By PAUL E. DELOUGHERY, Attorney at Law
PAUL E. DELOUGHERY practices exclusively in the areas of estate planning and asset protection in Phoenix and Scottsdale, Arizona.
An Asset Vault TrustTM is based on two undeniable rules.
First, with respect to an irrevocable trust, a creditor of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. (In other words, if the trust is self-settled, it is vulnerable to creditors).
See Uniform Trust Code Section 505; RESTATEMENT (SECOND) OF TRUSTS Section 156(2) and RESTATEMENT (THIRD) OF TRUSTS Section 58(2). This principle has been adopted in hundreds of cases throughout the country and many states have enacted statutes with this identical language. For example, see Alabama Code Section 19-3B-505; Ariz. Rev. Stat. §14-10505(A)(2); Cal. Prob. Code § 15304; Ga. Code Ann. § 53-12-28(c); Florida Trust Code Section 736.0505(b); Ind. Code Ann. § 30-4-3-2; Kan. Stat. Ann, §33-101; La. Rev. Stat. Ann.§2004(2); Mont. Code Ann. § 72-33-305; N.Y. Civ. Prac. L. & R. § 5205(c); Pennsylvania Code Title 20 §7745; Tex. Prop. Code Ann. §112.035(d); Wis. Stat. Ann. §701.0505(1)(a)(2). Also, here are some sample cases that support this point:
- U.S. v. Estabrook, 78 F.Supp.2d 558, 561 (N.D. Tex. 1999) (“Defendants created a revocable trust funded by all their present and future assets. They receive net income from the trusts in regular installments and have sole discretion to make use of the trust assets ‘as they may deem prudent.’ Under these circumstances, the Sunnyvale property and other trust assets are not beyond the reach of creditors.”).
- In re Brooks, 844 F.2d 258, 261 (5th Cir. 1988) (“Like all other states that recognize spendthrift trusts, however,Texas forbids a person to place his own assets in trust and then, by a spendthrift clause or some other restraint, to shield the trust from claims of his current or future creditors. A person is not allowed to make provision for his own support or comfort to the prejudice of his creditors.”)
- Judson v. Witlin (In re Witlin), 640 F.2d 661, 663 (5th Cir. 1981) (“There is, of course, a strong public policy that will prevent any person from placing his property in what amounts to a revocable trust for his own benefit which would be exempt from the claims of his creditors.”)
Second, a settlor can retain a special power of appointment without subjecting the trust to the claims of creditors.
See RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS Section 22.1; US Bankruptcy Code Section 541(b)(1), California Probate Code Section 681; Delaware Code Section 3536; Georgia Code Section 23-2-111; New York Code 10-7.1; Also see cases set forth below.
An Asset Vault TrustTM uses these rules by (1) not being a self-settled trust, and (2) including a Special Power of Appointment that allows the settlor to change the trustees, the beneficiaries, or the terms of the Asset Vault TrustTM at any time (except that the assets cannot be distributed to or for the settlor’s benefit, or the benefit of settlor’s creditors). In addition, the settlor can appoint assets to any other person at any time (i.e., direct that assets be transferred to another person).
Creditors do not have a claim to assets inside an Asset Vault TrustTM because no distributions can be made for the settlor’s benefit. There are no statutes, cases, secondary sources or commentaries to the contrary.
Cases Supporting Use of Asset Vault TrustTM
The following is a sampling of court cases over the centuries that support the asset protection features of an Asset Vault TrustTM:
In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002) – Defendant funded an irrevocable trust and retained an income interest and a special power of appointment over principal. The 11th Circuit analyzes creditor’s access to an irrevocable trust. The trust principal was not included in the defendant’s bankruptcy estate.
In re Colish, 289 B.R. 523 (Bankr.E.D. N.Y. 2002) – The interest of a contingent beneficiary was included in the bankruptcy estate. The court distinguished this from Knight and Hicks where the interest of a permissible appointee under a power of appointment was not included.
In re Knight, 164 B.R. 372 (Bankr.S.D.Fla.1994) – The interest of a contingent beneficiary was included in the bankruptcy estate, but the interest of a permissible appointee of a power of appointment was too remote to be property and was not included in the bankruptcy estate.
Cooley v. Cooley, 628 A.2d 608 (1993) – A special power of appointment is not a part of the marital estate that can be awarded in a divorce action. As one of the possible objects of the defendant’s power, the plaintiff possesses no more than a mere expectancy.
In re Hicks, 22 B.R. 243 (Bankr. N.D.Ga.1982) – A court cannot compel the exercise of a special power of appointment and the assets of the trust were not included in the bankruptcy estate of a permissible appointee.
U.S. v. O’Shaughnessy, 517 N.W.2d 574 (1994) – Assets subject to discretionary special power of appointment not subject to tax lien
Spetz v. New York State Dep’t of Health, 737 N.Y.S. 2d 524 (Sup. Ct. Chautauqua Co, Jan. 15, 2002) – New York Supreme Court holds that special power of appointment does not cause trust assets to be taken into account for purposes of Medicaid qualification
Verdow v. Sutkowy, 209 F.R.D. 309 (N.D.N.Y. 2002) – Assets subject to special power of appointment not taken into account for purposes of Medicaid qualification
United States v. Baldwin, 391 A.2d 844 (1978) – Assets subject to special power of appointment not subject to tax lien
Estate of Ballard v. Commissioner, 47 BTA 784 (1942), aff’d, 138 F.2d 512 (2nd Cir. 1943) – Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
In re Wyly, 553 B.R. 318, 2016 Bankr. LEXIS 2437 (Bankr. N.D. Tex. June 29, 2016). Because the Debtor controlled the flow of payments from the private annuity that Debtor created for himself, the annuity payments were not exempt from bankruptcy under Texas law.
Cote v. Bank One, Texas, N.A., No. 4:03-CV-296-A, 2003 WL 23194260 (N.D. Tex. Aug. 1, 2003) – Permissible appointee is not an “interested person” with standing to sue the trust. This is relevant because if the permissible appointee has no standing to sue the trust, neither should a creditor of a permissible appointee.
Avis v. Gold, 178 F.3d 718 (1999) – Permissible appointee had no interest which could be included in the bankruptcy estate, or to which an IRS tax lien could attach, prior to the time the power was exercised in favor of the debtor.
Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997) – 5th Circuit Court holds that the portion of the trust that was not self-settled is not included in the bankruptcy estate, and assets subject to a special power of appointment are excluded from the bankruptcy estate.
Horsley v. Maher, U.S. Bankruptcy Ct. Case No. 385-00071 (1988) – debtor was a permissible appointee of Trust A and a beneficiary of Trust B. Trust A was not included in the bankruptcy estate because “the debtor holds no interest in Trust A.” The assets of Trust B were included in the bankruptcy estate.
In Estate of German, 7 Cl. Ct. 641 (1985) (85-1 USTC Par 13,610 (CCH)) – Assets of an irrevocable trust were not subject to the creditors of the settlor despite the fact that the trustees and beneficiaries had power to appoint the assets to the settlor.
Kneeland v. COMMISSIONER OF INTERNAL REVENUE, 34 BTA 816 – Board of Tax Appeals (1936) – Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
Helvering v. Helmholz, 296 US 93 (Supreme Court 1935) – Assets of trust not included in wife’s estate merely because the beneficiaries had the power to terminate the trust and return the assets back to the wife.
Price v. Cherbonnier, 63 Atl 209 (1906) – Creditors of the donee of a special power of appointment cannot reach the assets subject to the power.
Gilman v. Bell, 99 Ill. 194 (1881) – Assets subject to power of appointment not subject to claims of creditors.
Jones v. Clifton, 101 US 225 (1879) – Assets subject to power of appointment not subject to claims of creditors.
Holmes v. Coghill, 33 Eng. Rep 79 (1806) – Assets subject to power of appointment not subject to claims of creditors.