People who live in states with high income taxes sometimes relocate to a state with a more favorable tax climate. A similar strategy can be available for trusts. If a trust is subject to high state income taxes, you may be able to change its residence — or “situs” — to a state with low or no income taxes.

What can a “trust-friendly” state offer?

In addition to offering low (or no) tax on trust income, some states:

  • Authorize domestic asset protection trusts, which provide added protection against creditors’ claims,
  • Permit silent trusts, under which beneficiaries need not be notified of their interests,
  • Allow perpetual trusts, enabling grantors to establish “dynasty” trusts that benefit many generations to come,
  • Have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters, or
  • Offer greater flexibility to draft trust provisions that delineate the trustee’s powers and duties.

If another state’s laws would be more favorable than your own state’s, you might benefit from moving a trust to that state — or setting up a new trust there.

Take states’ laws into consideration

It’s important to review both states’ laws for determining a trust’s “residence” for tax and other purposes. Typically, states make this determination based on factors such as:

  • The grantor’s home state,
  • The location of the trust’s assets,
  • The state where the trust is administered (that is, where the trustees reside or the trust’s records are kept), and
  • The states where the trust’s beneficiaries reside.

Keep in mind that some states tax income derived from in-state sources even if earned by an out-of-state trust.

Making the right move

To enjoy the advantages of a trust-friendly state, establish the trust in that state and take steps to ensure that your choice of residence is respected (such as naming a trustee in the state and keeping the trust’s assets and records there). It may also be possible to move an existing trust from one state to another.

We can assist you in determining if setting up trusts in another state would help you achieve your estate planning goals. Contact us at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

An unexpected outcome of the recent death of designer Karl Lagerfeld is that the topic of estate planning for pets has been highlighted. Lagerfeld’s beloved cat, Choupette, played a major role in his brand. The feline was the subject of a coffee table book and has a large Instagram following. Before his death, Lagerfeld publicly expressed his wishes to have his ashes, and those of his cat if she had died before him, to be scattered with those of his mother’s. It’s unknown if Lagerfeld accounted for his beloved Choupette in his estate plan, but one vehicle he could have used to do so is a pet trust.

Another celebrity who famously set up a pet trust for her dog was hotel heiress Leona Helmsley. She left $12 million in a trust for her white Maltese, Trouble. (A judge later reduced the trust to $2 million and ordered the remainder to go to Helmsley’s charitable foundation.) Thanks to the pet trust, Trouble lived a luxurious life until she died in 2011, four years after Helmsley’s death.

ABCs of a pet trust

A pet trust is a legally sanctioned arrangement in all 50 states that allows you to set aside funds for your pet’s care in the event you die or become disabled. After the pet dies, any remaining funds are distributed among your heirs as directed by the trust’s terms.

The basic guidelines are comparable to trusts for people. The “grantor” — called a settlor or trustor in some states — creates the trust to take effect during his or her lifetime or at death. Typically, a trustee will hold property for the benefit of the grantor’s pet. Payments to a designated caregiver are made on a regular basis.

Depending on the state in which the trust is established, it terminates upon the death of the pet or after 21 years, whichever occurs first. Some states allow a pet trust to continue past the 21-year term if the animal remains alive. This can be beneficial for pets that have longer life expectancies than cats or dogs, such as parrots or turtles.

Specify your wishes

Because you know your pet better than anyone else, you may provide specific instructions for its care and maintenance (for example, a specific veterinarian or brand of food). The trust can also mandate periodic visits to the vet and other obligations. Feel more secure knowing that your pet’s care is forever ensured — legally. Contact us for additional details at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

A revocable trust — often referred to as a “living trust” — can help ensure smooth management of your assets during life and avoid probate at death. And you may know that the trust isn’t effective unless you “fund” it — that is, transfer ownership of your assets to the trust.

But what about assets such as automobiles and other vehicles? Should you transfer them to your revocable trust?

Navigate potential bumps in the road

If you still owe money on an auto loan, the lender may not allow you to transfer the title to the trust. But even if you own the vehicle outright (whether you paid cash for it or your loan is paid off), there are risks to consider before you make such a transfer.

As owner of the vehicle, the trust will be responsible in the event the vehicle is involved in an accident, exposing other trust assets to liability claims that aren’t covered by insurance. So you need to name the trust as an insured party on your liability insurance policy.

On the other hand, because you’re personally liable either way, owning a vehicle through your revocable trust may not be a big concern during your life.

But after your death, when the trust becomes irrevocable, an accident involving a trust-owned vehicle can place the other trust assets at risk. Keeping a vehicle out of the trust eliminates this risk. The downside, of course, is that the vehicle may be subject to probate, although some states offer streamlined procedures for transferring certain vehicles to heirs.

Steer your questions to us

If you’re considering transferring an automobile or other vehicle to your revocable trust, get in touch with us. We’d be pleased to explain the ins and outs of such a move, call us at 205-345-9898.

© 2019 Covenant CPA

An IRA is a popular vehicle to save for retirement, and it can also be a powerful estate planning tool. Some people designate a trust as beneficiary of their IRAs, but is that a good idea? The answer: possibly.

IRA benefits

The benefit of an IRA is that your contributions can grow and compound on a tax-deferred basis for many years. The longer you leave the funds in the IRA, the greater the potential growth, because taxes aren’t taking a bite out of the account. If you don’t need to tap your IRA funds during your life — other than required minimum distributions (RMDs) — you can stretch out its benefits even longer by designating your spouse or child as beneficiary.

For traditional IRAs, you must begin taking annual RMDs by April 1 of the year following the year in which you reach age 70½ (your “required beginning date,” or RBD). The distribution amount is calculated by dividing your account balance by your remaining life expectancy.

If you name your spouse as beneficiary, he or she can transfer the funds to a spousal rollover IRA and delay distributions until his or her own RBD. If someone other than your spouse inherits your IRA, that person must take distributions even if he or she hasn’t reached age 70½ but can stretch them out over his or her own life expectancy.

If you designate multiple beneficiaries, distributions will be based on the oldest beneficiary’s — that is, the shortest — life expectancy.

One thing you shouldn’t do, unless you have a specific reason, is designate your estate as beneficiary or fail to name a beneficiary at all. Under those circumstances, the IRA must be distributed to your heirs within five years (if you die before your RBD) or over your remaining statistical life expectancy (if you die after your RBD).

Why use a trust?

One reason to name a trust as IRA beneficiary is to prevent a loved one from emptying the account too quickly and defeating your tax-deferral purposes. Another, if you have children from a previous marriage, is to ensure that they’ll benefit from an IRA you leave to your current spouse.

If you decide to use a trust, be sure it’s designed properly to meet the requirements of a “see-through” trust. Otherwise, distributions will be accelerated as if you’d failed to name a beneficiary. To qualify, the trust must be valid under state law, be irrevocable (or become irrevocable on your death) and name only identifiable individuals as beneficiaries.

In addition, the trustee must furnish the trust documentation to the IRA custodian by October 31 of the year following the year of death.

Under the right circumstances, naming a trust as IRA beneficiary can be a good strategy. However, contact us before taking action. We can help assess your circumstances and determine if this is the right move for you. Contact us at 205-345-9898.

© 2018 Covenant CPA

For many people, a family-owned business is their primary source of wealth, so it’s critical to plan carefully for the transition of ownership from one generation to the next.

The best approach depends on your particular circumstances. If your net worth is well within the estate tax exemption ($11.18 million for 2018), for example, you might focus on reducing income taxes. But if you expect your estate to be significantly larger than the exemption amount, estate tax reduction may be a bigger concern.

Here are two techniques to transfer a family business — one if gift and estate taxes are a concern, and one if they aren’t:

1. IDGT. An intentionally defective grantor trust (IDGT) is an income defective trust. As such, it can be a highly effective tool for transferring business interests to the younger generation at a minimal gift and estate tax cost if your estate exceeds the gift and estate tax exemption.

An IDGT is designed so that contributions are completed gifts, removing the trust assets and all future appreciation in their value from your taxable estate. At the same time, it’s “defective” for income tax purposes; that is, it’s treated as a “grantor trust” whose income is taxable to you. This allows trust assets to grow without being eroded by income taxes, thus leaving a greater amount of wealth for your children or other beneficiaries.

The downside of an IDGT is that, when your beneficiaries inherit the business, they’ll also inherit yourtax basis, which may trigger a substantial capital gains tax liability if they sell the business. This result may be acceptable if the estate tax savings outweigh the income tax cost.

2. Estate defective trust. If the value of your business and other assets is less than the current estate tax exemption amount, so that estate taxes aren’t an issue, you might consider an estate defective trust. Essentially the opposite of an IDGT, an estate defective trust is designed so that beneficiaries are the owners for income tax purposes, while the assets remain in the estate for estate tax purposes.

This technique provides two significant income tax benefits. First, assuming your beneficiaries are in a lower tax bracket, this strategy will result in lower “familywide” taxes. Second, because the trust assets remain in your estate, the beneficiaries’ basis in the assets is “stepped up” to fair market value at your death, reducing or eliminating their potential capital gains tax liability.

Determining the right strategy to implement when transferring ownership of the business to heirs depends on the value of your business and other assets and the relative impact of estate and income taxes. Also keep in mind that the gift and estate tax exemption is scheduled to drop to an inflation-adjusted $5 million in 2026. Contact us with any questions at 205-345-9898.

© 2018 Covenant CPA