Michael B. Mangini, J.D., CAP

Wills and Trusts can be drafted to meet your needs and may be used to reduce or eliminate estate taxes, protect trust income and principal from the claims of your and your family members' creditors, provide for responsible investment and distribution decisions and assure that your wealth benefits those whom you want to benefit. You can use the various kinds of philanthropic trusts to build a legacy in your family and community while getting some substantial tax benefits.

The terms "will" and "trust" are very general and not at all descriptive. The provisions that are actually drafted into the document are what count. Think of a will or trust as a contract; the terms of the contract define the relationship between and among the parties to it. Although the terms of the contract are negotiable, the terms of a will or trust are dictated by the grantor, i.e. you, and are limited only by Tax and Public Policy laws and decisions. For the most part, you have wide latitude in formulating the provisions of your wills and trusts designed to accomplish your goals.

An asset-protection analysis begins with identifying the person who needs protection. For example, you may have no risk and no need of protection, but your daughter the doctor, to whom you are leaving the bulk of your estate, may need significant protection. You may consider leaving your estate to her in trust so that her judgment creditors cannot seize the funds. On the other hand, you may want to protect your investment real estate by putting it in a Limited Liability Company or a domestic or foreign asset-protection trust combined with a variable universal life insurance policy. (Yes! You may partially fund your International Life Insurance Policy with real estate.) You may also take advantage of the protection that an IRA offers by investing your IRA funds in a start-up company or investment real estate.

The next step is the risk assessment. What is the level of risk that a creditor might attach your assets? If the risk is low, insurance coverage might be sufficient. If the risk is high, you might want to consider additional structures.

 After detrmining the level of risk, we can look at your current investments to see how protected they are. For example, owning your home as husband and wife (tenancy by the entirety) offers some protection in New Jersey, but none in California. Under New Jersey law, an IRA is more protected than an ERISA plan such as a 401(k). Proceeds and cash value of life insurance are protected if payable to a person or entity other than the insured of the insured's estate or personal representative in his representative capacity.

If your current asset structure offers insufficient insulation, you might consider more advanced domestic and international structures. Your comfort level controls the plan design.

With a traditional Individual Retirement Account, your investment opportunities are limited. With a self-directed IRA, you may invest in a wide-range of alternative investments, including start-up companies, domestic and international real estate, mineral rights, private-placement mortgages, tax-sale certificates, notes, and many more. If you or you and your spouse are the sole owners of your business and you have only part-time employees, you may be eligible to open a Solo(k) to boost your retirement savings.

The Internal Revenue Code permits the owner of investment real estate to exchange the property for like-kind property and thereby avoid capital-gains tax. The rules are pretty complex and strict, but the benefits are enormous. If you intend to sell investment property and buy another to replace it, you must seriously consider a 1031 Like-Kind exchange.

Giving to worthy charities is a way to build a legacy within your family and community. There are a number of techniques available, but the one that is appropriate for you depends on your goals and circumstances. For example, if you have appreciated stock that offers minimal income, you may ceate a Charitable Remainder Trust and transfer the stock to the trust with no tax consequence. The trust then sells the stock free from tax and reinvests the proceeds. The trust may then pay to you for life either an annuity or a percentage of the annual value. Upon your death, the balance in trust goes to the charities that you have selected.

When you transfer assets during your life or through your Last Will, the IRS and/or state government might demand a percentage. The IRS tax on gifts during your life is the Gift Tax. The IRS tax on transfers at death is the Estate Tax. Your state may impose an estate tax or inheritance tax or both. There are ways to manage these taxes through trusts, lifetime transfers, limited liability companies, college-savings plans, life insurance, and installment sales.

A captive insurance company is a legal, IRS compliant way to put your insurance-premium dollars to work for you and your family while enjoying significant tax benefits. Captive insurance is appropriate for larger companies.

A limited liability company (LLC) may offer significant protection from creditors and permit you to leverage your gift-tax exclusion and thereby reduce transfer taxes. You will NOT realize these benefits unless the operating agreement is drafted properly and all members and managers respect the structure.