Asset Protection Trusts in Utah: What’s Best for Me?

You may have heard about families or individuals in Utah who lost their wealth or their home due to a lawsuit or creditors. The effects of such situations can be devastating, and perhaps they’ve caused you to reflect on ways you can better protect your own assets.

To protect your home or other important assets, the best solution is an Asset Protection Trust. Not all trusts are the same, and that is also true for Asset Protection Trusts. We’ve outlined information that can help you understand more about Asset Protection Trusts in Utah and your options for establishing one:

Asset Protection Trusts Are Irrevocable (and That’s Okay)

Trusts are either revocable or irrevocable. A revocable trust is one where the Settlor (also called a Grantor or Trustor) retains powers to amend or revoke the trust. This is the most common type of trust people create for estate planning. 

An irrevocable trust is one where the Settlor does NOT retain powers to revoke or amend the trust. But this doesn’t mean that the trust cannot be modified, it just means some other mechanism is required to add flexibility to the trust. Asset protection is one of many reasons to create an irrevocable trust. When prepared properly, creditors cannot reach into the trust AND you maintain broad flexibility. 

What Is an Asset Protection Trust?

An Asset Protection Trust is an irrevocable trust established for estate planning and to protect trust assets from personal liabilities and helps influence outcomes in settlement negotiations. 

The goal of a properly prepared Asset Protection Trust is to allow the beneficiary access to the assets and funds while keeping creditors out. The most important rule of asset protection is, “If you do not own it, it cannot be taken away from you.” Timing is also crucial. Assets must be transferred to the Asset Protection Trust in advance of creditor problems. If you already have a pending claim, it’s too late. 

As the Settlor of the trust, you get to choose the beneficiaries; these can be your spouse, your children, another appointed individual, and in some cases even yourself. Successful asset protection will protect your assets against lawsuits, bankruptcies, IRS audits, and other creditors.

Your situation and assets are unique, and your Asset Protection Trust should be individually tailored to suit your needs. The following two types of Asset Protection Trust fit most needs and both can be specifically tailored to you. 

Utah Domestic Asset Protection Trust (UDAPT)

A Utah Domestic Asset Protection Trust (UDAPT) is a self-settled spendthrift trust. Self-settled means that you are the beneficiary of a trust which you created and funded. Generations of laws previously stated that your creditor can get access assets in your trust to the extent that you’re a beneficiary. 

Utah is one of a minority of US States that turned the tables allowing creditor protection for a self-settled trust (a trust whose settlor is also a permissible beneficiary). UDAPTs work well in many situations, and have many advantages as well as possible disadvantages. It is advisable to consult your attorney before deciding on this as your choice of asset protection.

541 TrustⓇ 

A 541 TrustⓇ is a third-party irrevocable trust (non-self-settled) meaning that it is established by the Settlor and names individuals other than themself as the beneficiaries. This type of trust works in all 50 States and under the Federal Bankruptcy Code. A 541 TrustⓇ allows the Settlor enormous flexibility to change the terms of the trust while maintaining maximum asset protection. It is simple to understand, modify, and even unwind. 

There are many ways to protect your assets. At McCullough Sparks, we work to tailor a unique strategy that suits you and your assets. We specialize in creating customized plans and flexible irrevocable trusts. Protect your assets for you and your future generations by contacting us today. 

Tips Series: Asset Protection Tips for Your Home

Your primary residence is likely one of your most essential assets. The safety, sense of family togetherness, security, and community provided by your home makes it your most treasured belonging.

Protecting your home provides significant peace of mind. Without asset protection, you could become the victim of a lawsuit or experience an unexpected loss of your home.

We’ve put together a list of good, better, and best tips for asset protection when it comes to your residence:

1. A Good Idea: Invest in Insurance

You should definitely have general homeowner’s liability insurance. Additionally, you should consider an umbrella policy. Umbrella liability coverage refers to coverage that protects beyond the existing coverage and limits of other policies. This personal liability insurance covers injuries to other people that occur in your home. It also protects the damage caused to their belongings while in your primary residence.

For instance, if your neighbor is over and trips on a toy left on the ground, they may be unable to work for some time, making you responsible for compensation for their injury. While the liability limits in your home insurance coverage may not be enough to cover the medical expenses, umbrella liability insurance can protect you from these additional costs. We recommend that everyone consider an umbrella policy because it provides additional protection and is relatively inexpensive. That said, insurance doesn’t offer full asset protection for your home.

2. A Better Idea: Transfer Ownership to Lower Your Risk

One of the fundamental rules of asset protection is, in the words of John D. Rockefeller, “Own nothing, but control everything.” If married, placing your home under the name of the less-at-risk spouse can keep your home safer from your individual liability exposure. Even better, separate revocable trusts are beneficial to married couples in terms of separating ownership while incorporating estate planning benefits.

For instance, if you are at a high risk of facing a lawsuit due to your profession, you should consider transferring the ownership of your home to your less risky spouse (or the less risky spouse’s trust). When done right, this ensures full protection from the creditors of the spouse at risk. It’s important to keep in mind, however, that this strategy has limitations and may fail if the less-at-risk spouse incurs a liability, is sued, etc.

3. The Best Idea: Get an Asset Protection Trust

The best option to provide reliable protection to your home is to seek the help of an attorney to prepare an effective Asset Protection Trust. This trust protects your home from creditors and involves transferring the asset to a trustee to manage it on your behalf. Since your home is under the ownership of someone else, your creditors cannot seize the asset. This goes back to that fundamental rule—own nothing, control everything.

It’s critical to make sure you seek asset protection services from a law firm that you trust, as well as invest in an Asset Protection Trust that corresponds to your asset protection needs and is relevant to your situation. Asset Protection Trusts are a good option for most. When done properly, they are simple and protect your assets from potential liability. You should also remember to transfer these assets in advance of a creditor problem.

Two types of asset protection trusts:

    1. Domestic Asset Protection Trust (DAPT):A Domestic Asset Protection Trust is an irrevocable trust where the person who establishes the trust (the Settlor) is an eligible beneficiary. This is often called a Self-settled Spendthrift Trust. It is a relatively new strategy and works in specific circumstances and is only permitted in a handful of US States. When this trust is appropriate, it works very well and can be flexible.Here are the states that currently permit DAPTs:
      • Alaska
      • Delaware
      • Hawaii
      • Michigan
      • Mississippi
      • Missouri
      • Nevada
      • New Hampshire
      • Ohio
      • Oklahoma
      • Rhode Island
      • South Dakota
      • Tennessee
      • Utah
      • Virginia
      • West Virginia
      • Wyoming

       

    2. 541 TrustⓇ: A 541 Trust is an irrevocable trust where the Settlor establishes and funds the trust and names another as the beneficiary (e.g. Settlor establishes the trust for spouse and descendants). This strategy works in all 50 states and provides the best protection for your home. It is easy to understand, operate, modify, or even unwind. More than 200 years of court cases and statutes support this strategy

    Keep Your Home Safe with Asset Protection

    It is important to stay informed and aware of the risk that your primary residence faces as an asset. Understanding that risk can help you decide on the best asset protection strategies that suit your specific needs. Taking simple steps now can protect you from potential future creditor attacks.

    Looking for more information? Reach out to our asset protection attorneys today and choose a trust that best works for you.

U.S. v. Kimball Case Supports the Use of a 541 Trust – Even Against IRS Lien

One of the simplest planning techniques to protect against claims from creditors, even the IRS, is to use a properly drafted irrevocable non self-settled trust. For generations, courts have found that these types of trusts will not be accessible by the creditors of the individual creating the trust.

In U.S. v. Kimball, Jr., 117 AFTR 2d 2016-811, (DC ME), 06/24/2016, the United States District Court District of Maine addressed two separate counts. The first count was granted on summary judgment, resulting in a judgment of $1,090,700.05 in unpaid taxes and penalties against Mr. Kimball as an individual. The second count was an attempt to have the tax lien attach to a trust that Mr. Kimball created. The Court denied the second count on summary judgment. In other words, the assets in the trust were safely protected from the tax lien.

The Court found that the trust was not the property of Mr. Kimball and the tax lien should not attach to the trust property. Mr. Kimball created the trust naming his children as beneficiaries and himself as trustee. The trust included flexible provisions, but the trust restricted any changes that would cause Mr. Kimball to become a beneficiary of the trust. In the event of changes to the trust, the relevant property would go to the beneficiaries of the trust, and not to Mr. Kimball.

The type of trust used by Mr. Kimball was a non-self-settled trust. This type of trust is a trust that does not name the settlor as a beneficiary, but instead the trust names a third party as the beneficiary of the trust (i.e. naming the settlor’s spouse or children as beneficiaries). 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 the trust.

A powerful asset protection solution is to combine the asset protection benefits from using a non-self-settled trust with the flexibility provided by the grantor retaining a special power of appointment. A special power of appointment is a tool that provides the settlor with a lot of flexibility while still protecting the trust from creditors’ claims. Court cases and statutes going back over 200 years have consistently held that a special power of appointment is not subject to creditors. We have created such a trust with these unique characteristics. We call our unique trust a 541 Trust®.

A non-self-settled trust has provided an elegant and powerful solution for solid asset protection. Asset protection does not need to be complicated and does not need to use a new and untested planning technique. When properly funded and operated correctly, a 541 Trust® is one of the most efficient, flexible, and effective creditor protection strategies available.

We have perfected the 541 Trust® to obtain the best in asset protection with the flexibility to adjust for changing circumstances. There are generations of court cases demonstrating that it is extremely unlikely that a creditor will be able to access the assets in a 541 Trust®.

Want to get the best in asset protection or learn more about the 541 Trust® and why the Kimball Court, on summary judgement, denied the IRS’ attempt to attach a tax lien to the trust, please call us at 801-765-0279.

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.

Piercing the Corporate Veil: Corporate Formalities and Business Records

Corporations are generally treated to be a separate entity from its owners.[1] However, the owners of a corporation (i.e. shareholders) might be held personally responsible for the debts of the corporation. Generally, this can happen when a court allows creditors to “pierce the corporate veil” or the protection offered by a corporation is destroyed by the court. A common deficiency that might lead to piercing the veil is the failure to follow corporate formalities.

Small businesses are less likely to follow corporate formalities or the steps required by the government to be shielded by the corporate veil. These entities are more at risk of having the corporate veil pierced. Corporations should comply with all contractual and statutory formalities, including, but not limited to the following:

  • Hold annual meetings of directors and shareholders;
  • Keep accurate and detailed “minutes” that document the decisions and issues addressed during a meeting;
  • Adopt and maintain company bylaws;
  • Make sure that the officers, agents, directors, and shareholders abide by the bylaws;
  • Ensure the formation documents were properly filed and recorded;
  • Renew the entity and update the public record on a timely basis to avoid any lapse in registration; and
  • Maintain separate accounts and do not commingle the entity’s financial assets with the owners’ personal assets or make them available for personal use.

Following the formalities of a corporation is important to defend against an attack that tries to pierce the corporate veil. Ultimately, a court might consider various factors when determining to pierce the corporate veil, such as evaluating whether: (1) a corporation was engaged in fraud or promotes injustice; (2) an entity was inadequately capitalized; (3) an entity is an alter ego of another individual or group of individuals; and (4) an entity fails to follow corporate formalities.

If your company is at risk, you might consider having a qualified attorney assist in completing the corporation’s annual minutes. In some cases a complete legal audit might prove beneficial to identify vulnerabilities and additional risks from failing to maintain proper formalities.

[1] E.g., United States v. Bestfoods, 524 U.S. 51, 55-56 (1998).

Who Needs Asset Protection?

asset-protection-page

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).