Why Your Financial Planner Needs to Know about a Castle Asset Protection Trust

There’s a handful of financial advisors that are familiar with a Castle Trust, which is a form of asset protection trust.  Now if you were to ask your financial advisor, he or she may say, “oh yeah, I know those…”, but chances are they are just covering for a lack of knowledge.  You can read more on this issue (What Your Financial Planner or Family Lawyer Doesn’t Know, Hurts You!).  Either way, most financial planners are not familiar with the planning options with irrevocable trusts, they are used to the old Irrevocable Life Insurance Trusts (ILITs) or other irrevocable trusts that were set up for estate tax purposes.

The new breed of irrevocable trust is very different than the old style, estate tax planning irrevocable trust. For example, the problems with the old style irrevocable trusts include:

  1. Loss of control over the management of the assets;
  2. A separate EIN number for tax reporting purposes;
  3. A larger tax bill because of the way traditional irrevocable trusts are taxed;
  4. A loss of the step-up in basis available to assets owned by an individual upon the death of the settlor; and
  5. The inability to change provisions or beneficiaries in the future.

Now remember, these problems only apply to irrevocable trusts of old, not the modern irrevocable trust.  

The Modern Asset Protection Trust- The Castle Trust

The modern irrevocable trust arose to address the concerns of clients today.  My clients are not concerned with estate taxes (unless you have over $5million or won the Powerball…), but what they are concerned about are long-term care costs and to a lesser extent law suits.

The advantages of the Castle Trust include:

  • This is a grantor trust that you create and are in control of.  No beneficiary ever has a right to demand a distribution of income or principal during your life.
  • The trust provides asset protection from future liability like car accidents, professional or personal negligence, and even can be structured to provide protection from Medicaid ineligibility.
  • The trust is a disregarded entity for tax purposes and uses your social security number.  This means you are taxed just like as if you owned the assets yourself.
  • The trust does not remove assets from your estate so your beneficiaries receive a full step up in basis upon your death, just like with personally owned assets or those in a revocable trust.
  • The assets in this trust are protected from the surviving spouse‚Äôs future marriage in much the same way that a prenuptial agreement would protect the assets.
  • The assets are protected from an elective share claim in the future.
  • You can change the beneficiary at any time without risking loss of the assets to creditors.
  • The trust has special provisions to protect inherited IRAs from the claims of creditors.  (A recent Supreme Court case held that inherited IRAs are not protected from creditors)
  • All assets that can be transferred to a revocable trust can be transferred to a Castle Trust without penalties or termination.
  • The Castle Trust can contain trust protectors that enable changes to the documents if the laws change in the future, in much the same way as one would have with a revocable trust.  Often in joint irrevocable trust, changes cannot be made after the death of the first spouse, but even with a joint Castle Trust, changes can be made after the death of the first spouse.

As you see, the modern asset protection irrevocable trust is a completely different animal.  These trusts are great for avoiding probate, protecting your beneficiaries, and most importantly–protecting you.  Given these benefits, it’s a matter of time before financial planners will be more familiar with the Castle Trust and realize these aren’t your parent’s irrevocable trusts of old.

Castle Wealth Group Legal in Media

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