I should emphasize that estate planning and asset protection planning (as well as income tax control, business planning, and all the other trappings of wealth management, while we are at it) are best addressed together. While we touch on smart estate planning and the other elements of wealth management in other posts, deep details on estate planning techniques are appropriate here.
Why you want trust protectors when you create estate planning trusts
An often-overlooked feature even in expensive estate plans is trust protectors, which is an inexplicable shame.
Think of protectors as guardians of the trust, the sheriffs if you will. These are something that seem to make perfect sense to most parents when asked, but we rarely find in new clients’ existing estate planning.
Protectors basically protect the kids (or other trust beneficiaries or trustees) from being forced to write a check against their interests, such as to satisfy a judgment, or divide assets in a divorce. In many cases, the child’s inheritance is given to a trust of which the child is trustee, but a protector – their brother, maybe – takes over if a threat appears.
Trusts to protect children from divorce risk
Giving the child their inheritance in their own special trust helps to prevent it from becoming marital property and hence at divorce risk, as in “of course I love you honey and would love to put your name on the account, but Daddy set it up in a trust fund and that’s how he wants it…” without restricting their access to the funds since they are the trustee (unless a threat appears, and they automatically lose trustee powers to the protector until the threat passes).
Protection for children’s inheritance if you remarry
Similar measures can be used to protect kids’ inheritance, say if you or your spouse dies and the other remarries, from the clutches of a future step-parent. Protectors can also be used to watch over and fire trustees, like if a bank or trust company becomes unresponsive or abusive, as is often the case. And they have particular utility in making advanced tax control techniques work, to help get you your tax cake and lifestyle eating too.
Asset protection trusts
Asset protection trusts (APT’s, domestic or offshore) are irrevocable and transfer control to outside parties as trustees, with protectors as control. These are often overkill but useful when applicable.
Spousal Lifetime Access Trusts (SLATs)
F-BOTS (Family Bank Ongoing Trusts) have more limited asset protection power, but this can and should be shored up using personal holding companies and the other techniques discussed in the asset protection posts. I think I coined the F-BOT term, and use it to describe a bundle of features built into an advanced form of SLAT or Spousal Lifetime Access Trust, a more generic term.
SLATs – Access and control with estate tax savings
F-BOTS, the way we do them, are the major artillery piece of estate tax control, and we will delve in detail in the tax posts. They allow the couple to have complete control and access to income, while still getting the property out of the taxable estate – and eliminating estate and gift tax entirely if done right in the right fact pattern – and done before too late with stiff tax hikes on the political wind.
Dynasty trusts
So-called dynasty trusts can eliminate all gift and estate taxes for the family for many generations, or forever, if this is desired, while still availing the family and descendants of the full benefit of the family assets, which can compound mightily over time in the absence of transfer taxes.
You can bolt these onto F-BOTS.
They work by granting rights in trust assets to the family which approach, but technically don’t equal, actual ownership (which would trigger estate, gift and generation skipping transfer tax for families with sufficient wealth).
Dynasty trusts vs. generation skipping transfer trusts
This is a far more elegant and effective approach than the ubiquitous “skip trust” method (which aims to game the Generation Skipping Transfer Tax regimen) since it avoids taxes for hundreds of years or longer, instead of for just one generation.
Skip trusts are cumbersome and mind-numbingly complex. They also nip intergenerational wealth building in the bud.
Dynasty-fueled F-BOT methods really sing, and can make for incredible long-term wealth building potential.