Protecting A New Business From Creditors’ (the IRS) Claims

In an IRS Office of Chief Counsel Release 200036045, dated May 16, 2000, two issues were raised:

First: Whether the terms of a trust prevent the attachment of the federal tax lien.

Second: What collection device, if any, should be used to collect from the taxpayer’s interest in the trust.

The Chief Counsel’s Release arrived at two conclusions:

First: The taxpayer has a property interest in the trust subject to the federal tax lien, despite the spendthrift, discretionary, and remainder interest provisions. The Internal Revenue Service believed that this property interest is limited to the payments to be made as provided for by the trust.

Second: A suit to foreclose the federal tax lien would be the collection action, if any, that the Internal Revenue Service would recommend.

The Chief Counsel’s Release draws a distinction between fully discretionary trusts and those requiring payments for support: “Where a trust gives the trustee uncontrolled, absolute discretion with respect to the distributions, if any, made to a beneficiary, the beneficiary has no basis to compel the trustee to make a distribution. Therefore, he does not have any interest which is subject to the federal tax lien. On the other hand, a beneficiary does have a right to property subject to the federal tax lien where, under state law, he can force the trustee to act, as is the case with a support trust.”

Strategic Planning Lessons Learned:

First: A trust created by parents or other third parties can help to protect business assets from creditors and estate taxation.

Second: Giving a trust beneficiary the power to withdraw assets for his or her support makes the trust assets subject to an IRS lien for outstanding taxes.

If you want to discuss your own situation with a California tax attorney, call Mitchell A. Port at (310) 559-5259.