The value of an independent trustee on your asset protection trust

When establishing an asset protection trust, I advise my clients to retain an independent professional trustee in Nevada with limited duties in addition to the trustee they have chosen who will carry the bulk of the responsibility. Here are a few reasons why:

1) If the Nevada resident settlor ever leaves the state, establishing a domicile elsewhere, then the settlor risks losing Nevada as the trust situs. NRS 166.015(1)(c) requires the settlor to be domiciled in Nevada for NRS 166 to govern the trust. Alternatively, the trust property may be located in Nevada, but as the years go by, Nevada property may be sold and accounts may be moved out of state, so I don't feel comfortable relying on those provisions alone. Moreover, if the trust is self-settled then the Nevada property provisions don't apply. The safer option is to take advantage of paragraph (d) in that statute that provides for a "qualified person" trustee (aka Nevada trustee) who has limited powers such as maintaining trust records and handling some trust administration. No matter what becomes of the trust property or where the settlor is domiciled, the trust will remain a "Nevada Trust."

2) A Nevada trustee will add another layer of legitimacy as a result of the trustee's independent relationship with the settlor. Unlike the appointed investment trustee, the Nevada trustee has no prior relationship with the settlor. In exchange for a fee agreed upon between the settlor and the trustee, the Nevada trustee will fill his or her role from a distance without any personal ties to the settlor.

3) The Nevada trustee's job description includes duties that might otherwise be overlooked. If a note is owed by the trust, the trustee will maintain an amortization schedule to keep track of payments. The trustee will arrange for tax returns to be filed and maintain all trust records. In my opinion the value of the trustee's administrative supervision far exceeds the monetary cost to retain the trustee.

Ultimately it's the client's decision whether to appoint a Nevada trustee since it's not mandatory, provided the other requirements in NRS 166.015 are met. But when the purpose of the trust is to protect significant and valuable assets against all claims, any additional layers of available, nonsuperfluous protection should be investigated and considered.

Who gets my property when I die?

This question can trigger hours of discussion. To keep it simple, I'll address only non-probate property. Non-probate assets are those that are not controlled by your will or trust. Assets that are controlled by contractual succession like a beneficiary designation on your life insurance policy, or real property titled as joint tenants with rights of survivorship are non-probate assets.

That leaves property like personal possessions, cars, property owned as tenants in common, family heirlooms, and liquid assets like cash and securities. In most cases these are non-probate assets and when not provided for in a will or trust (meaning the decedent died "intestate") are subject to the state's succession rules in NRS 134.

Nevada is a community property state. That means that most property acquired by a couple during marriage is community property and is split down the middle. The surviving spouse receives his or her share as their sole and separate property. According to NRS 123.250, the remaining share will also go to the surviving spouse unless some other testamentary disposition has been made. That's important because if the decedent spouse had children from a previous marriage, those children will have no legal right to the community property portion of their deceased parent's property. That is, unless a will and/or trust is in place to direct differently. If that is an undesirable result, then estate planning in advance will resolve that.

If the decedent (meaning deceased) spouse had any separate property of their own, that property is treated differently. This includes assets acquired before a second marriage that haven't been commingled and mixed in with the couple's community property. After debts are paid, the remaining amount is now subject to succession rules. Different circumstances dictate different treatments:

If the decedent spouse left behind only his or her surviving spouse and one child, then the property will be split evenly between the two. If there is a surviving spouse and more than one child, then the surviving spouse receives one third of the separate property, with the kids receiving equal shares of the rest.

Finally, if the person who passes away is single, either having never been married or was predeceased by his or her spouse, but leaves behind one child, then that child receives the entire estate. If there are multiple children, then the children share equally. The shares are the same no matter if the child is alive or dead, so long as a deceased child left behind children of their own, who would receive their parent's share in equal shares among themselves.

This is a very simplistic breakdown of Nevada's succession statutes and ignores less common scenarios. The point of this though is to show that what the state has planned for you and your family may not be what you have in mind. This is especially true for the increasingly common second marriages where kids from a previous marriage stand to lose quite a bit if proper planning is not made.

Are AB trusts still necessary?

I wrote a post last year explaining AB trusts. Since then Congress changed the law to make the estate tax exemption portable. That means that the first spouse to die didn't lost his or her exemption. If the deceased spouse didn't use it, the surviving spouse inherited it. Since AB trust language is primarily used for preserving the exemption, AB trusts are no longer necessary, correct?

No, of course not. Remember, AB trusts are just revocable trusts with AB trust language. You still need a revocable trust for a whole host of reasons. As for AB trust language, thanks to the portability of the estate tax exemption, AB trusts may be obsolete for the moment. But recall, the current law was really a temporary bandaid until more long term reform can be made. Thanks to Congress's inaction, 2010 passed without an estate tax and 2011 wasn't addressed until the 11th hour. This new law is only in place until the end of 2012, when the old laws are back in place, including a $1M estate tax exemption. Going by Congress past (and repeated) failures to act quickly, I won't hold my breath for their next move on estate taxes.

Also, while it's true that AB trust language restricts the surviving spouse's right to the corpus of the B trust assets, the surviving spouse gets around that by appointing a co-trustee to make distributions. Therefore, as a result of the uncertainty surrounding the future of the estate tax, I still use AB trust language in my revocable trusts.

Name your family trust as the beneficiary of your life insurance policy

You purchased a permanent life insurance policy to, among other things, provide for your family upon your passing. You would like that policy to be available to pay off debts, including the balance owed on your home. Perhaps you have even planned for enough of the death benefit to be left over to help out your kids if you were no longer around. In order to do so, you have made your children beneficiaries of the policy. You passed your physical, you qualified for the desired amount, and your agent has assisted you with the beneficiary designations. All the paperwork is complete and you intend to rest easy knowing your family will be provided for.

The missing step here that I point out to my clients is the failure to name a trust as the beneficiary. Should the death benefit be available while your children are young enough to misuse it, the cash is unlikely to be used wisely. I think it's unnecessary to point out real-life examples of the detriment to young adults a cash windfall can cause.

Traditionally, estate planning attorneys will recommend an ILIT (Irrevocable Life Insurance Trust) to own the policy to avoid inclusion in calculating the estate tax. While still an advantageous option, generally they are less desirable today because the estate tax exemption is so high. In most cases, I recommend simply naming the family trust as beneficiary. The trust will hold the cash and the trustee will make distributions for specific purposes and/or at certain ages to preserve the cash and ensure the money is used wisely.

I've met with many life insurance agents. Their job is to match you with the right policy from the wide array of unique options available. They are experts at helping you decide on the right amount and the best way to invest the premiums. When it comes time to name a beneficiary, they can sometimes overlook the critical decision of what will become of the cash upon the death of the insured. When you reach this step, envision how you would like the death benefit to be used. It's almost always the case that a revocable trust can provide the best method for accomplishing that vision.

Countdown to 2013

The turmoil over the estate tax continues. Congress acted late last year to nail down a new and simplified estate tax structure for 2011 and 2012 after allowing 2010 to pass without an estate tax at all. However, that new law is only temporary and expires at the end of next year. If 2009 and 2010 are any indication, Americans are unlikely to know how to plan their estate to take into account an estate tax for beyond 2012 until the last moment.

In the mean time, a massive lifetime gift tax exemption of $5M is available for individuals ($10M for most couples) to shift wealth out of their estate to avoid being subject to an estate tax. This is up from only $1M in the recent past. This makes now a prime time to take advantage of planning opportunities for those who would not otherwise be able.

As with most planning, timing is critical and with the uncertainty of 2013 drawing closer every day, it is imperative that those concerned about the estate tax and asset protection take action right away.