What are the tax implications of asset protection strategies?

The tax implications of asset protection strategies depend on the type of strategy used. Generally, asset protection strategies involve transferring ownership of assets to a trust, LLC, or other entity, which is subject to taxation. If the asset is held by an entity that is taxed as a corporation, the asset’s income is subject to corporate income tax. If the asset is held by an entity taxed as a partnership, the income may be subject to both individual and corporate income tax. In addition, when assets are transferred to an entity for asset protection, the transfer may result in a gift tax, capital gains tax, or estate tax. Gift taxes are imposed when an asset is transferred to a non-spouse donor and no consideration is given in return. Capital gains taxes may be imposed when the value of an asset increases due to the transfer of ownership. Estate taxes may be imposed if the value of the asset is included in the decedent’s taxable estate. In Virginia, there are exemptions from certain taxes in certain circumstances. For example, a person transferring an asset for asset protection may be exempt from gift taxes if the value of the asset is below the gift tax exemption amount. Additionally, a transfer of an asset by an individual to a spouse may be exempt from gift and estate taxes. A licensed attorney should be consulted when considering an asset protection strategy in order to understand all applicable tax implications.

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