There is the understandable perception that by establishing a trust for your beneficiary which contains substantial restrictions on distributions and gives a trustee discretion to determine the timing and amount of distributions that creditors of the beneficiary cannot access trust assets. However, in the recent Arizona case of Duckett v. Enomoto, the IRS was able to attach a federal tax lien to assets held in a discretionary support trust. Continue Reading
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
Background: Richard and wife Lois entered into a trust in 1986. They were the co-trustees and sole beneficiaries of the trust during their lifetimes. It contained a standard spendthrift clause. The trust could be amended or revoked only by the joint action of both Richard and Lois. Either Richard or Lois, acting alone, is considered a Managing Trustee. In other words, either one acting alone could exercise any power granted to a trustee under the trust.
Richard filed for bankruptcy in 2012. Richard disclosed the trust on his bankruptcy asset list but claimed that the trust assets were not property of the trust estate and that the spendthrift provision in the trust was effective to block a creditor from reaching trust assets. The trustee brought a summary judgment motion claiming that (i) the spendthrift provision of the trust is not enforceable under Michigan law, (ii) the trust is against public policy and unenforceable because it is a self-settled trust designed to place the assets outside the reach of the settlor’s creditors and (iii) the assets of the trust should be included in the bankruptcy estate. The trustee sought a declaratory judgment and order for surrender of the trust assets. Continue Reading
An enormous opportunity for asset protection planning in Michigan and other states involves using trusts. It is quite common that a settlor of a trust will establish a trust with the goal that creditors of the trust’s beneficiaries cannot reach trust assets to satisfy their claims. Occasionally the government is the creditor. In a recent Michigan case the State Treasurer sought reimbursement from a trust for the costs of incarcerating a trust beneficiary.