Wednesday, January 25, 2012

SPA Trust vs. NAPT

When it comes to asset protection trusts, the discussion with my clients almost always comes down to whether or the Nevada Asset Protection Trust (NAPT) or the Special Power of Appointment Trust (SPA Trust) is a better fit. Of course, it's always determined on a case by case basis and I will emphatically direct you to my disclaimer at the bottom of the blog before reading further, but there are certainly a couple common factors to consider when deciding.

Both trusts are spendthrift trusts designed to prevent creditors from reaching trust assets and endow the trustee with absolute discretion over distribution decisions. Where they differ is the self-settled aspect. The "Nevada" of the NAPT refers to the provision in NRS 166 that allows a grantor (aka settlor or trustor) to also be a beneficiary. Nevada and a few other states offer this nuance which was inspired by offshore trusts that do the same. By using a domestic trust, the grantor avoids the stigma of placing assets outside the U.S. and does not have to file notice forms with the IRS.

The SPA Trust is not self-settled, instead relying on the power of appointment to appoint assets back to the grantor, should the need arise.

The NAPT offers greater access for the grantor because he is treated the same as any beneficiary. The trustee may make distributions at any time to the grantor, giving the grantor the ability to protect trust assets, but still be able to enjoy the income or principal at any time. The power of appointment used by the SPA Trust is not used the same way. Instead it's generally a single use tool to receive some or all of the trust assets without being a beneficiary of the trust.

A grantor can appoint a professional, Nevada resident trustee to the trust to qualify the trust to be governed by Nevada law. That has its own inherent benefits, but is mandatory for the NAPT if the grantor is not a Nevada resident. Even when all of the trust assets are located in Nevada, I still recommend a resident trustee for a non-resident grantor. The risk for non-resident grantors, though, is the possibility that a non self-settled trust jurisdiction could apply their own trust law in a suit against the trust, extinguishing the asset protection provided to the grantor-beneficiary. Though I haven't seen it happen, in theory it could. Nevada residents are protected from this event, but non-residents with self-settled trusts can't be sure.

As already discussed, since the grantor is not a beneficiary of a SPA Trust, such a concern is moot.

Also important to the decision is how business entities will be used to support the strategy, the availability of a trustworthy distribution trustee to the grantor, and more. There is no right answer for every circumstance so it is important to discuss these matter with an experienced asset protection attorney who will intelligently guide you through the process. Most important to the entire process is timing. As always, transfers to an irrevocable trust should be done when the waters are calm to ensure the most effective arrangement.

Monday, January 16, 2012

Do I need to retitle ALL of my bank accounts into the name of my trust?

As has been mentioned before, funding a trust is the hand to the glove of trust instrument preparation. Just because you have your revocable trust instrument drafted and executed doesn't guarantee your beneficiaries will not have to probate your estate. You have to actually change title of your assets into the name of the trust to complete the process. It's a critical step and a subject I emphasize and review the process of during each document signing with my clients.

But the question often arises, do I need to transfer ALL of my liquid accounts into the trust? No, so long as you are aware of the consequences. Take a bank account, for instance. You have a couple options. Do nothing and upon the death of the account owners the bank will require a court order appointing the rightful beneficiary to those funds. Depending on the balance of that account and/or the size of the probate estate, the could require a significant amount of expense and time to access those funds.

The next best option is to name a "Payable on Death" (aka POD) beneficiary. Now the account is not a probate asset because, by operation of contract, the funds will pass to the named beneficiary upon presentation to the bank of a death certificate and some signed forms. However, should the owner not die, but merely be incapacitated, the account will be frozen since the owner is unable to access the funds him or herself. Were the account owned by the trust and appropriate language was found in the trust instrument, then the successor trustee could access those funds to pay bills or other needs in the stead of the principal. In addition, should the named beneficiary be financially irresponsible or already subject to execution of a civil judgment, those funds could disappear quickly. Finally, should the undocumented intent of the POD designation be that the beneficiary is to distribute those funds among others, that beneficiary could be stuck with the gift tax bill along with the responsibility of dealing with unhappy potential heirs.

The best way to alleviate the above problems and many more is to retitle all accounts into the name of the trust. Now, of course there are certainly circumstances that call for doing something different, but such a decision should only be made after considering all the ramifications of doing so. In fact, I have advised just such a course of action for a client recently. If I am retained to advise and draft your estate plan, I will walk you through the proper course of action for all of your assets. Call my office to set an appointment.