Using a Domestic Asset Protection Trust for Estate Planning By Ward J. Wilsey, JD, LLM www.wilseylaw.com [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

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

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)

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

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?

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

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.

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.

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

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

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

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

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

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

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

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

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]