“Americans”, it is sometimes said,”like to have their cake and eat it too”. If you’ve worked hard to create financial security for yourself and those you love, it is difficult to sometimes grasp a concept that is familiar more to Europeans than it is to us. The concept is that you can form an irrevocable trust for the benefit solely of our loved ones, choosing a third party (friend or relative) as trustee and from which you personally receive no benefit other than the pleasure of providing for the comfort and financial security of those you love.
WHAT IS A ‘WEALTH PRESERVATION TRUST’?
The Wealth Preservation Trust (the ‘WPT’) is a trust established not for you but for your loved ones. You decide whom you wish to benefit. You decide that you want them to be secure financially no matter what happens to you. You select the ‘trustee'(s) who will see to it that your instructions are followed. Then property you select is transferred from you to the trustee to be held exclusively for the loved ones named as the trust’s beneficiaries.
In a Life Insurance Trust, the only property owned by the trust is the life insurance coverage. You are the ‘Grantor’ (the person who establishes the trust) and usually the ‘Insured’ person but you’re not a ‘Beneficiary’ (a person who receives the benefit of the trust). With a life insurance trust, once the insured dies, the death benefit of the policy pays off and the trustee distributes the money – tax-free ‘outside’ the ‘Taxable Estate’ of the insured. Once that is done, the life insurance trust comes to an end and then terminates.
By contrast, with a Wealth Preservation Trust, instead of owning only life insurance policies, the trust is allowed to own that plus almost every kind of property there is-from investments to real estate to limited partnerships and much more. The first key to the Wealth Preservation Trust is that because it is ‘irrevocable’ whatever is inside of it is no longer yours. The second key is that it must be established while your legal seas are still calm and there are no lawsuits on the horizon.
That is why a lawsuit adversary of yours cannot take the assets of the Wealth Preservation Trust away from the trust or your loved ones. And there is where the ‘magic’ begins. “Ownership versus Control” is part of the formula that makes it work. John D. Rockefeller is credited with saying “It is better to Own Nothing but Control Everything” – and that is the key to asset protection features of the Wealth Preservation Trust. That is why the assets inside the WPT cannot be taken away in a lawsuit or a divorce, because you don’t own them. The trustee – whom you select- is not you. And the beneficiaries you select are not you either. You are only the ‘grantor’ or ‘donor’.
But how do you set up such a trust and give life to it without impoverishing yourself? Simple. Have the trust basically own two types of assets: (1) ‘X’ percent of your family Limited Liability Limited Partnership (‘LLLP’ or ‘Triple LP’); and (2) life insurance on the grantor(s). That’s it, nothing more. You would be the (managing) General Partner of the Family Limited Partnership, and you would be the insured(s) on any life insurance coverage owned by the trust. As the ‘managing’ General Partner of the Triple LP, you’ve have 100% effective control over investments and the companies owned inside even if your ownership as a partner were only one percent (1%). You would still have control because you are the managing Partner. The limited partner would be your Wealth Preservation Trust — owning 99% if you like.
ASSET PROTECTION FEATURES.
Because it’s irrevocable, the Wealth Preservation Trust will hold ‘X’ percent of the Family Limited Partnership plus life insurance coverage on your life – all ‘outside’ your estate and beyond the reach of either the IRS (for Estate Tax purposes) or the reach of your lawsuit adversary. In the USA if the trust had you as a beneficiary as well as the grantor, it would be considered a ‘self-settled trust’ and thus could be pierced by a lawsuit. Since the trust is the for sake of your beneficiaries and not you, it is not a self-settled trust. Thus if it owns 99% (as a limited partner) in a Triple LP that you control, and if it also owns life insurance on your life, a lawsuit adversary (or divorce lawyer) could not pierce it.
An additional feature reinforces this protection. It is the power of the trustee to make ‘discretionary’ rather than ‘mandatory’ distributions to the beneficiaries. Because of this, there is no ‘mandate’ (overwhelming requirement) and the trustee can sprinkle distributions over the lifetime of the beneficiaries but then can withhold them in the event a beneficiary is going through either a lawsuit or a divorce. Let’s say your daughter was going through a divorce from your future ex-son-in-law and your son was going through a lawsuit. Neither adversary would find success in getting a judge to order a distribution, because they are discretionary as to the trustee and not mandatory.
HOW WOULD THIS WORK?
Let’s say that you are both a business owner and a real estate investor. You have a tire store and some rental properties. You have your business inside of a corporation and your investment real estate inside of a limited liability company (an ‘LLC’). In the ideal set-up, the stock of the corporation and the LLC would both owned by your family’s Triple LP. You would be the ‘managing’ general partner of the Triple LP. Your revocable living trust might be the ‘X percent’ limited partner, and your Wealth Preservation Trust could be the ‘Y percent’ limited partner.
Let’s also assume that one of the customers of your tire store has a blow-out of 2 tires he bought from you while he’s drunk driving at 80 miles per hour through a construction zone over construction nails with his little daughter in the car without a seat belt, and they have a wreck, rolling the car over 6 times before coming to a stop. She’s now a paraplegic for life and he blames you instead of himself. He files a lawsuit against the tire store, the tire manufacturer, and you personally for millions of dollars. Your store has an insurance policy for $500,000 and it provides a lawyer to defend you and the tire store. After assessing the case, the insurance company pays its $500,000 limit into the court and leaves the case.
The tire company then settles and folds its cards, leaving you as the ‘last person standing’. At the end of the day, regardless of how the trial turns out – and regardless of how any out-of-court settlement might turn out, the assets held inside of the Wealth Preservation Trust and the family’s Triple LP are more likely to be safe so long as the trust was established well before the controversy leading to the lawsuit.
LOOKING AT THE ‘BIG PICTURE’.
Establishing a Wealth Preservation Trust (‘WPT’) is an effective estate planning and tax management tool. However, by combining it with other entities as part of an Integrated Planning architecture, it can be an effective asset protection strategy. The key is to establish it while your legal seas are calm. After all, “the difference between a Hero and a Fool is Timing”