Trusts are powerful tools that allow you to control and distribute your assets both during your lifetime and after your death. They provide flexibility, potential tax benefits, and a means to safeguard your legacy for future generations. However, not all trusts are created equal. The choice between a revocable and irrevocable trust can have significant implications for your estate plan, and it's important to understand the pros and cons of each before making a decision. Whether you're just starting to explore your estate planning options or you're already familiar with the basics, this article will help you navigate the intricacies of revocable and irrevocable trusts, empowering you to make informed choices that align with your unique goals and circumstances.

What is a Trust?

In the realm of estate planning, a trust is a legal entity that holds and manages assets for the benefit of designated individuals or organizations, known as beneficiaries. It's a versatile tool that can be tailored to various needs and goals. At its core, a trust involves three key players:

Grantor: The person who creates the trust and transfers assets into it.

Trustee: The individual or institution responsible for managing the trust assets according to the grantor's instructions.

Beneficiary: The person or entity who receives the benefits of the trust, such as income or distributions of assets.

An estate planning attorney plays a crucial role in drafting the trust document, ensuring it aligns with your wishes and complies with legal requirements. They can advise you on the best type of trust for your specific situation, whether it's a simple revocable trust for your family or a more complex charitable trust for philanthropic purposes.

By establishing a trust, you can provide for your loved ones, protect your assets, and even minimize tax liabilities. However, choosing the right type of trust is essential, as each has its own distinct features and implications. As we delve into the key differences between revocable and irrevocable trusts, consider reaching out to an estate planning attorney Montana, who can offer valuable guidance based on your circumstances.

Revocable Trusts

Revocable trusts, often called living trusts, are a popular choice for individuals seeking flexibility and control over their assets. As the name suggests, the grantor (the person creating the trust) retains the ability to modify or even dissolve the trust during their lifetime. This means you can change beneficiaries, add or remove assets, or alter the terms of the trust as your circumstances evolve.

One of the main advantages of a revocable trust is its ability to avoid probate. Probate is the court-supervised process of distributing assets after someone passes away. By placing assets in a revocable trust, you can bypass probate, saving your beneficiaries time and money while ensuring a smoother transfer of assets.

Additionally, revocable trusts offer privacy. Unlike wills, which become public records after a person's death, revocable trusts remain private, protecting your financial affairs from public scrutiny. While a revocable trust may not offer the same tax advantages or asset protection as an irrevocable trust, its flexibility and control make it an attractive option for many individuals.

Irrevocable Trusts

Unlike revocable trusts, irrevocable trusts are designed for permanence. Once established, the terms of the trust generally cannot be modified or revoked without the consent of the beneficiaries. This means that the assets placed in the trust are no longer considered part of your estate, and you give up control over them.

While the loss of control might seem like a drawback, irrevocable trusts offer significant advantages that revocable trusts cannot. One major benefit is their potential for significant tax advantages. Since the assets are no longer considered part of your estate, they may not be subject to estate taxes when you pass away. This can lead to substantial savings for your heirs, especially if your estate is large.

Additionally, irrevocable trusts can provide robust asset protection. Once the assets are transferred into the trust, they are generally shielded from creditors and lawsuits. This can be particularly important for individuals with high-risk professions or those concerned about potential liability.

Irrevocable trusts are a powerful tool for preserving wealth, minimizing taxes, and protecting assets. However, their complexity and permanence necessitate careful consideration and professional guidance. Consulting with an estate planning attorney, or another specialist in your area, can help you explore whether an irrevocable trust is the right fit for your unique situation.

Choosing the Right Trust for Your Needs

Deciding between a revocable and irrevocable trust requires careful consideration of your individual financial goals, priorities, and concerns. Each type of trust offers unique advantages and drawbacks, and the "right" choice depends on your specific circumstances.

If you prioritize flexibility and control over your assets, a revocable trust might be the better option. It allows you to make changes as needed and maintain access to your assets throughout your lifetime. On the other hand, if tax advantages and asset protection are your primary concerns, an irrevocable trust might be more suitable. By relinquishing control of your assets, you can potentially shield them from estate taxes and creditors, providing long-term financial security for your beneficiaries.

Your age, health, and overall financial situation are also important factors to consider. Younger individuals with a long life expectancy might prefer the flexibility of a revocable trust, while older individuals seeking to minimize their estate tax burden might opt for an irrevocable trust.

An estate planning attorney or elsewhere can help you weigh the pros and cons of each type of trust, taking into account your individual needs and goals. They can provide personalized guidance and ensure that your estate plan is structured in a way that maximizes benefits and minimizes risks.

Key Considerations and Potential Drawbacks

While both revocable and irrevocable trusts offer valuable benefits, it's important to be aware of their potential drawbacks as well.

With revocable trusts, the primary concern is their limited asset protection. Since you retain control over the assets, they may still be vulnerable to creditors and lawsuits. Additionally, because the assets are considered part of your estate, they may be subject to estate taxes when you pass away.

Irrevocable trusts, while offering stronger asset protection and potential tax advantages, come with their own set of considerations. The most significant drawback is the loss of control over the assets once they are transferred into the trust. You cannot easily modify or revoke the terms of the trust, and the assets are generally not accessible to you.

Furthermore, setting up and administering an irrevocable trust can be more complex and expensive than a revocable trust. It often requires the expertise of an estate planning attorney to ensure that the trust is structured correctly and complies with all relevant laws and regulations.

If you are considering an irrevocable trust, it's essential to weigh these factors carefully and consult with an estate planning attorney Montana to determine if it's the right choice for you. They can help you understand the potential benefits and drawbacks and guide you through the process of creating a trust that aligns with your long-term goals.

Conclusion

Understanding the nuances between revocable and irrevocable trusts is a significant step in crafting a comprehensive estate plan that aligns with your individual needs and goals. Whether you seek flexibility and control over your assets or prioritize tax advantages and asset protection, there's a trust that can meet your specific requirements. When deciding which path is right for you, remember that consultation with an experienced estate planning attorney, like those found in Missoula MT, or throughout Montana, can be invaluable.

Remember, estate planning isn't just about safeguarding your assets—it's about ensuring that your legacy is protected and your loved ones are provided for according to your wishes. By making informed choices about the type of trust you establish, you can create a lasting legacy that reflects your values and provides financial security for generations to come. No matter where you are in your estate planning journey, taking the time to understand your options and seek professional guidance will empower you to make the best decisions for your unique circumstances.

What is a cross-border estate? 

The characteristic of a cross-border estate is that either the claimants and assets are located in different countries, or that a decedent leaves assets in another country. Cross-border estates include individuals of German descent residing in the United States who claim a share of the estate of a deceased relative in Germany as well as German immigrants in the United States leaving assets in their home country.   

What succession laws apply in a cross-border estate? 

The applicable law must be determined separately for each jurisdiction in which a decedent leaves assets since each jurisdiction has its own conflict of law rules. Germany follows the so-called EU Succession Regulation of 2012 for all deaths occurring after August 16, 2015. Under the Regulation, the law of the State in which the decedent had his habitual residence shall apply unless he was manifestly more closely connected to another State. The Regulation also allows for a choice of the law of a State whose nationality a testator possesses. 

German probate courts will usually apply German law to the entire German estate if a German resident leaves assets to heirs in the United States.  

If a decedent domiciled in the U.S. leaves assets in Germany, the German probate court will apply the conflict of laws rules of the home state of the decedent in the United States. Conflict of laws rules under state laws in the U.S. typically provide that the law of the decedent’s domicile shall apply to movable property, whereas the lex rei sitae shall apply to real property. As a result, German probate courts typically have to apply the law of a U.S. jurisdiction with regard to a decedent’s movable property, whereas succession to real property will follow German in this situation. Even if the substantive law of a foreign jurisdiction applies to succession in interest, the German court will always apply German rules of civil and probate procedure.  

What are the most common issues regarding the settlement of estates in Germany for US-based heirs or claimants? 

Inheritance and succession laws in Germany are notably different from their counterparts in the United States, and so are the rules governing the settlement of estates in Germany. US-based claimants and their local attorneys are often unaware of the issues and risks this creates. 

Under German law heirs become owners of all assets and debtors of all obligations at the time of death (Universalsukzession). In most cases there is no personal representative securing and liquidating assets and paying the decedent’s debt. The heirs, who can only act jointly, personally have the respective authority and responsibility. This requires US based heirs to cooperate with heirs in Germany. Failure to cooperate can expose them to liability, and uninformed cooperation frequently results in foreign heirs receiving less than their fair share. 

Since heirs become debtors of the decedent’s obligations at the time of death they may inherit debt in Germany, for which they will become personally liable with their own assets.

A six-month deadline applies to heirs outside Germany who wish to disclaim the inheritance (Erbausschlagung) and avoid this consequence. At the same time, heirs in Germany and their representatives may attempt to scare U.S. based heirs without detailed knowledge of the estate into disclaiming a valuable inheritance suggesting that they will inherit debt. Therefore, it is critical for U.S. based heirs and attorneys to investigate an estate in Germany promptly in order to make an informed decision regarding the acceptance or disclaimer of an inheritance. 

The nomination of an executor (Testamentsvollstrecker) in a will, with authority to settle the estate, is the exception, not the rule in Germany. 

Even if there is an executor the settlement of the estate is not court supervised as we know it from probate proceedings in the United States. Unless a will provides for an executor no personal representative will be appointed. It is, therefore, critical for U.S.-based heirs and their attorneys to play a more active role controlling and holding the executor accountable. 

Spouses and descendants (and parents in the absence of descendants) can be disinherited entirely only under rare circumstances. Under German law, disinherited spouses and descendants can usually claim a forced share (Pflichtteil) against the heirs for payment of one-half of the value of their intestate share. E.g. if a disowned child would receive a 1/3 share but for a disowning provision in a will, she can still claim payment of 1/6 of the value of the estate. The value of gifts made by the decedent in the last ten years before the passing will be added to the date of death value of the estate for purposes of calculating the forced share. Forced share claimants are entitled to receive an inventory of the estate, which must include gifts made by the decedent and an appraisal of assets without a face value.  

Forced share claims to compel an inventory and appraisal, and payment of the resulting amount, are frequently the subject of estate litigation in Germany. 

The legal concept of trusts is not known to German law, which does not allow legal ownership on the one hand and beneficial ownership on the other hand to be separated. Consequently, assets in Germany cannot be trust assets, and a trustee cannot be recorded as the owner of real property in Germany.  

This creates significant problems when a U.S. based decedent with a traditional estate plan leaves assets in Germany. Pour-over-wills usually provide that the residue of the (probate) estate shall go to the trustee in order to administered and distributed according to the terms of the trust. Moreover, trust agreements between spouses often do not contain specific language that would allow for qualification of the surviving spouse as an heir, or the sole, heir under German standards.  

It is not uncommon that estate plans drafted by practitioners in the United States fail to address assets and heirs in Germany with these differences in mind. As a result, the settlement of the estate will be significantly delayed and the heirs will incur additional legal fees in order to process the incompatible U.S. estate plan through the German court system.   

How are cross-border estates taxed? 

Germany levies an inheritance tax which provides for different exemptions and tax brackets depending on the degree of kinship. Each recipient is taxed individually. Spouses, lineal descendants, and parents are in the most favourable tax class 1 with exemptions of up to 500,000 Euros and tax rates between 7% and 30%. Siblings, nieces, and nephews are in class 2 with an exemption of 20,000 Euros and tax rates from 15% to 43%. All other recipients are in tax class 3 with an exemption of 20,000 and tax rates between 30% and 50%. Estate plans drafted in the U.S. are typically ignorant of German inheritance tax consequences which can create unintended tax consequences, and a significant risk of malpractice for the drafter. 

If both the decedent and the recipient are non-residents and non-citizens of Germany, or citizens without residence for a number of years, the inheritance tax applies only to German situs property such as real property and business interests. 

If the decedent is a citizen or permanent resident of the U.S. the value of the German estate will be part of the worldwide estate subject to U.S. estate tax. The provisions of the double taxation agreement between the United States and Germany apply.   

Even if the value of the overall estate does not exceed the federal estate tax exclusion amount (and also if it does and the decedent is not a citizen or permanent resident of the United States) an interest in an estate in Germany, distributions from an estate in Germany, and inherited accounts in Germany may still be reportable to the IRS depending on the value. Failure to meet IRS reporting requirements can result in severe penalties for U.S. citizens and permanent residents.   

How is an estate dealt with if there are assets in the United States and Germany? 

This situation requires separate administrations in each jurisdiction. In the United States a personal representative typically administers the estate whereas the heirs themselves settle the estate in Germany based on a certificate of heirship (Erbschein) which is a court order identifying the heirs and their respective shares.  

The personal representative of a decedent’s estate in the U.S. cannot automatically proceed to settle an estate in Germany. Letters issued to an executor or administrator in the U.S. do not provide authority to act in Germany because probate courts in the U.S. do not have jurisdiction over assets and individuals in Germany. If an executor appointed in the U.S. intends to administer the same decedent’s estate in Germany,  it will be necessary to obtain letters testamentary from a German probate court. In the event of intestate succession a personal representative appointed in the U.S. will not be able to receive letters of administration in Germany. 

Likewise, a German executor does not have authority to act in the U.S. While it may be impractical, some States in the U.S. will issue letters to a non-resident executor while others have a strict residency requirement for personal representatives.  

How quickly can the cross-border estate be resolved, and what, if any, are time limits applicable? 

Since Germany does not require a formal probate court-supervised administration of estates, disputes can be resolved more expeditiously as long as they are resolved out of court. However, depending on the complexity of the estate and the family situation, litigating inheritance disputes in Germany for U.S.- based claimants may take several years regardless of whether we litigate entitlement issues in probate court or forced share claims in civil court.   

Can your law firm settle American estates on your own in the USA? 

We settle decedent estates on our own on a regular basis in California and elsewhere in the United States with the assistance of local counsel if the decedent is German or of German descent or if beneficiaries are German or from German-speaking countries.   

What are the issues and complexities when litigating cross border estates between Germany and the USA? 

Civil procedure and probate procedure in Germany are very different from what U.S. based clients and attorneys expect. The substantive law is very different with unexpected surprises as well. It is critical that clients and their attorneys are aware of and understand these differences at all stages of a case in order to secure their best cooperation toward a successful outcome. 

The requirement to produce certified translations for foreign language documents, Apostilles for foreign public records, and legal opinions to prove foreign law slows down proceedings significantly. Parties and counsel being in different countries and time zones, unable to appear on short notice (remote appearance are generally not available for this type of proceedings at this time) causes additional delays. 

German civil procedure and probate procedure do not provide for discovery as we know it in the United States.

This means that opposing parties do not have to respond under oath to interrogatories or requests for admission and production of documents, nor can the parties subpoena records. There are no depositions under oath outside the courtroom.

Witnesses and parties testify in the courtroom as the case proceeds questioned by the judge and counsel. The testimony is not always given under oath nor is it recorded verbatim. Witness testimony in civil and probate proceedings in Germany is not as thorough and detailed as a deposition in the United States. 

These factors have a major impact on the evidentiary strategy in a disputed case, as a case that is winnable in the U.S. may not be winnable in Germany and vice versa. It is critical for parties and counsel to understand and evaluate the effect of these factors on the outcome of a case at an early stage.  

The business of winding up an estate can be challenging for all concerned. This is the case for most estates, but it can be particularly so for those estates that include an international or cross-border element. What are the key issues to be kept in mind when dealing with cross-border estates between Germany and the USA? 

Both substantive law and procedure are systemically different in both countries. It is important for claimants to be proactive as soon as they become aware that they may have a case, particularly if hostile parties have taken possession of the estate or relevant evidence. This is also to determine whether an estate is indebted and the inheritance should be disclaimed. In disputed cases, U.S.-based claimants should demonstrate from the outset that they are able and willing to litigate the matter in Germany if necessary. 

Attorneys drafting estate plans for clients with assets or a future inheritance in Germany must not only be aware that German succession laws do not recognize trusts, but also consider German forced share claims and German inheritance tax, which will lead to unintended results if not addressed properly.  

About Holger Siegwart 

Mr. Siegwart was born and raised in Southern Germany where he practiced law with an international firm for almost a decade before he relocated to the United States.  

He started practicing law in the U.S. in 2007 and established his own firm in 2010. The experience of living and working in both countries, and the practical understanding of both societies and their legal and administrative systems, have become invaluable assets for his clients.  

Mr. Siegwart serves as a retained expert and expert witness in the U.S. on German law and in Germany on U.S. law. He is one of very few attorneys who are not only licensed in both countries but actually practice in courtrooms in both countries.   

About SIEGWART GERMAN AMERICAN LAW 

SIEGWART GERMAN AMERICAN LAW specializes in connecting both worlds. Every case the firm handles has a German and an American connection. One main focus of the firm’s practice is the settlement of German-American estates and German-American estate litigation.  

SIEGWART GERMAN AMERICAN LAW, INC. 

San Francisco Airport Office, International Trade Building, 1799 Bayshore Highway, Suite 150, Burlingame, CA 94010, U.S.A. 

Tel: (001) 650 259 9670 

F (001) 650 259 9682 

mail@siegwart-law.com 

www.siegwart-law.com 

Published by: Lawyer Monthly - 1st May, 2024

www.lawyer-monthly.com

The Essence of Property Development Finance

Each property development finance structure is unique, reflecting the specific needs of the project, including scale, risk, and duration. Typically secured against the property itself, the loan is released in stages aligned with the project’s milestones, balancing risk for the lender and cash flow for the developer.

Financial Instruments for Developers

Developers have access to various financial products, each suited to the different borrowing requirements and size of a development:

·       Property Development Finance: Typically, property development loans can be used for a borrowing requirement of £750,000 to £50,000,000 with a loan term of 9 to 36 months.

·       Bridging Loans: Typically, bridging finance can be used for property development projects with a borrowing requirement from £50,000 to around £2,000,000 with a loan term of 3 to 24 months.

Lender’s Loan Approval Criteria

Lenders assess development finance applications based on several factors:

·       Experience: The developer’s experience can be critical for loan approval, however, first-time developers can still be successful in attaining development finance but should surround themselves with an experienced team of professionals such as Architects, Surveyors & Valuers, Engineers, Lawyers and an experienced commercial finance broker.

·       Project Viability: A solid business plan demonstrating profitability and a well-defined execution strategy is essential.

·       Investment Strategy: The developer’s investment approach must align with market trends and project goals.

·       Exit Strategies: It’s crucial to have a well-planned exit strategy.

 If the development is being retained a long-term commercial mortgage can be put in place before the start of the build to repay the development finance upon completion of the build.

 If the development is to be sold then a realistic time for selling should be allowed within the loan term of the finance contract

 Alternatively, development exit finance can be utilised. It can relieve the pressure of having to make quick sales and is designed to repay the original property development finance and raise capital for other purposes once the project is finished or close to being finished, and before the property is sold or refinanced. This can improve the liquidity of the developer, and enable them to seize new opportunities.

The Role of Legal Expertise

The need for engaging with a Legal professional who specialises in property development can’t be underestimated and will play a crucial role in ensuring finance and building contracts are thoroughly reviewed and the developer’s interests are protected.

The Future of Property Development

As the industry grows, the demand for flexible and innovative financing solutions increases. These solutions must adapt to the complexity and scale of modern development projects.

In conclusion, property development finance is a dynamic element of the real estate world. It enables developers to pursue ambitious projects, driving economic growth and shaping our cities. A deep understanding of this financial domain is vital for any developer looking to succeed in the competitive field of property development.

Before you Begin the Application Process:

Consult with an Expert Property Development Finance Broker: At Evolve Finance we understand how property development finance works and can guide you through the intricacies of the process, helping you explore all available options.