Land Trusts and Revocable Grantor Trusts
The September 17 Lakeshore Lawyer program began with an extremely interesting change of format: the extended interview of the former long-time United States Attorney for the Central District of Michigan, John Smietanka. The main topic of that discussion was the recurrent problem of criminal convictions of persons who are “actually innocent” of the crimes of which they have been convicted, in other words, persons who have not in fact not committed those crimes.
Instead of attempting to recap the entire interview in this blog, I have posted it on the same website. Again, my email address is thelakeshorelawyer@lakeshoreptv.com, and the blog site is thelakeshorelawyer.blogspot.com.
On the completely different subject of land trusts, I noted that they are useful for purposes of protecting good title to real estate from claims against the beneficial owners of such trusts and that they facilitate the fractionalization of interests in those trusts (for gifting purposes, for example) while at the same time permitting the centralization of control. However, I also noted that all those same benefits are available through the use of limited liability entities such as LLCs, which also provide asset protection. Land trusts, by contrast, provide no asset protection at all.
In addition, in Indiana (although not in Illinois), interests in land trusts owned by a husband and wife do not qualify as tenancies by the entireties property. Thus, the use of land trusts by spouses to hold their homes or other real estate is not only nonbeneficial from an asset protection standpoint but actually detrimental.
In response to Chris’s question, I added that land trusts of this typical sort (where the land trustee does nothing except hold title and follow the directions of the holder of the “power of direction”) are to be distinguished from irrevocable charitable land trusts such as the Shirley Heinze Land Trust. Irrevocable trusts in general (a huge subject) will be the subject of the October program, with an emphasis on asset protection.
Finally, I touched on revocable grantor trusts, i.e., what most people mean when they say “living trusts.” Revocable grantor trusts should, in my opinion, be the foundation of most estate plans even though they (like land trusts) provide no asset protection against the claims of creditors of their owners. They by no means eliminate the need for powers of attorney, pourover wills, and other estate planning devices, and they can only have effect to the extent that they are “funded” with assets. Subject to those qualifications, though, they are, in my opinion, far superior to wills in most cases and, for that matter, beneficiary designation in many cases where the beneficiary is not a trustee, as a means of passing on asset-protected estates. Also, they provide for the management of their owners’ estates during periods of disability, which instruments that only take effect at death can not.
Revocable grantor trusts involve no income tax issues at all during their owners’ lives: as grantor trusts, under the grantor trust rules of the Internal Revenue Code, they are treated as if they do not exist for federal income tax purposes.
They are also, in these days, relatively inexpensive. Trusts are in short no longer reserved for the wealthy.
Tuesday, October 26, 2010
August 20, 2010 Show:
Tenancies by the Entireties and Third-Party Beneficiary Directions
I began the August 20 program by recapping the main points of the previous programs and the discussing a recent United States Supreme court decision (Estate of Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct.865 (2009)) that had made clear once again the paramount importance of making the proper designation of intended beneficiaries under retirement plans. There, the decedent has long been divorced and his ex-wife had expressly waived in the divorce decree any interest in his account benefits under his employer’s savings and investment plan. However, for whatever reason, the decedent’s lawyer had not memorialized that fact in the form of a Qualified Domestic Relations Order (which must, among other things, designate an alternate payee to the divorced spouse), nor had the ex-wife disclaimed her interest in the plan in the particular manner required by the plan to override her continued designation as the sole beneficiary. In those circumstances, the plan documents (including the concededly unintended beneficiary designation of the long-divorced ex-spouse) trumped the language of the divorce decree itself because of the preemptive effect of ERISA (the federal Employee Retirement Income Security Act) over state law. Thus, the ex-spouse took everything.
I next explained that even properly drawn beneficiary designations of retirement plans or life insurance policies provide no asset protection whatsoever against the creditors of the beneficiaries themselves unless the assets are held in trust. Trusts are also the surest way of achieving a “stretch-out” of distributions from inherited retirement plans so that only the required minimum distributions are made from them except in exigent circumstances and as much as possible of the principal can continue to grow and compound on a tax-deferred basis. However, a few IRA custodians also now offer accounts that permit such a stretch-out.
Third-party beneficiary designations are not limited to retirement plans and life insurance. They may include bank accounts, securities accounts, and, indeed, most types of assignable contractual rights. Indiana’s new Transfer on Death (“TOD”) statute even permits the designation of a transferee on death for real property.
All these designations - - to reemphasize a point made in the first presentation in this series - - control over contrary provisions in wills, and property that is passed by means of such designations is not probate property (unless the designation lapses for one reason or another and there is no contingent beneficiary).
I next quoted a list of common mistakes made in beneficiary designations, from a recent article that somewhat strangely did not refer to the use of trusts. The important general point to take away from that list and from the whole program is that the owners of the property rights covered by such designations must be extremely careful about the details of the designations and must know exactly what they are doing. (Never, for example, name a minor as the designated beneficiary of a life insurance policy or else the insurance company may require the establishment of a guardianship to receive the proceeds or even withhold them until the minor reaches the age of majority.)
With all the emphasis on beneficiary designations, there was relatively little discussion during the program of tenancies by the entireties. However, in Indiana especially, such a form of joint ownership of any real estate, not only homestead property, between spouses is an important means of asset protection. One of the key benefits is that the creditors of either spouse but not both spouses may not levy upon the real estate held in tenancy by the entireties while the marriage lasts (or even afterward if the debtor spouse dies first), although there is an exception for federal tax liens.
There is in Indiana the possibility of achieving at least some of this indispensable asset protection in rare cases by specifying in the beneficiary designation of a life insurance policy or annuity contract that the beneficiary may not “commute, anticipate, encumber, alienate or assign” any benefits. However, astonishingly enough, this possible protection only applies to life insurance or annuities issued by an Indiana life insurance company. Burns Ind. Code Ann. § 27-2-5-1 (2010).
If there are any questions about any of these important matters that the listeners wish to ask, I remain eager to answer them subject to my previously stated caveat that such answers should not be construed as particularized legal advice or as indicative of an attorney-client relationship. Please feel free to email in those questions to me at thelakeshorelawyer@lakeshoreptv.com.
I began the August 20 program by recapping the main points of the previous programs and the discussing a recent United States Supreme court decision (Estate of Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct.865 (2009)) that had made clear once again the paramount importance of making the proper designation of intended beneficiaries under retirement plans. There, the decedent has long been divorced and his ex-wife had expressly waived in the divorce decree any interest in his account benefits under his employer’s savings and investment plan. However, for whatever reason, the decedent’s lawyer had not memorialized that fact in the form of a Qualified Domestic Relations Order (which must, among other things, designate an alternate payee to the divorced spouse), nor had the ex-wife disclaimed her interest in the plan in the particular manner required by the plan to override her continued designation as the sole beneficiary. In those circumstances, the plan documents (including the concededly unintended beneficiary designation of the long-divorced ex-spouse) trumped the language of the divorce decree itself because of the preemptive effect of ERISA (the federal Employee Retirement Income Security Act) over state law. Thus, the ex-spouse took everything.
I next explained that even properly drawn beneficiary designations of retirement plans or life insurance policies provide no asset protection whatsoever against the creditors of the beneficiaries themselves unless the assets are held in trust. Trusts are also the surest way of achieving a “stretch-out” of distributions from inherited retirement plans so that only the required minimum distributions are made from them except in exigent circumstances and as much as possible of the principal can continue to grow and compound on a tax-deferred basis. However, a few IRA custodians also now offer accounts that permit such a stretch-out.
Third-party beneficiary designations are not limited to retirement plans and life insurance. They may include bank accounts, securities accounts, and, indeed, most types of assignable contractual rights. Indiana’s new Transfer on Death (“TOD”) statute even permits the designation of a transferee on death for real property.
All these designations - - to reemphasize a point made in the first presentation in this series - - control over contrary provisions in wills, and property that is passed by means of such designations is not probate property (unless the designation lapses for one reason or another and there is no contingent beneficiary).
I next quoted a list of common mistakes made in beneficiary designations, from a recent article that somewhat strangely did not refer to the use of trusts. The important general point to take away from that list and from the whole program is that the owners of the property rights covered by such designations must be extremely careful about the details of the designations and must know exactly what they are doing. (Never, for example, name a minor as the designated beneficiary of a life insurance policy or else the insurance company may require the establishment of a guardianship to receive the proceeds or even withhold them until the minor reaches the age of majority.)
With all the emphasis on beneficiary designations, there was relatively little discussion during the program of tenancies by the entireties. However, in Indiana especially, such a form of joint ownership of any real estate, not only homestead property, between spouses is an important means of asset protection. One of the key benefits is that the creditors of either spouse but not both spouses may not levy upon the real estate held in tenancy by the entireties while the marriage lasts (or even afterward if the debtor spouse dies first), although there is an exception for federal tax liens.
There is in Indiana the possibility of achieving at least some of this indispensable asset protection in rare cases by specifying in the beneficiary designation of a life insurance policy or annuity contract that the beneficiary may not “commute, anticipate, encumber, alienate or assign” any benefits. However, astonishingly enough, this possible protection only applies to life insurance or annuities issued by an Indiana life insurance company. Burns Ind. Code Ann. § 27-2-5-1 (2010).
If there are any questions about any of these important matters that the listeners wish to ask, I remain eager to answer them subject to my previously stated caveat that such answers should not be construed as particularized legal advice or as indicative of an attorney-client relationship. Please feel free to email in those questions to me at thelakeshorelawyer@lakeshoreptv.com.
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