Protecting Inheritances  from Creditors By Ward J. Wilsey, JD, LLM 3655 Nobel Dr. Suite 345 San Diego, CA 92122 (858) 764-...
The Problem <ul><li>Discretionary Trust is probably the most powerful asset protection device under California law </li></...
Types of Trust <ul><li>Mandatory Distribution Trust </li></ul><ul><li>Ascertainable Standard Trust </li></ul><ul><li>Discr...
Mandatory Trust <ul><li>Trust must pay out a set amount or percentage of the Trust Principal or Income </li></ul><ul><ul><...
Ascertainable Standard <ul><li>Health, Education, Maintenance, and Support </li></ul><ul><li>Originally used for estate ta...
Effect of a Property Right <ul><li>If the Beneficiary has a Property Right, enforceable in court, then their creditor has ...
Discretionary Dynasty Trust <ul><li>This type of Trust is the only type that provides creditor protection for beneficiarie...
Beneficiary Controlled Trust <ul><li>In California, a Beneficiary who is the sole trustee of a trust must abide by the hea...
Beneficiary Controlled with Distribution Trustee <ul><li>Beneficiary is managing trustee and appoints a co-trustee respons...
Fully Discretionary Trust with Independent Trustee <ul><li>Independent Trustee </li></ul><ul><li>Sole, Absolute and Unrevi...
Controlling the Trustee <ul><li>How do you make sure the Trustee makes prudent decisions? </li></ul><ul><li>Method 1 </li>...
Summary <ul><li>Most Trusts are Mandatory Distribution Trusts or Ascertainable Standards Trusts </li></ul><ul><li>These Tr...
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Protecting Inheritances

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Presentation Describing the different types of trusts in which an inheritance is received and how only a Discretionary Trust can provide asset protection.

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Protecting Inheritances

  1. 1. Protecting Inheritances from Creditors By Ward J. Wilsey, JD, LLM 3655 Nobel Dr. Suite 345 San Diego, CA 92122 (858) 764-2672 [email_address]
  2. 2. The Problem <ul><li>Discretionary Trust is probably the most powerful asset protection device under California law </li></ul><ul><ul><li>Can only be used for inheritances </li></ul></ul><ul><li>This type of Trust is almost never used for inheritances </li></ul><ul><li>Almost all Trusts are susceptible to creditors </li></ul><ul><ul><li>Lawsuit Plaintiffs </li></ul></ul><ul><ul><li>Bankruptcy Creditors </li></ul></ul><ul><ul><li>Divorce and Alimony </li></ul></ul><ul><ul><li>Government Reimbursement for Benefits </li></ul></ul>
  3. 3. Types of Trust <ul><li>Mandatory Distribution Trust </li></ul><ul><li>Ascertainable Standard Trust </li></ul><ul><li>Discretionary Trust </li></ul>
  4. 4. Mandatory Trust <ul><li>Trust must pay out a set amount or percentage of the Trust Principal or Income </li></ul><ul><ul><li>Ex. </li></ul></ul><ul><ul><ul><li>Pay All Income to Beneficiary </li></ul></ul></ul><ul><ul><ul><li>Pay 4% of Trust Assets per year to Beneficiary </li></ul></ul></ul><ul><ul><ul><li>Pay $100,000 per year to Beneficiary </li></ul></ul></ul><ul><ul><ul><li>Pay out ½ at 25 and rest at 35 </li></ul></ul></ul><ul><li>Beneficiary has property rig ht, enforceable in court to the mandatory payment each year . </li></ul>
  5. 5. Ascertainable Standard <ul><li>Health, Education, Maintenance, and Support </li></ul><ul><li>Originally used for estate tax purposes, to keep assets out of Trustee/Beneficiary’s Estate </li></ul><ul><ul><li>Bypass Trust is an example </li></ul></ul><ul><ul><li>Defined in Treasury Regulation 20.2041-1(c)(2) </li></ul></ul><ul><li>Now it seems most common type of Trust </li></ul><ul><li>Beneficiary has a property right , enforceable in court, to distributions for Health, Education, Maintenance, and Support </li></ul>
  6. 6. Effect of a Property Right <ul><li>If the Beneficiary has a Property Right, enforceable in court, then their creditor has a right to ask the court to make a distribution to satisfy the creditor claim </li></ul><ul><li>Mandatory Distribution and Ascertainable Standard Trusts </li></ul><ul><ul><li>Both allow Beneficiary to have Property Right </li></ul></ul><ul><ul><li>Neither protects against creditors </li></ul></ul>
  7. 7. Discretionary Dynasty Trust <ul><li>This type of Trust is the only type that provides creditor protection for beneficiaries </li></ul><ul><li>3 Types </li></ul><ul><ul><li>Beneficiary Controlled </li></ul></ul><ul><ul><li>Beneficiary Controlled with Distribution Trustee </li></ul></ul><ul><ul><li>Full Discretion of Independent Trustee </li></ul></ul>
  8. 8. Beneficiary Controlled Trust <ul><li>In California, a Beneficiary who is the sole trustee of a trust must abide by the health, education, maintenance, and support standard. Cal. Probate Code 16081(c) </li></ul><ul><ul><li>Creates a Property Right </li></ul></ul><ul><li>Therefore, this type of trust does not offer much asset protection </li></ul><ul><li>However, we can allow the Trust Protector to have the right to remove the Trustee, and replace them with an Independent Trustee having full discretion, which may solve this problem </li></ul>
  9. 9. Beneficiary Controlled with Distribution Trustee <ul><li>Beneficiary is managing trustee and appoints a co-trustee responsible for making distributions </li></ul><ul><ul><li>Beneficiary retains right to remove and replace all trustees </li></ul></ul><ul><li>This probably eliminates the application of Cal. Probate Code 16081(c). </li></ul><ul><ul><li>Co-Trustee may use Discretionary Distribution standard </li></ul></ul><ul><li>This should not create a Property Right in the Trust </li></ul>
  10. 10. Fully Discretionary Trust with Independent Trustee <ul><li>Independent Trustee </li></ul><ul><li>Sole, Absolute and Unreviewable Discretion to make distributions as they see fit. </li></ul><ul><ul><li>Still must be made “reasonably” under California law </li></ul></ul><ul><li>Most powerful asset protection </li></ul><ul><li>There is no real possibility of a “Property Right” </li></ul><ul><ul><li>Creditor attack is really not possible, according to case law. </li></ul></ul>
  11. 11. Controlling the Trustee <ul><li>How do you make sure the Trustee makes prudent decisions? </li></ul><ul><li>Method 1 </li></ul><ul><ul><li>Leave a Letter of Wishes </li></ul></ul><ul><ul><li>Allow Trust Protector to Remove and Replace if Letter of Wishes is Not Followed </li></ul></ul><ul><li>Method 2 </li></ul><ul><ul><li>Allow Beneficiary to Remove and Replace the Trustee </li></ul></ul><ul><ul><ul><li>Almost like the beneficiary is in control, no real risk of being labeled a “Property Right” </li></ul></ul></ul>
  12. 12. Summary <ul><li>Most Trusts are Mandatory Distribution Trusts or Ascertainable Standards Trusts </li></ul><ul><li>These Trusts create a Property Right in the Trust Assets </li></ul><ul><li>This Property Right makes the trust susceptible to creditors </li></ul><ul><li>The only way to avoid creditor issues is through Discretionary Trust </li></ul>

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