Grantor Trust

Arranging a Louisiana Estate for Asset Protection and Easy Inheritance

This post describes how Irrevocable Grantor Trusts are used to protect assets while parents are alive, and then to provide for an easy transition or inheritance to the children or other heirs.

As folks age, they often worry that they will run out of money before they die due to their longevity and all of the threats that seniors face these days.

Many seniors create trusts to help protect what they've worked for. They often keep some assets in their name, and they transfer other assets to a trust that they create.
 
Because their assets are titled in the right kind of trust, with the right kind of asset protection provisions, they are less likely to lose these assets from some kind of life-changing event.

These asset trusts are often irrevocable, but sometimes certain aspects of the trust are amendable. These trusts typically allow for trust assets to be sold and re-invested. These trusts usually have some provision for distributions of principal. Many of these trusts and estates are arranged so that probate is avoided at the death of the Settlors/Grantors/Trustors.

Check with the right estate planning attorney in your jurisdiction to make sure you establish an estate planning legal program that is right for you and your family. Don't try to do this yourself. Too much is at stake.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Income Tax Reporting Requirements for Grantor Trusts

This post address the income tax filing requirements for revocable trusts and for certain kinds of irrevocable trusts. 

Trusts are popular tools for many reasons, including probate avoidance and asset protection. Essentially, there are two types of trusts: revocable trusts and irrevocable trusts.

People easily get confused about the income tax filing requirements for trusts. Some trusts must file a tax return. Others do not. Here's a quote from the IRS website regarding a trust's requirement to file an income tax return:

"Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary. However, if the trust is classified as a grantor trust, it is not required to file a Form 1041, provided that the individual grantor reports all items of income and allowable expenses on his own Form 1040, U.S. Individual Income Tax Return. Thus, the grantor/individual would pay the total tax liability upon the filing of his return for that taxable year."

It's important to determine whether a trust is a grantor trust. A trust is treated as a grantor trust when a grantor or another person is treated as the owner of the trust income or principal or both for federal income tax purposes. This means the grantor or such other person must include in the computation of taxable income all items of “income, deductions, and credits against tax of the trust” attributable to the portion of the trust over which the grantor
or such other person is deemed to be the owner. In other words, the grantor or such other person treated as the owner of the trust is taxed to the same extent as if he or she had received the item directly. Section 671; Treas.Reg. §1.671-2(d).

Sections 673 through 679 set forth the situations in which a grantor or another person is deemed to be the owner of the trust, thereby creating a grantor trust. 

The power to revoke a trust is one of the powers that causes a trust to be a grantor trust. Thus, all revocable trusts are grantor trusts. 

Regarding an irrevocable trust, we must look to the provisions of the trust to determine if powers were retained by the grantor cause the trust to be a grantor trust. Powers often provided in an irrevocable trust that cause the irrevocable trust to be treated as a grantor trust include the power to control the beneficial enjoyment, and the distribution of the trust income to the grantor or grantor's spouse.

If your irrevocable trust is a grantor trust, then all income earned by your trust is reported on your personal income tax return, not a separate trust tax return.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Rules on an Irrevocable Trust and Nursing Home Medicaid

This post describes the regulations that exist regarding when assets in a trust are considered resources of someone who is applying for Long Term Care Medicaid.

Many Seniors are concerned about the cost of long term care, especially if it is necessary that they spend months or years in a skilled nursing facility.

Some Seniors explore getting assets out of their name timely to make themselves eligible for Medicaid. These same Seniors, however, are uncomfortable putting assets in their children's names for fear of losing control of the assets, and for fear of giving their children unwanted tax consequences.

Some people explore putting assets in trust for purposes of gaining future Long Term Care Medicaid eligibility. The Louisiana Long Term Care Medicaid Eligibility Manual (the "Manual") has specific rules regarding whether trust assets are considered a resource of the Medicaid applicant, rendering them ineligible for Medicaid benefits.

Regarding when the Medicaid applicant is a trustee of a trust, the Manual provides:

"Count the trust as a resource, regardless of whose funds were
originally deposited into the trust, if the applicant/enrollee:
 is the trustee, and
 has the legal right to:
- revoke the trust, and
- use the money for his own benefit."

Regarding when the Medicaid applicant is a Settlor of a trust, the Manual provides:

"Count the trust as a resource if the applicant/enrollee is the settlor
(created the trust) and:
 has the right to revoke it, and
 can use the funds for his own benefit"

Regarding when assets are not considered a resource and penalty periods apply to the transfer of the assets to a trust, the Manual provides:

Consider penalties under the transfer of resource policy (refer to
I-1670 Transfer of Resources For Less Than Fair Market Value) if
the applicant/enrollee:
 created the trust,
 does not have the right to revoke it, and
 cannot use the principal for his own benefit.

The traditional "avoid probate" revocable living trust clearly is a resource for a Medicaid applicant. Many people, however, create other trusts, and transfer assets to those trusts, which can enable a Senior to avoid the risks inherent in transferring assets during into children's names, while starting the five year penalty period and protecting assets from the nursing home spend down.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Info to Gather When Starting "Avoid Probate" Living Trust Based Estate Plan

I'm often asked, "Paul, what information do we need to gather and bring in to get started on our estate planning?" Well, this advice is based on a "typical" (even though there is no such thing as typical because every family's situation is unique and requires customization) person or couple who wants to set up an estate legal program and prevent their family and loved ones from having to go through the court-supervised judicial probate or Succession estate administration process. This typically involves establishing a Living Trust and transferring title to some of your assets into your trust while you are alive in order to make it easy for your Successor Trustee to access and disburse those assets when you die.

In general, there are three groups of information that must be provided: (1) family information; (2) asset information; and (3) substantive legal decisions.

(1) Family Information. This is typically simple. We are going to need the names of all who will participate in your estate planning program either while you are alive or after you die. This typically involves the full names (as you would have them listed in legal documents) of yourself and spouse, children, and sometimes grandchildren or others if they are included. We typically do not need the social security numbers of all of these people. although you may have to provide these numbers to financial institutions on items like IRA and annuity beneficiaries.

(2) Asset Information. When you get started, you should have a good working knowledge of what you own. It is particularly helpful if you gather, up front, all of your real estate legal descriptions. In Louisiana, these real estate legal descriptions can be found on the "Act of Sale" from when you purchased the property, or the "Judgment of Possession" if you inherited the property. We need these up front so that we can prepare the necessary transfer documents that will be signed at the same time that you sign your trust. Documents regarding investments and brokerage accounts don't have to be provided up front (but great if you have them), because you cannot transfer those assets to your trust until after your trust is signed.

(3) Substantive Decisions. All of the "who gets what, how they get it, who will be in charge" decisions are gathered through the dialogue you'll have with your estate planning attorney. These are important decisions and you need an experienced attorney to guide you through this. But it doesn't hurt give some good thought to these things in advance.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com

Sell or Distribute Assets When Someone Dies?

When someone dies with assets, whether those assets are in trust or not, the people in charge must make a decision to either sell (liquidate) the assets, or distribute them in their same form to those left behind.

When someone with a living trust dies, the Successor Trustee is typically heavily involved in that decision. If it is appropriate to sell assets, then the Successor Trustee will sell those assets, the proceeds of the sale will be payable to the Trust, and the Successor Trustee will deposit those funds into a trust account for subsequent disbursement to the beneficiaries of the trust. Trustees will sometimes sell real estate (a home, for example) that the survivors have no use for. Successor Trustees may also sell mutual funds or other investments and disburse those to beneficiaries.

On the other hand, sometimes it makes sense for the Successor Trustee to simply distribute the assets to the beneficiaries in the same form. Occasionally, a family has an emotional attachment to stock that a parent owned, and the beneficiaries will receive the stock in their own name.

Sometimes the family will want to continue owning real estate owned by the deceased (or the deceased's living trust). The Successor Trustee, immediately after the death of the Settlor, can transfer the real estate to the beneficiaries, outside of probate, so that each beneficiary owns an undivided interest in the real estate. It's also not uncommon, if the real estate was not owned in a limited liability company, for the beneficiaries to form an LLC and put their undivided interest in the property into the LLC. This could limit their liability exposure. Each beneficiary would then own a membership interest in the LLC.

So there are lots of decisions, each with tax consequences, that must be made when someone with a trust dies. Note that if there was not living trust, then the executor of the Last Will has similar decisions to make, but the actions of the executor are under the scrutiny of the judge that is assigned to oversee the Succession judicial proceeding. It's generally easier to administer a trust after a Settlor dies than it is to administer a Louisiana Succession which requires extra judicial processes and supervision. 

Paul Rabalais
Louisiana Estate Planning Attorney
paul@rabalaisestateplanning.com
Office phone: 866-491-3884

What To Do When Person Who Set Up Trust Dies

Here's what needs to be done after someone who had set up a Louisiana Avoid Probate Living Trust passes away.

Obviously, there are a number of non-legal tasks that must be addressed, from making funeral arrangements to notifying family and friends. But once we start talking to a family about legal matters, the initial things we often review are the trust instrument and the assets.

Regarding the trust instrument, we will always initially review who was designated as the Successor Trustee or Co-Trustees. We'll also take a close look at what action is required after the death of a Settlor. The actions required may be very different depending upon whether the Settlor was married or single at the time of his or her death.

If the Settlor was married, the trust might require that assets be divided into two trusts after the first death. This was pretty much "standard practice" back when the estate tax exemption was lower and we wanted to make sure that the assets of the first spouse were not lumped into the estate of the surviving spouse for federal estate tax purposes. Now, with couples being able to exempt more than $20 million, it's not as critical that there be a division of assets upon the death of the first spouse.

If the Settlor, at the time of his or her death, was married, then the trust is likely to require distributions to the principal beneficiaries of the trust, although some trusts may require that assets remain in trust for some period of time.

Another thing we look at is the assets of the Settlor and in the trust. The trust may own real estate, investments, or other assets. The trust might be named as the beneficiary of the Settlor's IRAs, life insurance, or annuities.

And the Settlor may have owned assets in his or her own name when the Settlor died. Assets may have either intentionally or inadvertently been left out of the trust. If there are probate assets left out of the trust, then we want to determine the existence and contents of, perhaps, a pour-over Will. If there are probate assets in the Settlor's individual name (not in the trust), a Succession may be required to pour-over those assets into the trust for distribution.

Finally, as part of this first step, we want to review the trust instrument to determine the rights and obligations of the Trustee and the beneficiaries. Some trusts have customized duties and powers that must be followed.

Bottom line - don't assume that you know what the trust instrument provides and requires. Work with an estate planning attorney who can spot and solve issues that you do not know exist.

Paul Rabalais
email: paul@RabalaisEstatePlanning.com
Offices: All over South Louisiana
website: www.RabalaisEstatePlanning.com

Living Trusts and Income Tax

As we discuss an estate planning program with our clients, some of our clients that they would like to arrange their estate to avoid the court-supervised probate estate administration at their death, but they are concerned about how setting up a Revocable Living Trust might affect their income tax situation during their lifetime.

When you create a Revocable Living Trust, you will be what's referred to as the "Grantor" or "Settlor." You can amend or revoke the trust at anytime, and you are entiled to receive all of the income that the trust assets produce during your lifetime.

While there are many different types of trusts, this type is arranged so that you are still taxed on all income earned by the trust assets. You continue to use your Social Security Number on all trust bank and investment accounts. The trust does not need its own Tax Identification Number. As long as you live, all of the income is reported on your own personal income tax return, so you won't need to file a separate trust tax return.

Some people like that their trust does not complicate or change their tax status, but the assets in the trust will avoid the Louisiana court-supervised probate estate administration upon their death.

www.RabalaisEstatePlanning.com

Share and Subscribe

What Assets Go Into the "Avoid Probate" Louisiana Living Trust?

We are often asked about which assets should Louisiana residents put in their "Avoid Probate" Living Trust. This is important because if you don't title the right assets into your trust correctly, your survivors will be required to hire lawyers and go through the court-supervised process when you die to get those assets that were not in your trust, in your trust.

This is a very general overview regarding which assets should go in your  trust. If you want your family to avoid probate, you should work with our office to set up the appropriate estate legal plan that accomplishes your objectives. We will work with you, asset by asset, to make sure your assets are titled in a way to ensure a smooth transition to your survivors.

Here's the basics:

Your real estate should go in your trust. Be careful to transfer your home to your trust in a way that you preserve your property tax homestead exemption. You should also transfer your undivided interests in real estate (immovable property) and your out of state real estate. Transferring your out of state real estate to your trust will avoid the ancillary probate proceeding in that state when you die.

Investments. Stocks, bonds, mutual funds, and other investments that are not held in your IRA or other qualified retirement account should go in your trust. 

Small Business Interests. If you own a membership interest in a limited liability company (LLC), you should transfer your LLC membership interest into your trust.

Bank accounts. Check with your estate attorney and your financial institution regarding whether your bank accounts should be titled in your trust name, or whether you can take advantage of an alternative way to enable your bank and credit union accounts to pass to your survivors outside of probate.

Vehicles. Check with your attorney regarding Office of Motor Vehicles rules which may permit you to keep your car titled in your name but still avoid probate when you die.

Assets that typically are not transferred to your trust during your lifetime are IRAs and other Qualified Plans, Annuities, and life insurance. These accounts, by their nature, avoid probate because you are permitted to designate beneficiaries to receive the assets outside of probate when you die.

Give us a call at 866-491-3884 to start a discussion about how you can arrange your legal affairs to simplify the transition of what you've accumulated to your loved ones and survivors.

Lafayette,Louisiana Family Benefits From Dad's Estate and Medicaid Planning

I've been working with a Lafayette area family lately. Dad has his home, his life savings, and a couple of other pieces of property, and he wants to make sure his kids get it when he dies. His biggest threats to his children, as he sees it, are:

  1. Losing the assets due to a long-term care nursing home stay;
  2. Taxes; and
  3. Probate

A large part of his life savings is tucked away in his Individual Retirement Account (IRA). He also has investments held in an account that is not an IRA, and he has some money in bank accounts.

He realized that his IRA is threatened. He knows that any distributions from the IRA during his lifetime or after he dies will be subject to income tax to the recipient of the distribution. He was questioning whether taking required minimum distributions each year was the smartest way to handle his IRA. Here's what he said:

"If I just keep taking my required distributions, then I will pay tax on those distributions and the remainder of my IRA will continue to grow tax-deferred. All of the future growth will be ordinary income to whoever receives a distribution and those distributions in the future could be taxes at a rate as high as 40%, particularly if they go to my kids. Plus, if I go to a nursing home, I will be forced to take large distributions, pay the income tax, and then spend the remaining amounts on my nursing home expenses."

Then he asked:

"Wouldn't it be better if I took larger distributions that the required distributions, pay the tax, and then place the after-tax proceeds in a special trust account where it will be protected from my future nursing home expenses? Oh, and since the trust is a Grantor Trust, any future appreciation of my investments after I take it out of the IRA will passtax-free to my kids due to the step-up in basis that they will enjoy when they sell the assets after my death?"

His analyses appears to make a lot of sense. Most people are encouraged to keep every penny that they can inside their IRA. I'm not saying that's wrong every time, but as long as the investments grow inside the IRA, then a big chunk of each distribution will go the IRS. If the IRA goes ahead and takes distributions faster than required, and pays the tax on those distributions, then future appreciation would escape taxation due to the step-up in basis. Plus, if the IRA owner takes distributions and places those funds into the right kind of trust, then there is the added benefit of being protected from future nursing home costs.

Anyone who has an IRA and is concerned about future taxes and about losing the IRA to nursing home expenses, should have a conversation with an estate planning attorney who understands not only the estate tax, but the income tax and capital gains tax consequences of taking minimum distributions versus taking distributions larger than the minimum required amount.

Give us a call at 866-491-3884 to start a conversation about how to protect your IRA from the government. Don't wait another day. Every day that you wait could be costing you and your family!!!

Louisiana Family Wants Estate Plan That Does 2 Things: Avoid Probate and Protect From Nursing Homes

Was working with a couple recently that had three grown children. One child lived in Lafayette. Another child lived in Lake Charles. The third child lived in Virginia. The couple told me they wanted to accomplish two things:

  1. They wanted an irrevocable trust that would protect assets from nursing home costs; and
  2. They wanted the surviving spouse and the children to avoid probate.

We discussed some of the issues that were involved when a large portion of their life savings were in their IRAs. The couple was serious about protecting what they had because one spouse had a parent that was spending a fortune right now on nursing home costs and private sitter costs. The other spouse that I was working with had seen parents lose a home and significant savings to nursing home costs.

We discussed all of the tax aspects of their estate legal program, including:

  • The income tax consequences of assets held in a trust;
  • The protection of the step-up in basis of appreciated assets at their death;
  • The likelihood that there will be no estate or inheritance tax when they die;
  • The income tax consequences of distributions from their traditional IRA and their Roth IRA.

We also discussed how they wanted to provide funds for their grandchildren's education and the best ways to accomplish that. We also discussed, at their request, how owning long term care insurance might fit into their overall legal plan to protect their estate for themselves and their children. They mentioned that they were already staring to look into long term care insurance possibilities with an insurance provider.

At the end of the discussion, I believe they felt that by discussing these issues with me and working toward an estate legal plan to protect their family, they have a plan in place that gives them peace of mind, knowing that they have done what they could to protect their estate.

Louisiana Family Establishes Estate Legal Program for Two Children and Grandchildren

I was working with a Baton Rouge family recently who wanted to set up an estate legal program the right way for their family. Their goals were to make things simple for the surviving spouse; designate both of their children to work together, while staying out of the Louisiana probate, after both spouses died; and making sure that the money they left their grandchildren would be used for the right reasons.

So, we are establishing their revocable living trust so that the surviving spouse is the sole trustee after one spouse dies and is in complete control of everything (no Louisiana Succession or Probate); their two children will be the Successor Co-Trustees after both parents die, and since there will be no probate, the children could sell the home immediately after the parents pass; and third, instead of dumping $100,000 or so into each grandchild's lap when the grandparents die (encouraging even more bad habits from the grandchildren), the grandchildren's parents (who are very responsible) will serve as the trustee of the trust for the grandchildren. The parents will have total discretion regarding what the funds are used for, and the grandchildren's parents will transfer the inherited funds to the grandchildren when the grandchildren show the maturity and financial responsibility to be able to handle this kind of money the right way.

Protecting Your Assets From Nursing Home Expenses: How To Qualify For Louisiana Medicaid

I was recently asked by the Louisiana State Bar Association to present at its 2016 Solo and Small Firm Conference. I taught about 200 Louisiana attorneys who were interested in learning the ins and outs of helping Louisiana families protect their estate from nursing home expenses. The following is an audio recording of my presentation.

While this presentation was designed for, and presented to, attorneys, it will give you a good understanding of some of the rules that apply to families that want to protect their estates from losing it all to the nursing home, and it will prepare you to have a meaningful discussion with me or one of our estate planning attorneys.

Forget About The Estate Tax. Capital Gains Tax Is The New Sexy Tax To Avoid

Face it. Most families simply won't have to worry a lick about the federal estate tax. That's because about 99% of unmarried people don't have an estate that exceeds $5.45 million. And more than 99% of married couples don't have a combined estate of $10.9 million. So, for most families, no worries about trying to avoid the 40% federal estate tax.

But almost every family who engages in estate planning has assets that have appreciated in value. That means there is the potential for capital gains tax at both the federal and state level when those appreciated assets are sold.

Example: Let's say Dad bought stock in ABC Co. for $5 per share over the years. Now, that Dad is 76 years old, ABC Co. stock sells for $60 per share. That means that there is $55 of gain in each share of stock that Dad owns. If Dad sells the stock during his lifetime, he'll get hard with a capital gains tax.

Now let's say that Dad wants to beat the system so he decides to put that stock in his children's names before he goes into a nursing home (to avoid nursing home poverty) and before he dies (to avoid probate and to avoid death tax). So, he puts the stock in his kids' names. Voila - Dad thinks he beat the system. But after the transaction is complete, the stock goes up even more (let's say to $100 per share) and the kids decide to cash in and sell the stock. What no one realizes is that when Dad transferred the stock during his lifetime to the kids, the basis of the stock "carried over" to the kids, so when the kids sell the stock, they will have to pay capital gains on everything they receive in excess of the $5 per share. So, $95 per share will be subject to a 20BUT +% capital gains tax at the federal and state level.

Perhaps if Dad would have put the stock into the right kind of Grantor Trust, he would have removed the stock from his name for probate and nursing home purposes, BUT HE WOULD HAVE PRESERVED THE STEP-UP IN BASIS AT THIS DEATH. So, when Dad dies later when the stock is worth $100 per share, and then the kids sell the stock for $100 per share, the total capital gains tax bill for the sale will be $0 or zilch. Even though Dad kept the stock in his taxable estate by transferring it to a Grantor Trust, there will be no estate tax due to Dad's estate being valued at less than $5.45 million.

Many a "Do-It-Yourself" estate planner have mistakenly believed that they beat the government or beat Uncle Sam by putting stock or other appreciated assets in their kids' names while they are alive. But what they don't know is that Uncle Sam is laughing at them from a distance knowing that when the asset is later sold, Uncle Sam will collect a bundle because the children, unfortunately, receive a "carry-over" basis in the stock, as opposed to a "stepped-up" basis in the stock.