What Tax Advantages Do Asset Protection Trusts Provide?

March 9, 2020 | Uncategorized | By Personal Injury Legal Directory | 0 Comments

Asset protection trust provides a way for people whose personal assets may be at risk in a lawsuit to place those resources out of harm’s way. However, it is also an excellent way for those whose assets may be at risk from tax or inheritance issues also to protect their possessions.

An Explanation of Asset Protection Trusts

Asset Protection Trusts are a specific type of irrevocable trust which allows individuals to be a beneficiary of their account. Domestic Asset Protection Trusts (DAPTs) are created in the US in only a handful of states. Still, individuals from other states can generate a DAPT in a state that is not their own. DAPTs are very helpful for high-risk professions like doctors. If they are concerned about a lawsuit being able to take their home or retirement money, they can place their assets into an asset protection trust.  Likewise, individuals concerned about inheritance taxes or high levels of appreciation on a property can do the same with their assets to protect themselves – legally – from high tax penalties.

Estate Tax Exemptions

Each year individuals can give money to their families tax-free. With an asset protection trust, an individual can gift their loved one’s capital, and they can also be beneficiaries of that gift themselves. Essentially, this allows people to grow money for retirement while having gifted it outside of the inheritance tax. At the current time, the standard estate tax exemption of $5 million for a gift of monies has been raised to $11 million until 2026. So, individuals can disperse an even higher amount of an estate and the taxes that go with it.

Real Estate Exceptions

Typically, if parents purchase a house, live in it and then gift it to their children when they die, the children must pay capital gains taxes. The government calculates those taxes on the difference between what the house was worth when the parents purchased it and what it is worth when it is gifted to the children. So, as an example – if it were purchased in 1985 for $200,000 and sells today for $500,000, they would pay capital gains on $300,000. However, if the house is in a DAPT, then the value is “reset” when it is gifted to the children when the parents die. If it is worth $500,000, then they have an asset worth $500,000. No capital gains are due.

Setting up an asset protection trust is a process that requires experience and competence. If you have real estate or monies that you need to protect from the estate tax, contact an estate lawyer, like an Estate Planning Lawyer in Melbourne, FL, today.

Thank you to the experts at Arcadier, Biggie & Wood, PLLC for their input into estate planning law.