, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter. 

Ike Devji, JD

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In part seven on our going series on the use of trusts by physicians we examine the use of installment sales trusts and how they can provide sellers of businesses and other assets with vital tax deferment options.

A combination of demographics and economic conditions including taxes, inflation and interest rates have created a near record high number of business sales and exits, including sales of medical and dental practices and other related businesses like labs, surgical centers, and office buildings. Sellers are always looking for the next holy grail of tax planning, and 

, not all the strategies you may be pitched are legal and effective and cross the line from legal 

In addition to the capital gains tax exposure sellers face at the sale of a business we are worried about several other“good problems” including both the change in your estate planning that may be required and, you guessed it, asset protection for the proceeds of the sale, when you exchanged a recurring income stream produced by a relatively illiquid asset, like a business, building or medical practice in exchange for a large amount of liquid, 

One proven legal strategy that can help sellers save somewhere between tens of thousands and millions of dollars in taxes is the use of an installment sales trust that one expert I consulted with refers to as an 

* is an experienced transactional law attorney in Phoenix that I often work with on my own clients’ exit planning and who provided detail on the strategy for us. Please do note that the use of this strategy for a 

 (as opposed to labs, medical buildings, ASCs, etc.) is only available in those states that allow non-physician ownership of such practices.

What is a Legacy Installment Trust (LIT)?

 that is established by a third-party Grantor and Trustee prior to the sale of the business and which names third party beneficiaries, like other family members, children etc. who are neither owners of the subject business nor the seller’s owners, members, partners etc. if the seller in the transaction is another business legal entity like an LLC, partnership or S-corp. (all permissible sellers) , and not an individual.

What Are The Steps in a LIT Sale Transaction?

1. First, after the trust is established, the seller “sells” a portion of the business asset and its equity to the LIT. This is an arm’s length transaction for market value.

2. Then the LIT, which has no cash assets prior to the sale, provides the seller with a “note” which guarantees the seller a stream of installment sale payments on specific (and carefully calculated) terms.

3. The LIT then sells the business to a third-party 

and receives the cash proceeds. Those proceeds are then invested, and the principal and investment proceeds are then allocated as required to service the note and make a stream of payments the original seller, allowing them to defer any capital gains tax exposure over the term of the note, a little at a time, as they actually receive the proceeds.

4. Finally, the note held by the seller can also in turn be assigned to a variety of personal asset protection structures available to the seller so that both the original purchase amount and the subsequent income stream are protected from future liability.

5. Using this strategy at the right time, with the right numbers can also create a significant inheritance for the beneficiaries of the trust in an 

 advantaged way that won’t affect your lifetime estate tax exemption.

As always, nothing in a forum like this can ever be legal advice that is specific to your facts, but for well-advised sellers of high value, highly appreciated assets who are willing to act ahead of the sale, this may be a good tax deferral, estate planning and asset protection strategy. We will continue our examination of the legal use of specific trusts again later this month.

*Full disclosure, Alan is a partner at the law firm I am part of

, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter. Learn more at 

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What is a Spousal Lifetime Access Trust or SLAT?

A SLAT is an irrevocable trust established by one spouse for the benefit of another and typically, additional heirs like children and grandchildren.

A SLAT can have several legitimate uses, but the two most common ones are estate tax avoidance and asset protection.

A SLAT can help legally avoid estate taxes on contributed by “locking-in” the Grantor’s current individual estate tax exemption (

milllion per person) to transfer assets to the trust and outside their future taxable estate and the taxable estate of the spouse and other beneficiaries. By doing so, any 

 the transferred assets enjoy is also outside the taxable estate of both the Grantor and the Beneficiary, as it is now trust property and outside their ownership and control, but not outside their use and enjoyment.

A properly drafted SLAT can provide asset protection for the assets transferred to it because the assets have been transferred to the ownership of an irrevocable trust that is legally distinct from the personal and professional liability of the Grantor and Beneficiaries. Those concerned with creditor protection should ideally use a third-party trustee that is neither a Grantor nor a Beneficiary, or at the very least carefully limit the distribution authority of a beneficiary and consider the use of co-trustees. A variety of controls and limitations on the Trustee’s distribution of trust assets can be included in the SLAT to provide additional protection, as assets distributed out of the trust, directly to a Beneficiary are no longer protected.

The trustee of the trust can make distributions of the trust’s assets and income to the Beneficiary spouse for a variety of needs ranging from basic health and maintenance to income distributions required to maintain a specific lifestyle or income level. In the past, higher net worth individuals were often advised to consider limiting contributions so that they retained enough wealth outside the trust for their expected living expenses to make trust distributions unnecessary, thus ensuring that the maximum amount possible passed to the next generation. While that strategy remains valid, I’ve seen an increasing number of people at a wider range of net worth levels taking of advantage of this strategy because of the predictably this provides their heirs against taxes and creditors as outlined above.

In most cases the SLAT is a Grantor Trust, which means that any tax due on the income of the trust is paid by the Grantor during their lifetime, not the trust itself or the beneficiaries. If carefully drafted, calculated and distributed as an explicitly discretionary distribution by the trustee, a SLAT may even have a clause that allows the Grantor to be reimbursed for income tax expenses by the trust.

A SLAT can hold a wide variety of assets, but the assets do need to be the 

 of the grantor. A SLAT is especially favored for assets with a low basis and high appreciation and may include cash, stocks, bonds, real estate, interests in businesses, life insurance policies and high value personal property collections, like art.

I’m frankly not even sure these are actual “negatives” but rather the detail and compliance required to predictably enjoy the benefit of a SLAT. Here’s some of the “fine print” to be aware of:

Requires careful professional drafting and strict compliance on tax reporting, distributions and other details to avoid being comprised to 

 on tax benefits, creditor protection or both.

Creates risk of loss of “second-hand” benefit and enjoyment of assets in the event of death of Beneficiary spouse or a divorce.

Assets are less agile and liquid in how they can be deployed, must be funded carefully with assets this fact pattern actually works for.

Requires tax return at the death of Grantor or immediately, if not taxed as a grantor trust

Requires filing of a gift tax return when assets are transferred into the SLAT

Part six of our trust law crash course for doctors examines the Spousal Lifetime Access Trust, commonly known as a SLAT. 