Paul Horton: Family Savings Trust

Most of the problems of an outright gift to a child can be eliminated through the use of Family Savings Trust (FST), which we have mentioned in previous posts as an asset protection strategy for holding ownership interests in entities such as corporations, Family Limited Partnerships, and Limited Liability Companies. Because we are asset protection lawyers, we’ve seen things go wrong so we want to point you in the right direction.

The Family Savings Trust can also be designed specifically to be used to directly protect personal assets from unexpected medical expenses.

The term Family Savings Trust is a broad descriptive term for a trust intended to hold and protect assets against lawsuits and business risks. A Family Savings Trust is extremely flexible in form and can incorporate provisions, which combine the features of domestic and even offshore arrangements within the language of the plan documents. All of your assets can be held within the trust—but be governed by special terms appropriate for that asset.

For example, your trust may be designed to hold your home, accounts receivable, and savings and brokerage accounts. Or the trust can own the entities, such as an FLP or LLC or your personal residence with specific language preserving the tax benefits associated with the home (including the mortgage interest deduction, property taxes, and avoidance of gain on a future sale). If estate tax savings are a priority, you can choose to construct the FST to take maximum advantage of whatever traditional or enhanced tax strategies are appropriate based on your goals and the types of assets you own.

An additional feature, which can be added to a Family Savings Trust, if desired, allows the trust to obtain certain “offshore” advantages, at some later point. The FST can be structured to permit a migration of the trust to a more favorable jurisdiction—domestic or foreign—when and if necessary. In the right situation, this provision can be used to force any future plaintiff to proceed with a lawsuit against you in a string of unfriendly foreign jurisdictions to which the trust has continuously migrated. For example, under normal circumstances, the trust exists and is governed by whatever domestic law we choose. But, if circumstances warrant and strategy dictates, you can convert all or a portion of the trust or its assets into an Offshore Trust or Offshore LLC—legally protected and effectively out of reach. A plaintiff attempting to litigate in a foreign country would be faced with nearly impossible hurdles, subject only to local fraudulent transfer rules and the applicable statutes of limitations.

LLC VERSUS CORPORATION

Let’s compare the LLC versus a corporation in real estate ownership. John and Mary could transfer the property to a corporation. Each would own 50 percent of the stock in the company. Since the law provides that the shareholders are not responsible for debts of the corporation, a liability arising out of the property would not subject John and Mary’s personal assets to danger.

The problem is that this protection against liability is only available if all of the corporate formalities are carefully followed. Since most people do not maintain proper corporate records and documentation, corporations often do not provide the intended level of protection. Further, corporations are subject to complex tax rules, which can cause severe and unintended consequences.

Finally, the corporation will not protect the property from outside liability-lawsuits against John or Mary unrelated to the property. A creditor can simply seize the stock that they own and reach the apartment building by dissolving the company. For these reasons, it is generally not advisable to hold investment real estate in a corporation.

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