What is a Charitable Remainder Trust?

May 3rd, 2011

A charitable remainder trust (CRT) is a trust where there are two separate and distinct “beneficial interests” also known as “split interests.”  This means that two different entities have an interest in the assets of the trust.  These two interests are usually the “income interest,” which means income from the trust, and the “remainder interest,” which means what is left over at the termination of the trust.  In a CRT, a non-charitable beneficiary receives t he income interest and a charitable beneficiary receives the remainder interest.

A properly drafted CRT can allow the creator of the trust to take a Federal income tax deduction, as well as provide an income stream for life.

Is it possible that I might be able to increase my income and reduce my taxes at the same time by using a Charitable Remainder Trust?

Yes, depending on your circumstances.  If you hold property which has considerablly increased in value since you purchased it, you may incur a capital gains tax if you sell the property.  A properly drafted Charitable Remainder Trust will allow you to donate the property to the trust and take an income tax deduction and establish an income stream for yourself.  If the property is currently producing little or no income, the income stream from the trust may increase your present income as well.

Call us to learn more about CRT’s (909)981-6177.

The Basic Premise of Asset Protection Planning

April 27th, 2011


Asset protection comes in all shapes and sizes.  Once the concern of the very rich, or those with potentially great liabilities; asset protection is now for everyone.  Whether it’s structuring protection for the nest egg in the event of a financial disaster, or preserving what’s left of a small estate for children and grandchildren, asset protection is worthy of consideration.

Asset Protection in General

What is the basic premise of asset protection planning?

 The basic premise of asset protection planning is that you are able to choose which jurisdiction controls your property rights.  This is often difficult for people to understand, because most people never have the opportunity to choose which set of laws affect any part of their life.  For example, we have no choice of who controls the traffic laws that we all must adhere to – this is decided by the municipality that you are driving in, and there is no way to change that. 

Similarly, none of us in the U.S. can decide which set of tax rules apply to us – the Internal Revenue Service takes care of that, and there is no way around it.  However, wealth usually takes the form of personal property.  Securities, for example, whether publicly traded or privately held, are personal property; and personal property usually governed by the laws of wherever the property is located.  That’s why the location, or domicile, of the owner of that property is so important.  As we will see, some countries allow you to be much more protective of your property than other countries. 

What is the goal of Asset Protection Planning?

The goal of Asset Protection Planning is to develop a wealth preservation plan that is effective and that will leave you with peace of mind if disaster strikes.  Asset protection strategies are generally not designed to take control of all of your assets, such as your daily living expenses, mortgage payments, or other loan payments.  Rather, they are designed to take a certain portion of your wealth and allocate it to structures that would likely frustrate the efforts of future creditors.  The goal here is to reassure the client that they have wealth that is beyond the reach of creditors that they can rely on to rebuild in the unlikely event that disaster strikes.  It is not designed to shield assets that are needed for short-term or mid-term financial needs.

Other goals of asset protection planning include:

  • To take the decision out of the hands of the local judges and juries
  • To allow lawsuits to be tried and heard by the jury
  • To allow the negotiation of the favorable settlements
  • To allow long-term planning
  • To avoid having one lawsuit ruin your life and the life of your family
  • To allow discovery of assets but have the assets protected
  • To allow the professional to continue to practice

Why would someone want to shield their assets from creditors?

In today’s litigious society, there is virtually no way to anticipate how your assets are exposed to potential creditors.  If you own a business or practice a profession (medical, legal, accounting, engineering, or architecture), it is truly impossible to foresee the financial pitfalls that exist.  Even though many businesses are operated as corporations or limited liabilities companies (which traditionally offer protection from business debts), there is a growing trend toward attaching certain business liabilities to the business owner.  For example, certain tax obligations can attach to the business owner, as well as liability for sexual harassment lawsuits (even if the unlawful acts were committed by a non-owner employee), and a wide variety of environmental regulations routinely impute liability to the business owner.

Although most business owners are careful and diligent about how they run their company, we simply cannot ignore the wide variety of risks that the owner is exposed to.  For that reason alone it makes sense to learn more about asset protection planning, and decide if any of those strategies are appropriate for you.

Why are professional liabilities so troubling?

A professional (Doctor, Lawyer) is personally liable for professional liabilities.  The usual state laws that shield an owner of a company from the liabilities of the company are typically not available.

These liabilities are especially severe as the professional may have conducted himself or herself beyond reproach and if sued in the wrong country with the wrong judge or jury, the professional may be unable to win.  Many times the professional will be forced into an unfair settlement due to the danger of submission to a jury.

Why should I be worried about local judges and juries?

The movement of judges and juries toward large awards in a disturbing trend.  As the voters elect judges, it is safe to say that the judges are representative of the voters, who elect them.  For defendants out of state or out of country, there is a natural leaning toward the local and known party.  The legal community has recognized that this exists and this is referred to as “home cooking.”

Juries may focus on the injury and wish to compensate the injured party, without strict regard to the person actually causing the harm.  Sometimes bad things happen without fault.  Sometimes persons are held liable for being in the wrong place at the wrong time.

It has become increasingly difficult for the juries to be filled with persons with business backgrounds.  If a person has the ability to take commitment or that person is independently wealth.  Either way juries have been awarding larger and larger sums.

When is the best time to do this type of planning?

The best time to do this type of planning is when you need at the least.  You can’t typically buy insurance on your boat while the boat is sinking.  By the same token, you can’t typically protect your assets after you’ve been sued or after you’ve committed an act that is likely to end in a lawsuit.  Stated in legal terms, you cannot protect your assets from current or from reasonably anticipated creditors.  There are state laws (Fraudulent Transfer Rules) that address “fraudulent conveyances.”  A fraudulent conveyance is any conveyance of an asset designed to hinder, delay or defraud a creditor.  You need to do this type of planning when there is no threat to your wealth – otherwise, the planning is very much at risk, and likely ineffective.

Are there any exceptions to the Fraudulent Transfer Rules?

Generally exceptions to the Fraudulent Transfer Rules under state law are transfers completed in the normal course of business, transfers for full value, transfers which do not create insolvency, and a transfer occurring before a known creditor exists.

What is the penalty for violation of the Fraudulent Transfer Rules?

The penalty for a violation of the Fraudulent Transfer Rules is to undo the transfer, and the remedy is against the recipient of the property.  This is a situation where legal counsel is a must.  As an example, if a doctor has a known claim and transfers a Certificate of Deposit to his wife, and if the creditor is successful in its claim, the creditor can bring suite against the wife to recover the funds.

If I have a known creditor, can I still do asset protection planning?


The existence of a known creditor should not stop asset protection planning.  Planning may still occur concerning other unknown future creditors.  Generally the planning should except known creditors but planning could continue.

How Can You Discourage Your Child or Grandchild From Depending Too Much On Their Inheritance?

April 14th, 2011

Your trust can provide that distributions will be made to your child on the condition that your child remains gainfully employed or, if unemployed, that your child is demonstrating steady progress towards becoming gainfully employed.  You can also establish guidelines in your trust that provide the trust funds are to be used for funding non-luxury items, such as a used but safe car for transportation, and only if the beneficiary is able to pay for the ongoing maintenance and insurance of the car.

You can also carve out conservative distribution guidelines that allow the Trustee to make distribution guidelines that allow the Trustee to make distributions solely based on demonstrated need.  When combined with incentive provisions that allow the Trustee to pay for expenses that enhance a beneficiary’s career, such as funding further education, a child’s dependency over trust funds can be controlled.  Call us for more information on our legacy planning (909)981-6177.