Monday, September 30, 2013

Breaking Bad Introduces Irrevocable Trusts to the World

There are three audiences for this blog post.  I’ll have some Breaking Bad fans that pick apart every minute detail and want to learn more about the irrevocable trusts mentioned in the show’s series finale.  There’s the potential client investigating irrevocable trusts and finding some interesting, if obscure, pop culture reference.  And then there’s going to be a few asset protections dorks like me, thrilled at the mention of one of our bedrock tools being featured on the highest profile primetime television episode in years. 

Until now, there weren’t many of group one who mingled with group two.  However, tonight’s series finale gave us yet another twist that utilized irrevocable trusts to resolve at least two loose ends. 

To catch non-viewers up to speed, the most relevant details here are that Walter White is the dying father of two children, both minors.  He’s sitting on a mountain of cash (literally) and very forcefully requires that two former colleagues place the funds into an irrevocable trust to be made available to the eldest child on his 18th birthday, less than a year hence.  If you’re a non-viewer and still interested in learning more about irrevocable trusts, I suggest reading my other blog entries on the topic since further discussion will be riddled with unfamiliar names and subjects, only further blurring already hazy subject matter.

So what is an irrevocable trust?  Very simply, it’s an entity respected by state and federal law, that exists separately from the person who places assets into it.  Think of a business entity like an LLC or corporation.  What makes it more unique is that the person for whose benefit it is created cannot lose the trust property to a creditor.  Any creditor, if the circumstances are right.  That is critical in this case because Walt is afraid that this money could be taken by the federal government after seeing what happened to Mike and his granddaughter. 

Walt is justified in placing his faith in an irrevocable trust because every state in the country has what are known as spendthrift trust laws on the books.  Spendthrift trust statutes prevent a creditor from having any right to remove a trust asset from a beneficiary, and likewise, withhold from a beneficiary the freedom to give it to them.  That means that no matter what Flynn (forget ever hearing him referred to as Walter Jr. again!) does or more importantly, what the Feds try to do, he can’t lose the money to an outside party.  It will remain in the bank unless an independent trustee distributes trust funds to Flynn, the beneficiary, or purchases something for his benefit, like tuition or a place to live.  Moreover, Flynn will likely have the option to control those trust funds directly, potentially even on his 18th birthday, and the trust will still provide that very same protection.

We saw Walt desperate to deliver some cash to his kids, but his wife and son continually rejected him.  At least with this method, Walt has some hope that the money will be preserved so that if Flynn ever changes his mind, its available.  In the mean time, Walt expects that the government (if they ever even become aware of its existence) won’t be able to touch it.  The end result is that Walt’s goal of taking care of his family financially is met, and his desire to make things miserable for his former Grey Matter co-founders is satisfied.

The plan is not perfect.  While the Schwartz’s had no choice but to agree to cooperate, I don’t know how enthusiastic they will be with their chosen attorney to provide all the flexibility the trust should include.  I also don’t see how they can possibly fund the trust via a bank account without raising red flags, even if they go offshore with it.  But assuming they get good counsel to help them navigate those issues, we, as fans, can take solace in Flynn having some nice financial options for Skyler, Holly and himself in the future.

Now, if you really want to dig deeper (as any Breaking Bad fan does), there are a lot more issues beneath the surface that only trust geeks would care to analyze.  Who is the grantor here:  Walter, or Gretchen and Elliot Schwartz?  What of the State’s existing creditors, whether federal or local?   Surely they were existing creditors at the time of the transfer.  Upon discovery of the transfer, will their lookback period claim succeed in unwinding the transfer?   Even if the funds make it in an account, to what lengths will the State go to freeze the assets and how successful might they be, regardless of the principles protecting the assets?  Holly isn’t mentioned as a beneficiary, but Walt expects Flynn will provide for the family, so is she named as a beneficiary or will Flynn provide for her via a personal gift post-distribution?  Can he possibly remain inside of a HEMS standard distribution and still take care of his sister and mother? Is New Mexico the best situs to govern the trust?  Not a question, but that's going to be a steep annual income tax bill unless the remaining White's are spending down hard.  Which trust company, if any, just fell into some massive trustee fees and do they sacrifice disclosure amid the sticky and vague origin and existence of the funds? 

This post attempts to serve as no more than an introduction to the topic than the brief mention in tonight’s episode did to introduce the subject at all.  No doubt there will be many posts to come from trust commentators and analysts who will answer the questions above and many more.  It falls right in line with one of the brilliant elements of the story: the deeper you dig, the more you find.  Hopefully this provides just a bit of contextual insight to yet another of Walt’s brilliant decisions.  For me, this one stood out as one of the most brilliant of all (self-serving or not)!


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