Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm.
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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.
On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers the below questions.
- What is a beneficiary-controlled trust and how does it protect against creditors? What is the difference between this and a domestic asset protection trust?
- If one were to execute a Castle Trust on May 19, 2021, can they fund non-qualified assets to the trust to start the 5-year clock, then fun additional non-qualified funds in the future? What would be the future look-back period?
- With calls for inflation, what are some things I should be thinking about how to position myself for rising inflation?
- What is a LIRP and what are the costs/fees?
- pop-in question) Last week you mentioned that the Estate tax for the family is portable, if the Estate Tax is reduced to five million or three and a half million, would the exemption be ten or seven million? If so what does the surviving need to take advantage of?
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Episode Transcript
All right we’ll go ahead and get started in just a minute here. Hopefully, everyone’s doing well here I am all right. So we do my name’s Chris Berry, we do these webinars every week and every week we start with something positive that’s happened. I call it a positive focus and today’s positive focus is that I get to go see my son do a concert. He’s been taking a saxophone and then he switched over recently to clarinet and he’s at an end-of-year concert that’s going to be outside. So it’s going to be nice to see him play live with his classmates. I saw him do a concert over Zoom and you can imagine how difficult that was. So it’s going to be nice assuming the weather holds up we don’t get any thunderstorms to listen to him live. So that’s my positive focus and so what we do on these calls each week is we take some time and answer whatever questions you have from a legal financial tax planning standpoint and we answer them live. So there’s no scripted PowerPoint or anything like that it really is all about what your questions are and give me just a second.
So with that if you do have any questions one second let me stop sharing and then let me get back to sharing my screen. If you do have any questions that you didn’t submit ahead of time please make sure to put them in the question and answer section. And then if you look at the chat and you like these webinars I’d appreciate just leave some feedback at that link that I put into the chat. And if you’re feeling tech-savvy you wanna record a short little video just like a two-minute video into your phone or computer. Letting us know what you learned or what you appreciate about these would be super awesome because more and more of the world’s depending on kind of these digital platforms and if we can capture that that would be super cool. So with that, I’ll get into the questions for the week. So the first question is what is a beneficiary controlled trust and how does it protect against creditors and what is the difference between this and a domestic asset protection trust. So trust can have different names and really what we call a quote-unquote beneficiary controlled trust. We call it a separate trust or a legacy inheritance trust and really what it’s getting is that while you’re alive and well. So let’s say you’re alive and well and you have this stuff and you want to make sure that this stuff avoids probing so a lot of times you’ll set up a revocable living trust. So think of it kind of like this you go home from the grocery store don’t just leave all your stuff sitting in the driveway what do you do with it? You put it away into your house.
You funded into the trust like I met some clients a family a couple of days ago they did trust back in 2012. They actually had I think separate trusts but they never funded the trust. So it’s super important that we get these assets funded into the trust. That’s why we work with our clients to put together an asset checklist and list out all the different assets that should be funded into the trust but if we have these assets that are funded into the trust and then they’ll avoid probate and then we have a decision on how we want to leave things to the next generation. So a lot of the trust that we review are just basic revocable trusts that say it goes outright to the kids at a certain age maybe 25, 30, 35, okay, but and this is kind of the old style of doing things. So saying you know what I want to make sure I’m protecting against my child’s financial immaturity but then the question is what happens if life throws them a curveball what if there’s a divorce or creditor action bankruptcy.
This outright distribution at a third at 25 increased to a half at 30 and then the all of it at 35 what happens if they get divorced at 36 all that half that money could be lost. So that’s where beneficiary control trusts we call these separate share trusts or legacy inheritance trusts are what we call them in our office. What we say is that instead of it going outright to these individuals. Let’s say that your one trust let’s say you have two kids could split into two separate shares one share for each one of your children. Upon death and each child if we trusted them could control their own separate share individually and whatever they decide to keep in the trust would be protected from divorces, creditors, bankruptcies, etc, and then if they pass away the money would stay in the bloodline. So stay in the family so the opportunity that you have with these separate share trusts or in our office we call them legacy inheritance trusts or we call this a legacy trust. Is that you’re giving them the opportunity so whatever they inherit from you are protected from creditors protected from divorces protected from the in-laws and then if they pass away the money stays in the family so stays in the bloodline. So it would flow down to grandchildren or whoever your beneficiary’s children are very different than this outright kind of more basic approach to estate planning of just avoiding probate. This avoids probate and builds in or protects that legacy. So I have more and more clients kind of going this direction in terms of their planning is they don’t want to just leave it outright to their kids they want to make sure whatever they leave to their kids are protected for their children’s lifetime or beneficiary’s lifetime.
So that’s kind of what a beneficiary-controlled trust is and that protects like your beneficiaries. It does not protect you so that’s where this person brings up a domestic asset protection trust. I’m not a big fan of these these are based on statute so it’s kind of like if you don’t really know how to set up an asset protection trust. It gives you a paint-by-numbers approach where if you follow the exact rules as a statute you know that you’re going to walk away with an asset protection trust but there’s a lot of downsides to it it’s state-specific. So if you set it up in Michigan it may not work anywhere else second of all a lot of times you have to give up control and it has to be completely irrevocable. You can never make any changes whatsoever. So if you want to go the paint by numbers approach you can have confidence that if as long as you follow all the very very very very restrictive terms then it will be asset protected in mission versus our approach we rely not upon statute but we rely on common law. Meaning this is going to work in any state because it’s relying on judicial opinions versus states’ kind of paint-by-numbers approaches. So if you set this up in Michigan and travel down to Florida or South Carolina or Georgia wherever you set it up. This is going to build you in the asset protection because it’s already been tested in court.
Now the downside of this is you have to find someone that knows how to set these up and doesn’t have to rely on this statute or paid by numbers. Approach someone that has to understand the different laws and the court rulings that give power to these. So instead of a domestic asset protection trust. We like to set up what we call an asset protection trust in our office we call it a Castle Trust. So this Castle Trust is different than a revocable living trust. So instead if you want asset protection for you. You don’t want a revocable living trust because a revocable living trust does not protect you from any lawsuits nor does it protect you from the devastating cost of long-term care. Which could run eight to twelve thousand dollars a month so that all of these things could wipe out whatever’s in your name and whatever is in the revocable living trust that doesn’t offer you any asset protection. Instead what we’d look at doing is setting up a Castle Trust which is a form of asset protection trust where you can be the trustee. You can receive the income you pay taxes the way you normally do and just like any type of castle you can like undo the drawbridge and if you want to you can get the assets back into your name. So it’s a way to almost have a revocable living trust but keep back just enough so that you maintain that asset protection. We think that’s a much better approach than a domestic asset protection trust. I can’t think of one good reason if you really know what you’re doing why you would rely on that paint-by-numbers approach.
Okay, so again the question is what is a beneficiary controlled trust really what that is is building asset protection for the next generation versus what is a domestic asset protection trust that’s building in asset protection for you. But I would say there’s a better way to do it rather than a domestic asset protection trust because you have a lot of limitations okay. All right that brings me to number two and before I get too far into it one thing I do have a hard stop at 1: 30 because I do have to go to that concert today. So I’m going to scoot out a little early to go to that concert number two if one were to what is here’s a question. What is what will protect the beneficiary from creditors, yes it will protect a beneficiary from creditors so whatever they decide to keep in the trust would be protected from creditors divorces lawsuits bankruptcies long-term care costs, etc. It’s a way to protect your beneficiaries from life throwing them a curveball.
It protects special needs if they’re gonna receive any type of governmental benefits. All of that can be done by instead of leaving it outright to them through a separate share of trust or in our office we call it a legacy inheritance trust. Number two and Ed, I appreciated the question a little more on it he said as I was in Brighton because he knows my kids play soccer in Brighton. I was thinking about you and hopefully, there are other things to think about just because you’re in Brighton watching your kids than death and taxes. But I appreciate it and so he continued right on if one were to execute a Castle Trust on may 19th can they fund non-qualified assets to the trust to start the five-year clock then fund additional non-qualified assets in the future. What would be the future look back here so again more on the Castle Trust? So the Castle Trust you have these assets things in your name real estate. I met with a family who had a business worth about a million dollars and they had some other investments.
All of those are non-qualified there’s no qualification to them qualified accounts would be things like IRA. There’s a tax qualification to them especially with your pre-tax IRAs you have to pay the income tax before you can really you’re free to do what you need to do with it like put it into the Castle Trust. So let’s say you set up a Castle Trust you move these assets over into the trust. What it does is immediately protects you from any lawsuits creditors assuming you don’t have any lawsuits hanging about out there already. The second thing that it does is protects against long-term care costs more specifically the eight to twelve thousand dollars a month nursing home bill. That’s where we have this governmental program called Medicaid that can help pay for the cost of care but to qualify for Medicaid there’s a five-year look-back period. Meaning from the time that you go into the nursing home they’re going to look back five years to see if you moved any money around. And if you have they’re going to penalize you because Medicaid has an asset test kind of general rule of thumb as a married couple you can’t have more than 120 000 accountable assets single individual. You can only have two thousand so you can’t just give away all your assets and qualify for Medicaid.
That’s why Medicaid has this five-year look-back period. So Medicaid looks back five years and so what this Castle Trust does as soon as we move the assets into the trust it starts that five-year clock. So let’s say we move 500 000 in and that’s may 2021 okay that 500 000 has its own five-year clock let’s say January 2022 we move another 100 000 in. Well, that has its own five-year clock, and don’t think like you have to keep an accounting of this or anything it’s easy to keep track of but really what happens is at the time that you need a nursing home. So now we need that eight to twelve thousand dollar a month bill and we’re looking to Medicaid that’s when we just look back to see okay what gifts or money has moved into the trust. So hopefully that was helpful all right number three with calls for inflation what are some things I should be thinking about. Now it’s a position for rising inflation a couple of things and I just actually got off a call with a client talking about this so understand that really any investment can only have two out of three characteristics.
So one we want our money to grow two we want our money liquid and three we don’t want to lose any money okay. So let’s say interest rates inflation everything starts going up where we don’t want money would be in things that have a fixed interest rate or have money in cash like money that’s safe and liquid because any investment really only has two out of these three characteristics money that’s safe and liquid that’s cash. So you don’t want to have too much money sitting in cash if inflation is going up because the value of your cash is now going down.
So we really need to think about growth at this point typically all you should have sitting in cash would be whatever your emergency we call this the now bucket of money. So it should be whatever your emergency fund is whatever big expenses you have for the year like if you’re buying a house or fixing up a house and then if you’re in retirement whatever your income gap is. So the difference between your expenses versus your fixed income for the year that’s really all that should be sitting in cash because otherwise, you’re missing out on growth, and then really the question is do you want the money to be invested in the market. That’s a little bit volatile with ups and downs or do you want to look at things that offer growth but give you safety. So short term that would be things like CDs at a bank with multi-year guaranteed annuities. Now the thing with both of these is you’re going to get a fixed rate of return and right now that might be like one to three percent and so if inflation goes up you don’t want to be locked into something that has this fixed rate of return that’s probably a no-no. Okay now if we’re to continue on maybe we want to look at things like IUL that do not have a fixed rate of return but it’s tied to the index and captures the growth of the index.
That’s index universal life insurance or fixed index annuities so both of these protect against the downside but you get a portion of whatever the upside is it’s not a fixed rate. It’s just based on the upside. So the first thing is don’t have too much in cash because now we need to start thinking about we need that money to be working for us. If inflation is going up and second don’t have anything that’s stuck in like a fixed rate of return like a CD or multi-year guaranteed annuity instead you probably want the money getting you growth in the market if long term or maybe index universal life insurance or a fixed index annuity that doesn’t have a fixed rate but it’s tied to what the index does. So if the index goes up you get a portion of the upside. So with inflation, think about getting money out of cash but don’t look at things like CDs or multi-year guaranteed annuities are two things I’d recommend.
I see a question come in that’s we’ll address that one number four what is a lerp. So it’s kind of a marketing term it stands for Life Insurance Retirement Plan. I think it’s I think the first time I ever heard it was from David Mcknight. He has a book called the power zero good book. It’s kind of heavily trying to sell you on life insurance because I think that’s all he does. But I like the concepts of it but really what it all it is cash value life insurance and typically we’re utilizing index universal life insurance with idea that you’re not necessarily chasing the death benefit but what it can do is two things one it can give you tax-free growth. So if the market goes up you get tax-free growth inside of it due to section 7702 of the tax code. Second, it’s indexed so that means that you have downside potential.
So if the market goes down you don’t lose anything third and this is a big one for a lot of people that death benefit that you don’t normally want necessarily in retirement that can double as a long-term care benefit. So most people don’t like paying separately for long-term care insurance pure traditional long-term care insurance but they do want long-term care. So this is a way that we can have a death benefit that could double as a long-term care benefit. Now a downside sometimes people talk about is fees like all right don’t this cost something they do they have to have an insurance component to it to qualify under section 7702. So kind of think of it as like you’re building this like a bucket of tax-free money right and you’re right there are fees associated with it. I think on average the fee ends up being about one and a half percent over the lifetime of the contract it averages out about one and a half percent. So you have this tax-free growth that’s happening and then you have this fee that’s going out and the fee is going to the death benefit.
That also is doubling as a long-term care benefit and you have to have this to be able to qualify for this 7702 so that you get this growth that’s tax-free. So I’m not saying everyone it’s an interesting tool and it’s if you’re looking for tax-free growth and you’re looking at not necessarily touching the money right away and you’re looking at a death benefit that doubles as a long-term care benefit then maybe that’s the tool that you would want to look at. [Music]
Other tax-free investment vehicles or Roths are pretty straightforward they just grow tax-free but this is a way that may be a percentage goes into Roth and a percentage goes into something that’s giving you a death benefit. That doubles as a long-term care benefit all right that was all the submitted questions ahead of time. Now there is another question that just came in last week you mentioned that the estate tax for families is portable. If the estate tax is reduced to five million or three and a half million would the exemption be ten or seven million if so what does survivor sauce need to take advantage? Okay yep so what we’re talking about here is the estate tax or you might hear this called the death tax or the inheritance tax and the way it works is you have an exemption meaning as long as you die with less than this exemption then you owe zero an estate tax. You might still owe income tax and that type of thing but you don’t owe any estate tax right now that estate tax exemption for an individual is 11 million dollars. Now it’s scheduled to drop down to 5 million in 2025 and then president Biden has proposed to lower it even lower to three and a half million. Meaning if you’re an individual and you add up the value of your life insurance your business everything you own even term life insurance is greater than three and a half million dollars.
You might have an estate tax issue and they might tax anything over this three and a half million could get taxed at 45 percent and then if you think about it you have IRA money in here. Then it’s a double tax you’re paying income tax as well as the estate tax. Now what they did in 2000 I want to say it was 2010 is they passed what’s called portability and what that says is that if I have a married couple. Let’s say a husband and wife and let’s say each of them and let’s assume that it does get down to three and a half million. So each spouse has their own think of it as a coupon that’s me drawing a coupon there’s gotta be a better way to draw a coupon. I gotta think about that one but each of you have a three-and-a-half million dollar exemption or a coupon that you could utilize. Now what they said in the past prior to portability is that if one spouse passes away that coupon goes away. So goodbye coupon right so if one spouse passes away they say you know what your coupon goes away and now if we’re married you can only pass three and a half million dollars to the next generation. So what we used to do in the past was we would do separate or what we would call a b trusts. Where now each spouse has their own trust to lock in this separate coupon. I mean if one spouse passed away the trust would maintain the surviving spouse’s exemption amount. Well what happened in 2010 is they said that all right well this is silly every person over that amount is are doing these a b trusts. So why make them go through the jumps and hoops and pay a state attorney extra money.
So what they said is that now if one spouse passes away all the surviving spouse has to do is file a tax form at death and I forget the exact tax form off the top of my head to lock in that portability. So all you have to do is just lock-in that portability so that when the surviving spouse passes both coupons pass now to the next generation effectively living leaving a state tax exemption or coupon amount of seven million dollars. So if you’re a married couple right now and the state tax exemption right now is 11 million dollars it’s actually doubled 22 and actually, it’s adjusted for inflation so it’s 23 million dollars. Now again that’s scheduled to come back down whenever the tax cuts and jobs act expires which is scheduled for 2025 could be sooner could be longer we don’t really know but we know that it’s set to expire in 2018 or it was passed in 2018 set to expire in 2025.
President Biden-Sanders proposal has talked about lowering it even further to three and a half. Now so again if you’re married with more than seven million definitely something to think about if you’re married with less than seven million and you don’t think your assets will grow over that amount. Probably not something you necessarily have to worry about but what we’re really for our clients any clients kind of within this range or greater. We’re at least bringing up this concept of we need to be watching what estate taxes are doing. So it’s just one of the things that we have on our radar and we should get some more clarification within probably this year. If not this year next year on where things are going. Excellent explanation of estate death tax thanks Chris my pleasure, all right so that’s all the questions I have if you do have any last questions please put them in. And again if you do me a favor it’s really important for us to get into this new kind of more digital world we used to receive a lot of referrals when we could meet people in person but now people are searching on the internet more and more. So if you could just leave us some feedback especially if you’re I wouldn’t mind just taking like two minutes. It doesn’t have to be anything scripted tell us something you learned on the webinar. We’d certainly appreciate it and can give us a rating and that would really make us happy. I really appreciate that but if you don’t have any other questions someone writes in thank you you’re very welcome my pleasure. All right so yeah so I am going to skip off for basically the rest of the day to go to my son’s concert with his kid or his classmates and then later coach him in soccer assuming thunderstorms don’t hit us. So I appreciate everyone take care, make it a great week and I will see you next week thank you so much.