Trusts Are Not Tax Shelters
The other day I had an
interesting conversation with a lawyer I know about
private annuity trusts. She’s an estate planning
lawyer, so she knows something about trusts, but she
was having the hardest time with private annuity
trusts. She, like many attorneys who don’t
specialize in PATs, was having a hard time believing
in the legitimacy of PATs. As we talked more and
more about her concerns, it occurred to me that she
was having the same problem with PATs that a lot of
people who encounter them do: she had been
bamboozled by some tax shelter salesman. When I
asked her what her experience with PATs was, she
said that she had never used them in practice and
had only encountered them when slick “financial
planners” had cornered her for a meeting and were
trying to set up some deal where they would supply
her with clients if she would draft PATs and sign
off on their authenticity.
Why, you might be wondering,
would a lawyer have to sign off on the authenticity
of a PAT? The I.R.S. has approved its use as a
tax-deferral vehicle. Well the problem that I see
most commonly, and that this lawyer had apparently
seen too, is that too often, PATs are marketed by
over-eager financial planner types as tax-shelters.
Often, to reassure clients that they will not face
any personal liability when using tax shelters, tax
shelter promoters provide letters from attorneys
documenting the legality of the particular shelter.
This is why my lawyer acquaintance was wary of PATs,
and, well, she should have been. When you try to use
PATs in that way, you’re looking for trouble with
Somewhat related to this is
another problem I often see with PATs which is too
many advisors and no accountability from those
advisors. I mean, if you have a financial planner to
guide your decision to use a PAT, a lawyer to create
it, an administrator to manage the investments and
paperwork, and a CPA to handle any tax issues, you
are paying a lot of expensive professional fees.
Sound crazy? There are plenty of PAT promoters out
there who will lead you into just such a den of
thieves. OK, maybe that’s too harsh, but still, PATs
can require a lot of maintenance, and paying several
professionals to keep up with that maintenance can
eat up a lot of your principal.
The way I get around these two
problems is easy. First, I make sure that my clients
understand that PATs are, primarily, a way to
convert a relatively illiquid asset into a lifetime
income stream. Tax deferral is an added bonus to
that purpose, a big bonus, but a bonus nonetheless.
The old saying about taxes being the tail that wags
dog holds true here; i.e. if you’re just in this for
the tax benefits you’re in it for the wrong reason.
Second, I am associated with a group that keeps
financial planners, CPAs, attorneys and
administrators on staff. Basically, they pay these
people so you don’t have to. I like that because it
helps preserve more of the client’s principal.
So, if you’re considering a PAT
or you come across one in your financial planning,
just be careful of what you’re getting into and be
sure you’re working with someone you can trust. If a
lawyer who works with trusts and tax planning every
day can be misled about PATs, it can happen to
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