Trusts for Business Owners
A revocable living trust keeps assets out of probate and keeps control with the owner but offers no creditor protection; an irrevocable trust can move assets out of the taxable estate and, when properly structured, out of a creditor's reach at the cost of control. Asset-protection and dynasty trusts are specialised versions with strict state-law rules. A trust is drafted by an attorney; a CPA models what it does to the tax picture.
Key points
- A revocable living trust keeps assets out of probate and leaves control with the owner, but it protects nothing from creditors because the assets are still treated as yours.
- An irrevocable trust can move assets outside the taxable estate and, when structured under the right state's law, beyond the reach of future creditors, at the cost of control.
- A transfer made when a claim is already looming can be unwound as a fraudulent transfer, so protection requires acting well before trouble appears.
- Whether trust assets sit inside or outside the taxable estate, and who is taxed on trust income, turn on how the trust is structured rather than on what it is called.
- An attorney drafts the trust because it is a legal instrument with strict state-specific rules; the CPA models estate inclusion, income taxation, and basis.
What does it protect against?
The two main types do different jobs. A revocable living trust is a planning and control tool: it keeps assets out of probate, provides for management if you become unable to act, and directs where things go — while you keep full control and can change it at any time. What it does for your estate is order and privacy, not protection from creditors.
An irrevocable trust is the one that protects. By giving up control of the assets, you can move them outside your taxable estate and, when structured under the right state's law, beyond the reach of future creditors. Asset-protection trusts and dynasty trusts are specialized versions built for exactly this, each with its own strict requirements.
What does it not protect against?
A revocable trust protects nothing from creditors. Because you can revoke it and take the assets back, the law treats those assets as still yours, and a creditor can reach them just as before. Owners often assume the word "trust" implies protection; for the revocable kind, it does not.
Even an irrevocable trust has limits. Transfers made when a claim is already looming can be unwound as fraudulent transfers, so timing matters and last-minute moves fail. The protection also costs control — you cannot freely take the assets back — and the specialized trusts depend on getting a strict set of state-law rules exactly right.
What do courts and the IRS look at?
A court asks whether the trust is what it claims to be. For a revocable trust, retained control means the assets are still reachable. For an irrevocable trust, the questions are whether control was genuinely surrendered and whether the transfer was made in good time — transfers made to dodge a known or foreseeable creditor can be set aside.
The tax authorities look at estate inclusion and income taxation. Whether trust assets are inside or outside the taxable estate, and who is taxed on the trust's income, turn on how the trust is structured, not on its name. A CPA models the estate and income consequences before the trust is signed.
Who drafts it, and what does the CPA do?
A trust is a legal instrument, and an attorney drafts it — the type of trust, the state law it is built under, and the terms that make it do its job are legal decisions with strict rules. This is the clearest case of the boundary: the CPA does not draft the trust. The CPA models what the trust does to the tax picture — estate inclusion, income taxation, and basis — so the owner and the attorney design it with the numbers in view. Trusts and entity documents are drafted by an attorney; the CPA sizes the tax effect.
The tax side of this structure
- §1361–1379Choosing and changing your business entityNo outlay
- §170Bunching, donor-advised funds, and private foundationsCapital outlay
Common questions
- Does a revocable living trust protect my assets from creditors?
- No. Because you can revoke it and take the assets back, the law treats them as still yours and creditors can reach them. A revocable trust is for avoiding probate and keeping control, not for creditor protection.
- Can I set up an irrevocable trust after a claim has come up?
- Generally not effectively. A transfer made when a claim is already looming can be unwound as a fraudulent transfer. Protection requires acting well before trouble appears, not in response to it.
- Who should draft my trust — an attorney or a CPA?
- An attorney drafts the trust; it is a legal document with strict, state-specific rules. A CPA works alongside to model the estate, income, and basis consequences so the trust is designed with the tax effect in view.
Sources
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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