Special Power of Appointment Trust:
The best way to protect assets is to create a good old-fashioned irrevocable trust that includes a special power of appointment. I call this a "Special Power of Appointment Trust". This publication explains why the Special Power of Appointment Trust is so much safer, more reliable, more confidential, and less expensive than all other asset protection trusts.
All other asset protection trusts are based on the concept of a self-settled trust (a trust in which the creator of the trust is also included as a potential beneficiary). The asset protection provided by a self-settled trust has no case law to support it. At least two bankruptcy courts have refused to uphold the asset protection provided by a self-settled trust because this would violate the policies of the bankruptcy system. In contrast, my Special Power of Appointment Trust is based on laws that have been consistently upheld for centuries in all fifty states and in the US bankruptcy courts.
A Special Power of Appointment Trust is better than a Family Limited Partnership or an Offshore Trust for many reasons, including the fact that is safer, more confidential, less expensive, and much less of a hassle to create and maintain.
If you create a Special Power of Appointment Trust, you will be the only person with knowledge, access, or control over your assets. Your Special Power of Appointment Trust will own all the assets. As Settlor of the Trust, you have direct access and control over your assets and you can invest them without limitation. The “special power of appointment” is a power that allows the assets to be appointed to you at any time even, though you are not a beneficiary.
If you are sued, bankrupt, divorced, or subject to scrutiny by a government agency, you will be asked to disclose all of your assets and any trust of which you are a beneficiary. If you had a self-settled asset protection trust, you would have to answer that you are a beneficiary of the trust and this will open the trust up to examination and attack. If you have a Special Power of Appointment Trust, you will correctly answer that you are not a beneficiary of any trust. You have no legal or beneficial ownership in the assets of your Special Power of Appointment Trust and they cannot be included on a disclosure of your assets.
These types of trusts have been tested in litigation, in bankruptcy, or in administrative proceedings, and all of them have proven to be completely unassailable. In fact, there has never been a case anywhere in this country where a creditor has pierced a trust because the debtor was a permissible appointee under a special power of appointment.
Unlike a self-settled asset protection trust which is only accepted in a few progressive jurisdictions, the Special Power of Appointment Trust is equally effective in all fifty states and all foreign jurisdictions regardless of where you are from or where the litigation takes place. Your Special Power of Appointment Trust can be located in any jurisdiction that you prefer, and it can be moved at any time. In addition, the special power of appointment is a provision in your trust that allows the conditions, beneficiaries, or terms of the trust to be changed at any time, but only with your consent. This makes the Special Power of Appointment Trust much more flexible than any other asset protection trust.
You create a Special Power of Appointment Trust with the following features:
1. You are the “settlor” (or creator) of the trust.
2. You appoint your spouse, friend or relative as the “trustee” of the trust. If you wish to have the trust located in a foreign jurisdiction, you will also need to name a trustee in that jurisdiction, which is not true in all cases or jurisdictions, such as Nevada. The trustee signs the trust document and has authority to sign for the trust. The trustee has no risk of personal liability and they can resign at any time.
3. You name your spouse, children, or others as the “beneficiaries” of the trust. Assets can be distributed to the beneficiaries from time to time, but only with your consent. After your death, the trust will be held for the beneficiaries according to your wishes as outlined in the trust document.
4. You appoint some combination of trusted friends, relatives or advisors as the “donees” of a special power of appointment. This gives the donees power to appoint the assets of the trust to any person or entity, including you, but not including the donees or their creditors. In order to be sure that the donees do not abuse this power, you provide that the power can only be exercised with your consent and you also have a trust protector.
5. You appoint someone as your trust protector. The trust protector has power (with your consent) to change the trustee, the donees, or the location of the trust, in order to ensure that the trust fulfills your objectives.
6. You design the trust so it is “incomplete” for gift tax purposes, allowing you to transfer unlimited amounts to the trust at any time without incurring a gift tax.
7. You design the trust so it is a “grantor trust” for income tax purposes. This means that you don’t have to file any extra tax returns and all income is simply reported on your personal income tax return. The trust files on form 1041.
8. You transfer assets of any kind and any value to the trust that is owned by your Special Power of Appointment Trust. The transfers must be done at a time and in a manner that they are not considered a fraudulent transfer.
9. Years later, you are the object of a frivolous lawsuit by an aggressive creditor with unlimited resources. You have no legal or beneficial ownership in the trust. The trust is not a public record anywhere. The entities and assets can be moved to any jurisdiction at any time. You are not a beneficiary of the trust or a trustee. Your creditors will have no way to discover the assets of the trust, and even if they could, they will have no legal recourse. The trustees, whom you have appointed, can transfer the assets of the trust back to you, in any amount, at any time.
Another Type of Trust: Power of Appointment Trust
How Does a Power of Appointment Trust Work?
A power of appointment trust can be structured in a number of different ways. A general power of appointment trust can be created by both spouses to place property in trust to be held for the benefit of the other spouse. The trust is revocable until the death of the first spouse. Upon the first spouse’s death, the surviving spouse receives a general power of appointment which gives the surviving spouse discretion to decide how to distribute the property during his life or after his death. Because the surviving spouse has a general power of appointment upon the first spouse’s passing, the surviving spouse can bequeath the property to his children, creditors, estate, creditors of his estate, or a charity and the predeceased spouse has no say in how the property is distributed, even though the property placed in the trust belonged to the predeceased spouse.
In a general power of appointment trust, all income from the trust must be paid to the surviving spouse no less than once annually. It can be paid more frequently if necessary. The property in the trust may be subject to claims of the surviving spouse’s creditors. The value of property over which one holds a general power of appointment is included in the holder’s gross estate, even if the holder does not exercise the general power of appointment. If the general power of appointment was created on or before October 21, 1942, other rules apply.
The Advantages of a Power of Appointment Trust
• A power of appointment trust allows a person to ensure his or her spouse will have income for life from the trust.
• The property in the trust avoids probate upon the death of the donor that created the trust.
• The property in the trust qualifies for the marital deduction and is not subject to estate tax upon the death of the first spouse, provided the surviving spouse is a U.S. citizen.
• A power of appointment trust allows the surviving spouse to determine how the assets in the trust should be distributed rather than requiring the predeceased husband or wife to choose the final beneficiaries.
Planning Tips for Making a Power of Appointment Trust
The spouse that establishes the power of appointment trust can determine the amount of control to grant the surviving spouse. For example, the spouse can name his or her surviving spouse as trustee with authority to manage trust assets during the surviving spouse’s lifetime. Alternatively, the spouse can name another person or entity as trustee, preventing the surviving spouse from having any authority to manage trust assets. When determining what type of authority to grant the surviving spouse, a donor should consider the ability of his or her spouse to manage trust assets, the amount of property that will be placed in trust, the federal and state estate and gift taxes to which the parties may be subject, and the donor’s objectives in creating the trust.
A general power of appointment trust must give the surviving spouse the right to receive all income from the trust during his or her lifetime.
A general power of appointment trust must give the trustee or surviving spouse the right to invade the trust principal in certain circumstances set forth in the trust document.
The property in the general power of appointment trust will be subject to estate tax upon the death of the surviving spouse.
What is a Power of Appointment Trust?
A power of appointment trust is a type of marital deduction trust which gives the surviving spouse the authority to choose the final beneficiaries of the trust. In a power of appointment trust arrangement, the first spouse to die leaves the surviving spouse the income from the trust property for life and the power to decide how to distribute the trust property during the surviving spouse’s lifetime or upon his or her death.
A power of appointment trust should not be used by a spouse that wants to control how his or her estate is distributed. For example, if you have children from a prior marriage or relationship, wish to leave a charitable bequest to your alma mater or a favorite charity, or want to ensure a specific bequest is made to your grandchildren or other heirs, do not place that property in a general power of appointment trust for your spouse.
While a power of appointment trust is beneficial in certain estate plans, some estates are not large enough to warrant the expenses involved in drafting and managing it. Before creating a power of appointment trust, consult a tax advisor or estate planning lawyer. Gift and estate tax issues of the donor and donee should be reviewed when creating a power of appointment trust. A power of appointment trust should only be made after consideration of your entire estate, along with your spouse's estate, and your overall objectives for distributing your property.
What is a General Power of Appointment?
In a general power of appointment, a donor grants another individual, called the holder or donee, the power to determine who shall receive the donor’s property. A general power of appointment can be exercised in favor of any beneficiary or appointee selected by the holder of the General Power of Appointment.
The first trust mentioned above is the best option and can be done with both spouses as settlors.