Irrevocable trusts are the most popular strategy to protect assets from judgments. Trust law allows great flexibility in the design and operation of the trust, creating significant asset protection and tax planning opportunities.
An irrevocable trust is the key strategy for protecting assets from legal judgments. It is distinguished from a revocable trust which provides estate planning benefits but not asset protection or tax advantages.
A major advantage of the irrevocable trust over other legal entities such as LLC’s and Family Limited partnerships is that it is extremely flexible in legal form. Unlike other entities, the creation of a trust is not required to be registered publicly so a greater degree of financial privacy concerning management and beneficial ownership can be achieved. Additionally the trust can incorporate provisions which combine the best features of domestic and even offshore arrangements within the language of the plan documents.
All of your assets can be held within the trust—but be governed by special terms appropriate for that specific asset ( Family Savings Trust). For example, the family residence, personal savings, life insurance, business property and real estate assets can be protected within an irrevocable trust structure with different terms providing protection for each asset ( Asset Protection and Estate Planning with Family Savings Trusts).
The choice of laws to be applied to the irrevocable trust also creates a wide variety of planning opportunities to take advantage of domestic or foreign laws which fully protect assets in the trust. For example, some states offer excellent asset protection for a residence but not for retirement plans. Or it may be the other way around with savings protected but homes less so. Based on the type of assets involved and the client’s goals, an irrevocable trust takes advantage of the asset protection laws in those jurisdictions which are most favorable for the clients needs. ( New State Laws Allow Residents to Shield Assets From Creditors)
Additional flexibility is provided when the irrevocable trust is designed to shift situs during its term to optimize available asset protection and tax benefits. The type and value of assets held by the trust may change over time. Often an asset sale is anticipated at some point in the future which may generate a large tax liability. Proper drafting of the trust document should permit the migration of the trust to the jurisdiction which provides not only asset protection but also the most favorable tax treatment of income.
Protecting Assets Under 2018 Tax Law
The 2018 tax law (Tax Cuts and Jobs Act ) creates opportunities for substantial tax savings by shifting income and assets to tax favored entities or lower bracket family members.
The most significant feature of the 2018 tax law is reduced rates for corporations and pass-through entities such as LLC’s, partnerships and S-Corps. The corporate rate was reduced from 35% to 21% and pass-through entities are now entitled to a deduction of up to 20% of income. Tax planning with an irrevocable trust attempts to shift income or assets to lower bracket entities or family members to take advantage of these favorable tax rates. ( Family Savings Trusts – Income Tax Planning)
The 2018 tax law also advantages business income over income derived from salary. Business income can be routed through one of the lower bracket entities while salary is subject to the highest individual tax rates. These provisions in the new tax law make the source of the income- as business or wages- the most important determinant of the rate at which it will be taxed. Often an irrevocable often attempts to convert wage income into business income to take maximum advantage of beneficial tax rates.
The new limitations on deductions for state and local taxes as well as mortgage interest make the shifting of income and assets through an irrevocable trust even more valuable. By shifting income and asset ownership the impact of deduction limitations may be mitigated by dividing state and local taxes and mortgage expenses among different taxpayers through an irrevocable trust.
Irrevocable trusts can be used to protect the assets in the trust for the benefit of the trust or other beneficiaries. To achieve asset protection goals and effective tax planning under the 2018 tax law, state and federal laws must be properly applied. Make sure to discuss your asset protection planning with your attorney and tax advisors so that your particular planning needs are considered in adequate detail.