Tag Archives: trusts

Asset Protection–Do the Paperwork

A basic strategy for asset protection is to hold various assets in different entities. Putting real estate, small businesses, and other assets into trusts, corporations, or limited liability companies (LLCs) is effective protection that is relatively easy to put into practice.

Not only do I recommend this strategy to clients, I use it myself. Recently, however, I discovered a potential downside.

About 25 years ago, I invested in some rare coins in a corporation I owned and put them into a safe deposit box owned by the corporation. When my business relocated 12 years ago, the safe deposit box billing was not forwarded to the new address and was never paid again. Last year I went to retrieve the coins from the safe deposit box, which I had not visited in 25 years. I discovered the box had been drilled open three years earlier and my collection turned over to the unclaimed property division of the State Treasurer’s office.

I was told getting the coins back would be simple enough. I just needed to verify that I owned the company which owned them by providing the corporation’s tax ID number. However, the corporation no longer existed. I didn’t have a record of its tax ID number. The IRS wouldn’t verify the number without my giving them the address the company had used. That address was a post office box number that I no longer used and couldn’t remember. The state’s position was “no tax ID, no coins.”

The only verification of my identity as owner of the corporation was my signature on the bank’s safe deposit box application. Eventually, with the support of bank officers who were willing to swear that I was who I claimed to be, I got my coin collection back.

The hassle involved in this process was a reminder of an important component of asset protection. Maintain accurate records so you don’t end up hiding assets from yourself.

A good start is to create a master file of all the entities that hold your assets. This can be any system that’s easy for you to use: a computer spreadsheet, a set of file folders, or a single paper list. Share it as appropriate with your CPA, attorney, or financial planner.

The master list should include the name of each company, its date of incorporation, tax ID number, address, and other relevant information like phone or bank account numbers. Also keep an inventory of the assets each company owns.

Once you’ve created a master list, it’s essential to keep it up to date as you buy or sell assets, close companies, or transfer ownership. Set up a system, as well, to remind yourself of tasks like filing tax returns, completing minutes of annual meetings, and paying the annual safe deposit box rent.

Make your record-keeping easier by eliminating unnecessary complications. For example, you probably don’t need a separate address for each trust, corporation, or LLC. Instead of creating a separate company for each asset, you might consider grouping smaller assets within one entity. I’d suggest first discussing the pros and cons with an attorney or financial planner. For larger assets like real estate, I do recommend holding each one separately.

When I talk to clients about asset protection, I mention that part of the price we pay for it is an increase in paperwork. It’s easy to accept that idea with casual good intentions. The case of my reclaimed coin investment is a good reminder of the importance of keeping up with that paperwork.

If we don’t, we might protect ourselves right out of access to our own assets.

Trusts–No Panacea To Retaining Family Wealth

When passing wealth to your kids, consider creating a trust to limit the later generation’s ability to tap into the principal. Several astute readers suggested this strategy after my recent column citing research that shows 90% of inherited wealth is gone by the third generation.

There is no question that a trust, done correctly, can go a long way to preserve wealth after the death of the wealth accumulator. Let’s explore what “done correctly” means.

1. Trust law is complex. Engage an accountant and attorney with strong skills and expertise in trusts.

2. Be sure the assets you intend to go into the trust will actually transfer.

Retirement plans like IRA’s, 401(k)’s, and profit sharing plans will pass to whomever you listed as the beneficiary. This must be the trust. In addition, the trust must include a number of special provisions in order for a retirement plan to be distributed according to your wishes and not as a fully taxable lump sum.

Annuities, insurance policies, and accounts with a TOD (transfer on death) clause will also pass to the named beneficiary.

Assets held in joint tenancy will not pass to the trust. Many married couples jointly own most of their major assets, such as the family home, investment real estate, brokerage accounts, or bank accounts.

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