Wyoming Trust Case Study with the Salazar Family

Wyoming Trust Case Study with the Salazar Family

Juan and Marta Salazar have been married for almost 30 years, living just outside of San Francisco. Over the past 15 years, Juan and Marta established a successful software design company. The couple had a combined annual income of $350,000, including their investment returns, and had raised three children.

Their youngest, David, had severe mental disabilities and Juan and Marta were dedicated to ensuring he had the best care possible. Their middle son had been in and out of treatment centers for the past several years, and their eldest was married and had begun a successful business of his own.

The couple had been approached by a company interested in acquiring their business for $11.5 million. The Salazars had wanted to wind down and were thrilled at the prospect of spending more time with their family and friends.  When we met with the couple, they spoke about three goals:

1. Reduce their tax burden.
2. Protect their children (and themselves) from creditor claims.
3. Continue to support their youngest son, David.

First, we considered their tax needs.

Roughly $11 million of the sale would be considered a taxable capital gain, which meant Juan and Marta would be subject to roughly $1,462,392 in California state income tax in addition to federal capital gains, although the federal tax would be reduced by deducting the state income taxes paid.

To reduce their tax burden, we helped them set up an irrevocable Wyoming Incomplete-gift, Non Grantor Trust (WING) and two LLCs in Wyoming, funding the LLCs with our clients’ interests in their software design company. The WING trust would:

• Be sole owner of each LLC so that gains from selling the business would be subject to only federal taxation, resulting in a state tax savings of about $950,500.
• Avoid gift taxes on the transfer of the business to the irrevocable trust.

As managers of the LLCs, Juan and Marta are entitled to salaries as they apply the net sales proceeds to other business ventures or investment strategies.  Although their salaries and any distributions from the trust would be subject to California’s state income tax as their individual income, the trust provides a financial safety net for Juan and Marta which, if necessary, could provide Juan and Marta with a secured loan, to get nontaxable cash into their hands.

Second, we assessed their creditor protection needs.

In Wyoming, there is no requirement that trust documents be registered or recorded at any time. With the LLC’s, only the name and address of a registered agent is part of the public record, providing a high level of privacy for the Salazars.

Additionally, the WING further protects Juan and Marta (and their beneficiaries) against creditor claims. Juan and Marta incorporated protective provisions into the Trust for the lifetime benefit of their children and descendants. With these provisions, only distributions given directly to the beneficiary ever become subject to claims by creditors or divorced spouses. Trust distributions given to third parties for the benefit of a beneficiary are also protected from the beneficiaries’ creditors and adverse claims.

Third, we created a special needs trust for their son David.

Designing a special needs trust requires a great deal of care to ensure that no portion of the trust assets would ever become David’s legal property. If that were to happen, the government benefits necessary to take care of David could be lost and the government may exercise its rights to recover the costs they incurred taking care of David from those trust assets. With First Western Trust as the trustee, we carefully administer the trust to provide for any of David’s supplemental needs that were not being met by the government, all to support and improve his quality of life.

With careful planning, we were able to help the Salazars meet their goals for effective tax planning, protection against creditors, and protection for their children for years to come.

If you are interested in taking advantage of the unique features provided by Wyoming trusts or if you need help designing a strategic financial plan to meet your goals, call our Jackson Hole team today.

First Western Trust cannot provide tax advice.

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