A “trust” is an arrangement whereby legal title is bifurcated from beneficial title (also known as equitable title) from certain contributed assets. A trust’s “settlor” is the individual who creates the trust. A “beneficiary” or “beneficiaries” refers to the individual(s) for whom the settlor created the trust. Central to the concept of the trust is that of separating legal title from beneficial (equitable) title. Beneficiaries retain equitable title in a trust’s assets. The “trustee” is the individual (or entity) to whom the settlor transfers legal title. Although the trustee retains legal title and is the record owner of the assets, the trustee may not use the trust’s assets for his or her individual gain. The trustee under a trust is held to a fiduciary standard and must hold and administer the assets as prescribed by the settlor in the trust agreement and as provided for by law.
Although the trustee retains legal title to the trust assets, and the beneficiaries retain the equitable title to the trust’s assets, no one actually “owns” the trust assets outright and for their own benefit, and no one actually “owns” the trust like some individuals may own a corporation. This is why a trust can be used so successfully for asset protection purposes—neither the settlor nor the beneficiaries own the assets in a fashion that leaves them available to be seized upon by his or her creditors. The settlor has parted with ownership of the assets, and unless, for instance, he or she has fraudulently conveyed the assets into the trust, any unforeseen future potential creditors will not be able to access the assets, because generally speaking, creditors can obtain only what the debtor owns, not what the debtor used to own. The trustee, while retaining legal title, has no right or claim to benefit under trust assets, so such assets are inaccessible by the trustee’s creditors. Moreover, if the trust contains a competently drafted spendthrift provision (described in greater detail below), a beneficiary’s creditors should generally not be able to pursue trust assets.
A trust, in general, can often shield the transferred assets from creditors of the trust’s non-settlor beneficiaries. Specifically, a “spendthrift trust” can be created to provide for a beneficiary while also protecting the trust against the beneficiary’s poor financial decisions and creditors. It is, in a real sense, a trust set up to protect a beneficiary from spending all the money to which he or she is entitled. A spendthrift provision is simply a provision in a trust document expressly prohibiting beneficiaries from transferring, encumbering, or pledging their respective beneficial interests in the trust. It also typically prohibits any creditor of a beneficiary from attaching, levying against, or seeking a forced sale of the beneficiaries’ respective beneficial interests.
When a settlor establishes a spendthrift trust for the benefit of himself or herself and others, the trust is categorized as a “self-settled spendthrift trust,” which is a standard trust formed for asset protection purposes. The weight of authority is that self-settled spendthrift trusts are indeed valid trusts; however, depending on the applicable law, they may or may not afford protection against the settlor’s creditors. If the trust does not afford protection against the settlor’s creditors, this would not only apply to the settlor’s present or subsequent creditors, but also as to future potential creditors, and for as long as the trust may be in existence. Thus, the “door to trust assets” remains open to creditors with a self-settled spendthrift trust (at least in some jurisdictions), meaning that a judgment creditor would not need to resort to a fraudulent transfer (also known as a voidable transaction) theory or other claim to gain access to trust assets.
An integrated estate planning trust (hereinafter referred to as an “IEPT”) involves the repositioning of how a person’s assets are owned so that the assets are not as vulnerable to dissipation or confiscation. It is, in essence, an enhanced estate plan that involves a restructuring of financial affairs at a time when there is no pending, threatened or expected creditor claims. This strategic titling of assets is a simple process that can result in those assets being much less susceptible to creditor attachment. The goal that clients like to achieve is to be able to separate ownership from the control and benefits, meaning that although the client would no longer own specified assets, he or she still retains sufficient controls and avenues through which he or she can enjoy the financial benefits of those assets. The characteristics of a trust are particularly well-suited for allowing assets to be legally owned by a trustee while the client, as a beneficiary of the trust, continues to have equitable ownership.
A simpler form of trust is commonly known as the “revocable living trust” (hereinafter referred to as an “RLT”). The two main advantages of an RLT include: (a) probate avoidance (as any assets titled in an RLT do not have to go through the probate process after the settlor’s death); and (b) privacy (as an RLT is a private document that is not filed with a probate court as opposed to a Last Will and Testament, which is statutorily required to be filed with a court, making it available to the public for a nominal fee).
When discussing estate planning with a client, estate planning practitioners should obtain as much information as possible regarding the client’s desires and goals in order to assist in determining what type of trust would be best for the client and his family. While asset protection should always be considered in crafting an appropriate estate plan, the bottom line is that not everyone wants, needs or requires asset protection planning. When determining what approach to take, estate planning practitioners should be well-versed with respect to how comprehensive IEPTs such as those created under the laws of, for example, the State of Nevada or the Cook Islands are more advantageous for some clients as compared to RLTs.
Settling an IEPT for many clients is generally preferable to settling an RLT for a myriad of reasons. Even though IEPTs have numerous benefits other than asset protection, it is well known that the protection of trust assets is at least a component of an IEPT, even if not the primary motivation for creating such trusts. That being said, below are examples of how the asset preservation component of foreign and domestic IEPTs compare favorably to RLTs.
1. The increased ability of the IEPT’s settlor to retain benefit and control.
IEPT laws (both domestic and foreign) are generally more restrictive regarding how much a settlor can retain in control and benefits with respect to a trust’s assets without losing any protective aspects of the trust. Foreign IEPT laws do not carve out special rights for certain “exception creditors” to be allowed access to assets of an IEPT in which the settlor is also a beneficiary (while certain domestic jurisdictions do have special rights for exception creditors).
With respect to an RLT, the settlor and the trustee are (usually) the same person (i.e., the client) and therefore the settlor retains full control over the RLT’s assets during the settlor’s lifetime. As trustee, the settlor also has complete discretion as to assets being transferred into, and out of, the RLT.
2. Asset Protection.
Even though most trusts (including IEPTs and RLTs) have many goals, including privacy and probate avoidance, an IEPT also has the additional element of asset protection, which an RLT does not. An RLT’s assets are equally available to the settlor’s creditors as compared to the settlor’s personally owned assets.
3. Real Estate.
Admittedly, real estate is more problematic in achieving the protections typically provided by IEPTs. Nevertheless, as the laws and our firm’s experience support, the fact that the settlor no longer owns title to the real estate provides a significant barrier to a creditor’s attempt to seize the property through an enforceable judgment. With respect to clients who sell (or intend to sell) real estate, the sales proceeds are never received by the settlor, allowing such proceeds to then be invested and enjoy the asset protection afforded by an IEPT as opposed to an RLT. IEPTs are generally more desirable for clients who anticipate diversifying investments into higher-risk ventures.
Overall, the trust laws of certain foreign (and domestic) jurisdictions with respect to IEPTs are more protective than laws governing RLTs. Accordingly, even if a creditor is not dissuaded by the many hurdles erected by an IEPT, these protective statutes make it difficult, if not impossible, to pierce an IEPT in order to satisfy the settlor’s debts. An RLT, on the other hand, provides no asset protection to the settlor during the settlor’s lifetime, and therefore, pales in comparison to the benefits that can be obtained by settling an IEPT.
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Greenspoon Marder’s International Wealth and Asset Planning Practice Group offers strategic trust solutions, including IEPTs and RLTs, to help protect your assets, preserve privacy, and achieve your estate planning goals. Click here to subscribe to our International Wealth and Asset Planning Blog and stay informed on the latest insights in global estate planning and asset protection.
