USA – TEXAS Law and Practice Contributed by: Perrin Clark and Meredith McIver, Ytterberg Deery Knull LLP
3.4 Tax Consequences of Fiduciary and Beneficiary Roles If a donor of a trust serves as fiduciary of that same trust, there is a risk that the assets of the trust will be attributed to them for federal tax purposes. While this risk can be mitigated by significantly limiting the powers of the donor as trustee, in practice we prefer that a person who is not related or subordinate to the donor serve as trustee. Similarly, when a beneficiary of a trust serves as fiduciary of a trust for their benefit, there is a risk that the assets of the trust will be attrib- uted to them for federal tax purposes. In practice, this risk is addressed in a number of ways, including by imposing an ascertainable standard for distributions to the beneficiary. Trust planning, involving the creation of irrevocable trusts with spendthrift provisions, can provide asset protection benefits for non-grantor beneficiaries. A beneficiary’s creditors generally cannot reach assets owned by the trustee and held in trust. Trust assets become subject to creditor claims if they are distribut - ed to the beneficiary; therefore keeping assets in such trusts can provide important asset protection benefits. However, Texas law does not provide for the crea - tion of self-settled asset protection trusts; therefore the asset protection benefits of trusts generally only apply to trust beneficiaries in the context of irrevoca - ble trusts created by third parties. Other important asset protection strategies in Texas include: • creation of limited liability entities, such as LLCs, with transfer restrictions; 4. Family Business Planning 4.1 Asset Protection • use of premarital and postmarital agreements; • asset transfers between spouses and family mem - bers, including in trust for their benefit; • purchases of insurance products; • funding of retirement accounts; and • investment in a residence to use as a homestead.
4.2 Succession Planning Individuals and families with substantial wealth, some - times involving significant closely held operating busi - nesses, often struggle with developing a viable suc - cession plan. While numerous strategies may exist and be employed to transfer wealth to lower genera - tions, a plan for succession of control over entities and property, particularly with respect to control of signifi - cant closely held operating businesses, can be much more challenging to create and much more nuanced in substance and implementation. Succession plans are often incorporated within other planning vehicles, such as trusts, LLCs, limited partnerships, and corpo - rations. With significant closely held operating busi - nesses, use of various strategies may be appropriate, including without limitation: robust company or part - nership agreements; shareholders’ agreements; buy/ sell agreements; insurance programmes; and board structures, potentially involving business managers and/or outside directors. Sometimes an actual suc - cession plan, setting forth a specific succession of governing persons and management provisions, may be appropriate. Family conflict with respect to suc - cession plans is often best avoided by creating a clear and robust succession plan well in advance of need and coupling it with transparency, so all the stake - holders are fully aware of the plan, including before implementation. 4.3 Transfer of Partial Interest In Texas, valuation discounts due to lack of control and lack of marketability are important estate planning tools for tax-efficient transfer of wealth to lower gen - erations. Often, ownership of property is bundled in a new holding company or partnership, if an appropriate entity for such planning is not already in existence. The entity is structured in a manner that separates control from ownership, either through the appoint - ment of governing persons (ie, managers of an LLC) or through a recapitalisation that creates a class of con - trolling shareholders or a general partner. Once such an entity is properly structured, non-controlling eco - nomic interests are transferred to lower generations, often in trust, without transferring control of the entity. Sometimes this transfer is done as a gift, but often it is wholly or partially done as a sale, perhaps in return for promissory notes that utilise an appropriate AFR as their interest rate. Due to the non-controlling nature
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