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Planning for a Crisis

Planning for a Crisis

The world around us is constantly changing and evolving. During times like these, we want you to have peace of mind knowing, with certainty, that your assets are secure and your estate plan is set.

To know if you are ready for a potential crisis you can ask yourself the following preliminary questions:

1)      Do I have control over my assets and how they’re protected?

2)      Do I have the legal documents I need so that my family is able to care for my needs?

3)      Is my family financially cared for if a crisis occurs?

These questions are simple starting points for what you and your family should be planning for prior to a crisis situation.

For a more in-depth analysis, consider the following:

Inventory of Assets

An inventory of your assets could look like you gathering a pen and paper and writing down every asset you own. We recommend gathering bank and investment statements, tax property notices, and life insurance policy information. This will ensure you know what you have and what you need to protect.

Protecting My Assets

When crises hit, panic can often follow. In the midst of panic, third parties may try to make claims against your and your assets. Most people only remember to think of protecting assets when they’re past the point of allowable protection. Think smart — plan ahead and protect those you care about by protecting the means and assets by which you can care for them.

Necessary Legal Documents

Financial and Healthcare Powers of Attorney are essential in preparing for a crisis. These legal documents allow trusted individuals (called “agents”) to make financial and health care decisions for you when you are unable to do so. These financial decisions can include filing taxes, paying bills, dealing with insurance, and contacting financial institutions on your behalf. Healthcare decisions can include authorizing emergency care procedures and physical therapy, signing healthcare releases, and making other healthcare decisions on your behalf. These documents work together to ensure your finances and health care are taken care of.

Caring For My Family Financially

You can prepare for your family’s future by ensuring you have the following: adequate health insurance, a good cash reserve, a working budget, and auto-payments in place. Furthermore, protecting assets, as mentioned above, and/or planning for death will help to secure your family’s future

By having McCullough Sparks provide your estate planning and asset protection, you can have peace of mind even during times of uncertainty.

Contact us today

for a free consultation about your financial protection for a free consultation about your financial protection

Who Needs an Estate Plan

Who Needs An Estate Plan?

If you own a home, have kids, want your kids to be taken care of, or just want a bit more peace of mind, get an estate plan today!

Avoiding Probate

Probate is a process every state has that validates Wills when someone passes away. Probate is expensive and scary for some—and for good reason. Knowing that your family members have to go through this sometimes expensive and lengthy process might make passing away more scary than in needs to be. Having a fully funded Trust allows you and your loved ones to stay out of the court system and mourn smoother than without a fully funded Trust.

If you own a home (a.k.a. real estate), your estate automatically goes through probate without a fully funded trust. If you only have a Will, your estate automatically goes through probate as well.

Controlling Inheritance

Concerned about your children or heirs receiving a lump sum of money after you pass away? A fully funded trust gives you the power to choose when, how, and how much your heirs receive. An added bonus: creditors aren’t allowed to reach your heirs’ inheritance share if you draft your trust just right.

Choosing Agents

Our estate planning packages include a Financial Power of Attorney and a Healthcare Directive. If you want to choose a list of loved ones to take care of your financial matters and make healthcare decisions in the event of your incapacitation, you need an estate plan.

Planning for Estate Taxes

If you want to avoid that pesky estate tax, estate planning can take care of it! Although the threshold is currently about $11 million per person, your wealth may change or the threshold could decrease.

Fully Funded—What Does That Mean?

A trust is useless if all of your assets lack the proper title. For example, having a well-drafted and strong trust document won’t do any good for your property if the deed to your house isn’t put into your trust name. Bank accounts, life insurance policies, stock, business interest, and sometimes IRAs are put into trusts. If any of your assets are missing, it’s not fully funded. A firm like ours includes funding trusts as part of our full estate planning packages.

So whichever motive resonates the most with you, meet with one of our attorneys and get your estate in order today!

Estate Planning That Everyone Needs

Everyone needs some sort of estate planning, regardless of the above reasons. Here are some estate planning documents that everyone needs:

  • Revocable Trust (Joint or Separate). This type of trust holds primary assets like a residence, bank or investment accounts, life insurance, and other assets so that after your death, successor trustees can ensure that all assets are responsibly administered for your beneficiaries. An added bonus: this type of planning avoids the need for complex probate after your death. You and your spouse, if applicable, are the trustees of this trust during your lifetimes and you can choose reliable people to be successor trustees once you pass away. 

  • Pour-over Will. A will is a good option, but a pour-over will allows any assets that were not already in your trust to be poured into the trust upon your death. Your will also identifies the guardians to any minor children.

  • Durable Financial Power of Attorney. This document grants authority to a trusted person (usually a spouse or a parent) to sign documents on your behalf for assets not in the trust such as cars, checking accounts, tax returns, etc. 

  • Health Care Directive. This document grants authority to a trusted person to make medical decisions for you if you cannot for yourself. The possibility of a coma or incapacitation applies to everyone. You indicate your wishes for end of life care (e.g. wishes for life support or resuscitation).

Contact us today

for a free consultation about your financial protection for a free consultation about your financial protection

Utah Domestic Asset Protection Trust – The Good, the Bad, and The Better

What is a Utah Domestic Asset Protection Trust (UDAPT)?

  A UDAPT is an irrevocable trust that provides (1) asset protection, (2) control, (3) and access. Hundreds of years of laws previously stated that your creditor can get access assets in your trust to the extent that you can benefit from them. Utah is one of 17 US States that turned the tables allowing creditor protection for a self-settled trust (a trust whose settlor is also a permissible beneficiary).

Who should consider a UDAPT?

  People with high-liability professions, high net-worth, or high-risk aversion who want to take some “chips” off the table and also be a permissible beneficiary. People who want to protect assets such as a residence or other real estate, savings or investment accounts, business interests, or other valuable assets should consider a UDAPT in their asset protection plan.

Pros and Cons of a UDAPT?

Pros:

  • Statutory – Blessed by Utah Statutes.
  • Control – The Settlor can control the trust assets and investments (however another non-beneficiary co-trustee is required to make distribution decisions).
  • Access – The Settlor is a permissible beneficiary.
  • Statute of Limitations
    • Non-existing Creditors (Potential Future Creditors): Immediate protection
    • Existing Creditors: Barred from making a claim after the later of 2 years or 1 year after they reasonably should have known about the transfer to the trust. This can be reduced to 120 Days by providing actual notice to known creditors and by publishing notice for unknown creditors.

 Cons:

  • Affidavit of Solvency – A strict interpretation of the UDAPT statute appears that every time you make a transfer into the trust, you must sign an affidavit of solvency. If this isn’t followed for each transfer, a potential creditor could attempt to attack the trust on the grounds that the formalities had not been followed (although there are no court cases on this).
  • New Law – Only 17 States allow DAPTs. Utah has only allowed the use of a DAPT since 2013. Alaska was the first state and has only allowed this type of trust since 1997. There are very few court cases addressing their effectiveness.
  • Liabilities in other States – There is concern that the trust assets are vulnerable to creditors outside of Utah without DAPT statutes.
  • Real Estate – Utah requires that deeds to real estate transferred to a UDAPT state that the trust is an “asset protection trust.” This requirement appears in a different part of the Utah statutes (not the UDAPT statute) and is often missed. Some have concerns about whether they lose the protection if they don’t do this. Some prefer not to put the words within an “asset protection trust” on a publicly recorded document.
  • Bankruptcy – Federal bankruptcy can reach assets transferred into the trust within 10 years of the bankruptcy. 

How to set up a UDAPT?

  The UDAPT requires specific language and should be prepared by an attorney with extensive knowledge about Utah estate planning and asset protection. At least one trustee of your DAPT must be a Utah resident. The Settlor must sign an Affidavit of Solvency each time assets are transferred into the trust, which means you are certifying that after the transfer of every asset into your DAPT, you still have more assets than liabilities and can cover your obligations.

 When to create an Asset Protection Trust?

  Timing is important with any asset protection. The trust should be established in advance of a creditor problem to avoid fraudulent/voidable transfers (transfers which render the settlor insolvent or are made with the intent to delay, hinder, or defraud known creditors). Any asset protection strategies should be established before the liability wind is blowing so that if the storm comes, you already have a bunker prepared.

Building a Better UDAPT

  McCullough Sparks has 30 years of combined experience in creating irrevocable trusts. Understanding a client’s particular situation is key in determining what tools to use. A UDAPT can be created with variations and provisions to provide greater protection and flexibility. This could include (1) appointing a Trust Protector who can remove and replace trustees among other things, (2) limiting the settlor’s beneficial interests (such as to reside in trust owned real estate, if the settlor doesn’t need distributions, or the trust only owns a residence), (3) asset protection planning with more than one trust, and (4) publishing notice (or providing specific notice to creditors) to shorten the statute of limitations period to 120 days.

What is better than a UDAPT?

In many circumstances, a third-party trust (non-self-settled) is a better planning tool. We call our third-party trust a 541 Trust®. A 541 Trust® works in all 50 States. We always consider your specific circumstances when determining which type of asset protection trust is best for you. Asset protection plans require customization by a knowledgeable attorney.

 

  A UDAPT is a good option if the settlor lives in Utah, the assets the settlor needs protecting are in Utah (or in another DAPT State), and the settlor doesn’t have a likelihood of bankruptcy within 10 years of funding the trust. UDAPTs often work well for unmarried individuals with assets in need of protection. If, however, the settlor has assets or liability exposure in many states other than Utah, a 541 Trust® may be a better solution. 

U.S. Supreme Court Ruling Enhances Support for saving state income tax with ING Trusts (NINGs, DINGs, WINGs etc.)(North Carolina Department Of Revenue V. Kimberley Rice Kaestner 1992 Family Trust)

On July 21, 2019 the U.S. Supreme Court ruled unanimously that North Carolina could not tax the income of a New York trust where the only connection to North Carolina was a discretionary beneficiary who had not received and could not demand distributions. While the court’s opinion was applied narrowly to the facts, it provides support for planning with trusts to avoid or defer state income tax such as NINGs.

FACTS OF THE CASE

Decades ago, a father established a trust for the benefit of his children in New York. Some time later, the trust was subdivided into separate trusts, one for the benefit of his daughter Kimberley and her children and called the trust The Kimberley Rice Kaestner 1992 Family Trust (the “Kaestner Trust”). Kimberly moved to North Carolina at some point.

The North Carolina Department of Revenue assessed a $1.3 million tax for 2005-2008 because The Kaestner Trust was “for the benefit of” a North Carolina resident. The taxing authority relied on North Carolina statutes and a North Carolina Supreme Court case which found that a beneficiary residing in the state was sufficient to assess the tax. The Trustee paid the tax then appealed in the North Carolina courts. The appeal claimed that the Due Process Clause of the U.S. Constitution prevents North Carolina from assessing a tax where the only link to North Carolina was that a beneficiary resided in the state. All of the North Carolina courts agreed, holding “that the Kaestners’ in-state residence was too tenuous a link between the State and the Trust to support the tax.” The North Carolina Department of Revenue appealed to the U.S. Supreme Court.

The North Carolina Department of Revenue’s argument failed again at the highest court in the land. The State argued that a “trust and its constituents” (e.g. a trustee or beneficiary) are “inextricably intertwined,” and supports state taxation, and an in-state beneficiary is sufficient to tax the trust. The court acknowledged that while a beneficiary is central to a trust, there is such “wide variation in beneficiaries’ interests” in any trust and wouldn’t adopt such a hard-line rule to tax solely on that basis. Likewise, the State’s arguments that ruling in favor of the Trust would “undermine numerous state tax regimes” and could “lead to opportunistic gaming of state tax systems” failed.

The US Supreme Court considered the Due Process Clause of the U.S. Constitution. Ultimately, a minimum connection between the State and the trust is required to assess a tax. It was a purely discretionary trust. Distributions to or for the benefit of a beneficiary were in the sole discretion of a Trustee who was not in the State of North Carolina. The ruling was that the mere residence of the beneficiary in North Carolina was not sufficient to tax the trust because: 1. The beneficiary did not receive any income from the trust during the years in question, 2. The beneficiary had no right to demand trust income or to control, possess, enjoy, or receive trust assets, and 3, The beneficiary couldn’t count on receiving distributions from the trust at any known point in the future.

ANALYSIS

What does this case tell us? Although the ruling was limited to the narrow facts of this case, it gives us an excellent view of how the U.S. Supreme Court interprets States’ authority to tax trusts. It supports the idea that a trust can be established in another state and avoid/defer income tax in the state of the trust beneficiary. Establishing a non-grantor trust (a trust which is a separate income tax payer) in a state without state income tax (sometimes called ING Trusts). These types of trusts can be excellent tools in the right situation to minimize tax liabilities so long as they are structured properly.

Best Asset Protection Trust isnt an Asset Protection Trust

Could it be true that the best trust for asset protection isn’t even an asset protection trust? It may sound strange, but the legal precedent proves it to be true.

Whenever you hear the term “asset protection trust” it almost exclusively refers to a self-settled spendthrift trust. This where the settlor establishes and funds an irrevocable trust naming themself as a beneficiary. The trustee is an independent party who can make distributions from the trust to the settlor. So what does this mean? It means that the settlor can give money or assets to the independent trustee of an “asset protection trust” so future creditors can’t touch those assets. It also promises that the trustee can give the assets back to you at any time. This sounds pretty awesome right!

The problem is that self-settled trusts have historically provided zero asset protection in the United States. Generations of US laws have made it clear that your creditors can reach into a trust that you create if you are also the beneficiary.

This includes dozens of US court cases successfully attacking the assets of offshore asset protection trusts and none to the contrary.

Likewise, domestic self-settled asset protection trusts have failed in the only court cases to date.

So if quote Asset Protection Trusts have a dismal record in protecting assets, what is the solution?

The solution lies right in front of us. Generations of US legal precedent has made it perfectly clear that a non self-settled trust has ALWAYS worked. As opposed to creating a trust and naming yourself as the beneficiary, this trust names a third part as the beneficiary, such as the settlor’s spouse or children. Because the trust is not “self-settled” the creditors of the settlor cannot reach into the trust, so long as there are no fraudulent transfers into it.

We’ve also learned that a special power of appointment is a tool that provides infinite flexibility without subjecting a trust to creditors. Court cases and statutes going back over 200 years have consistently held that a special power of appointment is not subject to creditors, without exception.

We call this a 541 Trust because it is canonized in Section 541(b)(1) of the US Bankruptcy Code, as well as multiple other statutes and court cases nationwide dating back generations. The 541 Trust is superior to what are traditionally called Asset Protection Trusts because:

1. It works in all 50 states and in bankruptcy courts and has for over 200 years.
2. It works for any asset in any location.
3. It is proven by court cases for generations. We can actually show you court cases and other examples where our trusts were upheld.
4. It’s simple to understand, implement, and operate unlike the extremely complex structures associated with offshore trusts
5. It is infinitely flexible and can be modified at any time.
6. It is a fraction of the cost of an offshore trust structure and doesn’t have high annual maintenance charges or complex IRS reporting.

Nobody prepares this trust as well as we do. We pioneered it, we perfected it, and we have seen it succeed in every challenge. Some have criticized the 541 Trust but the legal precedent and the continued court support remains. It doesn’t matter what we say or what others say. The only thing that matters is what the courts say. The courts have spoken in favor of the 541 Trust over and over again.

So technically speaking, a 541 Trust isn’t an asset protection trust. It just happens to protect assets better than the types of trusts referred to as asset protection trusts.

CALL 801-765-0279 for more information

Common Questions About Estate Planning Answered

The topic of estate planning and creating a Will can sometimes be a difficult subject to bring up, but it’s a very important topic to discuss with your loved ones, and with an experienced estate planning attorney. Estate planning, when done properly, can ensure that your affairs are handled properly after you pass on, that your family is taken care of, and the inheritance and property is shielded from unnecessary taxes and fines.

What is a Will?

A Will is a document designed to instruct your heirs how to divide and dispose of your tangible personal property and other assets when you pass away. A Will also designates guardians for minors. Television series often portray having a Will as the most important document to govern the administration of your estate when you pass away. This is mostly true—but if you own real estate, your Will has to go through probate. But again, guardians are elected in your Will and it is a necessary document.

What is a Trust?

A Trust is one of the most common estate planning techniques available. While there are many different variations of Trusts, they all share the same basic structure. The creator of the Trust is called the grantor who signs an agreement with a trustee who agrees to hold assets in Trust for the grantor’s chosen beneficiaries. Sometimes the grantor and the trustee are actually the same person.

Think of the Trust like a bucket. The grantor creates a bucket and puts assets into it, such as bank accounts and a home. The trustee’s job is to hold the bucket handle and the assets “in trust” for the beneficiaries named by the grantor. The trustee administers the trust according to the rules laid out by the grantor including how and when to take assets out of the bucket and give them to the beneficiaries.

The benefits of Trusts can include:

  • Probate avoidance;
  • Flexibility;
  • Cost savings;
  • Tax planning;
  • Privacy; and
  • Peace of mind.

Do I Need a Will or a Trust?

Both Wills and Trusts can be commonly used estate planning tools, and you may want to have both depending on your situation. The main differences that you will find between the two are that Wills are only effective after your death, whereas Trusts can become effective immediately (or at a specified time in the future); Wills are directives used to distribute property or appoint a legal representative after your death, whereas Trusts can distribute property at any time prior to or after your death; Wills cover all of your assets, whereas Trusts only cover items that are specifically placed in the Trust; and finally, Wills are public documents while Trusts can remain private if you choose. An experienced estate planning attorney can help you decide which is right for you.

How Important is Power of Attorney or Health Care Directive?

Granting someone “power of attorney” (POA) is a very important step in estate planning because it designates someone who can make legal decisions for you in the event you are unable to make them on your own. These can include financial decisions as well as medical or legal ones, so the person you appoint to this duty should be someone you trust and someone who knows what you would want. Without POA, these decisions could be left up to a judge in the courts, who is likely a stranger and will have no idea what you would have wanted.

A Health Care Directive (HCD) is designed to instruct medical caregivers and doctors how you want to be cared for in the event of incapacitation. Incapacity most commonly includes a coma or dementia. This document covers your Living Will wishes, which are your wishes if you are in a state of unawareness with little or no hope of recovery. You choose your own healthcare agents and tell through this document your wishes. You can revoke this document at any time while you’re competent to make decisions for yourself. 

How Often Should I Update an Estate Plan?

The best answer to this question is: as often as you need to. While there is no set time frame for updating your documents, you should make sure to revisit them any time you have a significant life event take place. This might include things like:

  • Marriage or divorce
  • Additional children, whether by birth, adoption, or marriage
  • Death of a spouse
  • Significant changes to your assets
  • Relocation
  • Changes to tax laws, or the status of guardians, trustees, or executors

Since you may not know when the tax laws change, in the absence of any of the other events, it’s a good idea to visit with an estate planning attorney in Utah about once every five years to be sure yours is up to date.

What Happens if My Family Contests My Will?

The death of a family member can be a very difficult time, and sometimes other issues within the family spillover when settling an estate plan. Fortunately there are things you can do to protect the directives spelled out in your Will, even in the face of a legal challenge after your death. Having a plan that is created and properly executed by an estate planning attorney is the best way to protect against this. It’s also helpful to discuss your wishes and plans with family members while you are alive to avoid surprises.

Estate planning can be complicated, so to answer all your questions and get started on your estate plan, call an experienced attorney today.

Who Needs Asset Protection?

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We are often asked when asset protection is necessary or helpful. Some believe asset protection might only be helpful once you accumulate millions of dollars in assets–but this isn’t always true. We help many wealthy clients and we also assist clients with only a few hundred thousand dollars in assets who want to protect those assets against outside liabilities.

Liability can arise for anyone. The risk of liability might come from driving a car, operating a business, being sued for professional malpractice, suffering economic downturns, engaging in bad investment deals, being subject to lawsuits, entering bankruptcy, and other similar risks. The key is to assess your specific situation and determine how to protect against those risks.

Here is a quick list of individuals who might benefit from some type of asset protection:

  • Professions with high liability risk (i.e. physician, dentist, attorney, accountant, engineer, and other similar professions)
  • Business Owners
  • Property Owners
  • Individuals who are close to retirement and want to protect retirement savings while still engaging in business ventures and other activities that might put retirement savings at risk.
  • Individuals who have accumulated substantial equity in real property, savings, or investments which with individual needs or wants to protect.

There are many ways to protect your assets such as maintaining liability insurance, using business entities for your business (corporations, LLCs, etc.), creating irrevocable trusts, and various other strategies. No two situations are exactly alike and everyone has different goals and risk tolerance. Finding the right solution to reach your goal is important.

To begin protecting your assets, we generally recommend that clients obtain adequate insurance coverage that frequently exceeds the minimum requirements. We can then analyze your situation and the available options to determine a plan that is unique to your situation.

Timing is important. It is essential to consider asset protection before a claim or liability arises. You can greatly reduce your risk exposure by implementing a plan before you are facing a claim or liability.

Hopefully, you will never need to test your asset protection plan. In any case, you will want the peace of mind and comfort of knowing that your plan will work and your assets are protected and can withstand lawsuits and unforeseen circumstances. We provide a free consultation to help you determine the most effective and appropriate asset protection strategy for your situation.

What is a 541 Trust®?

We use the 541 Trust® name to refer to an irrevocable asset protection trust built upon a foundation of generations of proven legal precedent. A 541 Trust® is a domestic, irrevocable, non-self-settled trust carefully designed to provide the best asset protection while at the same time affording maximum flexibility. The 541 Trust® is not a new school of thought nor is it based on foreign laws. We have carefully researched generations of legal precedent right here in the U.S. to find strategies that have always worked and design our trusts in compliance.

Assets owned by you are within reach of your creditors. Likewise, absent a fraudulent transfer, assets not owned by you cannot be reached by your creditors. If asset protection is a key goal in your estate planning, you must somehow remove the assets from your personal ownership. The best way to remove assets from your ownership is through the use of a properly crafted irrevocable trust. Because our trusts are drafted in compliance with U.S. laws, and are supported by generations of legal precedent, they provide the best possible protection.

Public policy and generations of legal precedent are clear: you cannot settle a trust for your own benefit and at the same time shield the trust assets from your potential creditors. Offshore Trusts and Domestic Self-Settled Asset Protection trusts (DAPTs) are self-settled, which is a fatal chink in the supposed armor of these types of trusts. Even though some states and offshore jurisdictions purport to allow self-settled asset protection trusts, it is important to see what the courts have made clear–the only court cases dealing with Offshore Trusts or DAPTs have shown that they fail to protect the assets.[i] Despite an abundance of promotion and marketing, self-settled trusts (DAPTs and Offshore Trusts) have zero wins when challenged in court. The Uniform Trust Code states that a creditor of a settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.[ii] In other words, if a settlor who is also a beneficiary has access to trust cash, property, vehicles, etc., so does a creditor. It is hard to argue that an Offshore Trust or a DAPT is the best solution based on their dismal record when challenged in court.

Generations of legal precedent have made clear that the only type of trust which has withstood the test of time as a proven method of asset protection is a non-self-settled trust (a.k.a. a third party trust or our 541 Trust®). This means that the settlor of the trust creates the trust for beneficiaries other than him/herself.[iii] 

Our 541 Trust® protects assets from a person’s potential future liabilities by removing the assets from the person’s legal and personal ownership. Rather than employing new strategies which have not been tested or strategies which rely on the laws of foreign jurisdictions, the 541 Trust® is designed using methods which have been successfully tested in lawsuits, bankruptcy, and IRS audits in the U.S. legal system. The 541 Trust® has been proven to work better than offshore trusts and other asset protection strategies. Frankly, the name of the trust is of little importance. The important part of the 541 Trust® is its craftsmanship. Our years of experience and dedication to building trusts upon a tried and tested legal foundation is the key value to our asset protection trusts. After all, what good is a trust if it fails when challenged? The legal precedent speaks for itself.

 [i] In re Mortensen, Battley v. Mortensen, (Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011), Waldron v. Huber (In re Huber), 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013), Dexia Credit Local v. Rogan 624 F. Supp 2d 970 (N.D.Ill. 2009), 11 U.S.C. 548(e), More offshore self-settled trust cases HERE.

[ii] Uniform Trust Code Section 505, Restatement (Second) of Trusts Section 156(2), and Restatement (Third) of Trusts Section 58(2).

[iii] “By establishing an irrevocable trust in favor of another, a settlor, in effect, gives her assets to the third party as a gift. Once conveyed, the assets no longer belong to the settlor and are no more subject to the claims of her creditors than if the settlor had directly transferred title to the third party.” In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002).

IRS Approved NING Trust provides Substantial Tax Savings

For many years, we have helped clients reduce income taxes by using a Nevada trust often referred to as a “NING Trust” (Nevada Incomplete Gift Non-Grantor Trust). In PLR 20131002, the IRS approved this concept by ruling that the trust qualified as a complex trust for income tax purposes and that gifts to the trust were incomplete for federal gift tax purposes. In other words, a person can transfer assets of unlimited value to a NING Trust without gift tax consequences. The income of the NING Trust is taxed at the trust level and does not flow through to the grantor. Because Nevada has no state income tax there is huge potential for income tax savings. Here are three examples of how a NING trust can save taxes:

A California resident can avoid the 13.3% California tax on investment assets or capital gains. For example, assume a California resident establishes a properly structured [NING] trust and contributes a $20 million stock portfolio that produces 8% taxable income per year. Over a period of 10 years, the California income tax saved could be $2,500,000. Over 20 years, the compounded savings from not paying California income tax could be $8,500,000. (See Gordon Schaller & The 13.3% Solution: of DINGs, NINGs, WINGs and Other ThINGs, LISI Estate Planning Newsletter #2191 (February 5, 2014)).

As another example, we have a client who placed his stock into a NING trust prior to a sale of his company. When the stock was sold by the NING trust, the client saved over $5,000,000 in state capital gains taxes. Later, when the trustee terminated the trust and distributed the assets back to the client, the client was not required to pay state capital gains tax on the distribution because the state does not tax capital gains distributed from a nonresident trust.

As a third example, a professional athlete transferred the majority of his investment portfolio to a NING trust. The athlete pays federal and state tax on his W-2 earnings and on the investments he holds outside of the NING trust. The athlete is not required to pay state tax on the investment income earned by the trust, and this allows the trust to grow free of state income tax.

Call 801-765-0279 for more information or click HERE to email us.

The information and examples above are provided as general information and may not be used as tax advice for any particular situation. Each person should seek individualized tax advice for their own situation.

Why Self-Settled Asset Protection Trusts Don’t Protect Assets

Don’t Self-Settle for Inadequate Asset Protection

Why Self-Settled Asset Protection Trusts Don’t Protect Assets

By: Randall Sparks, JD LL.M. and Lee S. McCullough, III, JD MAcc

Click HERE for pdf verison

Self-Settled Asset Protection Trusts are all the rage. They come in two main flavors: (1) The Domestic Asset Protection Trust (“DAPT”) and (2) the Offshore Trust, aka Foreign Asset Protection Trust (“FAPT”). To boost in-state trust business, about a dozen states have passed or are actively improving their self-settled asset protection trust statutes … and that number is growing. Although self-settled trusts are heavily promoted by asset protection attorneys across the county, all of the relevant court cases indicate that if asset protection is your goal, you should find a more viable option.

If self-settled trusts are inadequate for asset protection, why do attorneys go to such lengths to sell them? The answer is simple: Money. Asset protection promoters market them heavily promising maximum protection and make big profits in the process. They do this despite zero court authority in existence that upholds self-settled asset protection trusts. Promoters also ignore the many court cases showing that self-settled trusts simply don’t afford the promised asset protection benefits.

What is a Self-Settled Asset Protection Trust?

There are three parties to any trust agreement: (1) a Settlor, who creates the trust and funds it with assets, (2) a Trustee, who holds legal title to the assets in trust for the beneficiaries, and (3) the Beneficiaries, who are eligible to receive benefits from the trust. In most trusts, the Settlor and Beneficiary are different people. In a self-settled trust, the Settlor is also a Beneficiary. In concept, the idea is incredible: contribute any amount of property to the trust and while creditors can’t touch it, you can enjoy it as much as you want. The reality is that these arrangements just don’t work as advertised.

Public policy has long been clear that you cannot settle a trust for your own benefit and at the same time shield the trust assets from your potential creditors. The Uniform Trust Code states that a creditor of a settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.[1] In other words, if a Settlor/Beneficiary has access to trust cash, property, vehicles, etc., so does a creditor.

Offshore jurisdictions were the first to market self-settled trusts by promising protections in a foreign jurisdiction that is not bound by the laws of the United States. In 1997, Alaska was the first state to enact a DAPT statute. Since then, over a dozen United States jurisdictions have enacted DAPT statutes. However, creditor attorneys have developed successful techniques to pierce these trusts. By frequently siding with creditors in these cases, courts have rebuffed the zeal of offshore and domestic jurisdictions to establish and promote self-settled trusts as superior asset protection tools.

Court Cases Defeating Domestic Asset Protection Trusts (DAPTs)

When it comes to self-settled trusts, there is an elephant in the room and that elephant has a name: Bankruptcy. In states that don’t recognize self-settled trusts, a debtor’s interest in a self-settled trust is subject to bankruptcy.[2] The Mortensen case made clear that Federal Bankruptcy Law can even defeat a self-settled trust in states that recognize, protect, and advocate self-settled trusts.[3] In Mortensen, an Alaska resident created a self-settled trust under Alaska’s DAPT statute under ideal circumstances: he was solvent and there were no judgments against him. Several years later he ended up in a bankruptcy court sitting in Alaska. The court applied Federal Bankruptcy Law instead of Alaska law ruling that the trust assets were reachable by the creditors in the bankruptcy under Section 548(e) of the Federal Bankruptcy Code.[4]

Another problem with a DAPT is a potential lawsuit arising in a state that does not recognize or protect self-settled trusts. In Dexia Credit Local v. Rogan, the Seventh Circuit Court ruled that despite the debtor’s trust having been created in a DAPT state, Illinois law applied instead.[5] Another huge blow to DAPTs came on May 17, 2013 in Waldron v. Huber where, among other things, Washington State law applied rather than Alaska law where the DAPT was formed.[6] The result was that the trust assets were not protected. Based on the Dexia Credit and Huber cases, one shouldn’t expect that a self-settled trust will be upheld in a state that does not allow them. Numerous other cases indicate that a court can apply the law of the state where the court is located and not recognize the laws of the state where an entity was formed.[7]

If self-settled trusts don’t work in bankruptcy and don’t protect against laws of DAPT unfriendly states, then you can just avoid declaring bankruptcy and avoid contacts outside of your DAPT friendly state, right? Not so fast. Unfortunately, even if you are careful not to get sued in the wrong state and manage to avoid voluntary bankruptcy, your creditors could file an involuntary bankruptcy petition against you. The court cases and the bankruptcy code have shown that even though a self-settled trust is created pursuant to a DAPT statute, the trust is still vulnerable.

Court Cases Defeating Offshore Trusts, aka Foreign Asset Protection Trusts (FAPTs)

Many asset protection promoters claim that offshore trusts are impermeable, in contrast to the absence of a single court case to support their claims. Why do they sell a product that has such an abominable record? It’s a calculated risk that the resulting liability of a few failed trusts that are actually challenged will be vastly overshadowed by those that are never tested. In other words, they know that the majority of their clients will never get sued or go bankrupt. For those who are sued or face bankruptcy however, if the trust is self-settled, its assets are not protected.

Although promoters of FAPTs claim foreign laws protect you because the trust is not subject to the jurisdiction of U.S. Courts, there are many court cases showing how offshore trusts fail. For example, it is well established that an offshore trust cannot protect onshore assets.[8] Numerous other cases show that even though a court in the United States may not have jurisdiction over the FAPT, they have jurisdiction over the debtor and can order the debtor to repatriate the trust assets or face incarceration for contempt. In In re Lawrence the debtor was jailed for over six years for refusing to repatriate assets, in Bank of America v. Weese the debtors paid settlement of over $12,000,000 in order to avoid incarceration, and in U.S. v. Plath the debtor was held in contempt for refusing to obey the court order to disclose details about offshore accounts despite the fact that there was no fraudulent transfer.[9] These are just a few lowlights of the long list of failed FAPT strategies.

For a time, offshore trust peddlers used US v. Grant as the one court case that supported their strategy, because it was the single case where a court did not hold the debtor in contempt. The purported steel bulwark of the Grant opinion came crashing down when, in the Spring of 2013, a Florida court ruled against the very strategy FAPT promoters touted, dealing a huge blow to the offshore asset protection industry.[10] In Grant, Raymond Grant created two self-settled trusts offshore (FAPTs), one for his own benefit and one for the benefit of his wife. Raymond funded both FAPTs at a time when he was solvent and had no known claims against him, once again ideal circumstances. Years later, Raymond died and the IRS obtained a $36 million dollar judgment against Raymond’s wife Arline. The U.S. moved to hold Arline in contempt of court for failing to repatriate the assets in the offshore trusts to pay the tax liability. Initially, the court refused to do so because Arline had never exerted control or received benefits from these trusts. But later when it was proven that Arline had received funds from the trust through her children’s accounts, the court issued a permanent injunction prohibiting Arline and her children from ever receiving any benefits from the trusts. Ultimately a very expensive “asset protection” strategy kept the assets protected from creditors, but also out of reach of those the trust was created to benefit. If your goal is to protect assets from both creditors and yourself, an offshore trust may be a great fit. If, however, you seek any self-settled benefits at all, look elsewhere.

Solution – Non-Self-Settled Trust

The alternative to the self-settled trust is simple, remove the one aspect of the trust that creates all of its vulnerability; make the trust non-self-settled. A non-self-settled trust, aka third party trust, has the support of state and federal statutes, the federal bankruptcy code, and an overwhelming number of court cases. Since the Settlor is not a beneficiary, the creditors of the Settlor cannot reach the trust assets, even in bankruptcy.[11] A properly drafted third party trust can still benefit the settlor without disrupting the asset protection. The settlor could potentially benefit from the trust through a spouse who is a beneficiary. For example, the settlor could live in a trust owned residence free from rent so long as the spouse is a beneficiary.[12] The settlor could be an income only beneficiary and still protect the trust principal.[13] The settlor could also maintain flexibility by appointing a trust protector or through the use of a special power of appointment.

If the trust has discretionary spendthrift language, the assets are also shielded from the creditors of the beneficiaries. If Raymond Grant had created a non-self-settled discretionary spendthrift trust for his wife Arline, instead of creating the two FAPTs that failed, the assets would have been protected from the IRS judgment and Arline and other trust beneficiaries could still have benefitted from the trusts. For example, the trust could have purchased a home for Arline to live in and paid Arline’s credit card bills.[14]

If true asset protection is the goal, consumers and especially promoters should remember the old adage that pigs get fat and hogs get slaughtered. The court cases make it clear that a non-self-settled trust provides proven asset protection, whereas a self-settled trust lays out the welcome mat, flips on the light, and leaves the front door wide open to creditors. If you self-settle, you settle for an inferior trust.

[1] Uniform Trust Code Section 505, Restatement (Second) of Trusts Section 156(2), and Restatement (Third) of Trusts Section 58(2).

[2] Federal Bankruptcy Code 11 U.S.C. 541. See also In re Simmonds, 240 B.R. 897 (8th Cir. BAP (Minn.) 1999).

[3] In re Mortensen, Battley v. Mortensen, (Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011).

[4] 11 U.S.C. 548(e).

[5] Dexia Credit Local v. Rogan 624 F. Supp 2d 970 (N.D.Ill. 2009).

[6] Waldron v. Huber (In re Huber), 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013).

[7] American Institutional Partners, LLC v. Fairstar Resources, Ltd. (where Utah law applied against a Delaware-formed LLC), 2011 WL 1230074 (D.Del., Mar. 31, 2011), Malone v. Corrections Corp. Of Am., 553 F.3d 540, 543 (7th Cir. 2009) (a district court in diversity applies the choice-of-law rules of the state in which it sits).

[8] In re Brooks, 217 B.R. 98 (D. Conn. Bkrpt. 1998) (where the offshore trust was disregarded because it was self-settled and the onshore assets were seized).

[9] In re Lawrence, 279 F.3d 1294 (11th Cir. 2002), Bank of America v. Weese, 277 B.R. 241 (D.Md. 2002), and U.S. v. Plath, 2003-1 USTC 50,729 (U.S. District Court, So. Dist. Fla. 2003).

[10] US v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013).

[11] Uniform Trust Code Section 505, Restatement (Second) of Trusts Section 156(2) and Restatement (Third) of Trusts Section 58(2), In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002), Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997).

[12] Revenue Ruling 70-155, Estate of Allen D. Gutchess, 46 T.C. 554 (1966), PLR 9735035.

[13] In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002).

[14] United States v. Baldwin, 391 A.2d 844 (1978) or U.S. v. O’Shaughnessy, 517 N.W.2d 574 (1994) (where the trust assets were not subject to tax lien because the trust was not self-settled).