By Edward D. Brown, Esq., CPA, LL.M
Many existing designs of asset protection trusts are becoming more prone to invasion by creditors. Courts with more frequency are taking various viewpoints that assets held in such trusts are not so out of reach. Instead, the courts are discovering in numerous cases that the debtor (to whom we will refer as the trust founder) is continuing to retain too much ultimate control over access to the trust assets.
Nest Egg. Given this climbing number of cases that find in favor of creditor access, those potential debtors (trust founders) who want to fortify protection should consider identifying a nest egg of assets that are (i) of sufficient value that protecting those assets through a financial attack provides enough cushion to keep one financially intact for the recovery period, and yet (ii) not so much value that one is left with an unreasonably small amount of assets in light of the nature of the risks and financial obligations such person is likely to encounter.
Today’s More Effective Provisions. This nest egg amount can then be decanted from the original asset protection trust to a new “nest egg” trust that is created by the existing asset protection trust, but with stronger barriers. These barriers may include one or more of the following: (1) a third-party professional protector who has professional indemnity insurance coverage for any covered financial losses and who is located in a jurisdiction other than where the trust founder is domiciled, and who is a protector who holds certain powers such as being able to replace the trustee, (2) a third-party professional trustee that is located in a jurisdiction (preferably offshore) other than where the trust founder and the protector are located, and again, a trustee that has professional indemnity insurance coverage for any covered financial losses, (3) a respectable portion of the value of the trust being held in non-US situs assets, (4) the trust founder not serving in any fiduciary or signatory roles (such as a manager of an LLC owned by the trust, or an authorized signatory on any financial accounts), and (5) a class of beneficiaries who include charities and family members (such as any person to whom the trust founder is married – provided no divorce or separation is in play –, children, or other very close individuals who are “family” who the trust founder knows would always use any distributions from the trust in a praiseworthy manner), but the beneficial class does not include the trust founder.
It’s All about Giving Up More Control. Although implementing the five components above can enhance the protections of a structure as compared to older designs (or as compared to situations in which no asset planning structure is in place), such implementation may meet resistance by trust founders because each of those five components translates to giving up control and access to the trust assets. In particular, the last component listed above (the trust founder not being in the class of beneficiaries) is a situation that many will not want to accept. However, considering that (1) the nest egg trust further removes only a portion of assets from the trust founder’s control (so that other sufficient assets are more available to the trust founder), and (2) in the event of a severe creditor challenge, a trust founder would be happier with the result that the nest egg continues to be available to family members (who would likely be appreciative that the trust founder had such good foresight) as opposed to being under the control of (or ownership by) a creditor who has no desire to act in the trust founder’s best interest, (or one who possibly act to the detriment of the trust founder with these newfound assets if the creditor is a person who has negative or retaliatory emotions (a grudge) with regard to the trust founder (e.g., in a divorce situation).
Trust Founder Still having a Voice. For trust founders who desire some controls, consideration can be given (unless the nest egg trust is to be designed to remove the trust assets from the trust founder’s taxable estate) to allowing the trust founder to hold a voluntarily-exercisable restricted power to appoint assets of the trust to additional family members or individuals (other than the trust founder) who are close to such family members who the trust founder knows would use trust funds in ways that would achieve deserving goals. Perhaps a more conservative approach would be to further restrict the power of appointment to be exercisable only for the benefit of another offshore trust that is equally or more protective or one that significantly approaches the same protection level of the nest egg trust, all as determined in the discretion of the trustee. The new trust could include more current provisions that are in line with the trust founder’s current family situation. The key here is that the trust founder cannot use that power to appoint assets to himself or herself (nor to creditors of the trust founder), since it is important that the trust founder not be somehow viewed as a potential “indirect” beneficiary of the trust.
Fiduciary’s Latitude. The trustee of the trust can also have the authority to grant any of the beneficiaries of the trust an independent or collective power (with or without a designated third party’s consent) to appoint (gift) assets to others, if the trustee determines granting such a power is in the best interests of the beneficiaries. Another desirable power of the trustee can be to hold trust amendment powers that better ensure that the original intentions of the trust founder are not frustrated by changes in circumstances and laws that eventually occur. You could impose restrictions, such as not allowing the trustee to expand the class of beneficiaries.
Non-Fiduciary for More Flexibility. Trustees, as fiduciaries, may be hesitant to amend the trust for fear that a beneficiary will bring legal action against the trustee for a breach of the trustee’s fiduciary duties. If that is a concern, the nest egg trust agreement could grant a majority of adult beneficiaries (or one or more named individuals who would take such power very seriously in acting appropriately) a power to appoint an independent unrelated non-fiduciary protector (preferably one who would have knowledge of what the trust founder’s initial intentions were with creating the original trust) who can carry out the original intent of the trust founder. This protector would be directed to follow guidelines that are stated in the trust agreement. Again, you could also impose restrictions, such as not allowing the protector to expand the class of beneficiaries. A court, nevertheless, could possibly consider such protector as having fiduciary obligations. Nevertheless, such protector may still have broader latitude than a trustee
Contingent Beneficial Interest. If a trust founder is uncomfortable with not being a beneficiary of the trust, consideration can be given to allowing a trustee or protector to add the trust founder as a beneficiary, but only in the event of certain contingencies, such as the trust founder then being retired and less exposed to professional liability, or in the event of a major economic downturn or financial reversal (other than due to any actual or threatened litigation, action or claim against the trust founder).
Offshore Financial Account. As mentioned above, one of the other protection-enhancing components pertains to non-US situs assets. This is one of the more important components, because no matter what asset protection structure barriers may exist, an aggressive highly-persistent and well-bankrolled creditor may be able to break through most of them. That being said, the most difficult barrier to the creditor most likely is the absence of the existence of any assets within the US. Offshore accounts funded with reasonable amounts that are timely placed into and properly held in an offshore structure (that the trust founder truly does not have the unilateral authority to compel access to the funds) can be the most effective end-game, which a creditor could not garnish or attach through any US court legal process, absent certain egregious circumstances.
Of course, the above discussion only covers the tip of the iceberg of all the provisions that should be included in any well-crafted planning structure, such as duress clauses, gift, estate, generation-skipping transfer and income tax flexibility provisions, appropriate standards being imposed on the fiduciaries and the like. Therefore, experienced legal counsel should be involved with the crafting of any such planning structures.
*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
