Don't Forget to File a Gift Tax Return for 2010 Gifts

Posted on February 28, 2011 by Ken Laino

For anyone who did any asset protection planning in 2010 -- If you made a gift of more than $13,000 to anyone other than your spouse, you are required to file a federal gift tax return to report the gift(s).  The filing is made on IRS Form 709.  A gift tax return for gifts made during 2010 is due by April 15, 2011.

Assets are frequently transferred from one person to another in connection with asset protection planning, and also in connection with routine estate planning.  It is very important to remember that a gift tax return may be required in connection with such transfers.  If you transfer assets worth more then $13,000 to anyone other than your spouse for no consideration (that is, as a gift), you probably have to file a Form 709.  You will not owe any tax if you are simply applying the amount of the gift to your lifetime federal exemption.  That amount (which is now a unified federal estate, gift and generation-skipping transfer exemption) has been increased to $5 million for 2011 and 2012.  Gift tax will be due once you have used up your applicable lifetime federal exemption.

This post is just a very brief overview of gift tax filing requirements.  It is certainly not a complete summary of all requirements.  If you made a gift to anyone of more than $13,000 in 2010, you should consult with your tax advisor to determine whether a gift tax return is required.

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Revocable versus Irrevocable Trusts

Posted on February 23, 2011 by Ken Laino

Following up on my posts of January 26, 2011 and July 21, 2010 -- I want to emphasize again that not all trusts provide asset protection.

A so-called revocable "living trust" (often designed for probate avoidance) can protect beneficiaries of that trust from claims of creditors.  For example, you can protect assets that you place in trust for the benefit of your children from claims of their creditors.

But in order to protect your own assets from your own creditors -- the trust you set up has to be irrevocable.  You have to give up a certain amount of control over the assets you place in such a trust or they will simply be deemed the equivalent of your own personal assets.  As common sense would indicate -- if a trust you set up is completely revocable, a court could simply order you to revoke it.  And your judgment creditors could then take steps to seize those assets.

So the bottom line is what common sense would indicate:  if you retain complete control over assets in a trust, then the assets are not going to be insulated from claims of your creditors.

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Asset Protection Advantages of a Roth IRA

Posted on February 14, 2011 by Ken Laino

Does a Roth IRA provide better creditor protection than a traditional IRA?  The answer is yes.  This is because with a traditional IRA, you have to begin taking mandatory required distributions (MRD's) starting in the year you reach age 70 1/2.  These distributions can become a potential target for creditors.  You are not required to take any funds out of a Roth IRA.

Even though a Roth IRA may be a little better for asset protection purposes, you certainly do not want to convert a traditional IRA into a Roth IRA solely for this reason.  Tax considerations will likely be your main focus.  In a traditional IRA, you make contributions in pre-tax dollars, but you must pay tax when you withdraw the funds.  With a Roth IRA, you make contributions in after-tax dollars, and there is no tax when you withdraw the funds.  Converting a traditional IRA to a Roth IRA could result in a significant tax bill.  Such a conversion may or may not be a good idea, depending on your individual situation.

As I have emphasized many times before, a solid asset protection plan can only be developed by focusing on all your assets and liabilities.  Funds in any kind of IRA are going to be a lot better from an asset protection standpoint than funds in an individual investment account.  The Roth IRA simply has an advantage in that there is no requirement to withdraw any funds.

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