Property in Domestic Asset Protection Trust Not Included in Grantor’s Estate

A Private Letter Ruling (PLR 200944002) issued by the Internal Revenue Service states that under the facts and circumstances discussed in the ruling the property of a self-settled domestic asset protection trust is not included in the Grantor’s estate even though he is a discretionary trust beneficiary. Many commentators were surprised that Grantor could retain this right and keep the property of the trust out of his estate. This ruling opens the door for Michigan residents to utilize the trust laws of a state such as Delaware in order to create a trust in which they are discretionary beneficiaries yet the property of the trust is both protected from creditors and not included in their gross estates for estate tax purposes.

In order to accomplish this, the trust must be properly drafted so that the Grantor’s contribution to the trust is treated as a completed gift when the contribution is made.

Several notable aspects of the trust discussed in the PLR included the following: (i) the discretionary beneficiaries of the trust were the Grantor, his spouse and his descendants, (ii) a trust company served as Trustee and the Grantor did not have the authority to remove a Trustee, and (iii) a broad group of individuals were prohibited form acting as Trustee, including the Grantor and the Grantor’s spouse.

In select circumstances, the type of trust described in the PLR may serve as a useful and valuable estate planning technique. An individual who can benefit from such a trust includes someone (i) who may be subject to estate taxes, (ii) wishes to create an asset protection trust, (iii) does not want the trust property to be included in his estate for estate tax purposes, and (iv) wishes to have the ability to receive distributions of trust property in the future (as a discretionary trust beneficiary). Given the complex and sophisticated nature of such planning, interested individuals should contact a Michigan asset protection attorney who can help Michigan residents with the necessary asset protection and estate planning analysis, as well as with the drafting and implementation of the trust document.