Depending on state law, may protect separate assets in case of divorce

Question 1 :

From Ch. 14: Provide an example of tax elimination. Explain.

Student 1:

Tax elimination involves not paying taxes at all on a specific type of income being generated. Permanent elimination of taxes can be a particularly powerful tool. Some methods of eliminating taxation include gifts to charities, transfers to children, the establishment of Roth IRAs, and the structuring of employee benefits.

Home equity loans exploded in popularity after the Tax Reform Act of 1986 because they provided a way for consumers to get around one of its main provisions—the elimination of deductions for the interest on most consumer purchases. The act left in place one big exception: interest in the service of residence-based debt.

However, the Tax Cuts and Jobs Act of 2017 suspended the deduction for interest paid on home equity loans and HELOCs until 2026, unless, according to the IRS, “they are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.” The interest on a home equity loan used to consolidate debts or pay for a child’s college expenses, for example, is not tax-deductible.

Resource: https://www.investopedia.com/terms/h/homeequityloan.asp (Links to an external site.)

Question 2:

From Ch. 15.  Detail some of the advantages and disadvantages of setting up a trust.  Why set up an irrevocable trust when you can establish a revocable one that provides you with more flexibility?

Student 2:

living trust advantages and disadvantages:

Advantages:

  • Avoids probate but not necessarily estate taxes
  • Administers property in different states with one document
  • Manages business and personal affairs during your life
  • Manages assets if you become incapacitated
  • Depending on state law, may protect separate assets in case of divorce
  • Can pay medical and other bills and provide for scholarships
  • Distributes assets faster to beneficiaries
  • Provides privacy

Disadvantages:

  • Expensive to draft
  • Involves costs to update
  • Expenses can outweigh benefits
  • Not court-supervised
  • To protect assets, the trust must be funded with them
  • The need to update and fund the trust is ongoing

A revocable trust might be a better choice if you want to:

  • Avoid probate while maintaining maximum control. Probate is the process courts use to oversee the disposition of a person’s estate after that person dies. A revocable trust will help keep your assets out of probate court just as an irrevocable trust would. However, it gives you increased flexibility to maintain control over the assets while you’re alive and to make changes as you see fit.

An irrevocable trust might be a better choice for:

  • Estate tax reduction. An irrevocable trust permanently gives your estate (or a portion of your estate) to someone else, namely to the trustee and the beneficiaries of the trust. This means that whatever you put into an irrevocable trust cannot be taxed as part of your estate, because it is not part of your estate.
  • Asset Protection. Since it is not legally yours, an irrevocable trust is not subject to your personal liabilities. Nonetheless, if you make your children and/ or spouse your beneficiries of the trust, you can still keep your wealth within your family, even while protecting it from personal liab

https://www.personal-finance.extension.org/advantages-and-disadvantages-of-a-living-trust

  • attachment

    PersonalFinancialPlanning2ndEdition.pdf