Third-Party Trusts: Tax Benefits and Asset Protection

Brown, Edward D.; Kaplan, Eric R.
November 2007
Journal of Financial Planning;Nov2007, Vol. 20 Issue 11, p56
Academic Journal
Third-party trusts serve as an effective tool for experienced estate planners and their clients. Third-party trusts are a useful alternative for clients who feel that neither the value of their assets nor their potential creditor exposure warrant creating a more comprehensive asset protection plan such as an offshore or domestic asset protection trust. A typical third-party trust involves one family member settling (creating) a trust for the benefit of another family member (primary beneficiary). The third-party trust's settlor then advances a significant portion of the primary beneficiary's inheritance by transferring assets to the third-party trust. A third-party trust will have two trustees that manage the assets—an independent trustee and a family trustee. The independent trustee holds the powers that relate to the asset protection nature of the third-party trust, such as the ability to make loans or distributions to the primary beneficiary. The primary beneficiary typically serves as the family trustee. This role allows the family trustee to retain certain control over the third-party trust's assets as well as control over the independent trustee, without providing the family trustee with any powers that could jeopardize the third-party trust's asset protection. A third-party trust can be designed to be either a domestic trust or a foreign trust. Foreign trusts afford stronger asset protection features. Even if a third-party trust is foreign for asset protection law purposes, it can still be designed as a domestic trust for income tax purposes. A client and his or her spouse should avoid creating "reciprocal" third-party trusts, or the trusts may be exposed to creditors.


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