How Prepared Are You For Personal Disaster?


February 2006
Vol 29 No. 5



Recently, a subscriber had a surprise heart attack. It came without any warning. Fortunately, medical attention was close by and full recovery is expected, but it could have been financially debilitating. Whether killed or incapacitated by ill health, others will need to step in and take charge of business operations to keep income coming in. For a fortunate few, substitutes have been well trained, and business has gone on as usual. But, many times, when unprepared family members or friends try to fill the breach, the result is financial disaster and loss that far exceeds the costs of medical care. This becomes particularly acute when property is mortgaged. When loan payments come due, your lender isn't going to waive its income just because you are having personal health problems.


It can be much worse when an entrepreneur dies without having made any provisions for the passing of legal control and title to chosen heirs. No matter how logical or obvious it may be that a spouse – or in the absence of a spouse, adult offspring – ought to take charge of property and control over a business, that isn't going to cut much ice with lenders, brokers, bankers, accountants, tenants, contractors, etc. Anytime an heir is involved in a decision that affects an estate, most of the foregoing parties are going to dig their heels in and do nothing until the estate is probated. Probate filings, appraisals, and tax preparation are both expensive and time consuming. Large, complex estates with multiple potential heirs could require months, and even years, to complete before any funds would be available to survivors. Howard Hughes' estate was in probate for 17 years while associates and various claimants wrangled over the spoils.


It's easy to dismiss the importance of making preparations for the winding up or continuation of your financial affairs while you're hale and hearty; but what would happen to those who rely upon you for payments and support if you were incapacitated or killed in an automobile accident; or were felled by the onslaught of disease or illness? Where and how would your family live and support itself in addition to paying for your long term medical treatment? Which assets would you want them to liquidate first, if necessary? Who would take charge of your rentals, or collect outstanding loans owed to you? Who now has the legal right to cash in stocks, bonds, and mutual funds? Who has the legal authority to write checks on your accounts? Who would be willing, able, and ready to perform services you might have contracted to provide? What would happen to your net worth and income? What would become of your family? Doesn't this merit your consideration?


Getting all the legal paperwork completed boils down to listing all significant assets and conveying them into a Living Trust. The trust itself should contain instructions as to who gets what, and who does what in the event of your death or incapacity, and it should be signed, witnessed, and notarized so that it can be recorded if need be. Writing a separate letter outlining your personal wishes as to what you want your survivors, Trustees, and/or representatives to do will enable them to make better decisions not otherwise included in your Living Trust; and it will make things a lot easier for everyone.


In that same vein, you should let your family know the extent of medical treatment you want if you are in a coma and there is no hope of recovery. This will help them avoid the long drawn out agony of getting court approval of withdrawal of medical treatment such as occurred with Teri Schiavo. All the year of turmoil within her family were caused simply because no instructions had been left to guide the decisions. Medical professionals often ignore any instructions to terminate medical treatment when given by an heir to any part of an estate. To avoid this, you should execute a Medical Power of Attorney and appoint a friend as independent Trustee to make medical decisions regarding the nature and extent of, or termination of, treatment in accordance with your written instructions. He can provide your doctors the legal authority to terminate treatment.



Getting documents prepared and executed is the easiest part of the estate planning process. The hard part is selecting one or more Trustees who are qualified both by virtue of their ethics and experience; and who would be willing to undertake the task of shepherding your assets in the event of your incapacity and/or demise. This is a critical step in the estate planning process, and one that shouldn't be taken lightly.


When it comes to selecting a Trustee, if I had to choose between talent and morality, I'd choose as Trustee the person with the highest ethics and moral standards that I could find, and try to train him (or her) to enable him to make good decisions if I weren't able to. A long time ago, I selected a Trustee capriciously because he had a pleasing personality and was willing to fulfill the role of Trustee. He seemed to be ethical. Unfortunately for me, this wasn't the case. It cost me a lot of money to learn that lesson.


For many people, choosing one or more Trustees to handle assets and to make appropriate decisions that could affect their future and that of their family is too hard. In many instances, this is the principal reason that they haven't taken steps to create one or more Trusts to preserve and protect their estates. Who might make a good Trustee? A spouse or adult children familiar with your business and willing to step into your shoes are probably the best source of Trustees.


The next best source are those with whom you are already doing business: Responsible property managers – especially those who manage property in other areas — who are already collecting rent, making disbursement for maintenance, pursuing miscreants through the courts, and rendering reports – are “naturals” as Trustees appointed to take charge of investment real estate. Accountants and attorneys who “know where the bodies are buried” could handle tax matters. Investment counselors who may be currently handling investments in “managed accounts” could be given limited powers to serve as Trustees over those same accounts.


You could agree with trusted friends with approximately the same net worth and need for a Trustee to act in your stead, and you in theirs. Except for my little misstep early on, I've done all of the above for many years with completely satisfactory results.


For large complex estates that incorporate extensive assets and varied business operations, it wouldn't be unheard of for a number of trustees – including both family members and professionals – to be appointed to serve as a “Board of Trustees” in order to provide full coverage of the skills and talents required. One person might be ideal for taking care of your family needs over the long term, while another might be more qualified to deal with investment and tax issues. Still another might be best suited for maintaining your real estate operations, whether as a landlord or as a fixer, builder, broker, or flipper.


In addition to a Trust, one more document that is absolutely essential to your long term well being and that of your family is a Durable Power of Attorney held by the person you trust the most. Be extremely careful about letting someone else have the legal power to sign binding documents in your name. One ploy is to execute the Power of Attorney, then to put it into a safe place and reveal its existence only when it is needed, but this presupposes that you would be in full possession of your faculties and be able to tell the person named in it where to find it.


In a Medical Power of Attorney, you should limit the powers of the holder to medical or emergency financial situations. You could forbid any change in the content or purpose of any documents you've previously executed, whether in conjunction with your estate, business, or family provisions. Another solution is to limit the powers to those not already held by other Trustees that you've previously named.


 Copyright © Sunjon Trust All Rights Reserved, (888) 282-1882
Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.



It's going to be a challenge to find a single Trustee who is willing, able, and ready to handle a broad spectrum of assets; especially when they might be situated in different locales and consist of different types of property. By separating property by type, then putting it into trusts specifically designed to hold each type of property, the Trustee you choose need not be versed in all aspects of your financial life, nor even need to be aware of them. Here are some ideas:


I'm a staunch believer in placing each parcel of real estate into a separate Trust. A single real estate Trustee could then serve for multiple trusts. In Florida, Illinois, Virginia, Hawaii, North Dakota, and Indiana, there are either case law or specific statutes that authorize “Land Trusts”. These hold only real estate, or related property such as Mortgages, Deeds of Trust, Options, Leases, etc. With the exception of Louisiana, real estate that is located in any of 49 States and District of Columbia can be held in a Land Trust pursuant to the law of any of the foregoing States so long as the Trustee, the property, or the Beneficiary of the Trust is domiciled there. California, Nevada, Colorado, and Missouri have Trust laws that enable a Trustee to hold title to property for a named Trust; so there should be no problem putting real estate into Trust regardless where you, or it, is situated.


Financial assets such as Notes, Bonds, Stocks, etc. can be held in a Personal Property Trust. These Trusts can be created under “The Law of the United States of American and the Common Law”. You needn't name a State law except in Louisiana. Many of its statutes are based upon Civil Law rather than Common Law. Trusts formed in Louisiana must conform to these Statutes. Personal Property Trusts can still be formed there to hold your assets in the name of your selected Trustee(s). You'd name the Trustee of your Living Trust as the Beneficiary of any and all Personal Property Trusts to provide for your Estate. Potentially hazardous vehicles, guns, and tools that a neighbor might borrow go into their own Personal Property Trust. Any mishap with them won't “infect” other financial assets.


Whether you place real estate or personal property into Trust, you've got to identify it by description and list it in an attachment to the Trust document. Real estate and all money market, bank, brokerage accounts, etc. need to be re­titled in the Trustee's name for the benefit of the appropriate Trust. If you have insurance policies and retirement plans that don't already name a successor to you, they should also be placed into the Personal Property Trust.


There are many hidden benefits to placing property into Trust under the names of various Trustees; first among these is financial privacy. Casual observers won't find your name in the public records or record books of financial institutions. The Trustees would manage your property under the direction of the Trustee of your Living Trust. That would be you until you can no longer manage your affairs; then your successor could be your spouse, adult heirs, or financial friend as you may select. While all this may seem complicated, all that's involved thus far are three Trust documents: (1) A Living Trust, which names you as initial Trustee with your heirs as successors. (2) A Land Trust to hold real estate. Once drafted, the Land Trust document can be duplicated and used for each property. (3) A Personal Property Trust to hold all financial assets, Trust interests, LLC and Corporate shares, and other personal property. Finally, you will have to convey your property into the names of your Trustees for the various Trusts you establish.


So long as the Trustee acts under your direction, this will be deemed a Grantor Trust and there will be no income tax ramifications when you put a property into a Trust, or take it out. Legally, the property will be in the name of the Trustee for the Trust. You will no longer own it, but you will be entitled to the use, possession, income, gain, and any tax benefits. This will provide a fair amount of asset protection. The Trust can name your spouse or adult heir as Successor Trustee of your Living Trust and as the Beneficiary. This way, your Trustee can handle your assets and provide your family with its income and gain.



It's easy to confuse “Trust law” with “Real Estate law” or “Tax Law”. They're really quite different and their differences create gaps that can be exploited for the benefit of both Beneficiaries and Grantors. Most people fail to take advantage of these opportunities because of flawed legal advice, or because they haven't taken the time to learn about them. Their first sin is to go to the trouble of setting up a Trust, then ignoring its existence and treating all its assets as if they were owned personally. Let me clarify:


Legal title to assets must be held by a Trustee for each named Trust, not the Grantor who placed them into Trust. Trust interests are represented by Beneficial interests which may or may not be represented by share certificates as indicated in the Declaration of Trust; thus they are Personal property, not Real Estate. Since Trusts don't die, these assets may be held beyond the lifetime of the Grantor and be passed on to heirs. To the extent a spouse inherits a Trust, the transfer is tax free. A gift tax liability could be incurred when a non-spouse is named as a Beneficiary; but this does not apply to Grantor Trusts.


All Revocable Trusts are Grantor Trusts and are invisible insofar as the IRS is concerned. They do not impact gift, estate, or income taxes. Income and losses flow through to the Grantor with no special tax reporting requirements. Irrevocable Trusts in which the grantor retains special powers are treated as Grantor Trusts for tax purposes. An irrevocable Trust that is administered by an independent Trustee with full power to hold and invest assets must obtain a federal I.D. number as a separate taxpayer. It reports income and loss on a Form 1041, and distributes them by means of a Form K1 to the named Beneficiaries and/or assigns. Undistributed profits are taxed at very steep graduated rates which top out at 35% when taxable income reaches $9750. Except for Business Trusts, Trust income is generally not deemed to be earned income subject to payroll taxes.


Having said all that, how can these attributes be used? Let me list just five strategic Trust concepts for you to ponder:


1. Sellers of real estate must provide their Social Security number at settlement. Nothing requires them to do this when they sell personal property such as Trust shares. In escrow, the Seller first assign 1000 of the Beneficial interests to the Buyer. Next, the Buyer directs the Trustee to deed the property to him to serve as collateral for any required mortgage loan. The Trustee is not selling the real estate, and the Buyer is only buying personal property. No Form 1099 is required.


2. Some States tax real estate transactions severely by imposing stiff filing and transfer fees, or by reassessing property values, or by collecting special taxes from the buyer. These do not apply to personal property transfers.


3. The IRC will allow tax-free property Exchanges under IRC Section 1031 between real estate and Beneficial interests in Land Trusts. Property can be pyramided via Trusts privately by selling it for cash, then reinvesting in Beneficial interests.


4. Using Trusts to hold LLC and Corporate shares enables ownership transfers to be done privately without the need to inform the chartering authority or the State.


5. To reduce the size of an estate, gifts of property can be made into a Grantor Trust for one or more recipients. They would be able to receive income that would be taxed to the Grantor. Alternatively, a Trust could be drafted so its income would be taxed to the Beneficiaries. Tax breaks can also reflect back on the Grantor: For example, if a family home were gifted to the heirs to reduce estate taxes, it could be sold within 3 years after being vacated by the donors, the sale profits up to $500,000 could be tax free, even if the heirs kept the sale proceeds.


Copyright © Sunjon Trust All Rights Reserved, (888) 282-1882
Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.

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