Another effective option of protecting your assets is a Pre-Inheritance Trust (PIT). A PIT was originally used by wealthy individuals to reduce their estate tax liability while providing an inheritance for their children. The PIT has since evolved into a powerful asset protection tool.
Let’s look at the two benefits the PIT offers separately to understand how it works:
Estate Tax Planning
The U.S. estate tax law allows each individual taxpayer a certain amount of exemption when you pass an estate onto your heirs without having to pay an estate tax. The current exemption amount is around $5.5 million per person, so a husband and wife have around $11 million together. This exemption amount can be used at the time of death or some, or all of it, can be used while you are still alive. You could give away some or all of your exemption amount to a Pre-Inheritance Trust and the money in that trust will forever grow free of all estate tax. This means that if, at the time of your death, the money has grown to $25 million, all of that money will go to your heirs free of any estate taxes. “But, but, but if I gift to my children now, they will just squander it,” you might say. Well, that’s where the PIT comes in. By gifting the money to the PIT instead of to your children directly, they cannot actually touch the money until a certain time and manner determined by you. In other words, you can gift money to the PIT now to reduce your estate and your future estate tax liability while keeping that money from your children until you want them to have it. The PIT can be creatively set up in such a manner as to give the assets total protection against the creditors of the children, both now and in the future.
The asset protection benefit of a PIT is very easy to understand. Since you have gifted the money to the PIT, it’s no longer yours. If you are sued in the future, your judgment creditor cannot collect from the PIT since it’s no longer your asset.
In addition, since your children are just beneficiaries of the PIT and not owners of the trust assets, until the assets are distributed to them at the time and manner predetermined by you, court judgments against your children are not recoverable from the PIT either. The timing and manner of asset distribution from the PIT may be in one lump sum or in small periodic payments.
In other words, the PIT completely protects your assets from lawsuits against you or your children.
Here are a few more important aspects of the PIT to consider:
- In order to qualify as a gift and use up your lifetime exemption, you, the settlor of the trust, may not serve as the Trustee or Protector of the PIT. The Trustee and Protector can be a friend, financial advisor, your attorney or certain relatives.
- You don’t have to gift money into the PIT immediately. Any amount is perfectly fine. You may also gift in periodic chunks over time instead of in one lump sum upfront.
- PITs are Irrevocable Asset Protection Trusts. Therefore, the assets you place in the PIT may not be returned to you without tax consequences. You may, however, take out the earnings or interest generated from the assets.
- A PIT can hold any assets including bank accounts, real estate, and ownership interests in companies (corporations and LLCs).
- You can serve as the officer or manager of the corporations and/or LLCs owned by the PIT. As officer or manager of these entities, you may draw a salary or other non-salary compensation for your service. Since you are the officer/manager of these business entities, you have direct and executive control over the assets owned by these entities.
- Your children can also be employed by these companies and draw compensation in amounts determined by you.
By proper construction, a PIT creates an insurmountable shield against the claims of creditors and ex-spouses as well as lowers your future estate tax exposure. If you want your children to have the use of your properties and assets, and not their spouses and potential step-children, the PIT is a superior strategy to outright gifts. PITs are growing in popularity as estates of middle-class families become larger. For further question on how a PIT can protect your assets while you maintain control over them, please give us a call.