Selfish Reasons to be Generous
International Wealth & Asset Planning Blog
Jan 30, 2019
Edward D. Brown, Esq., CPA, LL.M
In the world of trusts, including gift-giving and asset protection, the current landscape has never been better to consider making large gifts to trusts for family members. The reason is threefold.
Gifts of up to $11.4 million (or $22.8 million for a co-spousal gift) are free of any gift taxation. These allowable amounts will continue to increase through the year 2025, but then could drop to close to half of these amounts. We now know that if one takes advantage of these large allowable exempt gifts, then in the event the allowable amounts drastically decrease in 2026 (as currently slated under the law), there will be no recapture of any taxes that had been saved by gifting prior to 2026 (which was a concern for advisors prior to now). The gifting caps can even be greater if LLCs are used in the process. Also, the 2026 deadline could close in sooner as any change in administration in Washington DC occurs.
With the current trend of trust designs and evolving laws that allow for irrevocable trusts to be modified to adjust for changes in laws, family circumstances and goals, trusts have become extremely flexible tools as desired recipients of gifts. “Rainy day” provisions and terms can be added to the trust that allow assets to be reverted to the person (the “settlor”) who created and made the gifts to the trust. Such reversion can result if unforeseen circumstances (e.g., divorce, forced early retirement, unexpectedly outliving a beneficiary, loss of a job) occur that create a need to use the assets in the trust. Such reversion capabilities provide added comfort to that settlor, knowing that such reversion can be accommodated.
Speaking of evolving laws, seventeen states that have enacted “self-settled” (meaning the settlor is a beneficiary of the trust) spendthrift trust protection laws (known as domestic asset protection trusts or “DAPTs”) and numerous offshore jurisdictions allow such trusts to be created to also protect the trust assets from predators that come into existence via lawsuits, bankruptcies, divorces and other creditor situations. Being “self-settled” however can invite added scrutiny during litigation, encouraging a creditor to argue more entitlement to break into such trusts. Therefore, trusts with the above-mentioned “rainy day” provisions may be preferable since the settlor’s beneficiary status is more tenuous. In fact, until the above mentioned “rainy day” events occur, the trust assets cannot be reverted to the settlor, which means such trusts are not nearly as likely to be considered “self-settled” trusts. As such, all fifty states, and not just the seventeen DAPT states, generally recognize and enforce the spendthrift (translates to “asset protection”) nature of such trusts.
The fact that reason 1. above highlights the tax motivation for creating these trusts also bolsters the asset protection effectiveness of such trusts because a creditor has a much more difficult time in successfully arguing that the trust was nothing more than a transparent attempt to hinder or defraud creditors. This form of argument is a common strategy used by creditors when they can show there is no tax or other reason for creating the trust. When the sole motive behind setting up the trust is for asset protection from the settlor’s creditors (versus tax or other reasons), this opens the door for such creditor arguments (i.e., assertions of fraudulent transfers or voidable transactions) in their endeavors to unwind the gifts or to seek a claw-back of such gifts from the trust.
*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.
About Greenspoon Marder
Greenspoon Marder LLP is a full-service law firm with nearly 250 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has upheld a spot on
The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions. MEDIA CONTACT
Natalie Villanueva, Director of Marketing
954.333.4308 | email@example.com
This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.