What Benefits Does a Trust Offer?

A Video FAQ with Mary E. Vandenack.

A trust can offer a variety of benefits. One possibility is probate avoidance. If all of your assets are titled in a trust, then the assets are not going to go through the probate process in that state.

Another advantage that a trust can offer is to protect assets from creditors. If I create a trust for my son, depending on how I structure that trust, there are certain protections from his creditors or from a divorcing spouse.

Another benefit of using a trust is to reduce estate taxes. If you have an estate tax exposure, there are certain ways you can structure the trust to protect those assets.

You can also control disposition among a mixed family. If your particular estate plan involves a remarriage and kids from one or more families, you can set up a trust so that each is treated, in some respect, fairly within that trust.

© 2014 Parsonage Vandenack Williams LLC

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Tax Court Rules Trusts Can Be Real Estate Professionals

The United States Tax Court has recently released a decision in Frank Aragona Trust v. Commissioner that will affect tax planning for many trusts that own businesses or hold real estate. In that case, a trust operated rental real estate properties and developed other real estate properties. It incurred losses from these activities, which it deducted as non-passive losses.

 Under prior law, rental real estate losses were automatically passive losses unless incurred by a “real estate professional.” The IRS’s position in Frank Aragona Trust was that a trust could never qualify as a real estate professional. However, the Tax Court found for the taxpayer. It stated that a trust could qualify as a real estate professional if the rental real estate activities of its trustees were regular, continuous, and substantial. It did not, however, address whether trusts could count the activities of employees who were not trustees. The decision will also have a significant impact on planning for the Net Investment Income Tax.

© 2014 Parsonage Vandenack Williams LLC

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Trusts Can Be Excepted From Passive Activity Losses Related to Real Estate

The IRS has historically argued that trusts are categorically excluded from obtaining an exception to the passive activity rules for rental real estate activities. A recent Tax Court ruling has contradicted this position and indicated that a complex trust engaged in rental real estate activities can qualify for an exception to the passive activity rules.  In determining that the exception was available, the court looked to the activities of the individual trustees and determined that the material participation trust was satisfied. This is an important ruling in the trust income tax regime and creates the opportunity to limit trust exposure to the tax on investment income.

© 2014 Parsonage Vandenack Williams LLC

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Should I Use a Trust to Protect My Assets?

A Video FAQ with Mary E. Vandenack.

There are a variety of things to consider before deciding to use a trust to protect your assets. Most states have certain laws allowing you to protect your home or a certain amount of your retirement account or IRA. You might be able to come up with asset protection before using a trust.

There are different types of trusts to consider using if you do get to the point where a trust makes sense. A trust that someone else creates for you is one of the best vehicles. There is also what we call a domestic asset protection trust where you create a trust for yourself in one of the states that allow for that type of trust. It’s a fairly complicated and expensive technique so you do want to be sure to exhaust all of your other alternatives before you choose that path.

© 2014 Parsonage Vandenack Williams LLC

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Exercising Care in Asset Protection Trust

A recent Washington bankruptcy case is a reminder of the need to structure asset protection trusts with care. In the case,  the court allowed creditors to reach the assets of an Alaska asset protection trust set up by a real estate developer. The court based its decision on a number of factors. Few trust assets were located in Alaska and several badges of fraud were present. The court applied Washington law despite the fact that the trust recited that Alaska law applied.

In structuring an asset protection trust, settlors should have or create a relationship with the state where the trust is being established. An asset protection trust will provide its best protection if created and funded when creditors are not pounding down the door.

© 2013 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com