It happens, you purchase one car, then another. Then you find that perfect one on Facebook Marketplace, and suddenly you have three cars, and you intend to keep them for the foreseeable future. You are a car collector. You start attending the local cars and coffee, making some great friends, joining organizations, and maybe even burning fuel on track.
You are also someone who now must worry about insurance, storage, maintenance, liability, taxes; everything that comes with having something valuable. Would it all be any easier to just place these vehicular pieces of art and science into trust? In this post, we will go over the benefits and drawbacks of putting your stable into trust.
Collectible automobiles are not just vehicles; they are valuable assets that can appreciate over time. Placing these prized possessions into a trust can offer several benefits. One of the primary advantages is asset protection. By placing collectible cars in a trust, owners can shield them from creditors and legal claims, ensuring that the collection remains intact for future generations. However, there are no free lunches, and you will need to ensure your potential creditors are otherwise accounted for. Additionally, a trust provides continuity in the management and preservation of the collection. This means that even if the original owner is no longer able to manage the collection, the trust can ensure that the automobiles are maintained and cared for according to the owner’s wishes. Furthermore, there are potential tax advantages and estate planning benefits. Trusts can be structured to minimize estate taxes, allowing more of the collection’s value to be passed on to heirs. The trust, if well managed, will keep the cars out of probate and assist in keeping the collection private; we all know the buzz that occurs when a rare model appears on the market.
However, there are also drawbacks to consider when placing collectible automobiles into a trust. One significant downside is the cost associated with setting up and maintaining the trust. Establishing a trust requires legal expertise and ongoing administrative expenses, which can be substantial. Additionally, there may be restrictions on the use and enjoyment of the automobiles. Trusts often have specific terms that dictate how the assets can be used, which might limit the owner’s ability to drive or display the cars as they wish. Lastly, managing a trust can be complex, requiring compliance with various legal requirements. This complexity can be daunting for those unfamiliar with trust administration and may necessitate professional assistance.
There are also no real income or capital gains tax benefits while the original settlor, the person who sets up the trust, is alive. If the trust is revocable, and can be entirely controlled by the settlor, then it is effectively one and the same as the individual who set up the trust, called a grantor trust. That also means your creditor protection is harmed, because the trust really does not own the vehicles. If you do choose to place the cars into an irrevocable trust, then you run into those control and enjoyment issues; as well as the potential for additional income taxes.
Wait, you say, I have heard of something called the ’Self Directed IRA’, it is a retirement account that I control the assets in and gain tax benefits for retirement with. A trust combined with that would be a great financial asset. Bad news, you cannot place collector cars into a self-directed Individual Retirement Account, the IRS is quite clear on this. “What types of investments can I make with my IRA? The law does not permit IRA funds to be invested in life insurance or collectibles.”
Placing your car collection into a trust is one option amongst many to help you meet your goals, and it may not be the best option for you – but for the lawyers at Griffin, Cain & Herbig – it is a fun thought experiment. If you have some fun thought experiments, or challenging issues to tackle: set an appointment, grab from our fridge beverage, and let’s talk about it.
