How To Protect Business Assets Through a Trust

One segment of the Getty family heirs, now in the third generation, used Nevada trusts systems to avoid millions in taxes from the California state over a decade.

A recent feature in the New Yorker shows that granddaughters of once American richest man J Paul Getty, using their Pleiades Trust, had managed to protect their assets from potentially $300 million in California state taxes by having their trust formed in Nevada and exploiting the trust friendly systems of Nevada law.

It is a testament to how powerful trusts have become as asset protection tools. This recent case further shows that Americans no longer need to resort to offshore accounts to protect their assets from creditors, the IRS, spouses, and others. The US has now become a tax haven hosting $5.6 trillion in trust assets from domestic and international individuals.

An enabling environment

The present period seems the perfect time to advantage of the opportunities trusts offer. That’s because even with the scrutiny from the Pandora Papers’ fallout and the general push to have more progressive tax laws federally and at state levels, more states are pushing to become a top attraction for trusts.

At the top is South Dakota which has no state income taxes and no state inheritance tax and holds the distinction of being the one state with no limit on trusts’ perpetuity, so wealth in trusts can grow forever. These laws have seen the number of trusts in the state grow from just three in 1996 to over 100, with assets of over $600 billion by the end of 2021.

Nevada is close by with no income tax and no corporation tax. Trusts can last up to 375 years (almost forever), and where it beats South Dakota is its 2009 law which made trust company documents confidential and exempted them from public record. Other states with trust-friendly laws include Delaware, Wyoming, Alaska, and New Hampshire.

How a trust protects your business

How a trust protects your business often depends on the type of trust and how it is structured to meet your main intention. Overall, the various types of trusts fall under two main categories; Revocable and Irrevocable. As the grantor, you can modify revocable trusts if you are still alive, as they give you access to the assets. For this reason, they can also be accessed by other parties, say, creditors. You cannot modify irrevocable trusts as you lose access to and control over them. They, however, provide excellent asset protection.

Types of trusts

Trusts have since then evolved from these two forms because people wanted flexibility in having both the control of revocable trusts and the comprehensive asset protection of irrevocable trusts. And that’s how asset protection trusts came to be. However, only 17 states support asset protection trusts, so where you form the trust matters a lot. Here is suggested reading on this type of trust.

Other preferred tailored trusts for specific intentions and approaches to protecting your business assets are;

Irrevocable Life Insurance Trust

In this structure, the trust holds the ownership of a life insurance policy it buys from gifts given to it by the grantor. This type of trust provides a tax-free death benefit to the beneficiaries and protects the life insurance policy from estate taxes and creditors.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust holds the ownership of a personal residence. The grantor transfers their residence into the trust for a specified period, after which the trust distributes the property to the beneficiaries. The primary benefit of a QPRT is that it allows the grantor to remove the value of the residence from their estate, reducing estate taxes.

Generation-skipping trust

With a generation-skipping trust, you can transfer assets to beneficiaries who are two or more generations younger than you. The primary benefit of a generation-skipping trust is that it allows the grantor to transfer assets to their grandchildren or future generations while skipping over their children, thus avoiding estate taxes on the transfer of assets to each generation.

Charitable lead trust

A charitable lead trust gives income to a charity for a specified term, after which it distributes its assets to the non-charitable beneficiaries. The primary benefit of a charitable lead trust is that it provides a tax deduction to the grantor for the value of the charitable income payments and reduces the size of their taxable estate.

Charitable remainder trust

A charitable remainder provides income to the grantor for a specified period, after which the trust distributes its assets to a charity. The primary benefit of a charitable remainder trust is that it provides the grantor with a source of income during their lifetime and a charitable tax deduction for the value of the future gift to charity.

Conclusion

Trusts provide a credible way to protect a range of business assets.

You can use them to minimize estate and income taxes, plan your succession, protect your assets and privacy, and determine who has access and control of the business assets. Whatever your motivation, your first step would be to find the right state and research the appropriate structure of your trust. With the correct setup, one can steer the growth of family and business wealth for generations.

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