MDNews - San Antonio

+++++++++++++++++++ + + +++++++++++++++++++ ACCOUNTING +++ +++ Estate Planning and Asset Protection Planning: Start Early, Don't 'Wait 'Til You Need It' By Bennett Allison, CPA, CFP D URING MY YEARS practicing as a CPA, on occasion I have received frantic phone calls from clients that go something like this: "Mom is dying and not expected to make it past the weekend. We know she wasn't interested in estate planning. What can we do now to reduce her estate taxes?" And I would not be surprised to receive a call like this in the future: "I'm being sued for $20 million and want to review options for protecting my assets." These supposedly theoretical concerns can suddenly become very real when clients experience estate tax or asset protection shocks such as these. So, what options are there? Well, there are a lot fewer than if planning had been done in advance. In fact, the limited options available are often less attractive and generally less effective. With advance planning, there are a variety of ways to protect assets from estate tax and creditors (including potential future creditors). We will focus in this article on three techniques that both limit estate taxes and protect your assets: inheriting/passing property in trust, spousal access trusts and family limited partnerships. Inheriting/Passing Property in Trust The largest transfer of an individual's assets typically occurs at his or her death. Decedents sometimes try to avoid the costs and complications associated with trusts when passing property to family members. Even if the decedent did not have estate tax problems or creditor issues, it does not mean that those 10 | San Antonio MD NEWS ■ MDNEWS.COM inheriting the property do not or will not. Example 1: A mother dies with a $1 million estate, all passing directly to her son. Her son is a cosigner on a $5 million real estate loan. The real estate project goes badly; none of the other cosigners are able to pay; and the son loses the $1 million inherited from his mother. If the mother, instead, had left the $1 million to her son in trust, the son would, in most cases, still have the $1 million available for his benefit. Example 2: A father dies with a $1 million estate, all passing directly to his daughter. Ten years later, the $1 million has grown to $2 million, and the daughter dies. The daughter passes all assets to her children. The daughter has other significant assets and is subject to a 55% estate tax. This results in an estate tax of $1.1 million on the $2 million inheritance. If the property had, instead, been inherited in a properly structured trust, the daughter could have had access to the funds during her lifetime; the additional $1.1 million of estate tax would not have been incurred; and the full $2 million would have passed to the daughter's children. Whether inheriting property or pass- ing property to the next generation, always consider doing so in trust when the amounts are significant. Spousal Access Trusts Sometimes individuals have amassed large amounts of property during their lifetimes and want to protect this prop- erty (from estate taxes and creditors) while still having the funds available if needed. A spousal access trust allows a married couple to do just that. In a typical scenario, the husband will create a trust for the benefit of his wife, fund the trust with his separate property and have the children act as secondary beneficiaries. The spousal access trust, if structured properly, will put the assets in it beyond the reach of creditors and out of the husband's, wife's and future generation's taxable estates. Before setting up a spousal access trust, careful consideration should be given to the couple's long-term marriage stability. Also, the spouse who is creating the trust/ making the gift should have other funds available, as he or she may no longer have access to the property held in trust (e.g. in a divorce). Family Limited Partnerships Wealthy individuals often set up family limited partnerships (FLPs) to protect assets. These entities are not attractive to creditors, since the creditors will be responsible for income taxes on any earn- ings of the FLP while generally having no right to receive any assets from the FLP to pay these taxes. Because of this, creditors are often willing to settle more quickly and/or for less money. FLPs also have the advantage of being subject to valuation discounts for estate and gift tax purposes. For example, an FLP holding $1 million of market- able securities might only be valued at $700,000 (i.e. a 30% discount). Here is a simplified explanation of how and why discounting works. Example 3: Two sisters are 50/50 partners in an FLP. Neither of them fully controls the FLP. Further, neither sister

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