U.S. v. Kimball Case Supports the Use of a 541 Trust – Even Against IRS Lien

One of the simplest planning techniques to protect against claims from creditors, even the IRS, is to use a properly drafted irrevocable non self-settled trust. For generations, courts have found that these types of trusts will not be accessible by the creditors of the individual creating the trust.

In U.S. v. Kimball, Jr., 117 AFTR 2d 2016-811, (DC ME), 06/24/2016, the United States District Court District of Maine addressed two separate counts. The first count was granted on summary judgment, resulting in a judgment of $1,090,700.05 in unpaid taxes and penalties against Mr. Kimball as an individual. The second count was an attempt to have the tax lien attach to a trust that Mr. Kimball created. The Court denied the second count on summary judgment. In other words, the assets in the trust were safely protected from the tax lien.

The Court found that the trust was not the property of Mr. Kimball and the tax lien should not attach to the trust property. Mr. Kimball created the trust naming his children as beneficiaries and himself as trustee. The trust included flexible provisions, but the trust restricted any changes that would cause Mr. Kimball to become a beneficiary of the trust. In the event of changes to the trust, the relevant property would go to the beneficiaries of the trust, and not to Mr. Kimball.

The type of trust used by Mr. Kimball was a non-self-settled trust. This type of trust is a trust that does not name the settlor as a beneficiary, but instead the trust names a third party as the beneficiary of the trust (i.e. naming the settlor’s spouse or children as beneficiaries). Because the trust is not “self-settled” the creditors of the settlor cannot reach into the trust, so long as there are no fraudulent transfers into the trust.

A powerful asset protection solution is to combine the asset protection benefits from using a non-self-settled trust with the flexibility provided by the grantor retaining a special power of appointment. A special power of appointment is a tool that provides the settlor with a lot of flexibility while still protecting the trust from creditors’ claims. Court cases and statutes going back over 200 years have consistently held that a special power of appointment is not subject to creditors. We have created such a trust with these unique characteristics. We call our unique trust a 541 Trust®.

A non-self-settled trust has provided an elegant and powerful solution for solid asset protection. Asset protection does not need to be complicated and does not need to use a new and untested planning technique. When properly funded and operated correctly, a 541 Trust® is one of the most efficient, flexible, and effective creditor protection strategies available.

We have perfected the 541 Trust® to obtain the best in asset protection with the flexibility to adjust for changing circumstances. There are generations of court cases demonstrating that it is extremely unlikely that a creditor will be able to access the assets in a 541 Trust®.

Want to get the best in asset protection or learn more about the 541 Trust® and why the Kimball Court, on summary judgement, denied the IRS’ attempt to attach a tax lien to the trust, please call us at 801-765-0279.

Piercing the Corporate Veil: Corporate Formalities and Business Records

Corporations are generally treated to be a separate entity from its owners.[1] However, the owners of a corporation (i.e. shareholders) might be held personally responsible for the debts of the corporation. Generally, this can happen when a court allows creditors to “pierce the corporate veil” or the protection offered by a corporation is destroyed by the court. A common deficiency that might lead to piercing the veil is the failure to follow corporate formalities.

Small businesses are less likely to follow corporate formalities or the steps required by the government to be shielded by the corporate veil. These entities are more at risk of having the corporate veil pierced. Corporations should comply with all contractual and statutory formalities, including, but not limited to the following:

  • Hold annual meetings of directors and shareholders;
  • Keep accurate and detailed “minutes” that document the decisions and issues addressed during a meeting;
  • Adopt and maintain company bylaws;
  • Make sure that the officers, agents, directors, and shareholders abide by the bylaws;
  • Ensure the formation documents were properly filed and recorded;
  • Renew the entity and update the public record on a timely basis to avoid any lapse in registration; and
  • Maintain separate accounts and do not commingle the entity’s financial assets with the owners’ personal assets or make them available for personal use.

Following the formalities of a corporation is important to defend against an attack that tries to pierce the corporate veil. Ultimately, a court might consider various factors when determining to pierce the corporate veil, such as evaluating whether: (1) a corporation was engaged in fraud or promotes injustice; (2) an entity was inadequately capitalized; (3) an entity is an alter ego of another individual or group of individuals; and (4) an entity fails to follow corporate formalities.

If your company is at risk, you might consider having a qualified attorney assist in completing the corporation’s annual minutes. In some cases a complete legal audit might prove beneficial to identify vulnerabilities and additional risks from failing to maintain proper formalities.

[1] E.g., United States v. Bestfoods, 524 U.S. 51, 55-56 (1998).