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T&E TALK: Follow All Rules When Transferring Assets to an Irrevocable Trust

Posted by Scott T. Ditman, CPA/PFS on Jul 18, 2016 11:00:00 AM
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Irrevocable trusts can provide a variety of benefits, including gift and estate tax savings, creditor protection, and the ability to control how assets are distributed. To preserve these benefits, however, it’s critical to respect all trust formalities.

Case in point
Here’s an example of just how critical this can be: In U.S. v. Tingey, a taxpayer set up an irrevocable trust for the benefit of his wife and children, naming someone else as trustee. Around the same time, the taxpayer and his wife purchased a ski cabin, the title to which was transferred to the trust. Later, the couple faced financial trouble and a federal tax bill of more than $2 million. The government successfully foreclosed several tax liens on the ski cabin.

The couple argued that the government couldn’t enforce the liens against the ski cabin because title was held by the trust. The 10th U.S. Circuit Court of Appeals disagreed. The court explained that a tax lien may be satisfied by property if it’s held by the taxpayer’s “nominee” — in other words, “the taxpayer has engaged in a legal fiction by placing legal title … in the hands of a third party while actually retaining some or all of the benefits of true ownership.”

Several factors indicated that the couple had done just that: they maintained the ski cabin, paid the utility bills and insurance premiums (on a policy issued in the taxpayer’s name), used the cabin without the trustee’s permission or supervision, and rented the cabin to friends without the trustee’s knowledge.

Tread carefully when transferring assets
As this case illustrates, if you continue to treat assets as your own after transferring them to an irrevocable trust, they may be at risk. If you have questions regarding asset transfers, contact me at SDitman@berdonllp.com or your Berdon advisor.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.

Topics: T&E TALK

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