A federal tax court’s ruling in favor a trust on certain deductions that the trust claimed on its federal income tax returns highlights a potential added bonus to the use of trust planning, as the court decided that a trust could engage in the sort of active participation in a business needed to claim the business’s losses on its taxes. By refusing to foreclose trusts from claiming the losses of trust-owned business assets, the court’s ruling offers one more reason why family farmers and small businesspeople should ensure they have a proper estate plan in place that includes their business holdings.
In 1979, Frank Aragona created a trust where he was the grantor and the original trustee, with his five children and one unrelated person serving as the trust’s six successor trustees. This setup might sound familiar, as many living trusts created as part of an estate plan often have the grantor serve as the initial trustee, with family, friends or a trusted professional serving as the successor trustee(s).
Aragona died two years after creating his trust, having funded some rental real estate properties, as well as some other real estate assets, into the trust. His successor trustees managed the properties, some directly owned by the trust, with others owned by LLC that was itself wholly owned by the trust. The use of LLCs within an estate plan is also a potentially helpful technique, offering important advantages in terms of establishing protection between various assets. Through this type of planning, a liability risk related to the LLC-owned real estate (such as, for example, a slip-and-fall injury on a LLC-owned property) will not expose all of the trust’s assets in the event of an unfavorable court judgment. Continue reading