My clients always want to provide for maximum protection for their heirs. Yet, they usually want it coupled with flexibility so that heirs get the maximum benefits from their inheritance.
Traditionally, getting more protection often came at a price: Less benefit, less flexibility, and/or less attractive tax consequences.
For decades, a big part of the estate planning I have done has focused on concepts that improve HOW you can leave property for your heirs. I designed parts of such planning to improve income, property, death and gift tax consequences for your heirs. But, I always spent as much effort on non-tax aspects to enhance and make your estate more valuable, more useful and more protected for your heirs.
At the same time, I developed strategies to preserve as much flexibility for your heirs (when it comes to spending, accumulation, investment and tax consequences) in the future as you want them to have.
Now, it seems likely that the death tax may be repealed by the time you read this. So, let me tell you to results of my design efforts – the Beneficiary Flex-Protect TrustSM[KZ1] , or “BFPT SM[KZ2] .” The BFPT’s combination of benefits go way beyond those of traditional multi-generational Dynasty Trusts and beyond leaving property outright to heirs.
A Constant Balancing Act – Protection vs. Access
We have always had to balance protection of beneficiaries with their ability to use property for their benefit and that of their children or other descendants. A Beneficiary Flex-Protect Trust allows for that balance to be adjusted year by year depending on the level of risk faced by the beneficiary. And, it allows property or money in the BFPT to be used by them, or advanced to them in ways that help protect it when they face serious liability exposure.
This constant balancing act in the BFPT will give beneficiaries maximum access to the benefits of the trust property when they do not need protection. But, the BFPT will reduce such access, or pass it to another family member who can use it to benefit the primary beneficiary, when necessary to protect the property from creditor claims. Note: Some clients have concerns that certain beneficiaries should not have expanded access to trust property due to a lack of maturity, adverse spousal influence, substance abuse issues or other concerns. Your Beneficiary Flex-Protect Trust can adjust for such concerns.
Protections for Your Heirs
Most of my clients legitimately worry about asset and liability protection. While it can be very difficult or expensive to protect your own property from your own liabilities, the law has long allowed you to protect an inheritance left in a properly drafted trust from their liabilities. We use the term “Spendthrift Trust” to describe a trust which holds your property with an intent to protect it from their liabilities.
The BFPT has special provisions to take advantage of spendthrift protections in California law, and to minimize exceptions to those protections.
Your BFPT allows a Trust Advisor (picked by you or your beneficiaries) to adjust these protections on an annual basis in a way that maximizes tax benefits and minimizes liability exposure.
IF later makes sense to limit the beneficiary’s access to property in the Trust so that to protect it from a creditor or predator claim, the Trust Advisor can restrict the access in order to provide meaningful protection, yet still provide cash to support the Primary Beneficiary’s family.
These provisions of the BFPT also protect the inheritance you leave from claims made by ex-spouses (no matter how much we love them while they are happily married to our kids and grandkids, they seem like “predators” if they try to get our property, or our heirs’ property, in a divorce).
Given the prevalence of divorce, most of our clients make “predator” protection a priority for their estate plans.
Most BFPT’s allow the “Pri-mary Beneficiary” of the trust the ability to control and manage investments by the Trust. However, sometimes, clients want this ability limited or shared with other beneficiaries or an independent person. We can write your BFPT to meet your desires in this regard.
Income Tax Flexibility
Most of the time, for California and Federal income tax purposes, taxation at the trust level proves more adverse that taxation at the beneficiary level. To deal with that problem the BFPT has provisions that cause the cause income and deductions of the trust to pass through to the beneficiary. However, since this will not always be true, a Beneficiary Flex-Protect Trust allows the Trust Advisor to change these this year-by-year if that proves more advantageous.
Getting ANOTHER Step-Up in Basis
Most of our apartment owner clients own property having values far higher than their remaining income tax basis (usually, cost minus depreciation). Current law allows that property to get a “Step-Up” in basis to fair market value when the client, or client’s spouse, dies. That means the heirs can sell the property for such value with no state or federal income tax, or get increased depreciation to shelter rental income from tax.
The BFPT has special provisions that allow the heirs of its primary beneficiary to get a step-up in basis on such property when the beneficiary dies, to the extent that such step-up will not produce more estate taxes than it saves in income taxes. This can be worth millions for the next generation of heirs.
Preserving Low Property Tax Assessed Values
If you have owned property for years (and, many of you have owned it for decades), your low Prop 13 property tax assessment provides much of your annual cash flow. And, you want to pass as much of that low assessed value to your heirs. Fortunately, California law allows you to leave substantial property (your principal residence of any value, plus investment property assessed at up to $1 million for each of you and your spouse) to children free of reassessment.
The BFPT allows your children who are beneficiaries of the trust to use the parent-child exemption from reassessment to pass low property tax assessments to their children, so that the benefits of this exemption can continue for generations.
Use a BFPT to Make Your Estate Plan Work Better for Your Family
A Beneficiary Flex-Protect Trust can make your estate plan work better for your family. Properly implemented by a good attorney who will work to customize planning for what you want to accomplish, the BFPT can be a part of the good planning that really enhances what you leave for your heirs.
But, good planning is still the key. That is why my motto is: “IF YOU FAIL TO PLAN (WELL), PLAN TO FAIL”
The tax environment, your wealth, and your family have probably changed a great deal since you completed your planning. The odds are high that your existing plan does not reflect your current goals for your wealth, avoid tax risks that changes in the law and your situation have produced or provide the protection you could get for your heirs with a BFPT. You can add these protections and improve your plan at the same time you do sound planning.
In order to prevent your estate plan from being a HAZARD to you and your family, get your estate planning reviewed now by a lawyer who will help you articulate your goals, and then put your goals first in any planning you want done. You will get peace of mind, and your heirs will gain substantial benefits.
 Flex-Protect Trust, Beneficiary Flex-Protect Trust and BFPT are service marks of Kenneth A. Ziskin. All rights reserved.
Kenneth Ziskin, an estate planning attorney, focuses on integrated estate planning for apartment owners to save income, property, gift and estate taxes. He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, a perfect 10 out of 10 rating from legal website AVVO.Com, and is multiple winner of AVVO’s Client Choice Award. See Ken’s website at www.ZiskinLaw.com. Ken also offers free consultations for AOA members. You can call him at (818) 988-0949. This article is general in nature and not intended as advice for clients. Please get advice from counsel you retain for your own planning.