Most Trusts Do Not Protect Your Assets; Asset Protection Trusts; Revocable and Irrevocable; US and Offshore

Bank Tells Her A Trust Will Protect Her. Sally called our office for an appointment to set up a trust to protect her proceeds from a new credit line to be placed on her home. She wants to protect the proceeds of the loan from her creditors and her Bank told her to set up a trust to do that. It is common for many people to think that a revocable living trust protects them from their creditors. It usually doesn’t. We told her the appointment was not a good use of her time and money. Instead, we helped Sally set up an LLC.

Self-Settled Trust. There is a legal doctrine in trust law or state statute in most states that says a self-settled trust does not protect you from past, present or future creditors. The policy behind this law is that you should not have the ability to set up a trust and remove those assets in the trust from your creditors. Otherwise, everyone would set up a trust and if they had a judgment against them, the owner of the judgment or the credit card company could not get a court order to take over the debtor's bank account. No one would have to pay their debts.

Modification of Self-Settled Trust Law. Certain states, such as Delaware, Alaska, Virginia and South Dakota have passed new statutes that alter the self-settled trust doctrine. In very general terms, these new laws allow you to set up an Asset Protection Trust (APT) and place assets in it and these assets may be not subject to what you will owe new creditors in the future. They are usually strong restrictions on what funds you can take out. Also, federal bankruptcy law overrides state law and may open up the state law APT to attack for ten years. If you are resident of a state that still has a self-settled trust law, but have an APT in Delaware, Alaska, Virginia, South Dakota or other state than allows you to set up an APT, then your local court may choose to apply the law of your state and not the law of the state of the APT and bust up your APT.

Offshore. Offshore, the story is completely different. You can set up trusts offshore where the law of the offshore country is that the assets in a self-settled trust are protected, usually after a period of three years from the date of the establishment of the trust. The assets in the offshore trust do not have to be in the country where you set up the trust. This is a complex area where you should be guided by experienced and competent counsel. This is not an opportunity for a US citizen to avoid paying taxes on investments you have outside of the country. If a US creditor attacks your offshore trust, the US court will examine what powers you have retained and whether the court can force you to bring the money back to the US and make it subject to the US court’s orders. As a general rule, if the trust and assets are offshore and the court cannot force the offshore trustee to bring the money back to the US, the ability of the US court to do anything about the money offshore will be very limited.

Trusts for Others. This self-settled trust doctrine should not be confused with trusts you set up for others. Fred dies and leaves his assets in trust for his daughter Jane for her lifetime. Jane has her CPA as a Cotrustee. Jane did not set up this trust; Fred did, so for Jane, Jane’s trust is not a self-settled trust. In routine legal cases, the Jane type of trust provides high hurdles to jump over for any past, present or future creditor of Jane. Some spouses or life partners may decide to set up such Jane trusts for each other. These can provide substantial asset protection for spouses and partners as long as the trusts are not carbon copies.

Asset Protection. There is no bullet proof asset protection vehicle and do not believe anyone who claims to have one to sell you. But, careful planning and operation of the proper type of vehicles can provide substantial protection of your hard earned assets.

Next: Virginia’s new asset protection trust law.

Aunty Mae and Inflation: Gifting to Avoid Estate Taxes; Purchasing Power and Inflation

Aunty Mae. Aunty Mae consults an estate planner to update her estate plans. She is 80, in good health, a widow, with $2,000,000 in assets, $400,000 of which is her home, which has with no mortgage. She has $80,000 a year of pension income from her deceased husband and social security; most of this income is not indexed for inflation. She spends $60,000 a year, believes that she has all she needs and saves what she does not spend each year. She is thinking of making some gifts to her grandchild. This is December of 2011 and she is a US citizen. She has a ten year life expectancy.

$1,000,000 Exemption. In December of 2011, the estate, gift and generation skipping tax exemptions for Aunty Mae are $5,000,000. However, the current law is that the estate tax exemption will be $1,000,000 starting January 1, 2013 unless Congress and the President are able to agree on a new tax law by then. If she dies after 2012 and there is no change in the law, then Aunty Mae’s estate could pay up to $550,000 in estate taxes plus any additional estate taxes due to the state in which she lives. This assumes that her assets will not increase in value during the next ten years (her life expectancy); but, her assets are likely to substantially increase in value due to her savings rate, the likely appreciation of her assets and the compounding of her rate of savings. Assuming an average increase of seven percent per year (inflation and return on her money combined) in the value of her assets, her $2,000,000 could be worth $4,000,000 in ten years, causing an estate tax of over $2.6 million. If she placed $1,000,000 in trusts for her four grandchildren in 2011 she would pay no taxes on the $1,000,000 transfer. Over the lifetimes of her grandchildren, this money, carefully invested, could provide several millions of dollars for each of the grandchildren’s retirement. This would allow the grandchild to take risks and pursue their dreams, knowing that their retirement was taken care of. Currently, it does not appear that Aunty Mae should need the $1,000,000 for her future needs.

$5,000,000. If the current $5,000,000 exemption is retained, Aunty Mae would probably not have to worry about an estate tax and could make the gifts to her grandchildren as part of her living trust at the time of her death. But, this is a gamble and potential waste of the limited opportunity to make tax free gifts in 2011 and 2012.

Inflation. Aunty Mae remembers paying $0.19 for a loaf of bread that now costs $2. Some commentators are concerned that the federal government’s level of high debt will motivate the federal government to increase inflation so that the federal government will be able to pay down its debt with future cheaper dollars. With all of the financial turmoil in Europe, there are concerns about hyper inflation. Other commentators are concerned about deflation.

Should Aunty Mae Make the Gifts? If there is hyperinflation, Aunty Mae’s $80,000 may only buy her $20,000 of the same goods and services she now receives for $60,000 and she may need all of her $2,000,000 to live on. Given her concern about the present financial turmoil in the world, she decides not to make the gifts to her grandchildren. Her advisors tell her that her financial security has to be the priority and not potential future taxes of $2.6 million and not the hopes and dreams of her grandchildren.

Tough Love. Aunty Mae’s daughter Karen asks Aunty Mae to pay off the $400,000 mortgage on Karen’s house because the lender is foreclosing and the house is now only worth $300,000. Her son Kevin wants to borrow $400,000 for an investment opportunity. Her son Larry needs $2,500 immediately to pay his back rent on the apartment he shares; Larry has spent the last three months at Occupy Wall Street, prefers to stay at home and write poetry and keeps losing his jobs over fights with his employers because they all fail to understand his personal needs. Also, he needs $1000 to replace his stolen laptop. Often Aunty Mae sends $20,000 a year to Larry to keep him afloat.

No Gifts. The advisors of Aunty Mae all advise her against making any gifts to Karen, Kevin or Larry. They adviser her that there is no certainty in this world of financial uncertainty and that she needs to keep her funds for her own future.

Common Dilemma. Aunty Mae is a fictional person and does not refer to any real person, alive or dead. But, her situation illustrates a common dilemma for people trying to plan their futures today, reduce taxes and provide a brighter future for their children and grandchildren.

Protect Your Cash, Stocks, and Bonds with the Right LLC

Age of Uncertainty. In an age of uncertainty, where the global market is changing so fast and is so complex and intertwined that even a super computer or a financial genius will get it wrong a lot of the time, you need to have a strong defense of your financial assets.

Corporations for Businesses. Business people are used to using corporations and LLCs to protect themselves when operating a business. What is less common is to use an LLC to protect their cash, stocks, bonds, precious metals and other liquid assets.

Fred Loses His Nest Egg. Fred bought a two million dollar home when business was booming and put a million down. Now the lender says that the property is only worth $800,000 and has started foreclosure. The house sells at the foreclosure auction for $500,000 and now Fred still owes the bank $590,000 as the balance on the loan which now includes $90,000 of attorney fees, advertising costs and a trustee commission incurred as a result of the foreclosure. Fred has $800,000 in stocks and bonds and the bank gets a court order to get paid $650,000, up from $590,000 due to $60,000 of bank attorney collection fees, out of the stock and bond accounts of Fred. Fred consults his attorney to ask if there is a way to protect his life savings and the attorney advises him that it is too late because Fred already knew about the pending foreclosure and anything Fred did now may be a fraudulent transfer.

What Should Have Fred Done? Fred could have set up a Virginia or Delaware LLC prior to his financial troubles to own just his cash, stocks, bonds, precious metals and other liquid assets. He would not put his home or business into this LLC. Once the Bank comes after him after the foreclosure, the bank lawyer will ask the Judge to issue an order to take the assets owned by Fred’s LLC to pay the balance owned to the Bank. Fred’s lawyer answers that the Bank can’t take the assets owned by the LLC because the LLC, not Fred, owns the assets and the Bank does not have a judgment against the LLC.

Take Over of LLC. The Bank’s lawyer then says, well, if we can’t get the cash directly in the LLC, we will get it indirectly. Since Fred owns 80% of the membership interests in the LLC, the Bank’s lawyer requests that the Judge order a sale of Fred’s 80% membership interests in the LLC. The Bank plans to buy the 80% membership interests at the court ordered auction of the membership interests at a very reduced price, vote a Bank officer in as the Manager of the LLC and then have the bank appointed Manager dissolve the LLC and distribute all of the LLC assets to the members, 80% of which go to the Bank. Result: the Bank gets paid in full, including the $150,000 of attorney’s fees and costs.

Fred’s Counter Offense. Fred’s lawyer counters that the LLC is a Virginia LLC and that under Virginia law, a charging order is the sole remedy of a creditor of a member of a Virginia LLC. In other words, the Judge is prohibited by Virginia statutory law from exercising the normal powers of a Judge to order the sale of the LLC membership interests to satisfy a judgment against a member. The Bank obtains a charging order that says if the LLC distributes, say $10,000 to Fred, the Bank and not Fred gets the $10,000. The Judge enters the charging order and denies the Bank’s request to sell the membership interests in the LLC of Fred. Fred is the Manager of the LLC and the LLC agreement gives Fred the discretion not to make distributions of assets out of the LLC. Fred tells the Bank there will not be any distributions out of the LLC anytime soon and the Bank cannot force distributions out of the LLC.

Settlement. With this stalemate, the lawyers for Fred and the Bank enter into settlement discussions. They settle on Fred paying $95,000 to the Bank in final settlement of all of Fred’s debt to the Bank. Fred makes a distribution out of the LLC to Fred to settle the debt by paying $95,000. Fred saved himself $500,000 or more and retains most of his nest egg.

Not Corporation or Trust. Could Fred have used a corporation or a trust to provide this protection? No, for the corporation, because corporate shares are the same as any other asset and can be seized and sold by court order. See prior blogs for protection of corporate shares. For trusts, unless it is a special asset protection trust set up under special offshore or certain state statutes providing for a special asset protection trust, a trust set up by Fred does not provide Fred this protection under the self settled trust doctrine. In addition, an LLC set up in a state without specific language that the charging order is the sole remedy may not provide any protection for Fred. See our article on Shaun Olmstead v. Federal Trade Commission in our 2010 blog entitled Asset Protection denied with LLC. Also, Fred has to set up the LLC prior to a creditor coming after him under the fraudulent transfer doctrine. More on these doctrines in subsequent blogs.

Act Now. Don’t wait for financial disaster to strike you before it is too late. Call us for your options for asset protection of your stock and bond portfolio.

If You Are in Your Eighties, It is Time to Get Married; Portability of Your Spouse’s Exemption from Estate Taxes.

New Estate Tax Law. For two years, 2011 and 2012, there is yet another new estate tax with another set of new rules. For two years, the amount that is exempt from estate gift and generation skipping taxes is $5,000,000. One new rule is the portability of your deceased spouse's estate tax exemption.

Portability. The new law allows the surviving spouse to use the exemption from estate taxes that was not used by the first spouse. This was not true under the prior law. Example: John dies in 2011 with a taxable estate of $1 million. In 2011, John had a $5 million exemption from estate taxes and therefore did not use $4 million of his exemption. Mary, his surviving spouse, dies in 2012 with an estate of $8 million. Because Mary gets to use the $4 million unused exemption of John, Mary's estate exemption is her $5 million exemption plus John's $4 million exemption for a total exemption of $9 million and with a $8 million estate, Mary pays no estate taxes.

Qualifying for Portability. You do not have to set up a living trust or make elaborate plans to qualify for portability other than getting legally married (under federal law). To qualify, when the first spouse dies, the deceased spouse's estate must file on time an estate tax return even for estates where no estate tax return is due because there is no estate tax. On that estate tax return, the deceased spouse's estate must make an election to use the "deceased spouse's unused election amount" (DSUEA). Once you make the DSUEA election, you can't change your mind. A downside is that this gives the IRS the right to audit the deceased spouse's return, regardless of the normal time limits on IRS audits. Also, all of this only applies where both spouses die in 2011 and 2012, although many commentators expect Congress to make portability a permanent feature of the estate tax law.

No Serial Marriages. For the enthusiastic tax savers or Zsa Zsa Gabor (married nine times), you cannot accumulate DSUEA by marrying one spouse after the other who dies before you. You only get to use the DSUEA of the last spouse. You may not want to marry someone with a large estate if you plan to use his DSUEA! The charming elderly retired professor living in gentile poverty is now a tax advantage.

Time to Get Married. Fran is 85, has a $10 million taxable estate and is in bad health. She has cohabited with her long time boyfriend Jim of 20 years, but they have not married because Jim would lose his survivorship pension from his prior marriage if they married. Jim has only $200,000 to his name which he plans to leave to his children from a prior marriage. Fran marries Jim. Jim dies in 2011 and Fran gets his remaining exemption of $4.8 million. Fran gives $200,000 to charity before she dies in 2012 with an estate of $9.8 million with her $5 million exemption and $4.8 million exemption of Jim. Her heirs save over $1.7 million in taxes and the cost may only be for Fran to replace the pension of Jim from her own resources. Or, if Fran dies first, through the use of family and marital trusts, she can still use Jim's $5 million exemption and achieve the same result: no estate tax.

Time to Change your Plans. In the past, when there was no portability, we had to move assets from one spouse to another to make sure we captured the exemption from estate taxes. Example: In a plan made in 2008 when the estate tax exemption was $2 million, if one spouse only had $1 million in her estate and the other had $3 million, to eliminate estate taxes by fully using both $2 million exemptions, we had to move $1 million to the spouse with the $1 million in order to even out the two estates in case the spouse with the $1 million estate died first. This could be uncomfortable in second marriages. With portability, this is no longer necessary.

More Flexibility. With the ability to exempt $10 million from estate taxes for a married couple without using exemption planning, we now can have estate plans that do not have to fit into the straight jacket of tax requirements. All of the money can be left to children or a surviving spouse or someone else.

Cautions. By law, unless changed, the estate tax exemption will be $1 million in 2013, with no portability and a rate up to 55%. This means you have to have two sets of plans, one for the current law and another for the future law. Also, for people who provide protective trusts for children and want some of their inheritance to go to grandchildren, there is no portability for the generation skipping tax exemption.

Time to Act. Call us to review your plans to see how you can take advantage of these new sets of rules.

Estate Tax Returns from the Grave

Estate Tax is Coming Back. President Obama has signed a compromise agreement on a temporary extension of the Bush income tax cuts for a two year period. Part of the bill includes a return of the estate tax with a $5,000,000 exemption and a 35% rate for two years only. Prior to this new law, there was no estate tax in 2010. In 2009, there was an estate tax with an exemption of $3,500,000 at a maximum rate of 45%. Without this new legislation, then the exemption was on autopilot to be $1,000,000 per person with a maximum rate of 55% on January 1, 2011. The autopilot date has been postponed to January 1, 2013.

Opposition of Compromise. There was opposition in the House and Senate, but a tax compromise of a two year extension was able to pass and be signed by the President. However, the return of estate tax and whether the exemption should be less than $5,000,000 will be an issue in the 2012 elections for President and Congress. Since this is only a two year extension, this means that the estate tax exemption will be $1,000,000 on January 1, 2013 with a 55% rate unless there is another compromise. In order to stop this from happening, there must be 60 votes in the Senate for another compromise. In 2010, there was the pressure of raising taxes in a recession. If the past is an indication, there will not be a compromise next time and the estate tax exemption will revert to $1,000,000 on January 1, 2013.

Tax Increases Are Coming. We have written before that the estate tax would return because of the growing federal deficit. This tax proposal and unemployment extension may add more than $900 billion to the deficit for the next two years according to estimates. Part of the opposition to this two year extension of the Bush tax cuts was due to the large and growing federal deficit. Eventually, Medicare, Medicaid and Social Security and the interest on the debt are on autopilot to consume all federal revenues. There will have to be painful tax hikes in the future unless the costs of these and other programs are reduced more than what is now considered politically acceptable.

$5,000,000 Exemption. The impact on planning between a $5,000,000 per person exemption and a $1,000,000 exemption is very large. With home equity, a life insurance policy and retirement savings over a lifetime, it is common for a family who worked for the government or had a mid level position to have over a $1,000,000 estate. However, over $5,000,000 estates are not common and require that the person had an unusually successful business or had a $300,000 or higher annual salary over a long period of time. The $5,000,000 exemption removes the estate tax as a concern for only a small percentage of Americans. In addition, with the new portability provisions (more on this later), married people will more easily use their combined $10,000,000 exemption.

What to Do Now. If you will have an estate over $5,000,000, or if you are concerned that the $1,000,000 exemption and 55% rate will return January 1, 2013, what should you do now:

1. Make large gifts before the end of the year. Since there is no estate tax or estate tax exemption in 2010, it is a reasonable position to make large gifts in 2010 and not use up any of your future exemption from estate taxes. There is a large dispute over how this will be decided by the courts due to ambiguous language in the statute which provides for the expiration of the Bush tax cuts. Even if there eventually is a ruling that the rules for 2011 should apply to 2010, even thought the tax year and law was different during those two years, you are likely to come out ahead because you made a gift when dollar prices were depressed in 2010. If you give away something worth $800,000 in 2010, it may have a price tag of $5,000,000 in 2020 simply as a result of high inflation rates. Gifts in excess of your $1,000,000 gift tax exemption in 2010 would incur a 35% tax rate on gifts.

2. Make gifts to grandchildren or to trusts for grandchildren. Not only is there no estate tax in 2010, there is no generation skipping tax paid on gifts to grandchildren in 2010, even if to a properly designed trust for a grandchild. With the return of the estate tax in 2011 at a 35% rate, there will be a 35% tax on gifts to grandchildren under the generation skipping transfer tax (GSTT) over the $5,000,000 exemption for 2011 and 2012. The new law clarifies that you can make a gift to a trust for grandchildren in 2010 and pay no GST tax this year or in the future. This is done by reimposing the GST tax in 2010, but with a zero percent rate. You make gift to a trust just for grandchildren, you do not use any exemption from GST tax and therefore it is a taxable transfer in 2010, but since the tax rate is zero, you can make gifts to trust for grandchildren and not use up any of your $5,000,000 GSTT exemption. You only have until the end of 2010 to do this. You will be able to make GSTT gifts up to $5,000,000 in 2011 and 2012.

3. Discounting and GRATs not modified yet. There was concern that the use of discounts for family limited partnerships or through a grantor retained annuity trust would be curbed by the new legislation. They were not. However, when taxes will need to be raised in the future, these restrictions could be reconsidered.

4. Roth Conversion. You can convert your retirement plans to a Roth IRA in 2010. This can be an important tool of estate planning. If your financial projections are that you will not need to use the funds in your regular IRA during your lifetime, then if you convert it to a Roth IRA, you will not be required to take out any distributions during your lifetime and the funds in the Roth IRA will continue to accumulate tax free. If you retain the funds in a regular IRA or retirement fund, you will be required to take minimum distributions calculated to exhaust everything in your retirement account during your lifetime. Instead, if you leave your Roth IRA to your five year old granddaughter with a life expectancy of 105 years, then the granddaughter could take distributions over her remaining 100 year life expectancy and have one of the few accounts that are not subject to any of the high tax rates that are coming in the future. The downside is that you have to come up with separate funds to pay the taxes caused by the Roth conversion now.

Taxes Are Going Up. The debt commission recommends tax increases and drastic cuts so as to balance the budget by 2035. The 2010 tax rates and the two year compromise will probably be the lowest taxes you will see during your lifetime. Eventually, taxes will go up to pay for everything. Our future may look like what is happening is Ireland now where they have to have large broad based tax increases and large cuts in entitlement and spending.

It is Not Too Late. There still is time to take advantage of these end of the year planning opportunities. There are only a few days left to take advantage of the zero percent rate for gifts to grandchildren in trust in 2010.

Pursuant to U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this document, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purposes of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this document.

A Purchaser of a Foreclosed Property May Be a Victim of A Botched Foreclosure; Protect Yourself Against Defective Foreclosures

Bungled Foreclosures. There are many headlines and news reports about bungled foreclosures, major lender nationwide suspensions of foreclosures and governmental investigations of foreclosure fraud. You need to make sure that you are not a victim of this legal morass.

Profits from Foreclosures. Buy low and sell high - is also a formula for making money in real estate. One way many people have bought low is to buy a property which has been foreclosed against. Often, a bank may be eager to get rid of a property that is costing it money that it cannot sell for top dollar because it needs a lot of work after it was trashed by the former owner or vandals. The investor buys the house, fixes it up and resells it for a profit or adds the house to their rental portfolio. Because of substantial fix up costs, cash requirements and holding periods costs, the investor usually needs to buy the property 40% or more under the market value.

Bob and Betty. Bob and Betty have been working for 20 years, but are nowhere near their dream of retiring with a large financial cushion. They went to a real estate seminar about how to make millions by buying foreclosure property and paid hundreds of dollars for books and tapes sold by the speakers. They follow the guidelines they learned, buy a foreclosure property, fix it up and are ready to put the house back on the market for a profit of over $50,000. After listing the property for sale with a realtor, they are served with legal papers from the former owner demanding that Bob and Betty turn over the house back to the former owner due to a defect in the foreclosure process. Bob and Betty lose the case, have to pay an attorney $50,000 to defend themselves and lose all of their investment and their savings of $100,000, sweat equity and lost weekends they put into the house. Their foreclosure dream has become a nightmare.

Foreclosure Legal Process. The buyer of a foreclosed property can have title problems if the legal procedure followed by the attorney overseeing the foreclosure was defective. There are many stories in the press now about defective foreclosures. In general, the law says you can’t take someone’s house unless you provide them the mandated notice, advertise the sale in the paper, have a proper auction and follow any required court filing procedures. Everyone can understand the heartbreak of someone who loses their home to a foreclosure and the law provides some protection to home owners against arbitrary foreclosures. Typically, after notice and advertisement, an auctioneer sells the property at a public auction and this process results in a legal transfer of title under state law to the new owner who made the highest bid at auction, all against the will of the foreclosed owner. Given the volume of foreclosures and bank loses, the lenders may have put the foreclosure legal work out to the lowest bidder and achieved defective results. Where a foreclosure does not properly transfer title to the auction imagesCAPEILPP.jpg" type="#_x0000_t75" o:spid="_x0000_s1026">buyer, the person who bought the property at the auction may never receive good title; the property may still be legally owned by the person against whom the foreclosure took place. This all depends upon a complex set of state rules. Each state has its own esoteric legal steps that have to be followed to legally transfer title through the foreclosure process. If the process was not followed correctly, the title of the buyer at auction could be defective and the auction buyer may be unable to pass good title onto the purchaser.

How Can This Happen? You as a buyer of a property which has been foreclosed, could have a loss of investment in the following cases:

1. You Didn't Buy Title Insurance. You got a loan to buy the foreclosed property and the lender received title insurance but you did not buy title insurance for yourself. Title insurance is where a capital rich insurance company enters into a contract to guarantee that the title to the property is good. There are lender policies and buyer policies. For the buyer to be protected, the buyer has to buy their own policy. The buyer may not understand this or try to save money by only paying for a lender policy, mistakenly thinking they are protected by the lender insurance policy. A lender title policy protects the lender from loss, but not the buyer.

2. You Got a Quit Claim Deed. In the deed, there is generally a guarantee, called a "warranty" of title from the seller. If there is a title defect and you have a warranty deed, you have legal recourse against the seller if the seller had a title defect in their foreclosure. If there is no guarantee in the deed, you may have no recourse against the seller of a property with a defective title.

3. The Bank Went Bankrupt. The bank or large federally regulated institution went bankrupt and even though you had a warranty deed, you are now an unsecured creditor in a huge nationwide bankruptcy case headquartered in Delaware and you have to hire a Delaware attorney for a large fee to collect three cents of every dollar you invested.

4. Your Title Insurance Does Not Protect You. You go to settlement and pay for title insurance. You ask to read the title insurance policy to make sure that you are protected against a defective foreclosure on the property prior to signing the settlement papers. If you have a title insurance contract that says you own the property with no exceptions for the prior foreclosure and you lose the property due to a defective foreclosure, then the title company is supposed to pay you for the loses up to the dollar limit of the title policy. The settlement company says they will get around to writing up the policy a couple of weeks after settlement. The settlement company gives you a letter saying they will commit to issuing you a title policy with certain exceptions. The exceptions listed concern anything to do with the foreclosure. Unless the exceptions for the foreclosure are later removed, the title insurance contract will not protect you from defects in the foreclosure process. The problem is that you may have to go to settlement before the title company has even looked at the foreclosure paperwork to determine if there is a problem. All you get is a promise that they will issue a policy later and you have nothing in writing that they will guarantee there are no problems with the prior foreclosure. You may have only bought yourself a lawsuit if later the title company finds a problem with the foreclosure.

5. You Lost Your Fix Up Costs and Profit. Larry and Louise bought a title policy with no exceptions for the foreclosure with a limit of $150,000, the price they paid for the house. They put $50,000 of fix up and carrying costs into the house and are ready to sell it for $250,000. But, they lost the property due to a defect in the foreclosure process. The title company makes good on the insurance policy and pays Larry and Louise the policy limit of $150,000 and Larry and Louise are out $100,000.

How To Protect Yourself. In general, this has not been a likely problem in the past and in many cases will not be a problem today for many reasons even if there is a defect in the foreclosure. But, press reports indicate that the number of messed up foreclosures have dramatically increased. To protect yourself, obtain a copy of the title policy with insurance against foreclosure defects prior to the settlement. If you have this option, select a title company to do the settlement that you know and trust to thoroughly review the foreclosure record. If you expect a large profit, have a clause in your purchase contract that provides that your own lawyer must approve the foreclosure paperwork as a condition of going to settlement. This will focuses everyone's attention on getting this taken care of prior to settlement.

Real Estate Problems. We have decades of experience working with investors in residential and commercial real estate and look forward to working with you.

Estate Plans that Fail to Protect Your Family; When Wills, Trusts, Powers of Attorney and Asset Transfers Are Not Enough

What is Estate Planning? Insurance companies, banks, financial planners and attorneys all advertise that they will help you with your estate plan. When we talk about estate planning, people are often confused as whether we provide financial or legal advice. Our name, Washington Wealth Counsellors, lends to this confusion. The answer: an effective estate plan is one that protects and provides for you and your loved ones now and in the future and distributes your property the way you want, when you want and how you want with the minimum of taxes and expenses. This requires the skills of lawyers, accountants, financial planners, insurance professionals and trust officers.

Sam and Sally. Sam and Sally come to us for an estate plan. During the interview we discover that Sam has several old life insurance policies which would provide $300,000 to Sally if Sam died and the total cash value of the policies are $280,000. The cash value is what the insurance company would pay Sam today if Sam turned in (surrendered) the insurance policies while Sam is alive. After Sam dies, his wife receives only half of his pension and then Sally will have less income than she needs without selling the house. Sally has spent thousands of hours in her flower beds and decorating her kitchen to make her home a very pleasing and comfortable place and has many wonderful memories of family gatherings there. As lawyers, we can do the wills, trusts, powers of attorney and property transfers to make their estate plan perform as they desire. But, the documents do not save Sally's house.

What is the Central Problem? The central problem in Sam and Sally's estate is not the legal documents, although the proper legal documents will make sure that their property goes to whom they want, when they want and how they want with the minimum of taxes and expenses. Instead, the central problem is that Sally, who statistically is likely to survive Sam, will not have enough income to stay in her beloved home after Sam dies. The children of Sam and Sally have their own families, are well established and do not need Sam and Sally's money to live on. Sally does not have the stamina or skills to go back to work.

Providing for the Surviving Spouse. The solution to this central problem is for Sam to exchange his insurance policies for a new insurance policy that will provide enough money for Sally to live on after Sam dies. The tax code under Section 1035 allows Sam to exchange his old policies for a new policy with a higher death benefit and lower cash value without paying any taxes at the time of the exchange even though he is using his untaxed earnings in his insurance policy to buy something of greater value to him. When not being used as an investment and tax saving vehicle, the purpose of life insurance is usually to replace the income of the breadwinner when the breadwinner dies and to shift the risk of a premature death of the breadwinner from the policy holder to the insurance company. Here, with $280,000 of cash value and a death benefit of $300,000, Sam has nearly all of the risk of his death on his shoulders and his insurance is providing him virtually no leverage. We brought this up to Sam and Sally during a review of their estate plan because we ask questions about how much will Sally have to live on after Sam dies, how much insurance they have and what is the cash value of their insurance.

Solving the Central Problem. We referred Sam and Sally to a qualified trustworthy insurance professional. The insurance professional shopped the insurance companies and came up with a policy that will provide a death benefit of $1,000,000 up to age 97 for Sam in exchange for the cash value in the policies. Sam and Sally pay for this by using the cash value in the insurance policies, do not write a new check, do not pay taxes when they trade the cash value for a new policy and have no future insurance payments because they used the cash value to pay for this new policy. If Sam dies before age 97, Sally receives $1,000,000 and this, with their other assets, will be enough for Sally to stay in her beloved home. Of course, Sam had the alternative of taking the $280,000 out of the policy and investing it in hopes that next year or any year thereafter he would have grown the $280,000 to $1,000,000. With many experts stating that the stock market will be flat for the next 6-9 years, how will Sam invest these funds to make sure the $1,000,000 would be there for Sally? The insurance company invests these funds, takes over the risk that Sam will die soon, and guarantees to pay the $1,000,000 under the terms of the contact and makes a profit.

How Can This Happen? I do no know why Sam's prior insurance agent never talked to Sam about this problem. If Sam had consulted any of the financial planners we work with, the financial planner would have brought up this solution. This happens too often because in this era of specialization, the specialist attorney or other advisors put their blinders on and only look at what concerns their narrow specialty rather than solving the problems of their clients. We spotted the problem and bought in an insurance professional with the license, credentials, honesty and experience to solve the problem. What is a necessity for an estate plan that meets all of your goals is that you must have a team of professionals looking out for you - your accountant, your lawyer, your insruance professional, your financial planner and your personal banker. All of them have a contribution to maqke to protect you and your family.

Plan Now. If you want a comprehensive estate plan, call us for an appointment for a review by our team.