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Protecting Your Assets With the “StepAPT™” Asset Protection Trust

CATEGORIES:  Elder Law, Medicaid Planning, Estate Planning, Creditor Protection, Asset Protection Trust, Irrevocable Trust, Trusts, Advance Planning, Winston Salem, North Carolina, NC.

An irrevocable Asset Protection Trust (APT) may be used as part of an advance asset protection planning strategy, to help a client create a “nest egg” of assets to be passed to his loved ones free from the claims of all creditors. Such trusts can help protect estates against large future medical care bills, such as bills from Medicaid Estate Recovery, hospital, or nursing home bills.

In order to create an APT free from all future creditors in North Carolina, the trust must be designed so that the trust grantor, who sets up the trust, does not benefit directly from the trust assets during his lifetime. The trust beneficiaries, however, may benefit from APT assets during the grantor’s lifetime—in fact the APT may be set up to start benefitting children or other beneficiaries immediately.

When the client’s estate is large enough to make a gifting strategy useful, it may make more sense to set up an APT instead. The StepAPT™ asset protection trust is designed to protect close family members, and provides these benefits:

  1. The StepAPT™ Can Provide Creditor Protection to The Grantor. Making a proper transfer into the StepAPT™ is legally very similar to making a gift to a family member. Once the grantor transfers assets into the StepAPT™, North Carolina and federal law considers this a transfer out of the grantor’s estate for creditor purposes, and future creditors such as Medicaid or hospitals cannot legally reach the assets in the APT.
  2. The StepAPT™ Can Provide Creditor Protection to Trust Beneficiaries. The StepAPT™ may be set up to provide creditor protection to trust beneficiaries both during the grantor’s life, and after the grantor’s death.
  3. The StepAPT™ Provides a Step Up in Tax Basis Which Can Greatly Reduce Taxes on Appreciated Assets. Transferring appreciated assets by gift, like a house, family farm, or stocks that have appreciated, can cause the gift recipient to pay capital gains taxes on all of the increase in value during the giver’s lifetime, which can total thousands of dollars, or more.Putting assets in a StepAPTasset protection trust, however, provides a step up in basis to the beneficiary, so that all of the capital gains accumulated during the grantor’s lifetime are erased. The beneficiary then only owes capital gains taxes for asset appreciation between the time that the grantor dies, and the time that the beneficiary sells the asset.Here is an example of how important getting a step up in basis can be: Suppose Dad bought a family farm in 1945 for $50,000. That farm then increases in value so that it is worth $500,000 in 2017. Then Dad gifts the farm away to son Bob in 2017, and Dad dies on January 1, 2018. If son Bob then sells the farm, at a 15% federal capital gains tax rate Bob would have to pay the IRS $67,500 in capital gains taxes for the farm’s appreciation during Dad’s life.If Dad would have benefitted Bob by placing the family farm in the StepAPTinstead of making the gift to Bob, Bob would have received the step up in basis, the $67,500 would be erased, and the family would have saved $67,500 in income taxes.
  4. Not a Medicaid Asset. Any assets placed into the StepAPT™ are not countable as Medicaid assets, thus are protected from Medicaid. But because the StepAPT™ is an advance planning tool, and Medicaid considers transfers into an irrevocable trust as gift transfers, assets must be transferred into the StepAPT™ more than 5 years before the grantor uses Medicaid, to avoid penalties.
  5. The StepAPT™ Avoids Probate. Assets placed in the StepAPT™ do not pass through probate following the grantor’s death, making the surviving family’s job easier.
  6. The StepAPT™ May Reduce Income Taxes. The StepAPT™ is designed as a grantor trust, which means that income taxes paid by the trust are taxed at the grantor’s individual tax rate, which is normally lower than a trust tax rate.

When using an APT, such as the StepAPT,™ it is important to plan early. An APT will not protect against any already known creditor, so trust assets cannot be moved into the trust to escape that creditor. Planning early helps assure that assets placed in an APT will be protected against any future creditors, both under North Carolina and federal law.

USING A StepAPT™ WITH A REVOCABLE TRUST

A Revocable Living Trust (RLT) does not protect trust assets from the grantor’s creditors during the grantors life, or from estate creditors immediately following his death. But a revocable trust does allow the grantor to easily pull assets out of the trust at any time to benefit him during his life. An irrevocable StepAPT,™ cannot benefit the grantor during life, but it can protect against creditors both during life and following death.

A flexible estate planning strategy may include forming both a revocable living trust and a StepAPT™ for the client, allowing the client to utilize the best features of each type of trust. If a client has a downturn in health, or for any other reason, the revocable trust trustee may flexibly protect any amount of assets at any time by moving them from the revocable trust to the StepAPT™.

How to keep your single member LLC out of probate in North Carolina

Categories:  Estate planning, elder law, asset protection, creditor protection, business formation, trust, trusts, probate.

The LLC has become one of the most popular legal structures for shielding an owner’s personal assets from business liability risks.   An LLC owned by a single person, or “member”, is considered a desirable “disregarded entity” by the IRS, which allows the LLC owner to skip filing a partnership return and instead report his LLC income directly on his personal income tax return.

In North Carolina, the personal ownership interest in an LLC, or membership,  is classified as an item of personal property.  Unfortunately, that classification leads to this not-commonly-known fact:  when the individual owner of a single-member LLC dies, the LLC’s necessary ownership transfer to the decedent’s heirs must pass through probate.

While the LLC is passing through probate, its revenue stream flows to the decedent’s estate, not to the heirs.  The LLC membership may thus be tied up in probate for months, or even a year or more.  This can interrupt a family’s finances.  For example, if a retired husband and wife were living on the monthly income from 10 rental properties held in the husband’s single-member LLC, the wife’s access to cash flow from the LLC may be disrupted if the husband dies and his LLC membership passes into probate.

In North Carolina, the best way to keep a single-member LLC’s ownership interest out of probate is to employ a trust.  The popular revocable living trust keeps assets held by the trust out of probate because the trust is a separate entity which transcends the trust grantor’s death.

When a grantor’s revocable trust becomes owner of the grantor’s single-member LLC, the LLC Articles of Organization and Operating Agreement are set up so that the trust owns the single membership in the LLC.  Because the IRS considers a revocable trust a grantor trust, income from the single-member LLC owned by a grantor’s revocable trust is still reported on the grantor’s individual tax return, maintaining desirable pass-through taxation.

Distribution terms added to the grantor’s revocable trust direct how ownership of the LLC will be transferred to the grantor’s beneficiaries following the grantor’s death.  Because trust distribution following the grantor’s death takes place privately outside of probate, the ownership transfer from the grantor’s trust to the beneficiary(ies) can take place almost immediately, keeping the LLC’s cash flow intact and uninterrupted to a needy beneficiary(ies).

Separate trusts offer NC married couples more flexibility

Categories:  Estate planning, revocable trust, trusts, marital trust, elder law, Winston Salem, North Carolina, NC.

Married couples in North Carolina contemplating adding a living trust to their estate plan may have a choice:  one joint trust or two separate trusts?  In most cases, I recommend a separate trust for each spouse, for the following 6 reasons:

  1. NORTH CAROLINA IS A COMMON LAW PROPERTY STATE. North Carolina is a “common law, ” or “separate property” state.  In general, separate trusts are preferred by planners and attorneys in common law property states like North Carolina, and joint trusts are used more frequently in community property states like California.
  2. SEPARATE PROPERTY STAYS SEPARATE. Many married clients enter into the estate planning process owning a significant amount of separate property.  They may own assets that they acquired before the marriage, they may have inherited family farmland, and they may expect to inherit assets or receive gifts from their parents or grandparents in the future.  Using a separate trust for each spouse more cleanly keeps their separate assets separate, so that they will be more easily characterized as separate at death or in case of divorce.
  3. JOINT TRUSTS MAY COMMINGLE SEPARATE PROPERTY. Where separate property (which has not been properly identified and tracked as separate property) is combined by both spouses in a joint trust, it may become “commingled.”  Where such property has been commingled, or has become jointly titled in a joint trust, it may be considered by our court system as having been converted from the contributing spouse’s “separate property” to “marital property.”  The spouse who contributed the separate property to the joint trust may lose the ability to control it as separate property in case of divorce, or the spouse’s fiduciaries or beneficiaries may lose access to that property following the spouse’s death.
  4. SEPARATE TRUSTS WORK BEST WITH BLENDED FAMILIES OR WHERE SPOUSES HAVE DIFFERENT TRUST BENEFICIARIES. It is common for spouses to have separate sets of children from prior marriages.  Separate trusts allow couples with blended families to each select different primary or secondary trust beneficiaries.
  5. CONSUMER DEBT PROTECTION. With a joint trust, all of the assets of both spouses may be endangered by the debts of just one spouse.  But if separate trusts are used, the separate assets of the uninvolved spouse may be protected from the creditors of the indebted spouse.  This protection may be limited in certain cases however– if the debt involves certain “necessities” such as food or medical care, the North Carolina “necessities doctrine” provides that both spouses may be responsible for the debt.
  6. LIABILITY PROTECTION.  Where separate trusts are used, if one member of a couple is involved in a car wreck which creates liability, the uninvolved separate assets of the other spouse within the other spouse’s separate trust may be protected against that liability.

 

Joint trusts may still be appropriate for married couples in some cases, but for the above 6 reasons, separate trusts are the most flexible choice for married couples in North Carolina, and allow each spouse to have better control over their separate assets.

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