| Corporate & Investment Structuring » Estate Planning Estate Planning THE ESENTIALS OF A SOUND OVERVIEW: In today’s society, a properly structured estate plan is more than just a plan to avoid probate. An estate plan is now used to preserve wealth while a person is alive, prevent lawsuits, provide privacy for the owners of the plan, reduce taxes and lastly to avoid probate. All of these seemingly difficult tasks are accomplished in one structure. That structure utilizes the following component entities (all of which will be explained in detail in this report).
While operating all these entities may sound like a daunting task, in actuality, it is relatively simple once you learn the basic rules that must be followed. To that end, whenever a client purchases an estate plan from Executive Solutions, Inc. we provide a comprehensive manual for each entity and a manual explaining how and into which entity you properly place your assets. Now, let’s review each entity that makes up a properly structured estate plan. Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552) Family Limited Partnership (FLP) Over the past five years, the Family Limited Partnership (FLP) has risen from obscurity, into the preeminent vehicle for asset protection and estate planning. A recent article in Forbes extolling the benefits of the FLP; Headlined "Cut Your Estate Taxes in Half", claimed that individuals were successfully using this technique to discount the value of their estate by up to 90 percent. The Family Limited Partnership provides remarkable advantages and planning opportunities. In combination with other entities, the FLP can be used to create a powerful strategy for asset protection and for realizing estate tax and income tax benefits. Limited Partnerships Every state has enacted legislation allowing the formation of a type of partnership known as a limited partnership. A limited partnership consists of one or more general partners and one or more limited partners. The same person (or a corporation) can be both a general partner and a limited partner, as long as there are at least two legal persons who are partners in the partnership (a husband and wife are considered as only 1 person by the IRS). The general partner is responsible for the management of the affairs of the partnership, and therefore has personal liability for all debts and obligations (this is why it is suggested to structure a Nevada “nominee” corporation controlled by the husband and wife for the role of the General Partner). Limited partners have no personal liability Limited partnerships are often used as investment vehicles for large projects requiring a considerable amount of cash. Individual limited partners contributing money to a venture, but not having management powers, will not have any personal liability for the debts of the business. In exchange for this protection against personal liability, a limited partner may not actively participate in management. However, it is permissible for a limited partner to have a vote on certain matters, just as a shareholder has a right to vote on some corporate matters. A typical limited partnership agreement may provide that a majority vote of the limited partners is necessary for the sale of assets or to remove a general partner. The partnership agreement determines whether the limited partners can vote on these matters. Tax Treatment of Partnerships Since the partnership is a "pass through" entity, there is no potential for income tax on it. Unlike corporations and irrevocable trusts, a partnership is not a taxpaying entity. A partnership files an annual informational tax return setting forth its income and expenses, but it doesn’t pay tax on its net income. Instead, each partner’s proportionate share of income or loss is passed through from the partnership to the individual. Each partner claims his share of deductions or reports his share of income on his own tax return. Limited partnerships have always been used for real estate and tax shelter investments in order to pass the tax deductions through to the individual investors. These losses are then used by the partner to offset other income he might have. GENERAL PARTNER: A General Partner manages the limited partnership. They make all partnership decisions without any real input from the limited partners. The recommended method of protecting the FLP and its other interests is to form a new Nevada “Nominee” Corporation, and have it act as the general partner. The advantages are:
The limited partners are passive investors: They transfer money or other assets to the limited partnership, and receive limited partnership interests in return. The limited partners have no management responsibilities. One of the wonderful things about a limited partnership is that the limited partners have no right to control the limited partnership, just like you can't tell Bill Gates what to do if you buy 100 shares of Microsoft stock, but also no right to demand distributions. This means that you can give limited partnership interests to your kids, but they don’t get any right to control the assets until you choose to give them control. In a way, this makes the FLP the equivalent of the living trust, since you can transfer assets to the FLP and then give control of the FLP to your kids at your death or disability by having them step into control of the general partnership corporation. The FLP also helps prevent family squabbles over control, and keeps the kids' creditors from getting family assets. Lawsuit Protection: The Family Limited Partnership is an outstanding device for providing lawsuit protection for family wealth. When used as part of a properly designed estate plan strategy, an unsurpassed level of asset protection can be accomplished. Under the typical arrangement, the FLP (see Estate Plan Chart) is set up in conjunction with Nevada “nominee” corporation controlled by the husband and wife. This corporation will act in the capacity of a General Partner and hold a 1% interest in the partnership. The remaining 99% interests are in the form of limited partnership interests held by the family Living Trust, wherein the husband, wife, and/or other family members hold these interests, directly or indirectly. Creditor Cannot Reach Assets: Now, let’s see what happens if there is a lawsuit against either Husband or Wife. Assume that Husband is a physician and that there is a malpractice judgment against him for $1 million. The plaintiff in the action is now a judgment creditor, and he will try to collect the $1 million from Husband. The judgment creditor would like to seize Husband’s bank accounts and investments in order to collect the judgment amount. However, he discovers that Husband no longer holds title to any of these assets. In fact, since all of these assets have been transferred to the FLP (or other entities within the estate plan), the only asset held by Husband is his interest in the FLP. Can the creditor can’t reach into the partnership and seize the investments and bank accounts? The answer is no. Under the provisions of the Uniform Limited Partnership Act, a creditor of a limited partner cannot reach into the partnership and take partnership assets. The creditor has no rights to any property, which is held by the partnership. Since title to the assets is in the name of the partnership and it is the Husband partner rather than the partnership, which is liable for the debt, partnership assets may not be taken to satisfy the judgment. Charging Order Remedy: If a judgment creditor cannot reach partnership assets, what can he do? Since Husband’s only asset is an interest in the FLP, the creditor would apply to the court for what is called a “charging order” against Husband’s partnership interest. A charging order means that the general partner is directed to pay over to the judgment creditor any distributions from the partnership which would otherwise go the debtor partner, until the judgment is paid in full. In other words, the creditor can seize money, which comes out of the partnership to the debtor partner, until the amount of the judgment is satisfied. The creditor could therefore, take cash distributions paid to Husband. A charging order does not give the creditor the right to become a partner in the partnership and does not give him any right to interfere in the management or control of partnership affairs. He only receives the right to any actual distributions paid to Husband. Under the circumstances in which a creditor has obtained a charging order, the partnership would not make any distributions to the debtor partner. This arrangement would be provided for in the partnership agreement and is permissible under partnership law. If the partnership does not make any distributions, the judgment creditor will not receive any payments. The partnership simply retains all of its funds and continues to invest and reinvest its cash without making any distributions. The result of this technique is that family assets have been successfully protected from the judgment against Husband. Had the FLP arrangement not been used and had Husband and Wife kept all of their assets in their own names, the judgment creditor would have seized everything. Instead, through the use of this technique, all of these assets were protected. CREDITOR’S JUST SAY NO THANKS: One of the best things about limited partnerships is that there are some reasons why a smart creditor probably doesn't even want either the charging order or even the limited partnership interest itself. What you say? The creditor doesn't want the limited partnership interest even if you offer to give it to the creditor? This is true, because for tax reasons a creditor may want to stay miles away from taking a limited partnership interest, such as even if the creditor takes over the limited partnership interest or gets a charging order, the creditor is not going to get any assets. However, the general partner may still distribute so-called "phantom income" to that particular limited partnership interest, meaning that the creditor pays the limited partnership's income taxes on the full amount of the judgment (order) even though he/she/it received no money at all. Reason for This Law: The law prohibiting a creditor from reaching the assets of the partnership has been well established for many years. In fact, these particular provisions of partnership law were first adopted as part of the English Partnership Act of 1890 and were subsequently adopted as part of the Uniform Partnership Act, which has been the basis of the law in the United States since the 1940s. The reason for these provisions is that they are necessary to accomplish a particular public policy objective. This policy is that the business activities of a partnership should not be disrupted because of non-partnership related debts of one of the partners. The non-debtor partner didn’t do anything wrong. Why should he be forced to suffer? To avoid precisely these unfair results, the law was formulated so that a creditor with a judgment against a partner—but not against the partnership—cannot execute directly on partnership assets. Instead, the law allows the creditor to obtain a charging order, which affects only the actual distributions made to the debtor partner. The business of the partnership is allowed to continue unhampered, and the economic interest of the non-debtor partner is not impaired. Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552) HOW TO SAVE INCOME AND ESTATE TAXES Income Tax Benefits: If family assets are held in the form of a limited partnership, it will be possible to obtain certain income tax savings in addition to the asset protection benefits. Tax savings can be realized by spreading income from high tax bracket parents to lower tax bracket children and grandchildren who are fourteen years or older.
Estate Tax Benefits: We can also use the Family Limited Partnership as a vehicle for dramatically reducing or eliminating estate taxes. This estate tax reduction can be accomplished because of certain unique attributes of the FLP, which are not present in any other business entity. Of primary importance is the ability to shift the value of assets out of your estate without any loss of control, through a program of gifting limited partnership interests to your children or other family members. For example, the Smith family owns a business with a current value of $1 million, a rental property with equity of $500,000, and retirement savings in stocks and bonds equal to $1 million. That’s a total estate of $2.5 million. Under current law, with a properly designed estate plan, taking maximum advantage of the combined current exemption of $1.3 million, the estate tax on the balance of $1.2 million would be approximately $500,000. Mr. and Mrs. Smith would like to take steps to preserve the family estate for the benefit of their three children, but they do not wish to give up control over their assets during their lifetime. One solution to the problem involves a properly structured estate plan including an FLP that is established to hold all family assets. Mr. and Mrs. Smith would be the general partners of the FLP. As such they would have complete management and control over their property in the FLP. Initially, they could make a gift of the limited partnership interests to their children in an amount equal in value to the combined maximum estate tax credit (currently $1.3 million). In subsequent years, they could gift limited partnership interests equal to the amount of the annual gift tax exclusion of $20,000 per child ($60,000 per year). That’s not a bad result, but we can push the advantages a great deal further. According to IRS rulings and court cases, the value of each gift of a limited partnership interest must be discounted in order to account for the lack of marketability and the lack of control associated with those interests. For example, if the parents transfer assets with a value of $1 million to an FLP, a gift of a 1 percent limited partnership interest should not be valued at $10,000. Instead, because the interest cannot be readily sold and because the donee has no right to participate in management of the FLP, a reasonable approach to determine value, suggested by many financial advisors, would be to discount (up to 40 percent is fairly common) the transferred interest to reflect its true value in the market. Once this discount is taken into consideration, potential tax savings can be accelerated. Using an aggressive 40 percent discount, the value of the limited partnership interests in the Smith FLP would be discounted in value from $2.5 million to $1.5 million. Almost all of this value could be gifted in the first year without exceeding the credit of $1.3 million. The remaining $200,000 in value could be transferred out of their estate in just one or two years. In a relatively painless fashion, the Smiths have eliminated $500,000 of estate taxes while maintaining control over their assets. If a less aggressive discount is chosen, it might take five or six years to completely eliminate the tax instead of one or two years as we just illustrated. As an added bonus, this approach will also remove future appreciation from the Smiths’ estate. In our example, the rental property and the business have a value today of $1.5 million. Increasing in value at a rate of just 7 percent per year, these assets would be worth an additional $1.5 million in just ten years. That’s another $750,000 in estate taxes that the Smiths have avoided by the use of the FLP strategy. If you own real estate or a business, which you believe will increase in value over the years, an estate plan utilizing the FLP provides an excellent planning opportunity to achieve meaningful estate tax savings. Creating the Family Limited Partnership: The first step in creating the Family Limited Partnership is the preparation and filing of the Certificate of Limited Partnership with the Secretary of State. The form also asks for the names and addresses of all general partners of the partnership. The names of the limited partners are not required. Since this document is a matter of public record, the names of the general partners will be publicly available but not the names of the limited partners. It is suggested that a Nevada “nominee” corporation controlled by the Husband and Wife be set up as the General Partner. The Partnership Agreement: Concurrently with the filing of the Certificate of Limited Partnership, a written partnership agreement must be prepared. This is the document that governs the affairs of the partnership. It sets out the purpose of the partnership, the duties of the general partners, matters on which the vote of the limited partners is required, the share of partnership capital and profits to which each partner is entitled, and all other matters affecting the relations between the partners. When creating a Family Limited Partnership for estate planning and asset protection purposes, the partnership agreement must also contain certain key provisions designed to accomplish your objectives. Taken together, these provisions must ensure that a creditor can never achieve any influence over partnership affairs and that Husband and Wife, as general partners, always maintains absolute control over the assets of the partnership. These provisions are unique and essential to a properly structured Family Limited Partnership. Funding the Partnership: Once the estate plan is formed, you must now decide which assets to transfer and into which entity. Dangerous and Safe Assets: In making the decision about funding the partnership, it is important that you understand the distinction between Safe Assets and Dangerous Assets.
The reason for the distinction between Safe Assets and Dangerous Assets is that you do not wish to have the FLP incur liability because of its ownership of a Dangerous Asset. If the partnership does incur liability, it will be the target of a lawsuit and all of the assets in that partnership will be subject to the claims of the judgment creditor. This is exactly the situation you are trying to avoid. Dangerous Assets must be placed in one or more separate entities. Dangerous Assets must be isolated from each other (especially real estate holdings) and from Safe Assets, in order to avoid contaminating the Safe Assets. The best approach for a Dangerous Asset is to transfer them into their own separate entity. Generally the Limited Liability Company (LLC) or a Real Estate Privacy Trust in the case of real estate is the proper way to hold Dangerous Assets. Since no individual member of an LLC can be sued for an LLC related obligation, the liability associated with the Dangerous Asset can be contained and insulated in the LLC or Real Estate Privacy Trust. If a number of Dangerous Assets are owned, each should be placed in a separate entity. In this way, the other properties and family assets will be safely insulated and shielded from liability. Safe Assets: Safe Assets with a low probability of creating lawsuit liability can be maintained in a single Family Limited Partnership. Although the family home is a Safe Asset, with liability issues generally covered by insurance, there are a number of tax issues, which arise with respect to the transfer of the family home into the Family Limited Partnership. The first problem concerns the availability of the income tax deduction for home mortgage interest. Section 163 of the Internal Revenue Code permits a deduction for "qualified residence interest." A "qualified residence" is defined as the "principal residence" of the taxpayer. The only requirements appear to be that (1) the house is the principal residence of the taxpayer; (2) interest is paid by the taxpayer; and (3) the taxpayer has a beneficial interest in any entity that holds legal title to the property. Based upon the language of the statute, the deduction for mortgage interest would, therefore, not seem to be adversely affected by a transfer into the Family Limited Partnership. Similar tax issues concern the ability to avoid up to $500,000 of the gain from the sale of your home. It is likely that a transfer of your residence into the FLP would cause you to lose this tax advantage. For these reasons, we do not recommend using the FLP to hold the family residence. Instead, the home should be placed into the Living Trust portion of your estate plan or in a Real Estate Privacy Trust. In doing so, all of the tax benefits will be preserved and the highest level of protection can be maintained. Bank and Brokerage Accounts: These types of accounts do not create any potential liability and can be transferred into the Family Limited Partnership. In order to open these accounts in the name of the partnership, you will present the financial institution with a certified copy of the Certificate of Limited Partnership. The institution will also require the Taxpayer Identification Number issued to the partnership by the Internal Revenue Service. Interest In Other Entities: The Family Limited Partnership is an excellent vehicle for holding interests in other business entities (such as your business or real estate LLCs and/or Real Estate Privacy Trusts). The reason that we mention these other business entities is that the Family Limited Partnership must not directly be engaged in this type of business activity. You do not want the partnership to buy or sell property or goods or to enter into contracts. If the partnership does any business other than that which could be viewed as “investments”, then the partnership can get sued. And if the partnership gets sued and loses, all of the assets that it holds can be lost. FLP Ownership by THE Family LIVING Trust: In most structures, the Family Living Trust holds 99% of FLP ownership and the other 1% is held (and managed) by the General Partner. The proper role of the Family Limited Partnership: is to hold the interests (as the 99% limited partner) in the business entities and real estate that are themselves subject to risk and 100% of the interests of all other assets that are not subject to risk.. The FLP can hold these interests, providing asset protection, tax savings and estate planning advantages all in a single integrated package. Other Advantages: Some of the other advantages of limited partnerships for families are:
Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552)
HISTORY OF TRUSTS: The entity known as a trust (includes Real Estate Privacy Trust as well as Living Trusts) is essential in creating various strategies for accomplishing asset protection, estate planning, and privacy benefits. A background for understanding how these techniques work together as part of your overall wealth preservation plan is essential if your estate planning and wealth preservation goals are to be realized. The legal arrangement, known as a trust, has been around for hundreds of years (The first recorded trust in America was in the 1600s and was formed by the governor of Virginia Colony. In England, Land trusts can be traced back even further to a time when the barons titled their lands to the Church of England to protect their holdings from seizure by a greedy king --gee, the times have changed little as the “greedy kings (and lawyers) still remain!!!). Every trust has certain essential characteristics: A trust has one or more trustees, who are responsible for administering and carrying out the terms of the trust. The beneficiaries are those who are entitled to trust income or principle either currently or at some time in the future. A trust is typically in the form of a written agreement between the settlor (the person creating the trust), and a trustee. The written trust agreement provides that the settlor will transfer certain assets to the trustee and the trustee will hold those assets for the benefit of the named beneficiaries. (The terms "trustor" or "grantor" are used interchangeably with the term "settlor.") Until recently, trusts were used almost exclusively by the wealthiest families to maintain privacy and to pass their wealth to succeeding generations. The privacy benefits were particularly important. The Vanderbilt’s, Whitney’s, Rockefellers, and Carnegies created trusts, which have now successfully shielded from public scrutiny the family wealth of five or more generations. But it is no longer only the wealthy that are attracted to the powerful benefits offered by a properly designed trust. Now, those with equity in the family home or some savings put away for retirement or college are using trusts as an essential ingredient in their asset protection and estate plans. The Basics of Trust Law: Many people have a difficult time understanding trusts, mainly because they confuse the concept of a trust with that of a corporation. A corporation is a distinct legal entity that stands apart from its owners. A trust is not an entity but rather a legal arrangement. Again, a trust is a contractual arrangement by which one party holds title to property for the benefit of another in a fiduciary capacity. A fiduciary is an individual or company responsible for managing another’s assets (a trustee). A fiduciary holds assets not for hi/her/its own benefit, but rather for the benefit of another (the “beneficiary”). A trust is created when a grantor executes a trust agreement with the trustee. The trust agreement states exactly how the trustee is to handle, manage and distribute the trust property for the beneficiaries. Once the trust agreement has been established, the trust is “funded” with assets. The trust assets are known as the “corpus” (Latin for “body”) of the trust. The trust assets can be “real property” (real estate) or “personal property” (tangible property other than real estate, such as money). Funding involves transferring ownership of assets from the grantor to the trustee. In the case of real estate, the trust property must be deeded to the trust through the trustee. Other assets, such as bank accounts and brokerage accounts are merely re-titled to the trust. NOTE: the trustee does not hold ownership for his own account, but rather as a fiduciary for the beneficiaries of the trust. There are many different “buzzwords” you may have heard in connection with trusts, spendthrift trusts, charitable trusts, business trusts, educational trusts, public trusts, etc. There are only two legal distinctions that we need to be concerned with at this time: Intervivos vs. Testamentary Trust Trusts: can be created during the lifetime of the settlor or upon his or her death according to instructions left in a will. A trust created during one’s lifetime is an intervivos (Latin for “between the living”). A trust created upon one’s death is a testamentary trust. A Real Estate Privacy Trust is an intervivos trust because it is created while the settlor is alive. If properly constructed, an intervivos trust will designate a successor beneficiary or beneficiaries for whom the trust will benefit once the settlor dies. Thus, a settlor can grant all of his/her property into trust for his/her own benefit during his/her lifetime, then for someone else’s benefit upon his/her death. Another name for an intervivos trust is a living trust. Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552)
Trustees and Beneficiaries: Revocable trusts are effective in avoiding probate only when the trust document has been properly drafted and only when all of the decedent’s property has been transferred into the trust prior to his death. The trust document, like a will, provides for the disposition of trust assets upon the death of the settlor. In the typical arrangement, a husband and wife will create a revocable trust with both husband and wife as the initial trustees. They are also the beneficiaries of the trust. The trust provides that during their joint lifetimes the trust may be revoked at any time. Upon the death of either spouse, the trust typically becomes irrevocable and the surviving spouse becomes the sole trustee. When the surviving spouse dies, the trust property passes according to the wishes expressed in the trust document. Funding the Trust: For the revocable trust to be effective in eliminating probate, it is essential that assets (NOTE: only the family home and personal bank accounts are placed into the Living Trust or Real Estate Privacy Trust portion of the estate plan, the rest is placed into the Family Limited Partnership and various LLCs) be transferred into the trust prior to a spouse’s death. Any property that has not been transferred into the trust will be subject to probate, defeating the purpose of creating it in the first place. An amazing number of people go to the trouble and expense of forming a revocable trust and then fail to complete the work necessary to fund it. Funding the trust involves transferring legal title from husband and wife into the name of the trust. For example, if Harry and Martha Jones are funding their revocable trust, they will change title to their assets from "Harry Jones and Martha Jones, husband and wife" to "Harry Jones and Martha Jones as Trustees of the Jones Family Trust, Dated January 1, 2004." Estate Taxes: The trust must also contain the appropriate provisions in order to minimize federal taxes payable upon the death of either spouse. Federal taxes are imposed on most transfers of property during your lifetime or at the time of your death. As a result of the changes in the tax code in 1981 and 1996, there is an effective tax exemption of $650,000 (effective from 1999) for transfers during life or at death. (We will refer to this amount as the exemption amount.) Amounts in excess of the exemption amount are taxed at rates ranging from 37 percent to a maximum of 50 percent for total transfers exceeding $2.5 million. The exemption amount will increase incrementally until in reaches $1 million in 2006. GIFTS: The law provides that annual gifts of $11,000 and under are excluded from tax. A husband and wife together can give $20,000 per year. This amount applies to each person to whom a gift is made. A husband and wife could give, as an example, a total of $100,000 per year to their five children and grandchildren. Further, the 1981 law adopted a provision known as the Unlimited Marital Deduction. All amounts transferred between husband and wife, during lifetime or at death, are exempt from tax. This means that if a husband leaves all of his property to his surviving spouse, there will be no estate taxes on his death regardless of the size of his estate. The estate taxes will arise on the death of the second spouse, as she transfers her property to her children or other relatives. Income Tax Treatment of Revocable LIVING Trusts: During one’s lifetime, revocable living trusts do not provide any income tax savings. For tax purposes, the living trust is treated as if it does not exist. A revocable living trust is known, for tax purposes, as a grantor trust. A grantor trust is not a taxpaying entity. No annual tax return is required to be filed. Instead, all income and loss of the trust is reported on the tax returns of the husband and wife. Revocable Trusts and Asset Protection (OR LACK THEREOF): A revocable trust does not provide any protection of assets from judgment creditors. It is ignored for creditor purposes just as it is ignored for income tax purposes. In most states, the law provides that if a settlor has the right to revoke the trust, all of the assets are treated as owned by the settlor. Perhaps because of the promotion associated with these trusts, many people mistakenly believe that a revocable trust somehow shields assets from creditors. This is not correct. If there is a judgment against you, the creditor is entitled to seize any assets that you have in the trust. Asset protection can only be accomplished when property is held in the FLP or LLC and Real Estate Privacy Trusts and those entities are themselves owned by the living trust (hence, your beneficiaries). Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552) A Real Estate Privacy Trust (a better name for a land trust) is a revocable, intervivos trust (similar to a “living trust”). A Real Estate Privacy trust is a simple, inexpensive method for handling the ownership of real estate. It is an arrangement by which a trustee holds the recorded title to the real estate, but all the rights and conveniences of ownership are exercised by the beneficial owner (beneficiary) whose interest is not disclosed and where the beneficiaries of the trust retain management, control and the right to receive profits from the property. This method of owning real estate eliminates many of the difficulties that otherwise may be encountered in acquiring, owning, or selling real estate. The beneficiary of a Real Estate Privacy trust changes his or her interest in the property from real estate (title to the property) to personal property (ownership of the beneficial interest). Even though the beneficiary retains complete management and control over the property itself, he or she is not burdened with the legal characteristics of real estate when he or she deals with the property. Since the beneficial interest is considered to be personal property, it is treated in much the same manner as a car, a savings account, or other tangible property. Consequently, the beneficial interest can be sold, pledged, or assigned in a simpler fashion than a conveyance of realty. How Does a Real Estate Privacy Trust Operate? A Real Estate Privacy Trust may be created by anyone capable of entering into a contract--an individual; a group of persons, a partnership, corporation, family limited partnership, living trust, limited liability company (LLC) or any other group who desires to purchase and own real estate as a joint venture. Under a Real Estate Privacy trust agreement, the beneficiary retains complete control of the real estate in the same manner as if the recorded title were in his or her name. He or she may terminate the trust whenever desired and may add additional property to the trust at any time. At all times the beneficiary deals with the property as though he or she were the owner, for, as a matter of fact, the beneficiaries are the owners. The trustee executes deeds and mortgages and deals with the property only if directed in writing by the beneficiary. When title to real estate is held in Real Estate Privacy trust, the interest of the beneficiary, under terms of the trust agreement, is personal property. Since the beneficiary's interest is personal property, he or she may transfer it by assigning that interest without the formality of executing and acknowledging a deed, going through an escrow or even notifying the lender. What Are The Benefits of a Real Estate Privacy Trust? There are many benefits derived from the use of a Real Estate Privacy Trust. 1. Privacy of Ownership: Under a Real Estate Privacy Trust, the identity of the real owner is never disclosed to the public. This feature can be important for many reasons. Whatever the reason may be for not disclosing the identity of the real owner, a Real Estate Privacy Trustprovides the answer. Another purpose for keeping ownership private is preventing lawsuits. You wouldn’t walk around with your financial statement taped to your forehead, would you? Then why would you want the details of your most valuable assets open to public scrutiny? Owning real estate in your own name is like walking around with a giant “kick me” sign taped to your back. In every county in the United States, copies of all deeds to real estate are recorded in the public records. Anyone can go down to the recorder of deeds’ office and look up the owner of any property in that county. In addition, the mortgages you have on your property are recorded in the public records as well. 2. Protection for the Owner: A Real Estate Privacy Trust offers particular benefits in those cases where two or more persons hold the real estate. If two or more persons own the property, the title to the property might become faulty and unmerchantable because of death, legal disability, divorce, judgments, and many other types of litigation affecting one of the co-owners. When the property is held in a Real Estate Privacy Trust, a judgment against one of the beneficiaries does not constitute a lien upon the real estate held in trust; neither do the ordinary legal proceedings against any of the beneficiaries muddle the title. 3. Succession and Ownership: It has been a common practice to create joint tenancy in real estate holdings solely for the purpose of providing a succession of ownership upon death without the expense and delay of probate proceedings. Under joint ownership, however, either of the joint tenants is given an immediate interest in the ownership and management of that property, and in many cases, it handicaps the real owner as he or she cannot deal with the property without the written consent of the joint owner and the other spouse. Under a Real Estate Privacy Trust agreement, the party creating the trust can retain sole control over the property during his or her lifetime, with the desired succession in ownership becoming effective upon death without, the expense of going through probate. This can be especially helpful to those who live in a state other than the state in which the real estate is situated. They will not need to institute separate probate proceedings and can have the Real Estate Privacy Trust property administered from their home states. 4. Ease of Conveyance: Since the beneficial interest is considered to have the legal characteristics of personal property, it can be pledged for a loan according to the same standards as stocks, bonds, automobiles, or other personal property without the restrictions and formalities of mortgages and title reports etc. 5. Disposing of Part Interes: A Real Estate Privacy Trust simplifies the practical problem of disposing of a part interest in a property since the beneficial interest under a Real Estate Privacy This avoids a deed's formal requirements concerning acknowledgment and recording. Trust can be transferred by assignment; (no deed is needed). IMPORTANT NOTE REGARDING LAWYERS, CPAs AND REALTORS: Many people with whom I discuss Real Estate Privacy Trusts fail to set up this device because their attorney, Realtor or accountant never heard of such a thing. Likewise, if attorneys where you live don’t know about Real Estate Privacy Trusts, they also don’t know how to sue them! WHY USE REAL ESTATE PRIVACY TRUSTS FOR PROTECTION AND PRIVACY: Let’s take a close look at our world today. Everyday, thousands of lawsuits are filed in courts across America. Real estate investors are particularly vulnerable for two reasons. The first is that the real estate ownership is shown in the public records for anyone to find. The second is that any judgment against you immediately becomes a lien against all your real estate. What this means is that any lawsuit against you could potentially result in all your real estate being encumbered by a resulting judgment. This judgment will lien your properties until you either pay it off or win a later appeal. You will not be able to sell or mortgage your property until you pay the judgment in full. A judgment of any size will tie up all your real estate until you deal with the judgment. If you appeal the decision, the judgment will still lien the property. If you still lose after taking all available legal action, then you must pay off the judgment. If you do not pay off the judgment, the judgment holder or creditor can execute on the judgment. This will give him the right to sell off your real estate as he chooses. By owning real estate in your name, you give up control of your assets and you risk losing everything: What's the answer? The only way to protect your real estate is to separate the ownership of the properties. Each property should be owned by a separate entity. If you use corporations or an LLC for example, you would use a different corporation or LLC to own each piece of real estate. This would be a terrific way of protecting other properties from a problem occurring at one property. The problem here is the recurring annual fees (costs) to keep these entities “alive”. You would also have the continuing expense of annual accounting fees and state corporation taxes. The annual cost could run be at least $500 in per entity. If you owned ten properties (10 entities), you would be paying $5,000 or more per year for this protection. What you need is a manner of ownership that provides for separate ownership of each property, gives you the protection you desire, but doesn't have all the costs and complications discussed above. You need is to own each property in a separate Real Estate Privacy Trust. To create a Real Estate Privacy Trust, you enter into a Real Estate Privacy Trust agreement with a trustee you choose. You will then deed the property into the trust. In the trust agreement, you will designate a name for the trust. You can use numbers, the street address or any other name you desire. I generally use the street name to minimize any confusion over which trust owns which property. For example, I would place the property at 123 Main Street into the 123 Main Street Real Estate Privacy Trust and the property at 245 Park Place into the 245 Park Place Real Estate Privacy Trust. By transferring each property (by recorded deed) into a separately named Real Estate Privacy Trust, you have separated the ownership of the each property. You always have only one property in each Real Estate Privacy Trust. The Real Estate Privacy Trust will make your real estate ownership your private business. The Real Estate Privacy Trust agreement is not recorded. Only the deed is recorded. Since the property is not titled in your name, only you and the trustee know that you own it. The trust contains a provision explicitly preventing the trustee from disclosing your ownership. Why is privacy important? The answer is based on this logic: if a person who wants to sue you cannot find any assets, he probably isn't going to sue. His attorney will not take a contingency case unless the attorney is going to get paid. The attorney doesn't get paid if he wins. The attorney only gets paid if he collects money from you. Attorneys don't line up to sue poor people. They fight for the right to sue people with assets, especially easily accessible assets like real estate. If you own real estate in your own name, you are almost begging to be sued. The Real Estate Privacy Trust will allow you to assume and obtain mortgage loans without any personal liability: When you are purchasing a property and assuming an FHA or VA no-qualifying loan, you have previously personally signed the note to the bank agreeing to be responsible for the loan. When you use a Real Estate Privacy Trust to purchase the property, the trustee signs the note to the lender, not you. The trustee signs on behalf of the trust, not personally, so he is not responsible for any payments. You haven't signed anything or even given your name so you aren't responsible for anything. The bank can't report the loan on your credit report. The bank can't sue you if you fail or a subsequent purchaser fails to pay the loan. The bank can foreclose, but you won’t ever be named. A similar scenario exists when you purchase a property with seller financing. When the seller is holding a mortgage, you want to avoid two things: personal liability and a due on sale clause in the mortgage. At the closing, the trustee executes the mortgage and note on behalf of the trust, which is the purchaser of the property. The trustee is not personally liable. You haven't signed anything so you can't be held liable. Real Estate Privacy Trust DOES NOT FILE A TAX RETURN: The Real Estate Privacy Trust does not require a separate tax return or a separate tax identification number. The trust is "transparent" to the taxing authorities. The beneficiary of the Real Estate Privacy Trust reports the income and expenses on his tax return just as if the trust did not exist. If a corporation or LLC were the beneficiary of the Real Estate Privacy Trust, the corporation or LLC would report the property's income and expenses on its tax return. If you transfer your currently owned property to a Real Estate Privacy Trust, no tax event occurs. Your basis and tax reporting remain the same. Your ownership of real estate in a Real Estate Privacy Trust does not affect your ability to accomplish tax deferred exchanges or, in most states, to get your homestead exemption. The due-on-sale clause: An obvious concern when you transfer your existing property into a Real Estate Privacy Trust is the due on sale clause in your mortgage to the bank. Federal law provides an exception to the due on sale clause for the transfer of your property into a Real Estate Privacy Trust as long as the real ownership of the property doesn't change. You can transfer your property into a Real Estate Privacy Trust and the bank can't call the mortgage due. The bank still maintains its lien position and can foreclose if you fail to pay. The lender’s power to call the loan due upon transfer is not absolute. A federal law called the Garn-St. Germain Depositary Institutions Act of 1982 governs the due-on-sale clause and provides for several exceptions where a lender may not call a loan due. These exceptions can be found in 12 U.S.C. Sec. 1701(d) (I will paraphrase the most noteworthy exception (Exception #8) for simplification: Exception (8): A transfer into an intervivos trust IN WHICH THE BORROWER IS, and remains a beneficiary and which does not relate to a transfer of occupancy rights in the property. Exception “8” gives the borrower the right to transfer title into a Real Estate Privacy Trust without triggering the due-on-sale clause. So long as you are and remain a beneficiary of the Real Estate Privacy Trust, the lender does not have the authority to call the loan due. Keep in mind, however that the Garn-St. Germain Act does not apply to all loans just one to four family residential properties. Lastly, remember that Real Estate Privacy Trust transfers are done by assignment not through an escrow and the Real Estate Privacy Trust itself does not require annual renewal fees to any state or even to the company/person that created the trust for you, saving you hundreds of dollars annually. Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552) The role of the corporation (must be a “C” corporation) in the estate plan is that of the “General Partner for all LLCs and the Managing Member for the FLP. The corporation holds 1% ownership of each entity and as the title infers, the corporation manages the whole ball of wax with VERY minimal liability. Additionally, by using a “nominee” (means a stand-in” for the true owners-see the discussion of “nominees”) the actual ownership becomes essentially “invisible” to prying eyes. All the while, you as the man behind the face and voice (like in the movie The Wizard Of Oz), you and only you are controlling the entire estate plan. To help you grasp the importance of this essential contributor to a sound estate plan strategy, please allow me to provide the following overview: WHAT IS A CORPORATION? A corporation is a legal “person’ formed separately from those who own and operate the corporation. As an “artificial person” the corporation’s debts and taxes are separate from its owners (shareholders) or its officers and directors, thereby offering the greatest personal liability protection of all business structures. And because the corporation continues to exist even after the death of a shareholder, it offers tremendous estate planning advantages. HOW A CORPORATION REALLY WORKS: Corporations are created, (not born), with the legal status of a person. They are, in effect, created of legal age, in any state that the owners choose, have the ability to contract, make loans, make sales, pay expenses, etc. Although they obtain their own social security number (known as an employer identification number or EIN number), they have no social security taxes to pay for themselves because they are not physical persons. They do have the need to file tax returns, open checking accounts, have a headquarters, and the list go on and on. The common difference between corporations and people is that corporations have only one function, namely, to turn a profit for the stockholders. They are created by operation of law by their state of incorporation. TAX SAVINGS: How much have you saved by incorporating? Corporations are entitled by law to many tax deductions that are not available to individuals, LLCs and trusts. Corporations have a lower federal tax rate at all levels of income. Compared with individuals, a corporation pays only 15% tax on the first $50,000 dollars of profit (this is the amount of money left over after all expenses are paid). One of the major reasons individuals incorporate is the fact that, as individuals, we earn money, pay taxes, and buy things, but a corporation earns money, buys things, and then pays taxes. Wouldn’t you rather pay for things with pre-tax instead of after-tax dollars? LIABILITY PROTECTION: While most unincorporated business owners know that incorporation can shield their personal assets in the event of frivolous lawsuits, many are lulled into complacency by the “it won’t-happen-to-me” attitude. Unfortunately, this thinking has resulted in tremendous losses by far too many unprepared business owners. Corporations as business structures provide liability protection to everyone involved with the business. From the investor or stockholder to the officers, corporate liability stops with the corporation.
INTRODUCTION: Nevada statutes have developed a corporate structure that is unique throughout the United States. Nevada established a corporate structure that allows investors and owners of Nevada corporations to remain completely private. Since these changes in Nevada’s statutes came into effect in 1991 the number of new corporations in Nevada has exploded: Some of the reasons for this “explosion” are: PRIVACY: Privacy just might be the principal reason that there were over 40,000 incorporations in Nevada in 1998 alone. Unlike other states, Nevada doesn’t want to know who owns the stock of a corporation. The information is simply not kept on file by the state. To ensure privacy, Nevada is the only state that I know of that allows its corporations to use bearer stock certificates. Which means that whoever physically holds the stock, owns the stock. For this reason, it is virtually impossible to prove the “true ownership” of a Nevada corporation. LIMITING LIABILITY NEVADA STYLE: Nearly every state has adopted statutes that limit the liability of corporate representatives including officers, directors and shareholders. Nevada has gone a step further with specific statutes (placed into the Articles of Incorporation and the Bylaws) stating that all corporate officers and directors are free from personal liability resulting from corporate activities, except in the case of fraud. Nevada corporations can be sued, file bankruptcy, and be involved in other unfortunate activities just like any other corporation but with one major difference, these unfortunate activities will not jeopardize the personal assets of corporate directors, officers, agents or representatives. The Nevada "corporate veil" has never been pierced except once and that was for outright fraud! NO STATE TAX: Nevada's popularity is based on the fact that the state does not tax its corporations. Unlike most states in this country, Nevada has taken a "pro-business” stance. Nevada’s legislatures have consistently recognized that taxing business is the wrong approach to maintaining a healthy state economy. A Nevada corporation is also not subject to any other hidden taxes such as franchise taxes, capital stock taxes, or inventory taxes. Sales tax applies only to products sold within the state. NO RECIPROCITY WITH THE IRS: Because Nevada has no state tax, and because budget conscious Nevada does not keep much information on their own residents or their corporations, it has steadfastly refused IRS requests for reciprocity. Other states freely exchange all of the information they have on every resident and corporation, BUT NOT NEVADA!! ADDITIONAL ADVANTAGES IN NEVADA: Nevada has minimal reporting and disclosure requirements. Stockholders, directors and officers need not live or hold meetings in Nevada, or even be U.S. citizens. Directors need not be stockholders. A Nevada corporation may purchase, hold, sell or transfer shares of it’s own stock. Nevada corporations can even buy and hold its own stock as “personal property” effectively by-passing SEC rules governing the sale of stock by a corporation. Further, Nevada corporations may issue stock for capital, services, personal property or real estate, including leases and options. The directors may determine the value of any of these transactions, and their decision is final. NOTE: A NEVADA CORPORATION CAN ACT ON BEHALF OF THE ESTATE PLAN REGARDLESS OF WHERE THE ASSETS RESIDE IN THE U.S. OR INTERNATIONALLY. Nominee Officers: Owners of Nevada Corporations who wish to remain “invisible” should consider using a nominee (Nevada is the only state that I know of that allows nominee officers). By employing a “nominee”, corporate owners can achieve something unattainable otherwise - total privacy and anonymity protection. Using a nominee (such as the service provided by Wealth Preservation Group) DOES NOT mean that you are surrendering any portion of your corporation or control over it. This process is a simple business transaction wherein you are essentially hiring someone to sign on the public record so that you don't have to. The nominee signs on as all corporate officers (including the President, Secretary, Treasurer, and Director) with the exception of the Vice Presidency (See discussion of the Vice President below). Once your name is out of the public eye (you and your assets become “invisible”), you can then manage things from behind the scenes. Remember that the corporate bylaws, Declaration of Beneficial Interest (Wealth Preservation Group’s nominee service contract) and any other amendment you wish to include, strips the nominee officer of any and all actual power. Keep in mind that the Declaration of Beneficial Interest protects both parties involved, the owner of the corporation as well as the person providing the nominee service. Liability can run both ways. To lay the rules out in black and white, corporate owners don't want the liability of nominee officer involvement and the nominee officer does not want the liability for the corporation he is signing on for. It is a simple business transaction, a win-win situation for everyone except those trying to locate the actual ownership of the corporation, the estate plan and any assets. This system works well because the nominee officer does not want to know anything about the corporation, estate plan or any of the assets contained therein and you as the private stockholder have the power to remove the nominee from the public list at any time you wish. Best of all, you, as the owner, are the ONLY signer on the corporate bank account. The owner of a Nevada The owner then becomes a vice-president of the corporation with the power to manage and run the corporation. corporation hires someone (a nominee) to represent the corporation in the corporate positions that are a matter of public record (those are president, secretary, treasurer and directors). Get a Free ESTATE PLANNING Consultation OR call us Toll-Free at 1866-YOURLLC (968-7552)
Background: The LLC is a relatively new legal entity created by statute and recognized in all fifty states. The purpose of the legislation is to allow individuals to create a legal entity that avoids many of the tax and business problems inherent in the corporate and partnership structure. The intent of the law is to allow individuals to conduct their financial and business affairs in an efficient and convenient manner without the restrictions, formalities, and liabilities associated with those other entities. More particularly, the LLC provides the protection from liability in much the same way a corporation does but without the formalities of corporate minutes, bylaws, directors, and shareholders. A primary goal of the LLC legislation was to clearly state that the members and managers of the LLC could not be named in a lawsuit against the company. The law was drawn specifically to provide a vehicle, which would protect the owners from liability associated with the business. The LLC is also convenient to maintain. The owners are permitted to adopt flexible rules regarding the administration and operation of the business. For tax purposes, it is treated like a partnership. That means the LLC itself pays no income tax (just like the FLP which is a limited liability partnership as well). All of the income and deductions flow through directly to the members and is reported on their personal tax returns. Protection from Inside Liability: A member of an LLC is not responsible for claims or judgments against the company. When we are dealing with a rental property (see also the section on Real Estate Privacy Trusts) or an active business, the potential liability associated with the business is a primary concern. But as we have stated, the law specifically provides that the members of the LLC cannot be sued. No Formalities: An LLC is not required to maintain formal minutes and resolutions. Record keeping requirements can be minimized without a threat that the members will be sued individually for a liability of the company. Contrast this treatment with that of a corporation. If the proper formalities are not followed, the corporate protection will be pierced and the owners will have liability for company obligations. The LLC law is specifically intended to remedy this problem by providing that the entity cannot be pierced because of a failure to maintain any of the corporate type documents. Protection from Outside Liability: Property held in an LLC cannot be seized by a creditor of a member. If there is a judgment or claim against Husband and Wife, the creditor cannot reach the property held in the LLC. As is the case with the Family Limited Partnership, assets of the LLC are protected from potential claims against a member. The creditor is limited to the ineffective charging order remedy. A creditor with a judgment against a member of the LLC is only permitted to take whatever actual cash distributions are made by the company to the member. The creditor cannot force a distribution or demand any portion of the assets of the company (See also Real Estate Privacy Trust section concerning real estate holdings). ALL BUSINESS VENTURES ARE CONSIDERED DANGEROUS ASSETS: There are leases to sign, bank loans, customers, employees, competitors, and government agencies-all with the potential to blow you sky-high. You don't want the liabilities from this business to threaten your other assets. The proper strategy is to contain the liabilities within the shield of the LLC. If something happens inside the company, make sure that it doesn't contaminate your savings and other assets. The purpose of asset protection planning is to allow you to engage in a business activity while protecting your other assets from the risks associated with the business. The proper plan enables you to pursue attractive investments and business opportunities without jeopardizing everything you own. Tax Treatment of the LLC: All income of the LLC is passed directly through to the personal returns of the members. Except in unusual circumstances, the general rule will apply and no gain or loss will be recognized on a contribution to or distribution from the company. There is no tax when funds are withdrawn from the company. The only tax paid is on the income earned, which is reported on the owner's personal tax return. Privacy: Control of the LLC is kept private, insofar as the person who acts on behalf of the general partner corporation in managing the LLC need not be disclosed in most circumstances. When a change of control is desired, the old managing family member simply resigns and a new managing family member takes over the job.
|
| | Incorporation | Service | Testimonials | Associate
Program | Links | Site
Map | Articles | Contact Us | Executive Solutions 4550 West Oakey Blvd., Suite
111, Las Vegas, NV 89102 CALL US Toll Free: 1866-YOURLLC (968-7552) or Fax 702-993-1514 Business Incorporation Services  |