Why Use Trusts?

Friday, January 9th, 2009 | Investment, Money, Real Estate, The Economy | No Comments

Estate Planning – Bypassing Probate

1.      Assets held in trust are not part of an individual’s estate; therefore, those assets would not be included in probate because they are already held in trust for the benefit of another individual.  If a beneficiary dies, the beneficial interest in a trust may be part of their estate; however, this would not affect the asset or the trust, unless dictated by the Declaration of Trust and Trust Agreement.

2.      The best example if this is Anna Nicole Smith.  This was the 20-Something model that married the 90-Something Texas oil billionaire.  The billionaire left Smith several million dollars and his children contested his Will.  Although the Will was modified several years prior to his death, the children contested on the grounds that the billionaire was not competent to make the change.  The children said the Will was not valid and a judge agreed and entered a different judgment.

a.       The Billionaire’s wishes were not honored
b.      He was found incompetent after his death
c.       The children were granted the majority of the estate

There are several version of what “really” happened … either way, if these assets had been placed in Trust for Smith, they would not have been part of the Billionaire’s estate and very difficult to contest.  The title to any such assets would be held in trust and a Trustee would have ultimately made the decision as to the disposition of them; in accordance with the Billionaire’s wishes.

3.      Probate is the publicizing of an individual’s Last Will and Testament.  A Probate judge makes the Will a matter of public record in order to determine if there are any outstanding debts which should be settled prior to the disposition of the assets.  In other words the Court says this; “Hey, this guy has assets.  Is there anyone who has reason why this Will should not be recorded?  Does this person owe you any money?  Is there anyone who’d like to screw this guy?”  If no one comes forward, the judge allows the heirs to have the proceeds of the Will.

4.      Since assets held in trust are not part of anyone’s estate, these assets bypass probate and continue to be held in trust for the benefit of another person.  The trust can hold these assets for up to 20 years, as directed by the Grantor or creator of the trust.  After 20 years, a new trust would have to be created or the assets liquidated.

Privacy – Avoiding Becoming a Target

1.      Since trusts are private documents created by individuals they may be kept from public view.  In fact, most trust documents forbid anyone from disclosing the documents to a third party or anyone who is not a party to the trust; Trustee, Director, Beneficiary, Etc.  Disclosing the documents would be a breach of contract and any disclosing party would be liable for damages.

2.      The assets of a trust are likewise, private and may not be disclosed to anyone outside the trust.  The members of the trust are the only individuals who know what assets the trust holds.  Land, vehicles, ATVs and other items which have a “Title” can become part of the public record; however, only the “Owner” or “Title Holder” may be made public.  If a Trust holds title to an asset, the name of the Trust is public, but the Declaration of Trust, the Trust Agreement, any Beneficiaries and other information about the Trust remains part of the private agreement.

3.      If an individual is sued and they don’t “own” anything, it will be difficult for liability to attach to an asset.  Trusts are not “Owned” by anyone.  Trusts have Trustees who handle the legal affairs of the trust and its assets (Trusts can’t be liable for the actions of a Trustee).  Trusts have Directors who tell the Trustee what actions to take with regard to Trust assets (Trusts are not liable for the actions of the Directors).  Trusts have Beneficiaries who may have the right to receive proceeds, avails, dividends and other funds produced by the assets; however, Beneficiaries to NOT have any ownership in the asset of the Trust (Therefore, Trusts may not be held liable for the actions of a Beneficiary).

4.      As beneficiary, an individual may “control” an asset without the liability of ownership.  The fact that an individual is a beneficiary is private and their interest in the trust is private.  An individual may control hundreds or properties without appearing on title.

Asset Protection – Avoiding Liability

1.      Private Jet Crash with Signer

a.       To be completed

2.      Victoria A. – Lost properties due to fire at property

a.       To be completed

3.      John R. – Charlotte, NC

a.       Imagine you leave for the weekend and a well-deserved vacation.  When you return, through no fault of your own, you are embroiled in what you think is a baseless lawsuit?  You have insurance, right?  Of course you do.  The problem is your insurance doesn’t cover All Terrain Vehicles and that is what your neighbor borrowed while you were out of town.

John R. is a Realtor and investor from Charlotte, NC.  Last year John became the victim of our litigious society and is realizing the difficulties faced by someone with large assets.  John carries a large “Umbrella Insurance Policy” in hopes that no judgment will exceed $5 Million.  He’s covered at home, work, the car and everywhere he travels.  His home is covered.  His rental properties are covered; however, his 4WD ATV is expressly NOT covered by his liability policy and that is what his neighbor was riding when he struck a tree and was paralyzed from the waist down.

John left for Myrtle Beach, SC on Friday May 26, 2006.  The neighbor, and friend, agreed to watch the house and feed the dogs.  John agreed to let the neighbor and his son borrow his ATV.  The neighbor had used the ATV on several other occasions and was an experienced rider; however, at some point on Saturday the neighbor was riding with his son and struck a tree.  The neighbor’s son was knocked unconscious and the neighbor broke his spinal cord and became paralyzed from the waist down.

When the family returned from the beach, they were informed on the accident (which didn’t even occur on John’s property) and John visited his friend in the hospital.  Within a few weeks an attorney filed suit against John for negligence in the maintenance of his ATV.  The suit stated that the neighbor was an experienced rider and would not have struck the tree if the ATV was properly maintained (the ATV was a Christmas present 5 months prior).

John’s insurance company immediately informed him of the clause which specifically excluded motorcycles, scooters, 4-wheelers and ATVs or any kind.

It has taken almost 18 months to reach a conclusion and John has liens against the equity in all his investment property, stocks and other assets, which are owned by him and his wife.  The neighbor has begun proceedings to seize the property in order to satisfy the judgments.  Not only has John lost the equity of his real estate, he has spent more than $125,000 defending the case.

The bright spot is that John’s personal residence is held in a Land Trust for his children.  The family’s home is owned free and clear with no mortgages or liabilities and is the family’s most valuable single asset.  The liability of the judgment has not attached to the home.  Since the home is held in trust for the benefit is their children, it is no longer titled to John and his wife and may not be seized to satisfy any judgments.

John and I spoke at several REIA meetings over the past few years about the need for him to place the rest of his property in trust.  This could have significantly impacted the neighbor’s ability to receive any satisfaction to the judgment, while John could have maintained control and tax benefit from the mortgages on the properties.

Greg@WeBuyHouses.ME
We Buy Houses Internet Trust
Asset Investment Trust
112 S. Main St
Clover, SC 29710
877-567-2513 (Ext 101)

Tags: Estate Planning, Real Estate, Real Estate Trusts, Trust