Trusts and Estates – Global Estate Blog

Asset Protection – LLC v. Irrevocable Asset Protection Trust

LLC

The Limited Liability Company (“LLC”) is the primary method to protect business assets.

The purpose of the LLC is to limit the creditor claims to only the LLC assets, allowing for the personal assets (e.g. residential home or personal bank accounts) to be excluded from the creditor claim.

Only legitimate business assets should be placed in the LLC. Personal assets should be kept strictly separate (avoid creditor commingling claim seeking to pierce to the corporate veil, i.e. declare null and void the business entity protections.)

The LLC can still be subject to a post-judgment creditor charging order (requesting payment from LLC to the creditor) or an LLC foreclosure order.

Should the LLC be unable to satisfy the creditor claims, the LLC will declare bankruptcy.

Irrevocable (Asset Protection) Trust

The Irrevocable Trust is to protect against creditor claims on the personal assets.

The Asset Protection Irrevocable Trust usually includes:

A spendthrift clause (preventing the involuntary distribution of Trust assets by creditors.)
A discretionary – ascertainable standard distribution clause (limiting distribution to the beneficiary’s Health, Education, Maintenance, and Support.)

The Asset Protection Trust is set up for the benefit other family members.

Conclusion

The Asset Protection Irrevocable Trust has better asset preservation protections.

Disclaimer

New Probate Hack – Real Property Succession (Primary Residence – $750,000)

For any California resident who passes away after April 1, 2025, if her or his interest in a primary residence was valued at less then $750,000 (at the time of death), the successors in interest (e.g. surviving children or relatives) can file a Petition to Succeed to the Real Property (v. a more extensive Probate Administration.)

If the decedent died before April 1, 2022, the date of death value for Petition allowance is limited to $166,250.

Usually a Petition can be heard within 3-6 months from the date of filing. It is not unusual to have at least one Court continuance where the Probate examiner requests additional information or procedural notices.

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Post Death Estate Obligation to Pay Known Creditors in California

California Probate Code Sections 11420 and 19001 require an estate Executor, Administrator, or Trustee to pay known and credible Creditors.

Probate Code 11420 states:

(a) Debts shall be paid in the following order of priority among classes of debts, except that debts owed to the United States or to this state that have preference under the laws of the United States or of this state shall be given the preference required by such laws:

(1) Expenses of administration. With respect to obligations secured by mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, only those expenses of administration incurred that are reasonably related to the administration of that property by which obligations are secured shall be given priority over these obligations.

(2) Obligations secured by a mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, in the order of their priority, so far as they may be paid out of the proceeds of the property subject to the lien. If the proceeds are insufficient, the part of the obligation remaining unsatisfied shall be classed with general debts.

(3) Funeral expenses.

(4) Expenses of last illness.

(5) Family allowance.

(6) Wage claims.

(7) General debts, including judgments not secured by a lien and all other debts not included in a prior class.

(b) Except as otherwise provided by statute, the debts of each class are without preference or priority one over another. No debt of any class may be paid until all those of prior classes are paid in full. If property in the estate is insufficient to pay all debts of any class in full, each debt in that class shall be paid a proportionate share.

Probate Code Sections 21401 and 21402 list the shares of beneficiaries to be abated for the purpose of satisfying the aforementioned estate debts:

1) Property not disposed of by the instrument.

(2) Residuary gifts.

(3) General gifts to persons other than the transferor’s relatives.

(4) General gifts to the transferor’s relatives.

(5) Specific gifts to persons other than the transferor’s relatives.

(6) Specific gifts to the transferor’s relatives.

Per Probate Section Code 19400, failure to provide the required creditor notice, and the beneficiary receives an estate distribution, then the beneficiary is personally liable.

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Frequently Asked Questions

Will or Trust?

The Trust is the only Estate Plan that does not require Court involvement. A Will still requires the Executor to go through the Court Probate Process that can last years.

Any beneficiary designations on financial accounts or joint tenancy for real estate are not affected by the Will (the beneficiary designation and joint tenancy overrides the Will.)

Gift v. Primary Beneficiary?

Gifts can be a set amount of cash, a personal item, or real property.

Gifts are distributed first and satisfied “off the top”, with the remainder going to the primary beneficiaries allocated out of 100% (e.g. 50%, 20%, 30%.)

If I am establishing a Trust, why do I also need a “Will”?

The Pour Over Will is complimentary and “part and parcel” of the Trust. One of the main purposes is to act as a “catch-all” by declaring that all property not held in trust at the time of passing is deemed to be transferred and held in Trust.

What is the Difference Between a Trustee, Executor and Guardian?

The Trustee is responsible for administering (i.e. ensuring the written wishes are effectuated) the terms of the Trust. The term Trustee is exclusive to the Trust.

The Executor is responsible for administering the terms of the Will. The term Executor is exclusive to the Will.

The Guardian is the person you nominate to take over the parental responsibilities for your minor child(ren) in the event you pass prior to the child(ren) reaching 18.

Does the Trustee, Executor, and Guardian have to be the Same Set of Individuals?

Usually the Trustee and Executor is same individual in the same order/sequence.

The Guardian often is the same as the Trustee/Executor as it is administratively more efficient (no splitting of the power of the purse v. responsibility of day-to-day care among different individuals).

Who Should be the Successor Trustee or Executor?

While alive the settlor(s) or sometimes referred to as grantor(s) (individual establishing the Trust) will also be the Trustee.

For the post death successor Trustee/Executor, the settlor(s) will often look to qualified family members. (When spouses involved the surviving spouse is the first Successor Trustee/Executor.) Ideally the successor Trustee/Executor will be well organized and have a good grasp of financial and/or legal matters. The successor Trustee/Executor will be able to consult an attorney or CPA if he or she requires assistance regarding the Trust or Will administration.

Nominating a Non-U.S. citizen/resident spouse or relative should only be in conjunction with naming also a U.S. resident as co-trustee (2 Trustees acting together).

What Type of Compensation is Common for the Trustee?

While there is no set standard, commonly reasonable compensation, or an annual fee ranging from 0.5% to 5% of asset, depending on size of assets, prorated by number of days served.

Disclaimer

Who Inherits if No Trust or Will?

If a person dies in California without a Trust or Will, then Probate Code Sections 6400-6455, intestate succession, dictates the succession disposition.

The attached Chart of Consanguinity details the various scenarios whereby the offspring of a predeceased direct bloodline relative can inherit by “right of representation.”

For example, the parents have two children, and one of the children predeceased, leaving two grandchildren. Under the California Probate Code, the two grandchildren are entitled to receive in equal shares the 50% of the pre-deceased parent child. The surviving grandchildren inherit 25% each.

In a situation where a single person has no direct bloodline and has an extended family with many cousins, who have offspring, the benefits of having a Trust or Will explicitly stating who will receive, will prevent the cost and burden of a Probate Administration leaving it to distant relatives that the decedent may not have known existed.

Court Probate of Intestate Administration for a deceased without a Trust or Will, can result in large Heir Search Vendor costs. This can be prevented by having a valid written Estate Plan, a Trust or a Will.

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