Friday, August 19, 2011

Special Power of Appointment Trusts

Unlike basic estate planning, asset protection is constantly evolving. Nevada spendthrift trust law remains the best in the country with the State Legislature frequently making tweaks and adjustments to keep it that way.

However, a new type of asset protection trust has become popular recently and one of its advantages is that it functions just as well in any jurisdiction. It's known as the Special Power of Appointment Trust (aka "SPA Trust"). It uses the power of appointment, a well-established estate planning tool, to allow the trustee of an irrevocable trust, in his full discretion, to appoint assets back to the grantor without sacrificing creditor protection.

This irrevocable spendthrift trust functions as most any other with an independent trustee endowed with discretionary powers of distribution to named beneficiaries. However, it does not require a "self-settled trust" situs like Nevada, Alaska, Delaware, etc., where local trust law allows the grantor to also be a beneficiary. Instead the grantor bestows a special power of appointment upon the trustee, who in turn, may choose to use that power of appointment to appoint assets back to the grantor. The technique does not jeopardize the asset protection of the trust thanks to the inherent prevention within this type of power of appointment that prohibits the "donee" of the power, in this case the trustee, from appointing assets to himself or his creditors. The "permissible appointee," here, the grantor, may receive assets without being a beneficiary, which in a majority of states, would eliminate any protection from creditors that trust is written to provide.

Noted asset protection attorney Lee McCullough, III has brought this tool to the attention of asset protection attorneys, including myself. You can read more about it at his website, or in the article published in the January issue of Estate Planning Magazine.

If you're interested in asset protection and/or what a SPA trust can do for you, call my office.

Monday, August 8, 2011

Protecting your money from yourself

A person is a spendthrift when they spend money recklessly or wastefully. A spendthrift trust is an irrevocable trust established on behalf of a beneficiary that gives full control to an independent trustee who will, in his sole discretion, determine when the beneficiary will receive distributions. It's done this way to protect a spendthrift beneficiary from recklessly or wastefully using the trust assets.

Two reasons why it's so desirable are 1) it provides protection of the trust assets from creditors of the trust creator (the grantor) because the assets are no longer in the grantor's possession. A creditor of a person can't reach what that person doesn't own. And 2) the beneficiary is prevented from spending the trust assets set aside for the beneficiary's benefit without the approval of the trustee. Unless the trustee actually makes a distribution, the beneficiary doesn't have a claim on the trust property.

This type of trust is most commonly used all over the country by parents who want asset protection and want to ensure their children use the trust assets wisely, taking advantage of the two benefits listed above. A unique use in Nevada, and another handful of states that allow self-settled spendthrift trusts, is for the grantor to place assets in the trust to protect them from himself or herself.

Nevada allows the grantor of the trust, the person who contributed the trust assets, to also be a beneficiary and trustee. I've had a couple cases recently where my client knew that if he had the cash, he would spend it unwisely. In both cases these clients had a lot to lose. They each wanted the safeguard of asset protection and the limitation of access to the cash in the trust. In both cases, I named the client as grantor and beneficiary. In one case we appointed a committee of family members as co-trustees and in the other, a bank as trustee. In both, we designed the trust with specific guidelines regarding the payment of living expenses, medical expenses, education and other related needs. We also set up an allowance, again on a discretionary basis, to be distributed to the grantor-beneficiary. The result was a limitation on the availability of funds to the literal spendthrift.

It's difficult to find an institution whether it be a bank or a life insurer or otherwise, who will create a product that doesn't provide access to deposited funds. Most likely they will discourage withdrawals from accounts like CDs or permanent life insurance policies with cash penalties, but access is still available. This is the best solution I'm aware of that will provide full asset protection and limitation of distributions to the original owner of the funds. Of course, it can't happen without the cooperation of the grantor, but when it works, the benefit is immense.

Wednesday, August 3, 2011

Funding a Revocable Trust

Signing your revocable family trust feels like a significant accomplishment. You've thought for years about getting it done and when you finally have your estate planning binder in hand, you feel a sense of satisfaction. However, the trust document won't do you any good unless you actually fund the trust.

I always tell my client to think of the trust as a box. I can help you construct the box, but unless you put your assets into it, it can't provide any of the benefits for which you created it. Funding the trust requires changing title and ownership of your assets from yourself to the name of the trust. Recording a new deed for your home, going into the bank to complete change of ownership forms, and changing the beneficiary designation on life insurance policies are the most common.

Part of the estate plan I prepare for you includes a table of assets. It's a grid displaying all of your property and how each should be titled. It helps you keep track of everything you own to ensure that all assets that should be in the trust make it into the trust. I will also assist you with these transfers, including preparing Nevada deeds and providing letters of instruction for title transfers of your other assets.

While actually drafting and signing the trust may the biggest task, funding the trust is the most important.