Does a Family Wealth Trust Provide Asset Protection?

Asset protection is intended to secure family wealth against business and other risks.  There are several ways to structure your assets to ensure proper protection of your wealth, including trusts, foundations and endowment life insurance.  A Family Wealth Trust is perhaps the most effective and flexible vehicle.  Property owned by a well-drafted, customized trust has great benefits that may not be seen if the property is simply owned outright by the beneficiaries.

What Is A Trust?

A trust is an agreement between three parties.  The owner of the assets or estate is the trust’s “grantor.”  The grantor transfers legal title to his or her assets to the “trustee,” for the benefit of the “beneficiaries.”  A trustee may be a relative or friend, an attorney or accountant, or an organization offering such services.

Trusts can be either revocable or irrevocable.  A revocable trust can be changed or terminated at any time by the grantor.  As such, the government considers the assets belong to a revocable trust to be included in the grantor’s taxable estate.  This means that you may have to pay estate taxes on those assets that still remain after your death.  You may also be required to pay income taxes on any revenue earned by the trust during your lifetime.

How do trusts protect assets?

However, an irrevocable trust cannot be changed once it has been created.  The assets placed in an irrevocable trust are permanently removed from the grantor’s estate.  Any income earned from those assets can be paid by the trustee on behalf of the trust, depending on the type of trust involved.  When the grantor dies, the assets are generally not considered a part of the estate, so they are not subject to estate taxes.  There are different types of trusts each designed to meet the different needs and objectives of various individuals.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust (QPRT) will allow you to remove your residence from your estate, under certain conditions.  One example would be placing your vacation home into a trust, while still using the residence for a designated period of time.  The benefit is that any gift tax you may have incurred from giving the property away is lower because you still retain rights to the house.  There are certain drawbacks, however.  If you die before the trust ends, your home will be considered part of your estate.  If you live beyond the term of the trust, you will be required to pay rent to continue to use the home.

A Generation-Skipping Trust

If you want to leave money to your grandchildren, the Generation-Skipping Trust can help to protect your generation-skipping tax exemption on gifts to your grandchildren and avoid the tax on any amounts exceeding that exemption.  In 2014, the Generation-Skipping tax exemption will be $5.34 million (the same as the federal estate tax exclusion).  This is a beneficial estate planning tool. You could place, for example, $100,000 in a generation-skipping trust and allow it to accumulate earnings for several years.  Yet, your lifetime exemption would only be reduced by the original $100,000.  If you have any questions about these or any other asset protection tools, please contact our office.