Life is full of risks. Every day someone, somewhere (let’s call him “Bob”) rushes to an attorney and asks, “Is there anything I can do to protect my assets?” Chances are, Bob is facing one of these four threats:
Someone got hurt, and they are blaming it on Bob—his mistake, accident, miscalculation, error in judgment. He is being sued for all he is worth.
Bob just received notice that his wife is filing for divorce, and he figures he’ll be “taken to the cleaners.”
Bob is aging and realizes that a nursing home is becoming a real possibility. He has no long-term care insurance, and the costs of care will probably eat quickly into his estate.
Bob’s estate exceeds $4,000,000, and he wants to protect it from the Illinois estate tax, which starts at an effective rate of about 28% on the excess.
When you are facing these threats, it is difficult, often impossible, to protect your farm and other assets. The law generally does not allow Bob to hide his own assets from his own mistakes, divorce, care needs or taxes.
However, if Bob is very fortunate his attorney may be able to give him some good news. It depends on what has happened in the past. Let’s imagine the perfect history.
Decades ago, Bob got his start because his parents gave him a special type of trust with some land and money inside. At the time, Bob didn’t appreciate it all that much. It seemed like a hassle to manage the assets within the trust; it would have been simpler to just have the money and land in his own name. But, he followed good advice over the years. He could take money out of the trust, but instead he invested every bit of the trust money in more land within the trust. He could not add his own money to the trust, but he did everything he could to grow it. For example, he paid maximum rent into the trust as he farmed the land. Later when his parents died, they added Bob’s inheritance to the same trust. Along the way, Bob’s own balance sheet of assets outside the trust—his operation, with operating debt—remained relatively small.
If this is the history, when Bob rushed in to see the attorney, most of what he thought of as “his” assets were not technically his: they were in the trust his parents started for him. Most of “his” assets were safe because of two important things. First, when assets were given to Bob, his parents had the vision to place them in a protective trust, and second, Bob diligently managed what he received in that trust for maximum growth.
The type of trust described was not a living trust. It was not something that Bob could have established for himself, or into which he could put his own assets. It was started for him by someone interested in his future, someone who placed him in control, who trusted him to make the most of what he was given. Which he did. As Norman Rockefeller said, “The secret to success is to own nothing, but control everything.” In this type of trust, Bob had control without the risks associated with ownership.
Update the trust agreement periodically. Most trusts, even if they are irrevocable, can be updated to take advantage of better tax treatment or stronger asset protection. Work with an attorney who will help with this.
Focus on ways to grow the trust. But if distributions are made, keep good records. Distributions often have an impact on how the income is taxed, and the trust probably says there must be a reason for any distribution. Document the reasons.
Keep the assets titled correctly; not only real estate deeds, but also the financial accounts. Remember that changing investments within the trust is not removing (distributing) assets from the trust.
File an income tax return for the trust. Modern trust drafting can provide you great flexibility: income might be taxed to the trust and left in the trust, taxed to you and taken out of the trust, or taxed to you but left in the trust.
You probably need to have a cotrustee. Be sure that you do so, and that the cotrustee appropriately participates.
If someone thought ahead and gave you a trust, make the most of it. Someday you will be glad you did.