Asset protection lawyers are almost universally in agreement that assets in an irrevocable spendthrift trust established by a third party (often a parent) for the benefit of a beneficiary (typically a child) are not available to satisfy the debts and liabilities of the beneficiary. Indeed, that is one of the principal reasons for including spendthrift language in the trust. And case law is clear that settlors have every right to place their assets outside the reach of their beneficiaries’ creditors. Compare this traditional planning with the self-settled spendthrift trust – the typical domestic asset protection trust – where under laws of certain states a settlor is entitled to convey the settlor’s own assets to a trust which is not reachable by the settlor’s creditors.
In a recent Massachusetts divorce action, Pfannenstiehl v. Pfannenstiehl, the marital estate was found to include the husband’s beneficial interest in an irrevocable spendthrift trust established by his father. Because the trust was not a party in the divorce case, the husband was ordered to make 24 monthly payments to his ex-wife insuring the ex-wife received her 60% share of the marital estate which included the value of the husband’s interest in the trust. Continue Reading
The Bloggers are having a heyday. The first case to test Section 548(e) of the Bankruptcy Code, In re Thomas William Mortensen, was decided in an Alaskan Bankruptcy court on May 26, 2011. The court held that Mr. Mortensen’s transfer to an Alaskan asset protection trust in 2005, while Mr. Mortensen was solvent, which occurred within the statutory 10 year period prior to the filing of his bankruptcy petition, was made with actual intent to hinder, delay or defraud his future creditors. The Judge concluded that a settlor’s expressed intention to protect assets placed into a self-settled trust from a beneficiary’s potential future creditors can be evidence of an intent to defraud. On this basis he allowed Mortensen’s creditors to reach the assets of the trust. Commentators are weighing in on the effect of this decision on Domestic Asset Protection Trusts. Some are predicting that the decision may be the death warrant for this planning strategy. This author believes that the decision should have only a minor effect on the continued use of DAPT’s.
When clients come to see me for asset protection planning, it is clear that the client has preconceived notions about offshore trusts that are integral to some type of abusive tax shelters or other nefarious activity. This is not surprising. The media recently reported about a man from Niagara Falls, NY who was sentenced to 36 months in prison for selling and promoting an abusive tax shelter scheme that involved offshore trusts and domestic trusts. It is stories like this one that confuse many clients and give them unnecessary concerns about what asset protection planning is all about. As I always tell my clients, the asset protection planning we do for our clients is not designed to shelter income or avoid the payment of income taxes; instead it utilizes legitimate structures with the simple goal of helping these clients legally position their assets in a way which makes them less vulnerable to creditors.
Commentators are coming up with all sorts of clever ways to take advantage of the new $5million gift exemption that was part of the TRA 2010 legislation. Indeed, those of us who practice extensively in the asset protection planning arena have our own preferences and, not surprisingly, they involve the use of domestic asset protection trusts.
A Private Letter Ruling (PLR 200944002) issued by the Internal Revenue Service states that under the facts and circumstances discussed in the ruling the property of a self-settled domestic asset protection trust is not included in the Grantor’s estate even though he is a discretionary trust beneficiary. Many commentators were surprised that Grantor could retain this right and keep the property of the trust out of his estate. This ruling opens the door for Michigan residents to utilize the trust laws of a state such as Delaware in order to create a trust in which they are discretionary beneficiaries yet the property of the trust is both protected from creditors and not included in their gross estates for estate tax purposes.