We’ve seen firsthand how asset protection planning can make all the difference. In the past, a lot of people (even us) believed that once assets had bypassed Probate and Estate Taxes, then it was okay if the Trust distributed assets directly to our beneficiaries. However, after handling estates of hundreds of clients who have passed on, we have found that what happens after beneficiaries receive their inheritance, is just as important as what happened before they received it. In other words, beneficiaries often run into a rocky marriage, greedy spouse, bogus lawsuits, creditors, personal injury claims, and a government that is trying to reduce benefits and even estate taxes. If your beneficiaries have these problems or possibly have them in the future, the distribution of trust assets directly to them might be wrong!

Real-Life Risks That Threaten Inheritances

Large Sums at a Young Age

In the event a child does not survive you, a large sum could pass to a grandchild. The old method had the Trust distributed to grandchildren at age 21 or 25, without regard to pursuit of education or career. With the huge increase in real estate values and values of estates in general, do you really want $100,000, $200,000, or more in the hands of someone that young? Today, we design distributions in stages going out as far as age 40 or 50. We also build in "education incentives". If they maintain a 'B' average in legitimate college courses (not basket weaving), their education will be paid for. If they graduate early, they might receive the first stage of the distribution at an earlier age.

Illness, Addiction, and Special Needs

What if a beneficiary is elderly, ill, has drug or alcohol problems? Clearly, they should not be managing assets themselves. For them, the Trustee can hold assets in Trust during his or her life and have a broad standard to distribute assets to the person as necessary for his or her reasonable support and health.

Irresponsible Spending Habits

Then there is the beneficiary who has problems with money. You know.. he earns five dollars and spends ten. For him, we use a spendthrift Trust. If he wants money from the Trust, then he must show the Trustee that he needs it. To the greatest extent possible, the Trustee will pay the expense or the bill for him and will not put money directly in his hands. The Trustee will pay the mortgage or doctor's bill and makes sure that he is provided for.

Restrictions That May Outlive Their Usefulness

What if you have created a trust which provides that the money is not distributed to a child until age 35 or 40? After you're gone, this child does well in business and runs his own very successful company. What about the child who had an alcohol problem but went through rehab and has been sober for years? Do you still need these restrictions in place for these children?

Losing Eligibility for Government Benefits

What about your child who is now 75 years old and has a stroke and is required to reside in a nursing home and receive long-term care for life at a huge expense? The money that you have left him or her would make them ineligible for any state or federal benefit programs (like Medicaid, etc.). We now build in the power for a trust to adapt and provide the Trustee with the flexibility...to allow distribution at an earlier age if it would be prudent or to allow direct distributions to the reformed alcoholic if he can prove that he has remained sober.

The beneficiary that couldn't manage his money, for whom we created a restrictive spendthrift Trust, may have changed his bad habits. Perhaps he or she married, settled down, matured, and became more responsible with money. The child who had a stroke at age 75 could have their inherited funds held inside a trust that could be converted to a "Supplemental Needs Trust" that would allow them to be eligible for state and federal benefit programs while remaining the beneficiary of this special Trust. Will your Trust adapt to these situations after you are gone?

The Case for Asset Protection Planning with PATs

There are always those clients who say they have the "perfect beneficiary". She is not too young, is good with money, has a good marriage, has no disabilities, and receives no government benefits. It sounds fairly simple, but there are always possible problems that may occur in the future. The most common problem we have seen after Mom and Dad are gone is divorce. Once your child receives the money directly, if they are married, it usually ends up in the bank account, investment account, or new house owned jointly with their spouse. Once the funds are co-mingled, they can be divided in a divorce action.

We have also seen the receipt of an inheritance as a driving force for the in-law to initiate a divorce if there have already been some marital problems. Money creates greed. Even if your child remains happily married, where will the inherited money go after his death? … right to his or her spouse. Wouldn't you rather see it stay in your bloodline and pass to your surviving children or grandchildren?

The Risk of Lawsuits and Malpractice

Another problem that has arisen is lawsuits, both legitimate and bogus. There is a real possibility that your beneficiary could cause an auto accident with serious injuries. Often, standard liability insurance policies are not adequate to pay the damages. Personal assets, including inheritances, are being used to pay for injury claims. Our children, who are professionals, may be subject to lawsuits for medical or legal malpractice. Also, everyone is suing everyone else (you've heard "I'm gonna sue you"). Many of these claims are phony and have little or no merit. However, the cost of attorney's fees to defend these claims, the aggravation and sleepless nights because of the legal proceedings, the possibility of losing at trial, is causing many folks to settle the claim, just to make it go away. Some of these settlements are substantial.

The Second Estate Tax

Lastly, we often see beneficiaries do very well financially, (because they are successful doctors, lawyers, dentists, real estate developers, business owners, executives,etc.). Now they invest their inheritance over 20 or 30 years. Their own substantial assets plus the money you left them, grows into a huge estate. When they pass it to their surviving siblings or children (your grandchildren), there is a second estate tax! That estate tax can be larger than yours. As you can see, outright, direct distributions are no longer the best type of estate plan.

How PAT Trusts Protect Beneficiaries

To resolve these problems, we have created an "asset protection trust" that we call the PERSONAL ASSET TRUSTS™(PAT). You've heard about wealthy people who have placed assets in Trust so that they can't be reached by lawsuits. We have taken that asset protection planning technology and built it into our Living Trusts.

This is how it works, if your Trust had 3 beneficiaries, John, Bill, and Mary, instead of John receiving his inheritance directly in his name, now he gets a special continuing trust (so do Bill and Mary). John can even be the Trustee of his continuing PAT trust, control the Trust, have liberal use of the money, and (if you allow), even decide where it will go after his death. But here's the secret. Does John own the money? No, the Trust does. We build walls of protection into this Trust, an approach rooted in solid asset protection planning. These walls protect against divorce, creditors, lawsuits, loss of government benefits, and the second estate tax.

Built-In Protection

There is, however, a possible problem. If John runs his Trust alone, someone could get a court order to break open the Trust. This requires him to release the money. To avoid that possibility, we provide him with a 'toggle switch' that he can "turn on" if he needs to, allowing him to appoint someone of his choice as a Trust Protector. The Trust Protector can be anyone except a sibling, spouse, child, or grandchild. Commonly, nephews, nieces, aunts, uncles, cousins, accountants, close friends, financial planners, or lawyers are appointed as the Trust Protector.

Even with a court order against John, the Trust Protector will not sign-off to release the money and can "lock down" the Trust. This is done merely by postponing the distributions of cash and income from the Trust. It can be re-opened when the threat is over and then the Trust Protector must resign. Then your child resumes control over his or her own Trust again.

Flexible Trusts for a Changing Future

What about the ability to adapt the Trust to a change in circumstances after you are gone? We cannot give John the power to amend the Trust you have created. If we did that, the creditor protection and the estate tax protection would be voided. Instead, he would again flip the "toggle switch" to the "on" position and appoint the Trust Protector to amend the Trust to adapt it for the beneficiary who no longer needs the restrictive Trust, or has become sober, to make a trust more restrictive for the "spendthrift" beneficiary, to convert it to a "supplemental needs trust" or to simply comply with a change in the tax, estate planning or asset protection planning laws that could occur in the future.

Secure Your Family’s Future with Asset Protection Planning

Establishing PAT Trusts for your beneficiaries gives them the most control over their inheritance. The PAT Trust can be designed to provide your beneficiary with complete control over their inherited assets without having any restrictions on how they use the funds. While, giving the beneficiary the ability to protect their inheritance from any creditors, (divorcing spouses, Lawsuits, Bankruptcy). Structuring a distribution into a PAT Trust is the ultimate gift you can give a beneficiary. This allows the beneficiary to use their inheritance in the ways that benefit them the most regardless of any curve ball life can throw at them.

Could any one of the above scenarios affect your beneficiaries? It is not only possible but also likely. If you would like to find out more about asset protection planning, specifically PERSONAL ASSET TRUSTS™(PAT), and how it can protect your beneficiaries, call us at (847) 670-8200 or email info@kf-lawgroup.com.

The Limited Liability Company (LLC) affords a number of significant advantages in today's estate tax, estate planning, and asset protection environment. The typical LLC involves an entity organized pursuant to an Operating Agreement following state law. It has members consisting usually of trusts and/or individuals, one or more of whom are named in the Operating Agreement as the "managing member". In its purest sense, the family LLC would be formed by you and your spouse (or your trusts) and your children. One of the spouses would act as the managing member.

Comparing The LLC To The FLP

Similar to a Family Limited Partnership (FLP), the LLC is a transparent or "pass-through entity for income tax purposes. LLCs are not themselves subject to income tax. Like the FLP, income earned by the LLC is charged to you as members in proportion to the interest that each of you holds. When a member passes away, in many cases, the LLC may be able to obtain a step-up in basis of the underlying LLC asset by making the appropriate election.

The LLC has some significant advantages over the FLP. The FLP is required to have at least one general partner. That general partner is subject to liability for any claim made against the FLP, although the limited partners escape that potential liability. This places the general partner's personal assets at risk. To avoid this problem, it is necessary to create another entity to act as the general partner. This general partner is nearly always a corporation that has little or no assets.

This creates another entity, annual reports, additional fees, and an additional tax return each year. The LLC is only required to have a managing member, who bears no liability for the debts of the LLC or any claims that may be filed against it. This means that your assets, as the managing member, are not at risk as a result of your manager position.

The Series LLC

Another advantage of the LLC over the FLP, is that under a recent change in Illinois law, the LLC can now be created as a "Series" LLC. This means that those who hold multiple parcels of real estate, each of which could generate its own potential claims or liability, can now hold those parcels in a separate sub-LLC within the main LLC. The Operating Agreement need not change, and the LLC still needs to file only one tax return no matter how many different series it may decide to create. You need only file a basic document with the Secretary of State. There are normal fees per series associated with filing the documents with the state, as well as a state filing fee.

If you were using the FLP structure, to provide the most insulation from claims made against any parcel of real estate, you would need to create a separate FLP for each parcel and pay an annual state fee for each FLP. That could be a paperwork nightmare and can create many separate tax returns. The Series LLC avoids that difficulty. Each time you acquire a new parcel of real estate, you simply create a new series (call them I, II, III, IV, etc.)

Creditor Protection Afforded By The LLC

Additionally, the LLC is an effective asset protection vehicle because your creditors can never become a member of the LLC (or any of its series). If a creditor did sue the LLC and won, they would only walk away with something called a "charging order." They still cannot use the LLC assets, make any decisions related to those assets, or force you to sell them. This is due to the restrictive language of the "Operating Agreement." The charging order would entitle them to a proportionate share of income or principal, should you decide to make any distributions, (which you wouldn't).

We have found that most creditors or suing parties don't like charging orders, because it gives them nothing but a potential tax liability for "phantom income". As far as the IRS is concerned, the party holding the charging order is liable for its proportionate share of the income earned by the LLC assets even though it never received any income distribution! This strategy not only discourages litigation but enhances your asset protection plan by reducing the appeal of your holdings to potential creditors. You can transfer any of your brokerage accounts, rental or commercial real estate, stocks, mutual funds, etc. into your LLC. The only real estate you can't transfer into your LLC, is your personal residence.

Estate and Gift Valuation Discounts Can Greatly Reduce Transfer Taxes

Asset protection planning with an LLC allows you to consolidate management of the multiple investment assets and business assets (real property and personal property) into a single entity. The LLC can provide the assets owned by it with "lack of control discounts" and "marketability discounts" (substantially reducing the taxable value of your investment real estate and investment portfolio and any future business holdings) for purposes of making lifetime gifts to your children and grandchildren. These same discounts can be achieved at the last spouse's death, thereby reducing Federal and state death tax. The LLC form of ownership allows you to make gifts of "interests" in the LLC each year to your children/grandchildren at a substantial discount off of actual value. This can greatly reduce or even avoid gift tax issues.

Restrictions must be incorporated into the Operating Agreement to limit a member's ability to sell his or her interest or to withdraw from the LLC and take his or her capital contributions out. Liquidation of the LLC would also be restricted to a unanimous vote of all members. Dissolution of the LLC would not occur upon the death of a manager or member. Other restrictions can be included as long as they are permitted under state law.

Extra Tax Benefits

It will also permit you to "freeze" the growth of the gifted membership interests in the LLC by having that growth inure to your children's shares of the LLC and not to yours, reducing the size of your taxable estate. Presently, the IRS has been conceding substantial discounts to a decedent's estate on the value of assets that have been held by a properly structured LLC. An initial operating agreement would be created by you and your trust, and after certain LLC interests have been "assigned" or transferred to your children as gifts, an amended operating agreement would be prepared which would include them as members. Adding your favorite charitable organization as a one percent (1%) member may even increase the "lack of control" discount which the IRS would be willing to concede.

For those of you with out-of-state real estate which may be subject to higher death taxes than Illinois (in states like Minnesota, Indiana, and others), the LLC allows you to convert your interest in the foreign real estate from that of "real property" to "personal property". The foreign state would effectively lose death tax "jurisdiction" over that asset because personal property must be taxed in the state of the decedent's residence unlike real estate, which must be taxed by the state in which it is located.)

You Maintain Control

The family member who is acting as the managing member (you or your spouse), maintains long term control over the underlying assets. The managing member will also control the younger generation's use of their membership interests. The Operating Agreement can provide that the children do not have unrestricted use over their membership interests. Often, a children's trust or grandchildren's trust is created for the sole purpose of holding the younger generation's membership interests. The Operating Agreement is also very flexible and based upon the terms of the Agreement can be easily amended.

Investment standards are also much more liberal than are those of trusts, where all investments must be "prudent". The LLC is able to invest assets under the much broader "business judgment rule," providing both flexibility and an added layer of asset protection in how investments are handled over time. This eliminates potential complaints from beneficiaries that may disagree with the investment choices made by the Trustee of a Trust.

In summary, an LLC as an estate planning and asset protection device, can be used effectively with real estate, closely held non-professional corporations, and marketable securities. Often your trust can participate as an LLC member and most likely should. Call us at 847-670-8200 or contact us if you would like to discuss this type of planning with us.

The Four Stages of Life as described by Mark Manson, are Mimicry, Self-Discovery, Commitment, and Legacy. When we get stuck in a stage it is usually because of a sense of personal inadequacy. The key to moving on? Acceptance.

Stage One: Mimicry

We are born helpless. We can’t walk, can’t talk, can’t feed ourselves, can’t even do our own damn taxes.

As children, the way we’re wired to learn is by watching and mimicking others. First we learn to do physical skills like walk and talk. Then we develop social skills by watching and mimicking our peers around us. Then, finally, in late childhood, we learn to adapt to our culture by observing the rules and norms around us and trying to behave in such a way that is generally considered acceptable by society.

The goal of Stage One is to teach us how to function within society so that we can be autonomous, self-sufficient adults. The idea is that the adults in the community around us help us to reach this point through supporting our ability to make decisions and take action ourselves.

But some adults and community members around us suck.¹ They punish us for our independence. They don’t support our decisions. And therefore we don’t develop autonomy. We get stuck in Stage One, endlessly mimicking those around us, endlessly attempting to please all so that we might not be judged.²

In a “normal” healthy individual, Stage One will last until late adolescence and early adulthood.³ For some people, it may last further into adulthood. A select few wake up one day at age 45 realizing they’ve never actually lived for themselves and wonder where the hell the years went.

This is Stage One. The mimicry. The constant search for approval and validation. The absence of independent thought and personal values.

We must be aware of the standards and expectations of those around us. But we must also become strong enough to act in spite of those standards and expectations when we feel it is necessary. We must develop the ability to act by ourselves and for ourselves.

Stage Two: Self-discovery

In Stage One, we learn to fit in with the people and culture around us. Stage Two is about learning what makes us different from the people and culture around us. Stage Two requires us to begin making decisions for ourselves, to test ourselves, and to understand ourselves and what makes us unique.

Stage Two involves a lot of trial-and-error and experimentation. We experiment with living in new places, hanging out with new people, imbibing new substances, and playing with new people’s orifices.

In my Stage Two, I ran off and visited fifty-something countries. My brother’s Stage Two was diving headfirst into the political system in Washington DC. Everyone’s Stage Two is slightly different because every one of us is slightly different.

Stage Two is a process of self-discovery. We try things. Some of them go well. Some of them don’t. The goal is to stick with the ones that go well and move on.

Stage Two lasts until we begin to run up against our own limitations. This doesn’t sit well with many people. But despite what Oprah and Deepak Chopra may tell you, discovering your own limitations is a good and healthy thing.

You’re just going to be bad at some things, no matter how hard you try. And you need to know what they are. I am not genetically inclined to ever excel at anything athletic whatsoever. It sucked for me to learn that, but I did. I’m also about as capable of feeding myself as an infant drooling applesauce all over the floor. That was important to find out as well. We all must learn what we suck at. And the earlier in our life that we learn it, the better.

So we’re just bad at some things. Then there are other things that are great for a while, but begin to have diminishing returns after a few years. Traveling the world is one example. Sexing a ton of people is another. Drinking on a Tuesday night is a third. There are many more. Trust me.

Your limitations are important because you must eventually come to the realization that your time on this planet is limited and, therefore, you should spend it on things that matter most. That means realizing that just because you can do something, doesn’t mean you should do it. That means realizing that just because you like certain people doesn’t mean you should be with them. That means realizing that there are opportunity costs to everything and that you can’t have it all.

There are some people who never allow themselves to feel limitations — either because they refuse to admit their failures, or because they delude themselves into believing that their limitations don’t exist. These people get stuck in Stage Two.

These are the “serial entrepreneurs” who are 38 and living with mom and still haven’t made any money after 15 years of trying. These are the “aspiring actors” who are still waiting tables and haven’t done an audition in two years. These are the people who can’t settle into a long-term relationship because they always have a gnawing feeling that there’s someone better around the corner. These are the people who brush all of their failings aside as “releasing” negativity into the universe or “purging” their baggage from their lives.

At some point we all must admit the inevitable: life is short, not all of our dreams can come true, so we should carefully pick and choose what we have the best shot at and commit to it.

But people stuck in Stage Two spend most of their time convincing themselves of the opposite. That they are limitless. That they can overcome all. That their life is that of non-stop growth and ascendance in the world, while everyone else can clearly see that they are merely running in place.

In healthy individuals, Stage Two begins in mid- to late-adolescence and lasts into a person’s mid-20s to mid-30s.⁴ People who stay in Stage Two beyond that are popularly referred to as those with “Peter Pan Syndrome” — the eternal adolescents, always discovering themselves but finding nothing.

Stage Three: Commitment

Once you’ve pushed your own boundaries and either found your limitations (i.e., athletics, the culinary arts) or found the diminishing returns of certain activities (i.e., partying, video games, masturbation) then you are left with what’s both a) actually important to you, and b) what you’re not terrible at. Now it’s time to make your dent in the world.

Stage Three is the great consolidation of one’s life. Out go the friends who are draining you and holding you back. Out go the activities and hobbies that are a mindless waste of time. Out go the old dreams that are clearly not coming true anytime soon.

Then you double down on what you’re best at and what is best to you. You double down on the most important relationships in your life. You double down on a single mission in life, whether that’s to work on the world’s energy crisis or to be a bitching digital artist or to become an expert in brains or have a bunch of snotty, drooling children. Whatever it is, Stage Three is when you get it done.

Stage Three is all about maximizing your own potential in this life. It’s all about building your legacy. What will you leave behind when you’re gone? What will people remember you by? Whether that’s a breakthrough study or an amazing new product or an adoring family, Stage Three is about leaving the world a little bit different than the way you found it.

Stage Three ends when a combination of two things happen: 1) you feel as though there’s not much else you are able to accomplish, and 2) you get old and tired and find that you would rather sip martinis and do crossword puzzles all day.

In “normal” individuals, Stage Three generally lasts from around 30-ish-years-old until one reaches retirement age.

People who get lodged in Stage Three often do so because they don’t know how to let go of their ambition and constant desire for more. This inability to let go of the power and influence they crave counteracts the natural calming effects of time and they will often remain driven and hungry well into their 70s and 80s.⁵

Stage Four: Legacy

People arrive into Stage Four having spent somewhere around half a century investing themselves in what they believed was meaningful and important. They did great things, worked hard, earned everything they have, maybe started a family or a charity or a political or cultural revolution or two, and now they’re done. They’ve reached the age where their energy and circumstances no longer allow them to pursue their purpose any further.

The goal of Stage Four then becomes not to create a legacy as much as simply making sure that legacy lasts beyond one’s death.

This could be something as simple as supporting and advising their (now grown) children and living vicariously through them. It could mean passing on their projects and work to a protégé or apprentice. It could also mean becoming more politically active to maintain their values in a society that they no longer recognize.

Stage Four is important psychologically because it makes the ever-growing reality of one’s own mortality more bearable. As humans, we have a deep need to feel as though our lives mean something. This meaning we constantly search for is literally our only psychological defense against the incomprehensibility of this life and the inevitability of our own death.⁶ To lose that meaning, or to watch it slip away, or to slowly feel as though the world has left you behind, is to stare oblivion in the face and let it consume you willingly.

What's the Point?

Developing through each subsequent stage of life grants us greater control over our happiness and well-being.⁷

In Stage One, a person is wholly dependent on other people’s actions and approval to be happy. This is a horrible strategy because other people are unpredictable and unreliable.

In Stage Two, one becomes reliant on oneself, but they’re still reliant on external success to be happy — making money, accolades, victory, conquests, etc. These are more controllable than other people, but they are still mostly unpredictable in the long-run.

Stage Three relies on a handful of relationships and endeavors that proved themselves resilient and worthwhile through Stage Two. These are more reliable. And finally, Stage Four requires we only hold on to what we’ve already accomplished as long as possible.

At each subsequent stage, happiness becomes based more on internal, controllable values and less on the externalities of the ever-changing outside world.

Inter-stage Conflict

Later stages don’t replace previous stages. They transcend them. Stage Two people still care about social approval. They just care about something more than social approval. Stage 3 people still care about testing their limits. They just care more about the commitments they’ve made.

Each stage represents a reshuffling of one’s life priorities. It’s for this reason that when one transitions from one stage to another, one will often experience a fallout in one’s friendships and relationships. If you were Stage Two and all of your friends were Stage Two, and suddenly you settle down, commit and get to work on Stage Three, yet your friends are still Stage Two, there will be a fundamental disconnect between your values and theirs that will be difficult to overcome.

Generally speaking, people project their own stage onto everyone else around them. People at Stage One will judge others by their ability to achieve social approval. People at Stage Two will judge others by their ability to push their own boundaries and try new things. People at Stage Three will judge others based on their commitments and what they’re able to achieve. People at Stage Four judge others based on what they stand for and what they’ve chosen to live for.

The Value of Trauma

Self-development is often portrayed as a rosy, flowery progression from dumbass to enlightenment that involves a lot of joy, prancing in fields of daisies, and high-fiving two thousand people at a seminar you paid way too much to be at.

But the truth is that transitions between the life stages are usually triggered by trauma or an extreme negative event in one’s life. A near-death experience. A divorce. A failed friendship or a death of a loved one.

Trauma causes us to step back and re-evaluate our deepest motivations and decisions. It allows us to reflect on whether our strategies to pursue happiness are actually working well or not.

What Gets Us Stuck

The same thing gets us stuck at every stage: a sense of personal inadequacy.

People get stuck at Stage One because they always feel as though they are somehow flawed and different from others, so they put all of their effort into conforming into what those around them would like to see. No matter how much they do, they feel as though it is never enough.

Stage Two people get stuck because they feel as though they should always be doing more, doing something better, doing something new and exciting, improving at something. But no matter how much they do, they feel as though it is never enough.

Stage Three people get stuck because they feel as though they have not generated enough meaningful influence in the world, that they make a greater impact in the specific areas that they have committed themselves to. But no matter how much they do, they feel as though it is never enough.⁸

One could even argue that Stage Four people feel stuck because they feel insecure that their legacy will not last or make any significant impact on the future generations. They cling to it and hold onto it and promote it with every last gasping breath. But they never feel as though it is enough.

The solution at each stage is then backwards. To move beyond Stage One, you must accept that you will never be enough for everybody all the time, and therefore you must make decisions for yourself.

To move beyond Stage Two, you must accept that you will never be capable of accomplishing everything you can dream and desire, and therefore you must zero in on what matters most and commit to it.

To move beyond Stage Three, you must realize that time and energy are limited, and therefore you must refocus your attention to helping others take over the meaningful projects you began.

To move beyond Stage Four, you must realize that change is inevitable, and that the influence of one person, no matter how great, no matter how powerful, no matter how meaningful, will eventually dissipate too.

And life will go on.