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Assets in an irrevocable trust generally don’t get a step up in basis. Instead, the grantor’s taxable gains are passed on to heirs when the assets are sold. Revocable trusts, like assets held outside a trust, do get a step up in basis so that any gains are based on the asset’s value when the grantor dies. The Biden administration would like to eliminate the step up in basis for revocable trusts and tax any appreciation at death. For irrevocable trusts, gains would be taxed when the appreciated assets are transferred to the trust.

An irrevocable trust also protects the assets from lawsuits and creditors. With the assets no longer in your name, people can’t file a claim against them. Someone who doesn’t have any long-term care insurance might use an irrevocable trust to protect the inheritance for their heirs, so the assets aren’t taken by a nursing home or Medicaid.

The protections don’t come immediately. Assets in an irrevocable trust for five years or less are still fair game for Medicaid. For creditors, it’s two years under federal bankruptcy law and longer in some states. Even your heirs are protected. If the assets are titled under the trust rather than the heir’s own name, the inheritance is shielded from claims in a lawsuit or divorce.

Irrevocable trusts often cost more to put together because they’re customized to your specific tax-planning needs and the kind of property you own. The cost to set one up typically ranges from $3,000 to $6,000, and an especially complex irrevocable trust can be even more expensive. Some irrevocable trusts are designed for a specific purpose, such as a special-needs trust for a disabled family member or a charitable trust for donating assets.

Irrevocable or not, a trust is no use to you if you never finish setting it up, and that’s a common mistake.

With our asset protection instrument, protection is immediate. Indirectly you still maintain control of the asset without owning the asset.

Contact us today for a free consultation.

A straightforward estate, probate expenses can be sizable. After fees for attorneys, courts, appraisals and executors, probate can end up costing 5% or more of the total estate, about $20,000 on a $400,000 estate, according to Nolo Press, a publisher specializing in legal topics.

The downside to irrevocable trusts is that you can’t change them. And you can’t act as your own trustee either. Once the trust is set up and the assets are transferred, you no longer have control over them.

• Why would you want an irrevocable trust? How an Irrevocable Trust Works. Irrevocable trusts are primarily set up for estate and tax considerations. That’s because it removes all incidents of ownership, removing the trust’s assets from the grantor’s taxable estate. It also relieves the grantor of the tax liability on the income generated by the assets.

• Can you sell your house if it is in an irrevocable trust?A home that’s in a living irrevocable trust can technically be sold at any time, as long as the proceeds from the sale remain in the trust. Some irrevocable trust agreements require the consent of the trustee and all of the beneficiaries, or at least the consent of all the beneficiaries.

• Can you remove assets from an irrevocable trust? As the Trustor of a trust, once your trust has become irrevocable, you cannot transfer assets into and out of your trust as you wish. Instead, you will need the permission of each of the beneficiaries in the trust to transfer an asset out of the trust.

• Can a trustee withdraw money from an irrevocable trust? Irrevocable Trusts

Generally, a trustee is the only person allowed to withdraw money from an irrevocable trust. But just as we mentioned earlier, the trustee must follow the rules of the legal document and can only take out income or principal when it’s in the best interest of the trust.

Who pays taxes on an irrevocable trust?Grantor—If you are the grantor of an irrevocable grantor trust, then you will need to pay the taxes due on trust income from your own assets—rather than from assets held in the trust—and to plan accordingly for this expense.

What makes an irrevocable trust invalid?In most cases, what makes a trust invalid is a problem with its creation. For instance, a trust might be legally considered invalid if it: Was created through intimidation or force. Was created by a person of unsound mind.

What happens when you inherit an irrevocable trust?Typically, because the irrevocable trust is a separate legal entity, it isn’t included in the estate of the person who created it. … If the trust is included in the estate, then estate taxes may be due, and the net amount of your inheritance could shrink.

Does a will override an irrevocable trust?Regardless of whether the trust is revocable or irrevocable, any assets transferred into the trust are no longer owned by the grantor. … In such cases, the terms of your trust will supersede the terms of your will, because your will can only affect the assets you owned at the time of your death.

Can you put a mortgaged house in an irrevocable trust?The bottom line is that you can freely transfer your mortgaged property to a revocable trust (to avoid probate) or an irrevocable trust (to protect your home from Medicaid) without fear of having to pay off the mortgage.

How much should an irrevocable trust cost?Irrevocable trusts often cost more to put together because they’re customized to your specific tax-planning needs and the kind of property you own, Parrish says. The cost to set one up typically ranges from $3,000 to $6,000, and an especially complex irrevocable trust can be even more expensive.

Do I pay taxes on inheritance from irrevocable trust?When you inherit from an irrevocable trust, the rules are different. … As a result, anything you inherit from the trust won’t be subject to estate or gift taxes. You will, however, have to pay income tax or capital gains tax on your profits from the assets you receive once you get them, though.

Does a Irrevocable trust protect assets?One type of trust that will protect your assets from your creditors is called an irrevocable trust. Once you establish an irrevocable trust, you no longer legally own the assets you used to fund it and can no longer control how those assets are distributed.

Irrevocable Trusts May Be a Poor Fit For:

Middle class people looking to save money. You’ll save on probate costs, but that’s not enough of a reason to choose an irrevocable trust . Especially when you consider the fact that you’ll be paying someone to maintain the trust. This was more worthwhile when the federal estate tax exemption wasn’t so high. With it now being permanently set at 5 million, most people won’t save on taxes.

Businessman who needs to keep assets fluid. Once you put assets into an irrevocable trust, they are no longer owned by you, but by the trust itself. That means you can’t just dip into them whenever your business has a downturn or a medical emergency occurs. There are plenty of other, better ways to protect your money and still keep it accessible.

Individual with high credit debt. If you attempt to set up an irrevocable trust because you know that creditors are about to start coming after you, there’s a high likelihood you’re going to be accused of using a fraudulent conveyance.

What signals a fraudulent transfer? Fourteen clues courts look for include:

1.             Transfers not in the debtor’s ordinary course of business or usual pattern for disposing of assets.

2.             Transfers of assets for inadequate consideration when the transfer creates or adds to the debtor’s insolvency.

3.             Secrecy in the transaction.

4.             An unduly hasty transfer.

5.             Transfer to a family member, friend or close business associate.

6.             Where a buyer of a business allows the seller to retain managerial control, or a home buyer allows the seller to remain in occupancy.

7.             Failure of the parties to use independent counsel on transactions where independent representation is customary or reasonable.

8.             Extraordinary or superficial attempts to make the transfer appear fair and reasonable.

9.             Unusual possession or use of the asset by the seller after the transfer.

10.          Transferring assets outside the debtor’s jurisdiction.

11.          Failure to promptly record deeds or title documents.

12.          Mortgages or liens for services rendered in the past, or where such services have questionable value.

13.          Failure of the debtor or transferee to accurately record loan transactions or repayments.

14.          Failure by the transferor to collect overdue loans secured by the property.

These activities of fraud simulate an actual transfer of property but are not intended to legitimately divest the transferor of his property. Commonly, a transferee holds title in his name with the tacit understanding that title will be later reconveyed when the creditor threat passes. Meanwhile, the transferee usually allows the property to be used as the transferor wishes.

These factors alone do not conclusively prove fraud or a fraudulent transfer; however, they may easily persuade a court to find such a questionable transaction a fraudulent transfer and hence recoverable by the creditor.

To help avoid fraudulent transfer claims, follow eleven important pointers:

1.             Protect your assets before a claim exists

There cannot be a fraudulent transfer on a transfer that occurred before the liability. That is why it is so important to judgment-proof yourself in advance of any financial or legal difficulty. The safe strategy is to be liability-free when you protect your assets.

2.             Smaller incremental transfers attract less notice than transfers of significant assets. Avoid transfers of all or most of your assets to one transferee. Eggs in one basket are more easily attacked. Assets widely scattered require a creditor to file numerous fraudulent transfer lawsuits. The cost and effort may discourage such actions.

3.             Avoid insider transactions to family or close business associates. Even completely innocent transactions are often suspicious to courts and creditors. Involve non-family members as trustees or corporate officers in transferee entities. A brother-in-law with a different surname is preferable to your same surname brother. Make all transactions appear arms-length, even when they are not arms-length.

4.             Establish the transfer for purposes other than sheltering assets from creditors. Your attorney’s correspondence may, for instance, show that you were instead engaged in estate planning when your irrevocable trust was prepared. And this can be persuasive. Document recitals or preambles that state an innocent legal purpose for the conveyance. And what the instrument is designed to accomplish is strong evidence of innocent purpose.

5.             Carefully document everything that you receive for your property. What services were actually performed? Why are they worth their stated value? If you borrowed money, can you show canceled checks or other customary documentation to prove the debt?

6.             Avoid circumspect actions. Selling your home? Avoid becoming its tenant. People seldom buy homes to rent. Selling your business? Think carefully about remaining in control as its manager. Selling a boat? Think twice about keeping it at your dock.

7.             Verify the value of your property. Establish fair consideration. Have your home appraised by local real estate agents. Prove you received at least 70 percent of its appraised value. If you sell an asset for a low price, obtain photographs or appraisals to show defects or other reasons to justify the lower price. Assume the value of a recently transferred asset will be questioned. Be prepared!

8.             Choose your transferees carefully. If a creditor attacks your transfer, your transferee must defend the transfer. A friendly “straw” with title to your property may not act as you want when facing litigation. He may then quickly surrender your asset or otherwise not cooperate. You then forfeit the asset by default. Transferees to questionable transfers must understand that a claim may arise and must be willing to defend against such a claim.

9.             Never publicize your transfers. Why alert your creditors when you rearrange your financial affairs? This only encourages creditors to move more swiftly to protect their rights.

10.          Employ multiple asset protection strategies. Why simply deed your home to one party when you can also mortgage it to a friend owed $100,000? Your creditor must then challenge both the transfer and the mortgage. This may be too ambitious and expensive a proposition.

11. Don’t overplay your hand. It is not always smart to be completely judgment-proof. Creditors forced to search too strenuously for some asset to recover may target your more valuable assets. Detract creditors with more reachable but less valuable assets.

1.             Creditors do have rights and they must be respected. A creditor can recover assets that you transferred for less than fair value and which rendered you unable to pay your creditors.

2.             Generally, only existing or foreseeable creditors can recover property that had been transferred. An existing creditor is any creditor to whom you have a present liability, whether known or unknown, actual or contingent.

3.             Actual intent to defraud the creditor is not a necessary element for the plaintiff to prove. It is sufficient for the creditor to prove that the transfer had the effect of rendering the debtor unable to pay the creditor.

4.             Creditors usually have five years to commence a fraudulent transfer case. In some states it is four years, or one year after the transfer was discovered.

5.             A fraudulent transfer can impose liability on the transferee, and in some states it is a criminal offense.

6. The best protection against a potential fraudulent conveyance claim is to shelter assets before you have creditors.

Revealed in the story linked here, late actor James Gandolfini through unfortunate planning, left his family with a $30 million dollar death tax burden.

This should be a wakeup call to anyone who will eventually die. (If this does not include you, I would love to hear your story!)

Actor James Gandolfini, who played Tony Soprano in the HBO series The Sopranos, died of a heart attack at the age of 51 while vacationing in Italy. He is survived by his wife, Deborah Lin, and two children: a 13-year-old son, Michael Gandolfini, from a previous marriage, and an 8-month-old daughter, Liliana. Gandolfini left an estate that has been estimated to be in excess of $70 million.

Following James’s demise, his wealth, estimated to be $70 million, was shared according to his will.

The 20% distribution to his wife is safe from estate taxes but the remaining 80% of the assets is subject to an immediate combined federal and state tax rate of 55%. Assuming that the estate is, in fact, worth $70 million, the estate will pay approximately $30 million in death taxes. This amount becomes due nine months after Gandolfini’s death. How is the estate going to come up with this amount of money? Will the estate have to sell some of its real estate at below market prices to come up with the money in such a short period of time?

There were many different options that Gandolfini could have used to minimize the tax burden and avoid making a “gift” of $30 million of involuntary philanthropy to the Federal & State governments. Three alternatives (of which there are numerous others) are:

• Gandolfini could have purchased a life insurance contract payable for the entire amount of the estate’s death tax liability. Life insurance payouts are not subject to inheritance taxes if properly arranged and would have made it easier and far less expensive in paying the $30 million owed in death taxes.
• Instead of the 20% distribution to his wife, Gandolfini could have left all of his assets to his wife. Tax law allows for unlimited tax-free transfers to spouses under the marital deduction. This would have delayed the payment of death taxes until Gandolfini’s wife also died. In the meantime, she could have established a network of tax-advantaged trusts to divide the estate at the time of her death in accordance with her late husband’s wishes, as well as buying life insurance on her own life to greatly reduce the impact of taxes.
• Finally, there was nothing mentioned in Gandolfini’s will reflecting any charitable or philanthropic intent. There are a number of philanthropic tools that could provide benefits to himself and his family members, and direct money to philanthropy instead of the government. Not only is this permitted by tax laws … it is actually encouraged by the tax system. Through careful planning, someone can leave money to charity, and at the same time, pass greater wealth to family members as compared to simply leaving assets to family members outright. Additionally, philanthropy is often an unexpected “glue” for families. It can make well-connected families stronger. It can bring disconnected families together through a shared purpose. Further, philanthropy, which I define as “intentional giving,” has been demonstrated to be one of the best teachers of character. It can break the cycle of selfishness that seems to permeate much of Western culture today … the sickness I have heard described as “Affluenza”.