Email Article Print Article

Kinetic Asset Protection: Moving To Red Alert ( Part Two - the tax downside)

By Rob Lambert - Email Editor

Date: 25-Aug-2005

In last week’s newsletter, I focused on the fact that the settlor/creator of a properly configured Kinetic Asset Protection Trust is normally also the U.S. Trustee. By virtue of their status of being the U.S. Trustee, the settlor/creator normally remains in control of all protected assets until such a time that they are faced with serious creditor attack, which is what I call a “Red Alert Event.” A properly configured Kinetic Asset Protection Trust contains machinery that causes the U.S. Trustee to be removed from the “normal” position of being in control of protected assets when serious attack looms.

It is interesting to note that this authority granted to the U.S. Trustee to invest and move assets is also one of the reasons that a Kinetic Asset Protection Trust is often treated as a U.S. Trust for tax purposes.

Furthermore, as long as the settlor/creator of this Trust also has the authority to remove or change beneficiaries at any time, the Trust is also classified as a Grantor Trust for income tax purposes. This means that the Trust is treated like a pass through or disregarded entity.

The bottom line is that when the financial seas are calm, the Kinetic Asset Protection Trust is classified as a Domestic Grantor Trust for tax purposes, and as a result, the Trust pays no tax and has no tax reporting obligations.

This act of removing the U.S. Trustee has a positive and a negative impact.

The Positive Impact:

The settlor/creator, once removed from his position of U.S. Trustee, cannot move the protected money, even if ordered by a court to do so. Arguably, this should prevent the settlor/creator from ever being faced with a court order, which they can’t comply with. (Much more on this in later newsletters.)

The Negative Impact:

When the settlor/creator is removed from the position of being the U.S. Trustee, the Trust will normally become a Foreign Grantor Trust for tax purposes. This does not cause any tax to be imposed. However, it will result in a reporting obligation.

The bottom line: higher accounting fees and more disclosure.

Once the Red Alert Event has passed, the protector and the foreign trustee can reinstate the U.S. Trustee (if they are convinced that the event of duress has passed). In this case, the Foreign Trust will often become domestic again. Once this happens, there are no additional reporting obligations.

One more tax issue dealing with Asset Protection: Watch out for promoters making tax promises. Remember, an Asset Protection Trust will never save you any taxes but, it should never ever cost you any additional tax. I often go so far as to say that you should RUN from any promoter who says an Asset Protection Plan will save you taxes because they are probably crooks.

Next week’s newsletter will discuss how the settlor/creator of a Kinetic Asset Protection Trust can move to Red Alert Status, thereby giving up control of assets, but not exposing himself to any risk of theft from the protector or the foreign trust company.

RELATED ARTICLES:

• Managing Asset Protection Offshore
• Making the Most Out of Hedge Funds That Drive Success
• Working Your Portfolio to Being Green
• Finding Better Ways to Manage Your Money