Domestic Asset Protection Trusts for Estate Planning
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Domestic Asset Protection Trusts for Estate Planning



The following examines the uses for the Domestic Asset Protection Trust in estate planning. While these trusts are commonly used for asset protection from creditors, they have a pretty amazing use for ...

The following examines the uses for the Domestic Asset Protection Trust in estate planning. While these trusts are commonly used for asset protection from creditors, they have a pretty amazing use for estate planning purposes as well.

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Domestic Asset Protection Trusts for Estate Planning Domestic Asset Protection Trusts for Estate Planning Presentation Transcript

  • Using a Domestic Asset Protection Trust for Estate Planning By Ward J. Wilsey, JD, LLM [email_address]
  • The Domestic Asset Protection Trust
    • Self-Settled Spendthrift Trust
      • Grantor sets a trust up for his or her own benefit, and has the assets immune from creditors
    • Traditionally, one cannot set up a trust for their own benefit and have it protected from their creditors
      • California Probate Code Section 15304(a)
    • Some states have done away with this restriction on “Self-Settled Spendthrift Trusts”.
      • Alaska, Nevada, Delaware, Wyoming, South Dakota, Oklahoma
  • Requirements for DAPT
    • Formed in DAPT State
    • Irrevocable
    • Independent Trustee
      • Trust company
      • Individual Resident of DAPT state
    • Discretionary Trust
      • Trustee has the full discretion on how and when to make distributions
  • DAPT
    • Grantor/Beneficiary may make requests to the Trustee for distributions
      • Distributions are fully in the Trustee’s discretion
      • Lack of control is what creates asset protection
    • Fear of Trustees run amuck
      • Trust Protector assures Trustee compliance with Grantor’s intentions
      • Trustee only given control over Ownership in a FLLC or FLP (discussed further later)
  • Creditor Protection Problems of DAPTs
    • Full Faith and Credit Clause of the Constitution
      • Is one state forced to accept the law of another?
    • So far no real case law
    • Opinion of Presenter
      • No real case law is a good sign that DAPTs are excellent asset protection devices
  • Question
    • Can an individual or married couple make completed gifts to a Domestic Asset Protection Trust and have those assets outside of their estate for estate tax purposes, while having the ability to receive those assets from the trustee if needed?
  • Problems
    • IRC 2036
      • Decedent’s gross estate includes assets which he/she has transferred but has retained
        • a. The possession or right to enjoy the assets
        • b. The right to determine who will enjoy the assets
    • IRC 2038
      • Decedent’s gross estate includes any transfer by which such transfer was subject to a power where the decedent, along or in conjunction with another person, had the right to alter, amend or revoke
        • Within 3 years of death
  • Basic Rule of DAPT’s for Estate Tax Inclusion
    • If the Grantor’s creditors cannot reach the assets, then the assets are out of the Grantor’s estate.
      • Ltr. Rul. 9837007;
      • Ltr. Rul. 9332006;
      • Estate of German, 7 Cl. Ct. 641, 55 AFTR2d 85-1577 (Ct. Cl., 1985);
      • Estate of Uhl, 241 F.2d 867, 50 AFTR 1746 (CA-7, 1957).
      • Estate of Wells, TCM 1981-574.
  • Estate of German, 7 Cl. Ct. 641, 55 AFTR2d 85-1577 (Ct. Cl., 1985)
    • Self Settled Discretionary Trust
    • Grantor was a beneficiary
    • Court ruled that the assets were not in the Grantor’s estate
      • because the IRS could not prove that they were within the reach of the Grantor’s creditors.
  • Ltr. Rul. 9332006
    • Partnership interests transferred to Offshore Asset Protection Trust
    • Partnership assets not includible in the Grantor’s estate
    • Grantor had no right to compel distributions
    • Distributions were at the discretion of the trustee.
      • IRC 2036 and 2038
  • Priv. Ltr. Rul. 9837007
    • Alaska Asset Protection Trust
    • IRS ruled that gift to such a trust was completed for gift tax purposes
    • Because assets are out of reach of the creditors
      • How can this possibly mean assets are includible in estate?
        • Not answered in PLR
  • Conclusion
    • Assets transferred to a DAPT should not be subject to estate taxes
      • No authority to the contrary
      • IRS acquiescence
      • Case law support
    • If you make a completed gift of assets to a DAPT, those assets are outside of your estate for estate tax purposes, despite your ability to access those assets if necessary
      • Forget about the creditor protection, this is the real benefit
  • DAPT in Estate Planning
    • Making gifts while retaining benefit of assets if needed.
    • Example
      • Husband and Wife gift $1,000,000 of $5,000,000 estate to DAPT
      • Husband and Wife primary beneficiaries, kids secondary
      • Husband and Wife now have creditor protected slush fund that’s out of their estate
  • Using a Family LLC with a DAPT
    • Client creates FLLC
    • Gifts membership interest into DAPT
      • 33% discount
      • $1,500,000 in underlying assets using $1,000,000 gift tax exemption
    • Client is primary beneficiary
    • Client retains ultimate control as manger of LLC
      • Client can hire any advisors
      • Client can keep accounts at current location
      • Trustee has control of only Ownership Certificates
  • Gifting using DAPT 1. Client has assets worth $1,500,000 2. Client forms Family Limited Liability Company with $1,500,000, runs FLLC as manager 3. Client gifts membership interests into DAPT, gets 33% discount, uses $1,000,000 exemption 4. Client is beneficiary of DAPT, can receive distributions at Trustee’s discretion Family LLC DAPT
  • Other Planning Ideas
    • Sale to IDGT
    • GRAT
    • SCIN
    • ILIT
    • Dynasty Trusts
  • Compare to SLAT
    • Spousal Limited Access Trust
      • H creates trust for W, with W as trustee and primary beneficiary
        • Vice versa for wife
    • Pros
      • Simpler
      • No Trustee fees
    • Cons
      • Reciprocal Trust Doctrine
      • Less Asset Protection
      • Cannot use for Survivor Policy
  • Client Profile
    • Net Worth of $7,500,000 or more
    • Concerns about estate taxes
    • Wants to retain control and possible use of assets
  • Questions??? Please direct all questions via email to [email_address]