Tax Court Decided That A MD's Asset Protection Trust Was A Sham!

The Tax Court has held, on that trusts established for asset protection by a doctor were shams. The trusts were disregarded and the doctor and his professional corporations owed taxes and penalties, as a result. 

The Court said that tax motivation alone, is not sufficient grounds for disregarding the trusts.

To Determine whether an a An Asset Protection Trust should be disregarded, the court had to consider the following four factors:

1. Whether the grantor-taxpayer's relationship to the trust property materially changed after the trust was created,
2. Whether the trust had an independent trustee,
3. Whether an economic interest in the trust passed to other beneficiaries, and
4. Whether the taxpayer felt bound by restrictions imposed by the trust or the law of trusts? 

The court then went on to determine that:

 "During 2001 through 2004 the corporations made payments to the trusts of $164,000, $160,000, $61,100, and $32,868, respectively. The Vlachs, as trustees, had exclusive authority to distribute trust proceeds and income at their discretion and, in fact, used their authority to pay for personal investments and expenses with trust funds. Thus, the corporate payments to the trusts solely benefitted the Vlachs personally and, as a result, the Vlachs must include those payments in income as constructive dividends."

 

Have Questions Regarding Taxation of
Asset Proctions Trusts?

 

Contact the Tax Lawyers at
Marini & Associates, P.A.

 

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or Toll Free at 888-8TaxAid (888 882-9243).

 

 

Source:

Steven E. Vlach and Nancy Vlach, TC Memo 2013-116