Asset Protection!

Asset protection is the pursuit of activities, such as placing assets in a trust, to lessen or avoid liability.

People may set up trusts for a variety of reasons; including: asset division on divorce, charitable giving for tax purposes and to limit estate taxes, prohibiting creditors from collecting an individual’s assets, protecting minor children from liability or being sued. 

In this post we will be looking at some important considerations when determining which type of trust is appropriate in your situation. We'll also look at what you should know before you establish any type of trust.

The way a trust is set up controls its tax consequences, as well as its use. The more complex the structure and the more assets involved, the greater the potential cost and complexity. It's important to first determine if you are in a situation where an asset protection trust can make sense.

The main types of asset protection trusts are discussed in further detail below.

Income and property are transferred to the trust during a person's lifetime. The assets of the trust are managed by a trustee for the benefit of one or more beneficiaries. A well-drafted trust agreement will provide that any income attributable to principal flows back to the grantor/settlor, which allows him/her to draw on income while reducing assets subject to creditor claims. This can make planning much easier in case something goes wrong with your plan.

U.S. Internal Revenue Code (IRC) §664(c) provides that the grantor of a trust is not required to include in income under IRC §6301 the distributive share of any amount which is included in income by the grantor or beneficiary under IRC §83, but only so much of such amount as does not exceed this exclusion. IRC§ 664(b) further provides that if property other than cash is transferred to a trust during the life of the grantor, such property shall be deemed never to have been included in gross income by the grantor or otherwise received from him for purposes of computing his taxable income or self-employment tax.

No tax consequences under IRC §664(b) apply to transfers effected in connection with any sale, exchange or other disposition of property which involves the acquisition of stock or other property by a grantor who is not a foreign person by reason of IRC §932.

IRC §664(c)(1) and (2) provides that the grantor of a trust is not required to include in income under IRC §6301 the distributive share of any amount which is included in income by the grantor or beneficiary under IRC §83, but only so much of such amount as does not exceed this exclusion. IRC§ 664(b) further provides that if property other than cash is transferred to a trust during the life of the grantor, such property shall be deemed never to have been included in gross income by the grantor or otherwise received from him for purposes of computing his taxable income or self-employment tax. IRC §664(a)(3) provides that a grantor trust is treated as owned by the grantor or transferor for all federal income tax purposes.

There are no special rules for calculating income inclusion with respect to IRC §664 trust assets. Thus, trust assets are subject to all of the same reporting and taxation rules as any other non-grantor assets.