Asset Protection Trusts

<div class="Section1">A qualified disability trust will generally be responsible for filing a tax return in the same manner as any other trust. The filing is made on Form 1041 and must be made if any one of three circumstances applies: (1) the trust has taxable income for the year, (2) the trust had gross income of $600 or more for the year regardless of whether it had taxable income or (3) the trust has a beneficiary who is a non-resident alien. Form 1041 is due at the same time that personal income tax returns are due for the year (a five-month extension may be available upon request).</div>

<div class="Section1">A Delaware dynasty trust can be used to transfer business interests from one generation to future generations while minimizing tax liability. Essentially, the trust is funded with the business interests. If the value of the business interests does not exceed the transfer tax exemption amount in the year of transfer, the transferred interests will, theoretically, increase in value within the trust and the appreciation will also be transferred without transfer tax liability.</div><br /> <div class="Section1"><br /> <br /> Delaware is one of the few states that allow a trust to continue indefinitely, so that the trust creator and business owner can ensure that the business interests will benefit the heirs into future generations. Further, because the trusts are irrevocable and are generally protected from a taxpayer’s creditors, the business owner can ensure that his or her business is protected from the beneficiaries’ creditors even after death.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Creating a Delaware dynasty trust is a complex undertaking and requires expert legal advice in order to ensure that the trust document clearly meets Delaware statutory requirements.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Yes, but if a qualified disposition has been made, a creditor whose claims existed at the time of the disposition must bring a claim within four years following the disposition or, if later, within one year following the date the creditor discovered the disposition or the date the creditor reasonably could have discovered the disposition.<a href="#_ftn1" name="_ftnref1">¹</a> For creditors whose claims arose after the qualified disposition, no claims may be brought unless the transfer was made with actual intent to defraud the creditor.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> If the transferor has made more than one qualified disposition to the trust, a subsequent disposition is disregarded in determining whether a creditor’s claim with respect to a prior qualified disposition is time-barred. Further, any distributions to a beneficiary are considered as having been made from the latest qualified disposition.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Certain claims are not subject to the time limitations discussed above. For example, claims for child support and alimony cannot be avoided. Further, claims by persons who suffered death, physical injury or property damages on or before the date of the qualified disposition are not barred.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Del. Code. Ann. Tit. 12, § 3572(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Del. Code. Ann. Tit. 12, § 3572(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Del. Code. Ann. Tit. 12, § 3572(f).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Del. Code. Ann. Tit. 12, § 3573.<br /> <br /> </div>

<div class="Section1">The settlor of an Alaska trust who is also named trust beneficiary is required to sign a sworn affidavit before the assets are transferred to the trust. This affidavit must state that the settlor has full right, title and authority to transfer the assets to the trust, and that the transfer will not render the settlor insolvent. The settlor must also verify that he or she does not plan on filing for bankruptcy relief.</div><br /> <div class="Section1"><br /> <br /> Further, the affidavit must state that the settlor does not intend to defraud any creditors through the transfer, and that no pending or threatened court actions exist (unless the actions are identified and attached to the affidavit). Similarly, the settlor must verify that he or she is not involved in any administrative proceedings unless they are identified and attached to the affidavit.<br /> <br /> The settlor must also verify that the settlor is not in default on child support payments by more than 30 days, and that the assets being transferred were not obtained from unlawful activities.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Alaska Stat. § 34.40.110(j).<br /> <br /> </div>

<div class="Section1">A spendthrift is an individual who is prone to using property in an excessive or frivolous manner. Thus, a spendthrift trust serves two important purposes: (1) it protects the beneficiary of the trust from himself or herself; and (2) it prevents the beneficiary&rsquo;s creditors from accessing the beneficiary&rsquo;s interest in the trust.<div class="Section1"><br /> <br /> A spendthrift provision protects the beneficiary by preventing voluntary or involuntary alienation by the beneficiary.<a href="#_ftn1" name="_ftnref1">¹</a> The beneficiary cannot sell, give away, exchange, or otherwise transfer the beneficiary&rsquo;s interest. A settlor typically does this to protect the beneficiary from misfortune or incapacity.<br /> <br /> In addition, the spendthrift provision also allows the settlor to carry out the intent of benefitting the beneficiary, rather than the beneficiary&rsquo;s creditors or assignees. A spendthrift trust does not require that the beneficiary be a &ldquo;spendthrift&rdquo; or declared incompetent under the law.<a href="#_ftn2" name="_ftnref2">²</a> It is enough that the settlor has a concern about the beneficiary&rsquo;s ability to manage their finances in a responsible manner.<br /> <br /> Most states have now codified the law of spendthrift trusts. Some states make all trusts spendthrift trusts unless the settlor specifically provides otherwise. In addition, some states may restrain involuntary, but not voluntary, alienation for all trusts.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9074">9074</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9076">9076</a> for a discussion of domestic asset protection trusts generally.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Restatement (Third) of Trusts &sect;&nbsp;58 cmt. a (2003).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Restatement (Third) of Trusts &sect;&nbsp;58 cmt. a (2003).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Restatement (Third) of Trusts &sect;&nbsp;58 cmt. a (2003).<br /> <br /> </div></div><br />

<div class="Section1">First, a domestic asset protection trust must be irrevocable in order to effectively protect the assets of the trust creator (settlor) against the claims of future creditors. The trust settlor is named as a trust beneficiary (additional beneficiaries may also be named), resulting in what is known as a self-settled trust. Second, a trustee (whether an individual or a corporation) who is a resident of the state in which the trust is established must be appointed and given discretionary authority over trust administration and distributions.<div class="Section1"><br /> <br /> Importantly, a domestic asset protection trust must contain a &ldquo;spendthrift&rdquo; clause in order to protect the trust settlor&rsquo;s assets against the claims of creditors. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9087">9087</a> for an in depth discussion of the types of language that can constitute a valid spendthrift clause.<br /> <br /> Some of the important considerations that an individual must be aware of when determining whether a domestic asset protection strategy is appropriate are discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9076">9076</a>.<br /> <br /> </div></div><br />

<div class="Section1">A Delaware dynasty trust can often be used as an asset protection trust in order to protect the trust assets from the creditors of the beneficiaries. Under Delaware law, the ability of creditors to reach trust assets is limited if a qualified disposition to a qualified trustee has been made.</div><br /> <div class="Section1"><br /> <br /> A qualified disposition is a transfer of property to a qualified trustee of an irrevocable trust that expressly provides that Delaware law will govern. There may be multiple trustees, so long as one of the trustees is a qualified trustee.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A qualified trustee is an individual, other than the transferor, who is a Delaware resident or a financial institution that is authorized to act as a trustee under Delaware law. A portion of the trust property must be maintained under Delaware law and the trustee must materially participate in the trust administration. The trust may also provide that a trust protector or trust advisor may be appointed, and the transferor may hold the trust advisor position so long as he or she does not have any additional authority over the trust.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Del. Code. Ann. Tit. 12, § 3570(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Del. Code. Ann. Tit. 12, § 3570(8).<br /> <br /> </div>

<div class="Section1">If a beneficiary of a Delaware trust has not acted in bad faith, the beneficiary may retain any distributions from the trust that are made before a creditor brings a claim against the trust assets.<a href="#_ftn1" name="_ftnref1">¹</a> Under Delaware law, it is presumed that the beneficiary (including a beneficiary who is also the transferor) did not act in bad faith, and the creditor has the burden of proving the existence of bad faith.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Del. Code. Ann. Tit. 12, § 3574(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Del. Code. Ann. Tit. 12, § 3574(c).<br /> <br /> </div>

<div class="Section1">Generally, the beneficiary’s interest in an Alaska trust is not considered marital property that is subject to division. However, unless the parties otherwise agree in writing, this general rule does not apply if the settlor is the beneficiary and the assets were transferred to the trust (1) after the settlor-beneficiary’s marriage or (2) within 30 days before the settlor-beneficiary’s marriage, unless the settlor gives written notice of the transfer to the future spouse.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Alaska Stat. § 34.40.110(l).<br /> <br /> </div>

<div class="Section1">A settlor must intend to create a spendthrift trust, and, as such, the trust must contain a spendthrift clause that restrains both voluntary and involuntary alienation.<a href="#_ftn1" name="_ftnref1">¹</a> A provision as simple as “This is a spendthrift trust” is generally enough to satisfy the courts. Other examples include:</div><br /> <div class="Section1"><br /> <blockquote>“To B for life. Her right to these payments is not to be transferable.”<br /> <br /> “A beneficiary shall not have the right or power to anticipate, by assignment or otherwise, any income or principal given to the beneficiary by this Will or to sell, transfer, encumber or in otherwise charge his interest in income or principal in advance of actually receiving that income or principal. Neither the income nor the principal shall be subject to execution, garnishment, attachment, insolvency, bankruptcy or other legal proceeding of any character, or legal sequestration, levy or sale or at any time be applicable or subject to, voluntarily or involuntarily, the payment of a beneficiary’s debts, including, without limitation, any claims for alimony or support.”</blockquote><br /> A settlor’s intent may also be implied. The Restatement 3rd of Trusts provides that language in a trust instrument that restrains only voluntary alienation is sufficient to create a spendthrift trust that also implicates involuntary alienation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Restatement (Third) of Trusts § 58 cmt. a (2003) at cmt. b(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Restatement (Third) of Trusts § 58 (2003).<br /> <br /> </div>