Preserving Your Trust: How to Preserve Trust Funds for Couples

In Episode 1 of "Trust Us: Estate Planning Wisdom," hosts Danielle Friedman, Herb Fineburg, and Charles “Max” McCauley III focus on preserving trust funds for couples. They explore a case where parents established an irrevocable trust for their son, who now wishes to buy a home for his family with the trust's $450,000 in assets. The hosts discuss options, favoring the trust buying the house to ensure asset protection. They also consider the trust lending money to the couple, cautioning against making distributions that could deplete assets and make the house marital property. The episode concludes with a Q&A on jointly owned property, creditor protection, and divorce outcomes.

If you are interested in learning more or have any questions, please feel free to contact Danielle at [e-mail], Herb at [e-mail], and Max at [e-mail].

Episode Transcript

Danielle Friedman (00:05):
Welcome to Trust Us Estate Planning Wisdom,
the podcast where we unravel thecomplexities of estates and
trusts to empower you with theknowledge needed for effective
estate planning.

Max McCauley (00:16):
This podcast is hosted by seasoned estates and
trust attorneys, DanielleFriedman, Herb Feinberg, and

Herb Fineburg (00:21):
Charles Max McCauley. This podcast is your
guide to the intricatelandscapes of estate planning,
including wills, trusts, andprobate.

Danielle Friedman (00:31):
Thank you for joining us, and we hope you find
the discussion informative. Butremember, when it comes to legal
matters, always consult with aqualified attorney regarding
your specific case.

Max McCauley (00:45):
Episode one, how to preserve trust funds for
couples.

Danielle Friedman (00:49):
Today, we're going to be talking about a case
where mom and dad established anirrevocable trust for their son
in order to make annual gifts.The trust currently holds around
$450,000 in assets and was firstestablished when the son was a
minor. Son is now married withtwo children and wishes to
purchase a home for him and hisfamily. Herb, can you walk us

(01:12):
through what we would do topreserve the value of the son's
trust?

Herb Fineburg (01:16):
There are a couple of options for the
trustee of the trust in handlingthis situation. The best is for
the trust to buy the house. Theson can live there rent free and
permit the wife and children tolive there as well.

Danielle Friedman (01:32):
If I'm wife, I'm not loving that option
because I am permitted to livethere by my husband. I'm not on
the deed. It doesn't make mefeel like it's my home. So I'm
gonna say to my husband, hey.You have this trust. Let's just
take the money out and buy ahouse together. Can't you do

(01:54):
that?

Herb Fineburg (01:55):
Yes, you can do that. We can have the trust lend
the couple the money to buy thehouse or to fund the down
payment on the house.

Danielle Friedman (02:05):
And why would you do a loan versus, you know,
our house in this example costs$450,000. Why can't they just
make a distribution to the sonand son buys the house in joint
names with his wife? Why are wewhy are we doing a loan?

Herb Fineburg (02:21):
Once you make a distribution from the trust to
the couple, the trust isdepleted and the house becomes
marital property. So you'vedefeated the whole purpose of
establishing the trust or thelegacy for the son, for the
son's children and other heirs.The trust is set up such that

(02:43):
all the assets in the trust willnot be subject to death taxes as
people pay us on.

Danielle Friedman (02:49):
So if I'm borrowing money from the trust
or son rather is borrowing moneyfrom the trust with his wife,
they're both signing a note, apromissory note to the trust and
it's secured by the house,almost like a mortgage. And then
if something were to happen tothe marriage and then the house

(03:09):
is sold, it can be used to repaythe note.

Herb Fineburg (03:12):
Right. And that's a very good plan to have both
parties of the couple sign thenote so that in the event of a
divorce, it is an obligation ofthe marital estate and will
diminish how much is going to besplit up between the ex husband
and the ex wife.

Danielle Friedman (03:31):
All right. I guess we're doing a note.

Herb Fineburg (03:33):
Yes. I think that's the best option. The
purpose of the trust is toaddress not only a situation of
divorce, but it could includecreditors. It could be, for
example, that the son or hiswife get into a business and the
business goes under. We now knowthat 90% of businesses fail. So,
is an asset protection trust,which protects the couple from

(03:57):
creditors, such that if theyeven filed for bankruptcy, they
would all still have theirhouse.

Danielle Friedman (04:03):
Whereas if they took the money out of the
trust, bought the house in theirown names, they're not going to
have that similar protection.Creditors are going to take the
property.

Herb Fineburg (04:13):
In most cases, there are issues related to
jointly owned property incertain states, but in most
cases, when a loan is obtained,the bank is going to ask the
spouse to sign as a guarantor onthe loan, so they'll both be
responsible for that. What aresome other comments, Max, that
we might make on this here?

Max McCauley (04:32):
I think for creditor protection planning,
not only would you sign a note,you would also sign a mortgage
and record the mortgage so thatthe debt is evidenced in the
public record.

Herb Fineburg (04:41):
Excellent. Max, interesting question for you. If
the house is bought in the nameof the trust and the couple is
divorced, who will be able toreside in the house when they
are separated?

Max McCauley (04:55):
The beneficiaries under the terms of the trust.

Herb Fineburg (04:58):
And in our situation, who would that be?

Max McCauley (05:00):
The son.

Herb Fineburg (05:01):
Isn't that unusual that the court would
give possession of the house tothe son as opposed to the wife?

Max McCauley (05:08):
No, the court will follow the terms of the trust.

Herb Fineburg (05:10):
But absent the trust, it would be normally that
the wife would be givenpossession of the house and the
husband would have to find anapartment or another property to
live in.

Max McCauley (05:21):
Yes, herb. Potentially, that could be the
outcome.

Danielle Friedman (05:24):
And husband could presumably keep the
children with him. That's theirhome as well, and he would allow
them to live with him in thehome, even though technically he
is the sole trust beneficiary.

Herb Fineburg (05:36):
Very interesting result by using the trust beyond
gifting.

Max McCauley (05:41):
Well, thank you all for joining us. This podcast
opens the door to futurediscussions regarding trust
account, minor accounts, giftsto minor, HOTMA account, gifts
less than or equal to the annualgift tax exclusion, gifts in
excess annual exclusion, step upin basis on date and death and
prenuptial agreements. Pleasejoin us for episode two. Episode
two deals with passing yourwealth to children and

(06:04):
descendants, how to ensure yourdescendants benefit from your
hard work.

Danielle Friedman (06:08):
Thanks, guys. That was fun.