Are you a Pennsylvania resident?
Do you have, or are you interested in a domestic asset protection trust?
Are you unsure whether or not these self created trusts will be included in your estate for tax purposes?
If so, then you’ll be interested in the IRS’s new Private Letter Ruling.
The general rule, in most states,(including Pennsylvania’s trust law) is that you cannot create a trust (a self-created trust) and then claim that your creditors cannot reach it.
And, the IRS generally takes the position, that when you create a trust, it remains in your estate for estate tax purposes if you retain the right to continue to use the trust assets, your creditors’ can reach them under state law, or you retain the right to benefit from or to control the assets.
And, for that reason, the residents of Pennsylvania tha are interested in creditor protection have started creating trusts under the laws of Delaware and/or Alaska, Nevada or other states that permit these asset protection trusts.
However, there has always been some question about whether these new trusts (now permitted in 12 states including Delaware, Alaska, Utah and Nevada) are effective for asset protection and whether or not the Service would claim that they were to be taxed at death since they do often allow for the grantor or settlor (the creator of the trust) to get distributions from the trust under certain circumstances.
However, in a recent PLR (Private Letter Ruling 200944002) the IRS confirmed that an Alaska self created trust will not be included in the creator’s estate for estate tax purposes. However, the ruling is limited on it’s face to an Alaska resident using an Alaska trust. And, the PLR seems to also turn on the fact that under the particulars of that state law, the creditors could not reach the assets. However, in some states that have asset protection trusts, there are provisions that allow creditors to reach assets under certain circumstances that might still cause their inclusion in your estate.
So, if you have or intent to create a trust under one of the 12 states laws that now permit such asset protection trusts, you now, for the first time, have something from the IRS to help you to evaluate the effectiveness, the pros and cons of these trusts.
Now under IRC (Internal Revenue Code) section 6110(k)(3) Private Letter Rulings cannot be cited or used as precedent. And, these rulings are specific to the facts, the type of trust, the trustees, and many other factors. However, this one does expressly hold that the trust is not includable in the estate.
In summary, and according to Douglas Blatmacher this ruling provides planners and their clients “who have been hesitant to make large gifts (for fear of future needs)” – “with a strategy that not only provides asset protection, but significant potential estate tax savings while at the same time the comfort of knowing that if the settlor requires some portion of the funds transferred a trustee can provide for them.”
More specifics on this to follow as we analyze this important development.