Arizona Estate Planning

Irrevocable Trust Nonjudicial Settlement Agreements: The Good, the Bad, and the Ugly

Some trusts are irrevocable as soon as they are created, which means that, in general, the trustmaker (the person who created and funded the trust) cannot terminate or modify it and take back the money or property that it holds. You may wonder why anyone would want an irrevocable trust, but irrevocable trusts can provide some very important benefits, particularly asset protection, tax minimization, and maintaining eligibility for government benefits. In contrast, trustmakers may amend or revoke a revocable living trust at any time prior to their death, but at their death the trust becomes irrevocable.

Although irrevocable trusts generally cannot be changed, many states’ laws allow interested parties to modify a trust in certain circumstances using a binding nonjudicial settlement agreement—assuming there is no language in the trust document prohibiting their use or providing another way for the trustee and beneficiaries to consent to modifications. In the absence of a statute permitting a nonjudicial settlement agreement, the interested parties under state law, which may include the grantor, the trustee, or the current or future beneficiaries or their representatives, would have to petition a court to modify the trust or interpret unclear provisions. In states where nonjudicial settlement agreements are permitted, their use can avoid the costs, delays, and lack of privacy associated with judicial proceedings.

When May a Nonjudicial Settlement Agreement Be Used?

A nonjudicial settlement agreement is only valid if it does not violate a material purpose of the trust or terminate the trust in an impermissible manner and any modification would have been approved by a court if the parties had petitioned the court. Although there are variations in each state’s statute governing nonjudicial settlements, there are […]

On the Net2023-03-21T08:32:07-07:00March 18th, 2023|Asset Protection Trusts, Irrevocable Trusts, Trusts|

Have You Chosen the Right Trustee?

Whether you are reviewing your existing trust or creating a new trust, you should understand the important role that a trustee plays not only in handling trust matters but also in providing for and protecting your loved ones.

What is a trust?

A trust is an agreement between an owner of accounts and property (trustmaker) and another person (trustee) who agrees to manage the accounts and property on behalf of a third party (beneficiary). In most situations, there is a written document, called a trust agreement, that lays out the specific instructions or rules that govern the trust relationship.

What is a trustee?

A trustee is a trusted decision maker who is tasked with handling all matters that relate to your trust. Depending on the type of trust, you could be the trustee in the beginning and need someone else to act as trustee only when you are unable to manage the trust, or you could select a trustee to act immediately.

What types of trustees are there?

When creating an estate plan, there are several types of trustees to consider. An initial trustee is the decision maker that immediately starts managing the trust’s accounts and property. You may choose to be the initial trustee if you create a revocable living trust. However, for some types of irrevocable trusts, you will need to select someone else to be the initial trustee.

The successor trustee is the next in line to manage the trust. This person may need to act because the initial trustee becomes incapacitated, dies, or steps down from their role.

You could choose to have one trustee handle the entire trust. You could […]

On the Net2023-03-21T08:33:22-07:00March 14th, 2023|Asset Protection Trusts, FAQ, Irrevocable Trusts, Trusts|

Is a Defect a Good Thing? Intentionally Defective Grantor Trusts in Estate Planning

The notion that your estate plan contains a defect would not normally be welcomed as good news. But despite the moniker, an intentionally defective grantor trust (IDGT) can be an advantageous tool for minimizing estate taxes and maximizing the money and property that are passed on to a spouse, descendants, or other beneficiaries.

The defect in this case refers to trust provisions that make the grantor (the person creating the trust)—not the trust—the trust owner and therefore liable for trust income taxes. By not having annual income taxes come directly out of the trust’s money and property, more value remains for beneficiaries. Further, the appreciation of accounts and property is excluded from the trust owner’s taxable estate.

How an Intentionally Defective Grantor Trust Works

Typically used by wealthy families to preserve intergenerational wealth, IDGTs are a type of irrevocable trust best suited to holding appreciating assets, such as real estate and securities.

These assets are held outside of the grantor’s estate for transfer tax purposes (gift and estate tax), but for federal income tax purposes, they are treated as though they are owned by the grantor. Thus, the grantor pays income tax on the appreciation of the assets placed in the trust, but the appreciation of those assets is excluded from the grantor’s estate, which amounts to a tax-free gift to the trust. In other words, once the assets are placed in the trust, their value is effectively frozen. Any appreciation that occurs does so outside of the grantor’s estate.

The “defective” part of this arrangement is the intentional inclusion of a right of power that results in the grantor being treated as the trust owner from an […]

On the Net2023-02-25T13:06:37-08:00December 7th, 2022|Asset Protection Trusts, Estate Planning, Gifts, Trusts|

Spousal Lifetime Access Trusts: What You Should Know

No one wants to pay more taxes than they have to. To carry out this objective, many people search for the perfect estate planning tool that will allow them to control as much of their money and property as possible while reducing the amount they or their loved ones will have to pay the government. If you have looked for the tax-saving estate planning tools, chances are you might have come across the spousal lifetime access trust (SLAT). Here are some important things you should know before you settle on this tool as your estate planning solution.

What is a spousal lifetime access trust?

A SLAT is a type of irrevocable trust created by one spouse (trustmaker spouse) for the benefit of the other spouse (beneficiary spouse) that is used to transfer money and property out of the trustmaker spouse’s estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts by having the trustmaker spouse make sizable, permanent gifts to the SLAT that decrease the value of their estate while maintaining some limited access to the money and property that is gifted for the beneficiary spouse’s benefit.

How does it work?

The trustmaker spouse gifts money or property (of which they are the sole owner) to the SLAT for the benefit of the beneficiary spouse. If the couple resides in a community property state, they will likely need to convert community property into separate property through a partition agreement. The trustmaker spouse reports the gift on a gift tax return. The beneficiary spouse can receive distributions from the trust, from which the trustmaker spouse may also indirectly benefit. Upon the death […]

On the Net2023-02-25T12:34:37-08:00November 15th, 2022|Asset Protection Trusts, Beneficiaries, Estate Planning, FAQ, Peace of Mind, Spousal Lifetime Asset Trusts, Trusts|

An Introduction to Dynasty Trusts

When people create estate plans, they typically focus on handing down their money and property to their children, grandchildren, and other living heirs. But some people want to leave behind a more enduring legacy. For those interested in multigenerational wealth transfer, a dynasty trust could be the answer.

A dynasty trust is an irrevocable trust that offers the tax minimization and asset protection benefits of other types of trusts, but unlike a trust that ends with outright distributions to your children or grandchildren, a dynasty trust can span more than two generations. Also known as a perpetual trust, a dynasty trust theoretically can last forever—or at least for as long as trust money and property remain. Because the trust could last for many years, and the rules generally cannot be changed once the trust is created, a dynasty trust must be set up with great care.

How Does a Dynasty Trust Work?

A dynasty trust starts the same way as any other trust. The trust’s creator (i.e., the grantor) transfers money and property into the trust, either during their lifetime or at the time of their death, in which case the trust is a testamentary dynasty trust. Regardless, as an irrevocable trust, once the dynasty trust is funded, it is set in stone. It cannot be revoked, and the rules the grantor sets for the trust can only be altered under certain state statutes governing trust modifications.

Who Should Serve as Trustee of a Dynasty Trust?

One role that the grantor must seriously consider is who will act as the trustee. It is common for the grantor of a dynasty trust to name an independent trustee, such as […]

On the Net2023-02-25T13:42:24-08:00October 25th, 2022|Asset Protection Trusts, Beneficiaries, Estate Planning, Trusts|

Will Our Child Have to Handle Multiple Trusts after Our Deaths?

When a married couple creates an estate plan using a revocable living trust, they have the option of creating a single joint trust or two separate individual trusts. While the pros and cons of each are beyond the scope of this article, spouses may choose to create separate trusts for a variety of reasons including the following:

the desire to leave property to different beneficiaries or for greater asset protection from the financial risks of one spouse
the ability to keep inherited or individually owned property separate from jointly acquired property, or
the need for greater flexibility or more certainty with respect to tax planning after the death of the first spouse.

Whatever the reasons for creating separate trusts, when the ultimate beneficiary is the same for both spouses’ trusts (often the couple’s child or children), the question that inevitably arises is whether the beneficiary of these separate trusts will always have multiple trusts to deal with? Keeping track of the property owned and invested by each trust and filing tax returns for multiple trusts can be an administrative headache. The good news is that, in general, if multiple trusts have similar terms and neither the trust agreement nor state law prohibit the consolidation of the trusts, then the trusts can usually be combined into one.

Under section 417 of the Uniform Trust Code (UTC), which has been adopted (either completely or in some form) in thirty-five states and the District of Columbia^[1] as of the date of this writing, a trustee, after giving notice to the qualified beneficiaries, may combine two or more trusts into a single trust, “if the result does not impair rights of […]

On the Net2023-02-25T13:49:21-08:00October 20th, 2022|Asset Protection Trusts, Beneficiaries, Estate Planning, Trusts|

How to Give Assets to Loved Ones in an Asset Protected Trust

Most of our estate planning clients create a trust because they want to leave assets to children and loved ones in a trust that protects the assets from the child's or loved one's creditors and ex-spouses. When we are hired to prepare an estate plan with a trust we prepare a revocable living trust that contains language that causes the successor trustee to create a beneficiary controlled asset protected trust (a BCAPT) for each child or loved one on the death of the trust maker or death of the second spouse if the trust is a joint trust. See the contents and prices of our two estate plan packages.

If the future beneficiary of the BCAPT ever got sued the creditor could not touch the assets in the trust. If the future beneficiary were to marry and get divorced the ex-spouse could not get any of the assets in the trust. You cannot predict if your child or loved one will ever have a creditor or ex-spouse problem, but it is prudent to protect against these two problems.

It is also possible to create a BCAPT while you are alive if you want to transfer valuable assets to your child or loved one now before you die. We prepare BCAPTs for people who want to give valuable assets to their children or loved ones now and protect the assets from their future creditors and ex-spouses. To learn more about the BCAPT see my article called “Beneficiary Controlled Asset Protected Trusts.”

Richard Keyt2023-03-04T09:07:58-08:00August 21st, 2021|Asset Protection Trusts, Estate Planning, Trusts|

Do Domestic Asset Protection Trusts Work?

A domestic asset protection trust (DAPT) is an irrevocable trust established under the laws of a state that adopted a DAPT statute. Currently 17 states have passed DAPT statutes. These states are Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Unfortunately Arizona does not yet have a DAPT statute.

A DAPT is an irrevocable trust that allows the trust maker to be a discretionary beneficiary and the trust's assets are protected against claims made by the trust maker's creditors. The trustmaker retains access to the trust's assets, but the assets are protected against many types of creditor claims.

A lawyer on a list serve I follow wrote:

“Why do people still push DAPTs? There are so many cases defeating them. And they are part of the bankruptcy estate unless they've been in existence for 10 years. I feel like it's the 1970s again, and everyone is telling each other how stupid seat belts are and that cigarettes are healthy and help with weight loss. Talking about Wyoming vs. South Dakota vs. Alaska vs. Nevada is like discussing which brand cigarette is healthier. None of them are good. And there are much better options that have tons of case law backing them … like special power of appointment trusts.”

The following text was written by Nevada DAPT attorney Steve Oshins in response to the above comment. Steve is a friend and my choice as the best domestic asset protection trust lawyer in the United States.

“I substantially agree with your comments about regular DAPTs for residents of non-DAPT states. However, not for residents […]

On the Net2020-11-05T04:01:52-08:00November 5th, 2020|Asset Protection Trusts, Estate Planning, Trusts|

Don’t forget about digital assets in your estate plan

The Globe and Mail: “If only half of Canadians have a will and only about a third of them are up-to-date, according to a recent poll, it’s likely even fewer Canadians have accounted for the growing number of digital assets in their estate plans. Many Canadians have trouble keeping track of all of their online assets – which includes everything from cryptocurrencies to eBay and PayPal accounts to loyalty reward programs and social-media sites – let alone figuring out how to distribute them among their beneficiaries when they die. Wealth-management experts warn that overlooking digital assets in estate planning can create huge headaches down the road for executors, powers of attorney and beneficiaries, especially given Canadians’ expanding digital footprints.”

On the Net2018-10-01T14:15:51-07:00October 4th, 2018|Asset Protection Trusts, Estate Planning, Social Media|

Who’s Going to Get It: Do You Really Know the Beneficiaries of Your Dynasty Trust?

Today many estate plans contain irrevocable dynasty trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations. Since these trusts are designed to span multiple decades, it is important that they clearly define who will be included as trust beneficiaries at each generation.

Who Are Your Descendants?

In the past the definition of “descendant” was straightforward: A person who can be traced back to a specific ancestor through the same blood lines. But the modern family now encompasses much more than just blood heirs:

Adopted beneficiaries. In your trust, should the definition of “descendant” include a minor child who is legally adopted by your child, grandchild, or great grandchild? What about an adult who is legally adopted by your child, grandchild, or great grandchild? What happens if your child, grandchild or great grandchild gives up their naturally born child for adoption, should your blood heir who has been adopted away from your family be included as your descendant? You should consider specifically including or excluding adopted minor and adult beneficiaries in the definition of “descendant” used in your trust agreement.

Stepchildren. In your trust, should the definition of “descendant” include a stepchild of your child, grandchild, or great grandchild who is never legally adopted by your heir but otherwise treated like one of their own? While you may have the opportunity to get to know your stepchildren (and even your step grandchildren) and choose to specifically include them or exclude them in the definition of your descendants (in fact, you may want to include some and exclude others), it will be important to decide and communicate whether stepchildren in later generations should […]

On the Net2016-12-13T20:33:27-08:00January 16th, 2015|Asset Protection Trusts, Estate Planning|

Why Dahl Doesn’t Support The Viability Of Domestic Asset Protection Trusts

Jay Adkinson: “If you don’t want to read this whole article, and then just take this quick summary and go on to something else: The 2011 decision in Dahl v. Dahl does not, absolutely not, nope, nada, nein, nyet, nuh-uh, support an argument that DAPTs provide protection to settlor/beneficiaries against third-party creditors who are not a party to the trust document. If you want to know why it doesn’t support this, or why somebody might suggest that it would, then read on. On May 17, 2013, the U.S. Bankruptcy Court for the Western District of Washington issued an Order in the case of In re Huber, which was the subject of my article, Domestic Asset Protection Trust Blows Up Bigger Than Alaska In Huber Case. The Huber decision, which applied Washington state law to a Domestic Asset Protection Trust (DAPT) formed in Alaska, where the settlor/beneficiary was resident in Washington state, called into very serious question the viability of DAPTs both in bankruptcy and for settlor-beneficiaries who are resident outside a DAPT state.”

On the Net2013-09-07T10:03:28-07:00September 7th, 2013|Asset Protection Trusts|