MaxProtect Plan®: The Perfect Plan for Your Son/Daughter

Posted on October 15, 2018

Originally published in October 2015; Updated January 2018

Copyright © 2015 and 2018 Knox McLaughlin Gornall & Sennett, P.C.

Introduction

The goal in developing the MaxProtect Plan® was to use common (not controversial) estate and asset protection planning techniques to deliver uncommon results. In developing the MaxProtect technique, I was thinking like a father. How could I protect my 16-year old son’s growing lawn & garden business from unwanted and/or unintended creditors but, at the same time, not saddle him with higher income taxes that often result when business entities are owned in trust? We considered the Intentionally Defective Grantor Trust (IDGT) that allows income tax to be borne by the Settlor (me or my wife). However, we both agreed (my wife and I) that we pay enough income taxes, and we did not want to pay tax on our son’s business earnings. The next option we considered was the Beneficiary Defective Inheritor’s Trust (BDIT). However, many authors who have written on BDITs recommend an independent trustee. I (father mode) did not believe I could find anyone who would be willing to take on a 16-year old running a business, and I knew my son was not willing to pay the fees (or understand the need to pay such fees) associated with an independent trustee.

Accordingly, we moved, by necessity, to the options described more fully herein as the MaxProtect Plan®.

Bonus: Listen to Tom Hoffman discuss this issue for WP$E Radio:

Trust Premises

Trusts have been used by estate planning practitioners as an essential tool in estate planning and business succession planning for a very long time. Over the years, the nature and purposes of trusts have evolved in response to changes in legislation and the perceived needs of clients.

In the relatively recent past, one of the primary reasons for utilizing trusts in estate planning was to minimize federal transfer taxes, including the federal estate and gift tax and the Generation Skipping Transfer Tax (“GST Tax”). Historically, trusts have been utilized both during lifetime and at death as a vehicle to pass wealth on to family members, typically those at a younger generation level. The use of trusts in tandem with the judicious use of transfer tax exemptions and exclusions set forth in the Internal Revenue Code (“Code”) [such as the Applicable Exclusion from Federal Estate and Gift Tax (“Applicable Exclusion”) and/or the Generation Skipping Transfer Tax Exemption (“GST Exemption”)] has made it possible for families to gratuitously transfer wealth in a tax efficient manner. Minimizing federal estate and gift tax has therefore been a dominant focus of many practitioners’ estate planning practice. The relatively recent increase in the Applicable Exclusion has simultaneously made it possible for wealthy families to use trusts to pass on greater amounts of wealth without additional transfer tax and has also made it possible for other (less wealthy) families to pass on wealth free of transfer tax without having to resort to the use of trusts.

For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the new tax law doubles the base estate and gift tax exemption amount from $5 million to $10 million. (Code Sec. 2010(c)(3), as amended by Act Sec. 11061(a)). The $10 million amount is indexed for inflation occurring after 2011 and is $12,920,000 for 2023 ($25,840,000 per married couple). The language in the Act does not mention generation-skipping transfers, but because the generation-skipping transfer tax exemption amount is based on the basic exclusion amount, generation-skipping transfers will also see an increased exclusion amount.) (The excerpt is from RIA Checkpoint dated 12/28/2017). Many estate planners have therefore either reduced the use of or completely eliminated trust structures (such as credit shelter trust provisions in testamentary documents) from their estate planning practice in response to these changes in the tax laws.

However, trusts continue to play an important role in many estate plans, particularly those involving the transfer of an interest in a small business. This article discusses a particular type of trust structure created during a Settlor’s lifetime that can be utilized to facilitate the transfer of a business in a way that maximizes the protection of the entrusted assets from the reach of potential ex-spouses, tort claimants and other unintended creditors. The particular structure is at times referred to in this article as the “MaxProtect Plan®.” It involves the use of a type of trust common to many estates planning practitioners – a non-grantor trust. Before getting into the specifics of the MaxProtect Plan® and its advantages, some background about trust income taxation may be helpful.

Trust Taxation Generally

Because trusts are recognized for federal tax purposes as separate taxpaying entities in much the same way that individual persons are, they (trusts) generally have federal tax reporting obligations. Absent exceptional circumstances (like those discussed below), trustees must file fiduciary (trust) income tax returns reporting items of income, gain, loss and deduction generated by trust assets. In very general terms, any net taxable income remaining in the trust at the end of the trust’s tax reporting period is taxed to the trust at the tax rates applicable to the trust, and any taxable income distributed to the trust beneficiaries is taxed to them at the rates applicable to individuals. Historically, tax rates applicable to trusts were similar to those applicable to individuals and therefore certain wealthy individuals found it beneficial to put funds in trust for family members, such as children, in order to take advantage of the tax brackets applicable to trusts at lower income levels – in other words, to have the income taxed at lower tax rates. In response to this perceived abuse, a series of rules (known to tax practitioners as the “grantor trust” rules) evolved whereby a trust’s existence would under certain circumstances be disregarded altogether for federal income tax purposes and the trust’s tax attributes imputed to the creator (the “grantor”) of the trust, or to others. Those rules (again more familiarly known as the “grantor trust” rules) are set forth in Sections 671 through 678 of the Internal Revenue Code. In addition, to further combat the income shifting practices associated with trusts, legislation was later enacted in 1986 to significantly compress the income tax rate brackets applicable to trusts. That legislation all but eliminated the income tax benefit of shifting income from individuals to trusts. Thus, while the original rationale for the grantor trust rules arguably no longer exists, the rules themselves remain a part of the tax code to this day.

Grantor Trusts Generally

While the grantor trust rules were originally enacted to combat perceived abuses on the part of taxpayers, clever planners eventually found ways to utilize the rules to accomplish client’s tax and non-tax objectives.

One common use has been to “leverage” the benefits of gifting in trust to family members. Specifically, because under the grantor trust rules, the income generated on entrusted assets is generally imputed back to the grantor (trust creator), the grantor, by paying the income tax, is able to increase the amount effectively given to the beneficiaries (in the form of tax paid on their behalf) without having to recognize it as a “gift” for tax purposes.

Another way in which the grantor trust rules can be useful to taxpayers is in a commercial context. Many small businesses are organized as corporations subject to tax reporting under Subchapter S of the Internal Revenue Code (“S Corp”). S Corp status is elective and is in many cases very beneficial, but is at the same time subject to various requirements. One such requirement for electing S Corp status (the “S election”) has to do with the types of persons and/or entities that are permitted to own stock in the corporation. In order to maintain the integrity of a corporation’s S election (and continue its status as an S Corp), a corporation is generally only permitted to have individuals and certain types of entities as shareholders. As a general rule, trusts are generally not permitted to be shareholders of an S Corp; but, like most rules, there are certain exceptions to that general rule. One such exception is for a grantor trust. If a trust qualifies as a “grantor trust” for federal income tax purposes, its status as a trust is disregarded for federal tax purposes and it can therefore hold shares of stock in an S Corp without causing the corporation to lose its status as such. Accordingly, if an advisor thinks that it will be in a client’s interest (possibly for asset protection reasons) to put an S Corp business into a trust, it is important for the trust to be a “grantor trust.” Under such circumstances, if the grantor happens to be in a lower tax bracket than the trust (which, with the highly compressed tax rates applicable to trust, is now often, though not always, the case) the grantor trust rules can also have the added benefit of causing the business’s income to be taxed at the grantor’s lower tax rate(s) rather than at the higher tax rate(s) applicable to the trust.

Qualified Subchapter S Trusts

The “leveraging” effect associated with irrevocable grantor trusts is of course tied to the grantor’s willingness to bear the tax on income allocated to the trust. While the additional tax benefits associated with such a strategy will no doubt appeal to many very wealthy grantors – and even more so to their intended beneficiaries – it will not appeal to all grantors. Particularly if the grantor transfers a major income producing asset (such as their interest in a small business) or a significant portion of their overall wealth to a trust, the grantor in some cases may not desire to bear the tax on the trust’s taxable income. Under such circumstances, if the entrusted asset consists of stock in an S Corp, then maintaining the corporation’s S Corp status will often be a paramount concern, and so the issue frequently will be how to maintain the effectiveness of the S election and at the same time prevent the grantor from having to bear the tax burden associated with all of the “phantom” income allocated to the trust.

Although different solutions are possible, the answer in many cases will involve making a tax election on behalf of the trust known as a “qualified subchapter S trust” (“QSST”) election. The election is only possible if the trust contains certain language that enables the trust to meet the requirements for making the QSST election, and if the trust beneficiary makes a timely QSST election on behalf of the trust.

One of the conditions for making a QSST election is that all of the trust’s net accounting income must, under the terms of the governing trust instrument, be distributed annually to a single beneficiary.

There are a number of other requirements as well. If all of the requirements for the QSST election are met, the election will have the effect of shifting the tax on the trust’s taxable income from the grantor (or the trust) to the trust beneficiary. In the parlance of tax practitioners, trusts making the QSST election are sometimes referred to as “Section 678 trusts” (after the Code section that causes the beneficiary to be taxable on the trust income) or as “beneficiary defective inheritors trusts” (also called “BDITs”). As is the case with the more commonly styled grantor trusts, a Section 678 trust is among the types of trusts that are permitted to own S Corp stock and therefore the corporation’s S election will not be jeopardized by the trust’s ownership of the stock. If, as is commonly the case, the trust beneficiary happens to be in a lower tax bracket than the grantor or the trust, then the election will have the added benefit of shifting the income to a taxpayer who will be taxed on that income at a lower tax rate. Solely for federal (and not Pennsylvania) income tax purposes, a QSST (Section 678 trust) is disregarded, and the beneficiary (child of business owner in a classic business succession plan) recognizes the income earned by the S-Corp on his or her federal income tax return (Form 1040).

It is not uncommon for a grantor who is initially enamored with the “leveraging” benefits associated with the use of a grantor trust to decide at a later point in time that they no longer wish to pay the tax on the trust’s income, particularly if the trust holds assets that are generating significant taxable income. If a family member, such as a child, is the primary beneficiary of the trust, it may make sense – especially from the Settlor’s standpoint – to have the beneficiary (rather than the grantor or the trust itself) bear the tax burden attributable to the entrusted asset. Under such circumstance, the QSST election may be particularly attractive.

Under the newly passed Tax Cut and Jobs Act (the “Tax Act”) allows, a 20% deduction for qualified business income from pass through entities (such as LLC, S corporation, partnerships and sole proprietorships) only to individual taxpayers. (Qualified business income is generally ordinary income from a trade or business conducted within the United States and does not include investments related income, deductions or losses (e.g. capital gains, dividends and interest income). The QSST election should allow the trust beneficiary take advantage of these 20% deduction for the qualified business income thus further reducing the income tax burden.

Generally for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new section, Code Sec. 199A, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:

  1. the lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
  2. the lesser of: (i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or (ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year. (Code Sec. 199A(a), as added by Act Sec. 11011)

The “combined qualified business income amount” means, for any tax year, an amount equal to: (i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer's QBI subject to the W-2 wage limitation; see below); plus (ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year. (Code Sec. 199A(b))

QBI is generally defined as the net amount of “qualified items of income, gain, deduction, and loss” relating to any qualified trade or business of the taxpayer. (Code Sec. 199A(c)(1), as added by Act Sec. 11011) For this purpose, qualified items of income, gain, deduction, and loss are items of income, gain, deduction, and loss to the extent these items are effectively connected with the conduct of a trade or business within the U.S. under Code Sec. 864(c) and included or allowed in determining taxable income for the year. If the net amount of qualified income, gain, deduction, and loss relating to qualified trade or businesses of the taxpayer for any tax year is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year. (Code Sec. 199A(c)(2), as added by Act Sec. 11011) QBI does not include: certain investment items; reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered with respect to the trade or business; any guaranteed payment to a partner for services to the business under Code Sec. 707(c); or a payment under Code Sec. 707(a) to a partner for services rendered with respect to the trade or business.

The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction reducing taxable income. (Code Sec. 62(a), as added by Act Sec. 11011(b))

Limitations. Except as provided below, the deduction cannot exceed the greater of:

  1. 50% of the W-2 wages with respect to the qualified trade or business; or
  2. the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is defined in Code Sec. 199A(b)(6) as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.

The above limit does not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for married individuals filing jointly, $157,500 for other individuals, indexed for inflation after 2018). The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals). (Code Sec. 199A(b)(3), as added by Act Sec. 1101) Thus, for 2018, the limit fully applies to married taxpayers with taxable income over $415,000 and other individuals with taxable income over $207,500.

For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to their allocable share of the W-2 wages of the entity for the tax year. A partner's or shareholder's allocable share of W-2 wages is determined in the same way as the partner's or shareholder's allocable share of wage expenses. For an S corporation, an allocable share is the shareholder's pro rata share of an item.

Service businesses. Except as provided below, the deduction does not apply to specified service businesses (i.e., trades or businesses described in Code Sec. 1202(e)(3)(A), but excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities). However, the disallowance of the deduction for specified service trades or businesses of the taxpayer does not apply for taxpayers with taxpayer income below the threshold amount described above. And, the benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for joint filers ($50,000 for other individuals). (Code Sec. 199A(d)) Thus, for 2018, the limit fully applies to married taxpayers with taxable income over $415,000 and other individuals with taxable income over $207,500.

The deduction does not apply to the trade or business of being an employee.

The new deduction for pass-through income is also available to specified agricultural or horticultural cooperatives, in an amount equal to the lesser of (i) 20% of the co-op's taxable income for the tax year, or (ii) the greater of (a) 50% of the W-2 wages of the co-op with respect to its trade or business, or (b) or the sum of 25% of the W-2 wages of the cooperative with respect to its trade or business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property of the cooperative. (Code Sec. 199A(g), as added by Act Sec. 11012) (Except is from RAI Checkpoint dated 12/28/2017)

"MaxProtect" Trust

As noted above and for tax purposes, a trust can convert at a later point in time from a “non-grantor” trust (income taxed to the trust and/or to persons receiving distributions from the trust) or from a “grantor trust” (income taxable to the grantor) to a “Section 678 trust” (income automatically passed through and taxed to the primary trust beneficiary). The “MaxProtect” concept recognizes that a trust can also be structured as a “Section 678 trust” from its inception. The MaxProtect concept further recognizes that it may be useful in some instances to create different types of entities within the trust, and in some cases to make use of tiered ownership structures in order to diversify holdings and/or increase the level of asset protection provided to clients.

Steps Involved

The steps involved in creating the MaxProtect Plan® are perhaps best illustrated through an example.

Step #1: Creation of the Trust. An individual owns certain valuable assets and wants to protect them. The assets to be protected could be (but do not necessarily have to be) assets currently used (or soon to be used) in a business, or a business entity itself (an LLC or a corporation). In this example, let’s assume that the assets are in fact business assets (unincorporated sole proprietorship). The owner’s intent is to transfer those assets to his children over time and protect them from potential creditors. It is important to note that the MaxProtect Plan® can be used with just about any assets, including cash, marketable securities, businesses already operating in the form of limited liability companies, corporations, general partnerships, or limited partnerships. Additional planning may be necessary, but the same results may be obtained.

The first step for the individual/owner (“Business Owner”) is to create a trust (the “Trust”), appoint a Trustee, and contribute the business assets to the Trust. Since this is a transfer of a business to the next generation, commonly the Trustee will be the child who will succeed to the business. However, the beneficiaries of the Trust can be any persons whom the Business Owner cares to name. In most cases, the Trust beneficiaries will be one or more of the Business Owner’s children and/or any other persons to whom they wish to ultimately transfer ownership and/or control of the business. To obtain the desired asset protection, the Trust will need to be an irrevocable trust with standard “spendthrift” language.

If the Business Owner also intends to avoid taxation at the entity level and instead shift the tax consequences to the intended beneficiaries, then the instrument under which the Trust is created (the “Trust Agreement”) should also contain language that enables the Trust to qualify as a Qualified Subchapter S Trust (“QSST”). To qualify as a QSST, a trust must meet the following requirements: (1) the trust must have only a single income beneficiary (who must be a U.S. person) during that income beneficiary’s lifetime; (2) the trust’s net accounting income must be required, under the terms of the governing instrument, to be distributed to that income beneficiary at least as often as annually; (3) the trust principal can only be distributable to the income beneficiary during the time that the income beneficiary is alive; (4) the income beneficiary’s income interest must terminate at the earlier of the income beneficiary’s death or the trust’s termination; and (5) if the trust terminates during the income beneficiary’s lifetime, all of the trust’s assets must be distributed to the current income beneficiary.

One way for a Trust to meet the QSST requirements would be to explicitly incorporate each of those requirements as part of the Trust Agreement. Alternatively, if the Trust Agreement does not explicitly state that the Trust must meet the above requirements, then the Trust should, at a minimum, contain language authorizing the trustee to subdivide the Trust assets, and hold all S Corp stock in a separate trust that meets all of the requirements of a QSST.

In addition to the above, it’s also important that the Trust Agreement does not contain any provisions that would cause the Trust to be treated as a “grantor trust” for federal tax purposes. (Or, that if the Trust does contain any such provisions, that any such provisions be removed before making a QSST election). The tax treatment afforded by a QSST election must not be inadvertently overridden by the application of one or more of the grantor trust rules.

Step #2: Creation of the Business Entity (LLC). Once the Trust is created, the next step will be for the Trustee to create one or more entities to hold the entrusted assets. To avoid taxation at the entity level, the created entity (or entities) will need to be a pass-through type entity for tax purposes. In this particular instance, let’s assume that the entity type chosen by the Trustee is a limited liability company (“LLC”). From a purely mechanical standpoint, the Trustee will transfer all of the entrusted business assets to the newly formed LLC in exchange for all of the “membership units” (ownership interests) in the LLC entity, as depicted in Flowchart #1. Immediately after the transfer, the LLC will therefore be wholly owned by the Trust, as illustrated in Flowchart #2.

Step #3: Election by the LLC to be taxed as a corporation. As a wholly owned entity, the LLC’s existence is ordinarily disregarded for federal tax purposes, unless it affirmatively elects to be taxed as a corporation. Thus, if the Business Owner’s sole objective (from a tax standpoint) was to avoid taxation at the lower tier entity level (i.e., the LLC), then that objective would already be accomplished without any further action on the part of the Trustee.

However, if the Business Owner’s objectives also include shifting taxation of the Trust’s earnings from the Trust over to the Trust beneficiaries, then the latter objective will not be accomplished, unless tax elections are filed on behalf of the Trust and the LLC. The election to be filed on behalf of the Trust is the QSST Election, which has already been discussed. However, the QSST Election cannot be filed on behalf of a trust unless its sole stockholdings are shares of stock in an S Corp. If the only Trust asset is its ownership interest in a wholly owned LLC, then the Trust would not own the requisite S Corp stock to make the QSST Election. To meet the requirement that the Trust holds S Corp shares of stock, the wholly owned LLC must also make a series of tax elections. The first tax election the LLC must make is to be treated for tax purposes not as a disregarded entity, but instead as a corporation. That tax election (by an LLC to be treated as a corporation for federal tax purposes) is made by checking the appropriate box on Internal Revenue Service (IRS) Form 8832 and filing it with the IRS.

Step #4: S Election by the deemed “corporation” (i.e., the wholly owned LLC). If the LLC simply elected to be treated as a corporation without making any other tax elections, it would be treated for tax purposes as a C corporation, which would put it in a worse position than if it had made no election at all. For that reason, it is important that the Trust as owner of the LLC (which, after making the first election, is then treated for federal tax purposes as shareholder of a corporation) also contemporaneously elects for the LLC (which, after making the first election, is treated as a corporation) to be treated for tax purposes as an S Corp. The S election is made by executing and filing IRS Form 2553. If the S election is being made for a new entity (LLC) owned by the Trust, Form 2553 allows for a contemporaneous S election by the LLC and Qualified Subchapter S Trust election by the trust. The election is effective for the tax year if it is made within two (2) months and 15 days after the beginning of the tax year the election is to take effect.

Step #5: Formation of lower tier entities (LLCs). Let’s add the following wrinkle to our example: Business Owner now has multiple business lines or alternatively has investment assets he wishes to keep separate from the entrusted business assets, for one reason or another. So, in our example, let’s assume that the wholly owned LLC now holds business assets and investment assets (cash and marketable securities), and the Business Owner wishes to keep the business assets and the investment assets in entirely separate entities in order to maintain an additional layer of asset protection with respect to each set of assets. Further, the Business Owner wants income to be taxed to the trust beneficiary on the business assets and the investment assets.

To achieve the objective, the Trust will form a new LLC and make an S election for the new LLC, as depicted in Flowchart #3. In exchange for the LLC interest, the Trust will contribute all interest it owns in the original LLC, so that the original LLC becomes a wholly owned subsidiary of the new LLC (i.e., a Qualified Subchapter S subsidiary). For federal income tax purposes, the parent subsidiary relationship is disregarded and all income, earnings and taxes from the subsidiary (original LLC) are reported on Form 1120 S Federal Income Tax Return for the parent LLC. Next, the subsidiary LLC distributes, on a tax-free basis (the subsidiary is disregarded for federal income tax purposes), an S corporation distribution from the subsidiary LLC to the parent LLC. The parent LLC will now own S corporation stock and have marketable securities and cash to invest in a diversified portfolio. The trust will have an additional level of protection by having less risky assets (cash and marketable securities owned by an entity other than the business entity). Immediately after the formation of these entities, the Trust will be the sole owner of the parent LLC (effectively a holding company) which in turn wholly owns the limited liability companies. The ownership structure is illustrated in Flowchart #4.

What Has Been Accomplished?

Having gone through the time and expense of creating the aforementioned entity structures, it is fair (and important) to ask what has been accomplished by all of the above.

First and foremost, the Business Owner has effectively facilitated the transfer of the business to the next generation of business owner(s) and, in so doing, implemented a plan of business succession.

Secondly, the Business Owner has utilized entity structures that will serve to insulate and ultimately protect the assets of the underlying business (or businesses) from potential creditors – including creditors of both the Settlor and the beneficiaries. While there are no absolutes when it comes to protecting assets, few practitioners would dispute that interposing multiple entities between the beneficiaries and the underlying assets of the business will make life far more difficult and complicated for persons who might wish to bring a contract or tort claim against one of the beneficiaries, or to actually collect on a judgment against a beneficiary.

For example, the fact that a trust beneficiary does not directly own the underlying assets or even have a direct ownership stake in any of the entities holding the assets can be very beneficial if the beneficiary experiences problems such as a divorce, bankruptcy, disability or substance abuse problem in the future. Furthermore, by segregating the business and investment assets into separate LLC entity structures, there is additional asset protection against potential “spillover” exposure from other activities (e.g., investment activity and the business activity) at that level. In other words, because the business assets are held in a subsidiary LLC and the investment assets in another parent LLC, the investment assets are arguably shielded from liability caused by the business activity.

Third, to the extent that the Settlor does not retain an ongoing interest in, or control of, the Trust (typically the case), the Settlor will have effectively removed the entrusted assets from his or her estate for federal transfer (estate and gift) tax purposes.

Fourth, the Settlor has shifted the income tax burden over to those persons who will ultimately benefit from the income and growth of the business.

Countervailing Considerations

The advantages of the “MaxProtect” structure should be balanced against certain other countervailing considerations, including the initial set-up costs, the need to periodically monitor business and investment activities, and perhaps most importantly, the need to retain capable advisors, including in particular, an experienced and reasonably sophisticated tax accountant. In weighing and balancing all of the above, clients will want to take into account the size and scale of the operations and the relative degree of risk associated with their individual businesses, and the nature and characteristics of the intended successors to the business.

Conclusion

For many business owners, the MaxProtect Plan® is an idea that merits careful consideration to determine whether it can further the objectives and goals of the business owner and their intended successors.

Contributing Authors

Originally published in October 2015; Updated January 2018

Copyright © 2015 and 2018 Knox McLaughlin Gornall & Sennett, P.C.