non-residents. Let’s say that you’re a resident of Florida, single, and you own a home in Dennis. Then, let’s say that your estate is valued at $3 million, and your Osterville home represents one-third of your estate because it’s worth $1 million.

If you were a resident of Massachusetts and if your entire estate were located here, your estate tax would amount to $182,000, but as a resident of Florida, your home in Massachusetts constitutes only one-third of your total estate.

You would thus pay one-third of the estate tax that a resident of Massachusetts would pay, or $60,667. If you would prefer not to pay over $60,000 to a state where you’re not a resident, a Cape Cod estate planning attorney can help you plan to avoid the estate tax in Massachusetts.

A Revocable Trust Will Not Protect Your Estate from the Massachusetts Estate Tax

Many of the people who own real estate or tangible personal property in Massachusetts have set up revocable living trusts. Transferring your Massachusetts assets into a revocable trust will avoid probate in Massachusetts, but it may not give those properties protection from the Massachusetts estate tax. Incidentally, the same is true for irrevocable Medicaid Planning Trusts (MPTs).

It’s true that a revocable living trust provides a number of advantages and lets your estate avoid the probate process, but any Massachusetts property that is owned by your revocable trust (and most MPTs) is still considered part of your taxable estate and remains subject to the estate tax in Massachusetts.

How Can Non-Residents Avoid the Massachusetts Estate Tax?

It is often best to keep things simple. For married couples, there is a very easy option. No sophisticated estate planning is needed. A properly drafted joint revocable trust may be used to eliminate the Massachusetts estate tax.

If you are using revocable trusts to avoid probate, your trust may be amended. Most married couples use separate trusts – one trust for one spouse and a second trust for the other. By amending and merging those separate trusts into one joint trust, it is possible to eliminate any Massachusetts estate tax liability. A Cape Cod estate planning lawyer can help you and your spouse establish a joint trust or help you merge your individual trusts into a joint trust.

With a joint trust, at the death of the first spouse, the Massachusetts real estate may be allocated to an irrevocable portion of the trust (sometimes referred to as a credit shelter trust), as long as the net value of the real estate is less than $1 million. Because the irrevocable trust is built in a way that the surviving spouse can use the real estate but not “own” it under the tax code, the Massachusetts real estate will not be a part of the survivor’s estate at death. This effectively allows a widowed spouse to avoid the Massachusetts estate tax on Massachusetts real estate when the second spouse dies.

What if you are not married? Or what if my Massachusetts real estate is worth more than $1 million?

However, an out-of-state resident who owns property in this state may have several other practical alternatives for avoiding or reducing the Massachusetts estate tax. A Cape Cod estate planning attorney can help you determine which technique makes the most sense for you and your family.

Out-of-state residents who own investment real estate in this state may consider setting up a limited liability company, which is one strategy for avoiding the Massachusetts estate tax. When you transfer your real estate in Massachusetts into your LLC, the LLC becomes its legal owner. By statute, Massachusetts levies a tax on real or tangible personal property “owned” by a decedent and located in the Commonwealth.

Massachusetts does not subject the intangible personal property of a non-resident, including limited liability company membership shares, to its estate tax, so any of your properties that legally belong to your limited liability company would no longer be considered a part of your taxable estate.

But be warned: just creating an LLC and transferring your real estate to an LLC is not enough. Your LLC must have a legitimate business purpose, that includes generating some form of revenue. So your LLC will need to charge fair market rent on the real estate it owns to be legitimate. The trick is how to structure the rent so that it does not create taxable income in Massachusetts. There are many other considerations that your Massachusetts estate planning attorney can help with.

What Are Your Other Alternatives?

If you are an out-of-state resident who owns a home or other real estate in Massachusetts, another strategy for avoiding the Massachusetts estate tax is the creation of one of several types of irrevocable trusts.

Some examples of irrevocable trusts include:

(1) the sale of the Massachusetts real estate to a deceased spouse’s credit shelter trust (this preserves ones federal estate tax exemption but that this may have a capital gains tax consequence),

(2) the sale of the real estate to a Massachusetts Estate Tax Avoidance Trusts (this technique preserves your federal estate tax exemption and has no capital gains tax exposure), and

(3) transfers to a Qualified Personal Residence Trust (QPRT). A QPRT is a special type of irrevocable trust into which you give your primary or secondary home and reserve the right to use the home for a term or period of years. QPRTs use a portion of your federal estate tax exemption and do not expose you to capital gains taxes (but your heirs will receive your cost basis). QPRTs also have a risk of failure. If you die before the term ends, the real estate will be pulled back into your estate, thereby subjecting your estate to the estate tax you were trying to avoid.

These are just a few examples of the types of irrevocable trusts that may be used to eliminate the Massachusetts estate tax. Which technique will work best for you depends on your particular needs and circumstances.

What Is a Spousal Access Trust?

If you are married, a trust like a Spousal Access Trust allows you to give your Massachusetts real estate and tangible personal property to a trust for your spouse. And you can be sure that your spouse will greatly appreciate the gift!

A spousal access trust is an irrevocable trust prepared by one spouse for the other’s benefit. A spousal access trust is funded by gifts from the donor spouse while both spouses are still alive. It may be written in such a way that if your spouse dies before you, the assets owned by the trust may be transferred to an irrevocable trust for your benefit.

What Option Is Right For You?

Several other types of trusts – and several other estate planning approaches – may allow an out-of-state resident who owns tangible property or real estate in Massachusetts to reduce or avoid this state’s estate tax.

The option that’s best for you can only be determined by consulting a Massachusetts estate planning lawyer. Your estate planning lawyer will evaluate your assets and properties and recommend the best way for you to reduce or avoid having to pay the Massachusetts estate tax.