Asset Protection Trusts and Taxes
If you are planning your estate, you may have heard of something called a trust. Additionally, you may have heard of a special type of trust called an asset protection trust. It can be confusing to understand what these are and what they are useful for. You may be wondering if there are any tax reasons to set up an asset protection trust. Let’s dive into the answers to these questions.
Trusts and Taxes
What Is a Trust?
First things first, you need to understand what a trust is. Unlike a will, a trust is an agreement between an individual and a trustee. The individual, who is called the benefactor, transfers a set of possessions to the trustee. The benefactor also sets a condition for the trust. When the condition is met, the possessions are transferred from the trustee to an individual who the benefactor determine, called the beneficiary. If someone uses a trust for estate planning, the condition of the trust will be the death of the benefactor.
What Is an Asset Protection Trust?
An asset protection trust is a trust specifically set up to protect a set of possessions. Generally, this kind of trust is not used for estate planning, although it can be. The idea is that the possessions in the trust technically do not belong to the benefactor anymore. This means that those possessions cannot be claimed by creditors or a lawsuit. Essentially, the possessions are closed off both to the benefactor and anyone who wishes to claim the benefactor’s possessions.
Asset protection trusts are not legal in all states. In fact, there are only 15 states where it is currently legal to set up an asset protection trust:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
An asset protection trust can protect your possessions from taxation as well. However, most trusts are immune to taxation already. This is not one of the primary functions of an asset protection trust. However, certain states do still tax trusts, so you need to research your local laws or speak with an estate planning attorney. Remember that you will have to pay a fee to the trustee when you establish a trust. In many cases, the fee will be more than the estate taxes.
The first step you should always take when planning your estate is to speak with an attorney. A trust attorney in Sacramento, CA will be able to help you understand your options.
Thanks to Yee Law Group for their insight into estate planning and asset protection with a trust.