I am being pressured by a certified estate planner to establish a "limited liability trust" so that I won't be taxed so heavily. My business earns about $400,000 per year, and I claim most of that as personal income. I am sure I need to make some changes, but the information the planner is giving me just sounds too good to be true. He suggests that I establish the trust, give myself a $25,000 salary and end up paying about 10% income tax...my suspicions are high.
It is really unclear what your planner is recommending. First of all, the term "limited liability trust" is itself unclear. Is he suggesting that you set up a limited liability company, commonly known by the acronym "LLC"? If this is the case, how is he proposing using a limited liability company to reduce your tax cost? A limited liability company is a flow-through entity so that any income earned by the entity itself would be taxed to you personally. Further, if your business is already organized as a corporation or other entity, depending on the type, what would be the benefit of restructuring it as an LLC? As far as organizing it as a trust, the business itself should not be organized as a trust because a trust is not going to provide the limited liability protection you should have for a business. Your planner might be suggesting a host of different things to reduce your tax, but more detail is really needed in order to help you understand it. For example, is he talking about reducing estate tax; or gift tax on gifts to children or other heirs; or income tax? I suggest you get more detail and an explanation of what type of entity the planner is suggesting and how it is to be formed. Then, send in a new question and we will tackle it again. In calling your planner to discuss this information, consider some of the following questions: 1. Which specific types of taxes are you trying to minimize and why? If you are trying to minimize estate taxes, please provide some information on the family and other potential heirs to whom you would be shifting your estate. 2. If you are trying to minimize income taxes, have you reviewed with your accountant all the basic income tax planning steps which could be taken for your business? It is always best to crawl before you walk and certainly before your run. Before trying something wild and esoteric, why don't you try some of the basics. Do you have an appropriate pension plan? Can this be improved upon? Have you engaged in appropriate depreciation planning for fixed assets being acquired? Are there opportunities to hire family members who might be taxed at a lower tax bracket if they can provide legitimate services to the business? 3. If your business is not incorporated, then restructuring it as a limited liability company or another entity (which will depend on state law and taxation), it is essential that it provide you with limited liability. If you are operating a business generating $400,000 of income and have not reviewed asset protection with your attorney, start there first. How does a planner believe his plan would affect this? 4. Your general inclination to be uncomfortable when something sounds to good to be true is right. If the plan cannot be explained in simple English so that everyone can understand it, especially you, then do not do it. The estate planning field is full of people making up new names and titles with complex approaches to basic planning techniques in order to package and sell them for more, or even to confuse perspective customers. It is possible your planner is right on point, and you may have misunderstood his recommendation, but do not proceed until you do. Caution: The above advice is general advice and cannot possibly address your particular situation due to the dearth of facts provided. Estate law, estate taxation, and your unique circumstances will clearly affect any ultimate answer. Be certain to contact your attorney and accountant, preferably licensed and practicing in the state where you operate before proceeding with any plan.
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