Volume 1 • Issue 6 • October 2011
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss several specialized trusts designed to solve particular estate planning problems, including trusts for pets, registered firearms and alimony. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
While much of the discussion regarding estate planning can get hijacked by estate taxes, estate taxes are rarely the main reason, let alone the only reason for planning. Below is a discussion of three specialty trusts that may assist you in meeting a specific planning goal or objective.
Many who have pets have a very real sense of responsibility to care for them, even after their own deaths. Most states have adopted some form of pet trust legislation that lets you be assured your wishes regarding your pets will be carried out.
When setting up a pet trust, you will need to think about your desires, your pet's needs and how best to accomplish your goals. Consider the following:
Make sure your pet is identified to prevent a different animal from benefiting from the trust. This is especially important if the pet is valuable or a large sum of money is involved. This can be accomplished with photos, veterinary records, a microchip, even DNA testing.
You may want to name different people as the trustee (to manage the funds) and the caretaker. You can name one person to have both responsibilities, but it can be good to divide them and have one person be accountable to the other.
You may want to require that the caretaker sign an agreement to provide proper care and relinquish care to a successor if the promised care is not provided.
Name successors in case your initial choices become unable or unwilling to act. Include a sanctuary or shelter of last resort if none of your chosen caretakers survives the pet or is able to serve.
The trust should define what proper care is. For example, expenses could include food, housing, veterinary and dental care, toys, exercise routines, grooming, compensation for persons caring for the pet, and burial/cremation fees. Farm animals, race horses and other large or valuable animals could require a full-time caretaker.
Liability insurance should be considered to cover any potential damage caused by the pet to persons and/or property.
If the caretaker is subject to additional taxes as a result of distributions from the trust, you may want to increase the distributions to offset the additional tax liability.
Consider carefully how much money will be needed to fund the trust to provide for this care. If you don't have the assets, a life insurance policy on your life may be the way to provide the needed funds.
Will the trust end when the pet dies, or will it continue for the pet's descendents? In some states, that is not an option. What do you want to happen to any remaining funds? Do you want them to go to family members or to a charity?
NFA or "Gun" Trusts
There are four million members of the National Rifle Association (NRA) and an estimated 240 million firearms in this country. Many families also have guns and other weapons as heirlooms that they would like to keep in the family and pass down from generation to generation.
But weapons present some unique challenges. The National Firearms Act (NFA) as well as state and local laws strictly regulate possession of certain weapons and may affect the transfer of permissible weapons. For example, convicted felons, those with a history of mental illness, persons convicted of misdemeanor domestic violence offenses, convicted users of illegal drugs, dishonorably discharged veterans, and persons who have renounced their U.S. citizenship are not allowed to own or possess certain weapons.
When an estate includes firearms or other weapons, the executor must be careful to avoid violating these laws. Transferring a weapon to an heir to fulfill a bequest could subject the executor and/or the heir to criminal penalties. Just having a weapon appraised could result in its seizure. An out-of-state heir creates even more problems.
A revocable living trust designed specifically for the ownership, transfer and possession of weapons (commonly known as a gun, NFA or firearm trust) can avoid some of the problems or at least make them manageable. A corporation or LLC can also be used to own weapons, but trusts do not require annual filing fees, public disclosure or a separate tax return. Here are some of the main points:
The trust is the owner of the weapons.
The trust document must be carefully written to account for the different types of weapons held and comply with the applicable laws.
The name of the trust, once established, should not be changed. Because the regulated weapon is registered in the trust's name, a change in the name of the trust would require that it be re-registered and a transfer tax paid.
The trust can name several trustees, each of whom may lawfully possess the weapon without triggering transfer requirements. (Persons not allowed by law to own or have access to the weapons in the trust are not eligible to be a trustee.)
Weapons can be purchased by a trustee to avoid having to pay a transfer tax.
Once a weapon becomes a trust asset, any beneficiary (including a minor child) may use it. However, the trustee is still responsible to determine the capacity of the beneficiary to use it.
Unlike a traditional revocable living trust which can be revoked at any time by the grantor, the Bureau of Alcohol, Tobacco, Firearms and Explosives (BATFE) must approve the termination of a gun trust and the distribution of its assets to the beneficiaries.
No regulated weapons held in the trust may be transported across state lines without prior BATFE approval.
Also, since weapon laws vary from state to state, gun trusts may not be valid from one state to another as a traditional revocable living trust would be.
These trusts are often set up to provide income to an ex-spouse under a written dissolution or separation decree/agreement. Here are some of the key points:
Assets are transferred to the trust as part of the settlement.
The trust's income is typically paid to the former spouse for a specified length of time, until a specified amount has been paid, or until the ex-spouse remarries or dies.
The payee (the ex-spouse receiving the payments) pays income tax on the income received.
After the former spouse's interest has ended, the trust can continue for the benefit of the children from the marriage or terminate.
The trustee can be a neutral third party who can act as an intermediary between the former spouses.
An alimony trust may be useful for a business owner who cannot or does not want to sell an interest in the family business to make payments to his former spouse or if the business lacks the liquidity to redeem the stock of the former spouse.
It can also protect the payee (ex-spouse receiving the income) in the event the payor should die or become financially insolvent before all payments have been made.
One downside is that the trust can become under- or over-funded, so care should be taken when creating and funding the trust.
The recent debt ceiling debate showed us a lot about how Congress works. There is public posturing and blaming, to be sure, but there is also negotiation behind closed doors that we do not see. Of course, no matter how much time there is to make the deal, it seems to always come down to the last minute. We can expect the same in regards to the fluid status of the estate tax law. However, regardless of what Congress does or does not do, control and protection of your assets, improving the predictability of the future, and doing good rather than harm with your accumulated assets remain the principal reasons for doing estate planning. These specialized trusts are just a sample of the ways trusts can be used to benefit your planning apart from any estate tax considerations. We hope to talk with you soon about your estate or business planning needs.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.