Trusts for Tax Planning, Tax Avoidance, Estate Planning

It is not enough to earn gains in your portfolio – you have to retain that money by tax planning.

This article is reprinted from the February 8th  edition of The Tax Guru

Mitt Romney received a lot of negative attention when he revealed he had $200 Million dollars in trust funds in the Cayman Islands. Had he been elected his critics said he would have been the first American President to have a Swiss Bank account.

Trusts are widely used and available for a variety of purposes.

Common objectives for trusts are to place assets that are growing into the hands of trusts that will be taxed at a lesser rate than the settlor of the trust  thus such transfers reduce the estate tax liability,  protect property from creditors, and  avoid probate ( a trust as a legal entity cannot die). Many international clients are seeking to avoid the income tax or creditor scrutiny that attaches to public ownership.

The trusts are often set up as agreements to hold and control property without disclosing that the original owner is still in control.From the taxation viewpoint of the U.S. Revenue Service such control would mean the trust is not effective .

Placing property, money , shares in a trust can give immunity from estate taxes, resistance to probate, creditors and so on. Your goal is the transfer so that you do not own the property legally or beneficially and therefore creditors pursuing you cannot touch the trust – if they even learn of its existence.

Suppose that you want to set up a trust.You have assets that you want to protect – assets that may not be as large as the hedge funds of Mitt Romney but can maintain their growth and provide your family a greater future if left to grow.

Setting up the trust. The person  creating the trust is commonly known as the trustor, though you may sometimes see the terms settlor or grantor.

  • Objective of the trust. You use different types of trusts to achieve a variety of specific income tax and / or  estate-planning objectives. You can establish a single estate-planning objective,-others help you achieve more than one goal.
  • Property. After you place property into a trust, that property is formally known as trust property and is then removed from your use as an asset .If you – in the simplest case – give property to another person you will be unable to have it returned to you. In the divorce work I did this was a point brought  home to many an older, sadder  but wiser man.
    • Beneficiary. In your estate planning (your will, for example), a trust’s beneficiary (or, if more than one, beneficiaries) benefits from the trust in some way, usually because the person or institution will eventually receive some or all of the property that was placed into trust.
    • Trustee. (The person in charge of the trust is the trustee). You cannot have direction over a trust if you are arguing that the property of the trust is no longer in your control. The trustee needs to understand the rules for the type of trust he or she is  managing to make sure everything in the trust stays in working order. Use of a nominee shows control in another person and removes your name from the trust document
    • Rules. Finally, some of the rules that must be followed are inherently part of the type of trust used, while other rules depend on what is specified in the trust agreement. Your concern should be on the taxation of the trust – seeking to avoid the income being attributed to you and thus of no tax benefit .This is the dreaded attribution section of the tax codes you seek to avoid.

    To set up a trust you will require professional assistance. The legal language is a safeguard tested in courts over centuries but it is the arcane legalese unfamiliar to most. The scope and complexity will vary with the assets, how they are to be accumulated, management of the trust  and your objectives.The simplest document may only be a dozen pages long and a complex trust of stock market assets and cash may be several hundred pages because of the necessity of setting out nominee management and control. Thus setting up the trust will be several thousand dollars in consultant fees on a one time basis -then ongoing annual registration is about $ 1000 in most jurisdictions.

    For a no cost / no obligation consultation please email or call Jack direct at 604-858-3202 ( same time zone as Los Angeles).


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