The legal strategy of protecting assets with a trust allows individuals to manage and distribute their assets while minimizing their tax liability.
A trust is a legal entity that allows individuals to transfer ownership of their assets to a trustee, who manages the assets on behalf of the trust’s beneficiaries. Trusts can be established for various purposes, including asset protection, estate planning, and tax planning.
One of the primary advantages of protecting assets with a trust is the ability to minimize tax liability.
Depending on the type of trust, individuals can shield their assets from capital gains taxes, estate taxes, and other taxes. For example, an irrevocable trust is a type of trust that cannot be changed or revoked once it is established. Assets held in an irrevocable trust are generally not considered part of the grantor’s estate for tax purposes, which can help to reduce estate taxes. In addition, capital gains taxes on assets held in an irrevocable trust may be deferred or avoided altogether, depending on the terms of the trust and the type of assets involved.
According to Sims & Campbell, a law firm specializing in estate planning and trust administration,
“The tax rules applicable to capital gains in irrevocable trusts are complex, and the results can vary depending on a number of factors, including the type of assets held in the trust, the duration of the trust, and the terms of the trust agreement.”Â
In addition to tax benefits, protecting assets with a trust can also provide asset protection. When assets are held in a trust, they are legally separate from the grantor’s personal assets, which means that they are generally protected from potential legal claims. This can be especially beneficial for individuals in professions that are at a high risk of lawsuits, such as doctors or business owners.
Another advantage of protecting assets with a trust is the ability to control the distribution of assets. When assets are held in a trust, the trustee can manage the assets according to the terms of the trust agreement. This can help to ensure that assets are distributed in a manner that is consistent with the grantor’s wishes and can help to prevent disputes among family members or beneficiaries.
Note that protecting assets with a trust should not be used solely for tax avoidance purposes.
The Internal Revenue Service (IRS) has strict rules and regulations governing trusts, and individuals who use trusts for fraudulent or abusive tax planning may face penalties and fines.Â
While protecting assets with a trust can provide numerous advantages, including tax benefits, asset protection, and control over asset distribution, establishing a trust requires careful consideration and planning. This isn’t a LegalZoom situation. You should work with a qualified firm to ensure that any trust established is legally sound and meets specific needs and goals.
Sims & Campbell note:
“The tax rules applicable to capital gains in irrevocable trusts are complex, and the results can vary depending on a number of factors, including the type of assets held in the trust, the duration of the trust, and the terms of the trust agreement.”
Let’s examine the different types of trusts available.
Depending on your specific needs and goals, there are several types of trusts that may be appropriate, each with its unique benefits.
One type of trust that can be used to protect assets is a revocable living trust. A revocable living trust allows individuals to transfer ownership of their assets to a trustee while retaining control over the assets during their lifetime. Upon their death, the assets held in the trust are distributed to the trust’s beneficiaries according to the terms of the trust agreement.
Revocable living trusts are often used for estate planning purposes, as they can help to avoid probate and ensure that assets are distributed according to the grantor’s wishes. Additionally, because the trust is revocable, individuals can change or revoke the trust at any time during their lifetime, which provides flexibility and allows them to adapt to changing circumstances.
Another type of trust that can be used to protect assets is an irrevocable trust. An irrevocable trust is a trust that cannot be changed or revoked once it is established. Assets held in an irrevocable trust are generally not considered part of the grantor’s estate for tax purposes, which can help to reduce estate taxes. In addition, capital gains taxes on assets held in an irrevocable trust may be deferred or avoided altogether, depending on the terms of the trust and the type of assets involved.
However, it is important to note that once assets are transferred to an irrevocable trust, they are no longer under the control of the grantor. This means that individuals who establish an irrevocable trust must be prepared to relinquish control over the assets held in the trust.
A third type of trust that can be used to protect assets is a spendthrift trust. A spendthrift trust is a type of trust that provides for the management and distribution of assets for the benefit of a beneficiary while protecting the assets from potential creditors. Spendthrift trusts can be especially useful for individuals who are concerned about protecting assets from lawsuits or other legal claims.
There is a new kind of trust that combines the most powerful trust features available into one. It is called a “Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust” and you can learn more about it here.
Tax benefits, asset protection, and control over asset distribution that trusts provide are considerable. There are also other advantages to consider. For example, trusts can be used to protect assets for future generations. By establishing a trust, individuals can ensure that their assets are protected and distributed according to their wishes for many years to come.
Probate
Another advantage of trusts is that they can help to facilitate the transfer of assets to beneficiaries without the need for probate. Probate is the legal process by which a court determines the validity of a will and oversees the distribution of assets to the will’s beneficiaries. Probate can be a lengthy and expensive process, and many individuals choose to establish a trust to avoid probate altogether.
Privacy
Trusts also offer privacy benefits that may be appealing to some individuals. Trusts are private documents that do not have to be filed with the court, unlike wills which are a matter of public record. This means that the details of the trust and the assets held within it can be kept confidential, which can be important for individuals who value their privacy.
Incapacity or disability
A trust can provide for the management of assets and the care of the grantor in the event that they become incapacitated or unable to manage their affairs. This can be especially important for older individuals or those with chronic health conditions who may be at risk of incapacitation.
Individuals with special needs
A special needs trust is a type of trust that is designed to provide for the needs of an individual with disabilities without disqualifying them from receiving government benefits such as Medicaid or Supplemental Security Income (SSI). Special needs trusts can be used to ensure that an individual with disabilities has access to the resources they need to live a comfortable life, while still qualifying for government benefits.
As you’ve seen, the advantages of protecting assets with a trust are numerous and varied. As the American Bar Association notes, “a trust can be a highly effective way to manage and transfer assets, but only if it is properly created, funded, and administered.” (American Bar Association, 2016).
Using the legal strategy of protecting assets with a trust can provide significant benefits, including:
- tax savings
- asset protection
- control over asset distribution.
There are several types of trusts available, each with unique benefits, and individuals should work with a qualified firm to determine the best type of trust for their needs and goals. While trusts require careful planning and consideration, they can provide long-term security and peace of mind for individuals and their families.