INSTRUCTION LETTER FOR ESTATE PLANNING

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INSTRUCTION LETTER FOR ESTATE PLANNING Powered By Docstoc
					(Date) RE: ESTATE PLAN

Dear

: I am in the process of finalizing your estate plan. You have in your possession (and hopefully in your safe deposit box by now) the following original estate plan documents which were executed in my office on , 20 : 1. The Irrevocable Family Trust; 2. The Irrevocable Life Insurance Trust; 3. Last Will and Testament of ; 4. Last Will and Testament of These documents are summarized as follows: THE IRREVOCABLE FAMILY TRUST This Irrevocable Trust will be funded with assets during your lifetime to protect your assets from the claims of potential creditors and to reduce your overall estate for estate tax purposes. Since one of your objectives in forming and funding this trust is to safeguard your assets from potential creditor's claims, you should be aware that a transfer of any kind may be avoided when made with the intent to delay, hinder or default creditors in the collection of their claims. Fraud in this context does not envision malice or evil motive, but simply a design by a debtor to prevent satisfaction of a debt to the creditor. If you transfer assets to your irrevocable trust, your creditors may attempt to use the statute to try and prove the trust was established with the intent to hinder creditors in the collection of their claims. The intent to "delay, hinder or defraud" creditors is drawn from all the facts and circumstances ("badges of fraud") surrounding each individual case. Badges of fraud considered separately may be inconclusive, but taken collectively from the totality of the circumstances, may constitute fraud. Some examples of badgers of fraud are as follows: 1. Insolvency or indebtedness of the debtor; 2. Transfer of the debtor's entire estate; 3. The relationship between the transferror and transferee; 4. Lack of consideration for the conveyance. A transfer made without consideration (a gift) is prima facia fraudulent if the transfer is made when the transferror was indebted and thus can be easily avoided); 5. Reservation of benefits of debtor. If debtor retains benefits, possession, or control in, of, or over the transfer of the property, either directly or indirectly, a fraudulent transfer may be established; 6. Retention of possession or control over the property by the debtor; 7. Secrecy or concealment of the transaction. If you do not file a gift tax return when required by the Internal Revenue Code, the Internal Revenue Service may allege that you are trying to conceal the transfer of your assets to the trust; 8. Pendency or threat of litigation against the debtor. If a creditor alleges or proves several of the above-described badgers of fraud, any transfer to avoid creditors may be set aside. Under present law, any irrevocable inter vivos trust is not avoidable if the Settlor has not retained any legal or beneficial interest in the trust and no badges of fraud exist in the creation of the trust. However, even the reservation of seemingly insignificant powers over trust property may give rise to a successful fraudulent suit by a creditor. In your particular situation, it is my opinion that any transfer of assets to your irrevocable inter vivos trust at this time will not be subject to attachment by your creditors and the transfer will not be voidable since you have retained no legal or beneficial interest in the trust and no badges of fraud exist at this time. In addition, since we will be filing a gift tax return for gifts made to the trust on an annual basis, the IRS will not be able to allege that there is any secrecy or concealment in the creation of the trust or in the assignment or transfer of assets to the trust. Finally, I would recommend that you transfer some of your assets to the trust at this time since there is no pendency or threat of litigation against you which could be used to set aside the transfer at some future date. The laws of the State of that give creditors the means to set aside fraudulent transfers also permit certain assets to be exempt from their reach. The most common

exemption is the "homestead exemption" under the residences of individuals is exempt from the claims of creditors. Accordingly, I would not recommend that you transfer your home to the trust since this asset is already protected under the laws of the State of before the transfer. The following discussion will summarize and analyze the income, gift, and estate tax consequences of establishing your inter vivos irrevocable trust. 1. Income Tax. A trust is generally treated as a separate entity, subject to the same basic tax rules that apply to individuals. For instance, interest and rents earned and accrued are included in the gross income of a trust to the same extent that they would be if received by an individual. The law specifically provides that gross income of a trust includes income which is distributed currently by the trustee to the beneficiaries. Since your trust provides that all the income will be distributed to , then and not the trust will be taxed on all the income. Your trust will still have to file an annual income tax return, but no tax will be due since the trust will receive a deduction equal to the amount of income which must be reported by as the sole income beneficiary. 2. Gift Tax. The transfer of property to a trust constitutes a gift to the extent of the value of the interest that passed from the grantor's control. The gift will constitute a completed gift for gift tax purposes if the grantor transfers property to an irrevocable trust and retains no beneficial interest in the trust. A gift tax return must be filed with the IRS unless the present value of the gift is less than the permitted annual exclusion amount, which is currently $10,000.00. To avoid a gift tax for gifts to your trust with a present value in excess of $10,000.00 per year, I have drafted the dispositive provisions of the trust to qualify any transfer for the unlimited marital deduction from gift tax. 
				
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