FLEX TRUST

For most of us, our homes are much more than merely a collection of building materials held together by nails and two by fours. Instead our homes are our sanctuary for the craziness of the outside world, the refuge where our children can play and sleep knowing that they are protected and the focus of many of our fond memories. It is exactly because of these emotional ties that even the thought of some frivolous lawsuit could cause us to lose this sacred spot seems so abhorrent.

In response to these concerns, most states have something called Homestead protection laws. Generally these laws say that a certain dollar amount of the equity of our homes is protected from most judgment creditors.

Example, Dr. Jones lives in State X. State X has homestead protection of $100,000. If Dr. Jones only had $75,000 of equity in their home and was sued for negligence, and lost the lawsuit, the individual who won the suit, could not foreclose upon or kick out the good doctor. The doctor’s home would be protected.

While that may sound reassuring, keep in mind that almost half of the states’ Homestead protection laws protect an amount of equity that is $10,000 or less. Sure you might decide to move to Florida, Texas, or some other state that allows an unlimited amount of homestead protection, but the new bankruptcy rules require you wait a number of years to get that protection. Additionally, Homestead protection does not protect you from the federal government. So if for some reason the IRS placed a lien on your home and decided to foreclose, state Homestead laws would be powerless to stop the forced liquidation of your home.

Finally, for many of us, our home is the greatest asset that we own, and may very well be of such a value that our heirs will have to pay estate taxes on its value when we try to pass on the property to our loved ones upon our death.

In response to clients asking us for a solution that would ease their fears about estate taxes on their homes, and making sure the home is protected for future generations to come, we have developed a specialized Trust we call the FLEX Trust.

The FLEX Trust was specially designed so that you will not lose any of the income tax benefits of owning a home. You still receive interest deductions, and you still receive the $500,000 capital gains exclusion on your home. Furthermore, if you decide to move into a different home, the FLEX Trust has the built in flexibility to allow you to do that also.

At the same time however, with the use of the FLEX Trust the value of your taxable estate will be dramatically lowered and your home can be protected from the claims of creditors – even the federal government.

Here’s how it works:

1. You create a Trust that provides that your heirs will receive your assets inside the Trust when you pass away. Either a friend or a family member would serve as the Trustee.

2. You then sell a portion of your home to the Trust. Since the federal income tax laws will treat you as the owner of the Trust, no gain will be due on the sale.

3. You then enter into a buy-sell agreement with the trust, giving the trust the ability purchase the entire interest of the home at the fair market value. (Query: What would someone pay to own 95% of a home, when the owner of the other 5% can come in at any time?).

4. When you pass away, your home is valued at its fair market value for estate tax purposes. Go ahead and read the question in 3 above. You’ve probably just saved a bundle in estate taxes.

Estate Taxes

When you pass away, all assets owned by you, or those which you are considered to have incidents of ownership are added up to determine if you own estate taxes. Since, your home has been dramatically “devalued” estate taxes have as well.

Probate

Probate is merely the process of determining legal title of the assets owned by the deceased party. Assets owned by the FLEX Trust will avoid probate since the legal title is vested in the name of the Trust. Thus assets inside the Trust, as well as the home, will avoid probate.

Asset Protection

A general rule regarding the enforcement of judgments is that the creditor steps into the shoes of the debtor. To put this in plain English, if you are subject to a buy sell agreement with your trust, your creditor is as well. Now if you do go to code red, your trust merely exercises its rights to purchase the home from your creditors at a low value, via a 30-year interest-only promissory note. Not only does this apply to regular citizens, but to the Federal government as well.