Sec. 1034 and asset preparation.

• Author: Allgood, John W.
• Position: Brief Article

In business and personal planning, many clients wish to preserve and protect their assets while maintaining income tax and economic neutrality. One way to do this may be through the combination of a "domestic asset protection trust" and a limited liability company (LLC).

Example: Taxpayer T wants to sell his residence, purchase a replacement residence, roll over the gain and protect the equity he has established from creditors. First, T chooses to establish an LLC to serve as a mortgage lender and an income tax defective domestic asset protection trust (Trust) to be the LLC's primary member.

T then sells his primary residence for $500,000, with a gain of $400,000 that is deferred under Sec. 1034. The replacement residence is purchased from an independent third party for a fair market value of $1,400,000, using $400,000 as a down payment. At the same time, T transfers $1,000,000 to the Trust. Simultaneously, the Trust exchanges the $1,000,000 for a 99% membership interest in the newly formed LLC. The remaining 1% LLC membership interest is issued to a relative o the taxpayer in exchange for cash. The LLC then serves as the mortgage lender to facilitate the taxpayer's purchase of the replacement residence.

Under this scenario, T has shifted $1 million to the Trust with a membership interest in the...