PLANNING TECHNIQUES FOR LARGE ESTATES PLANNING WITH DOMESTIC ASSET PROTECTION TRUSTS

Transcription

1 PLANNING TECHNIQUES FOR LARGE ESTATES PLANNING WITH DOMESTIC ASSET PROTECTION TRUSTS Richard W. Nenno, Esquire Managing Director and Trust Counsel Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware Tel: (302) Fax: (302) April 30, Wilmington Trust Corporation. Affiliates in California, Delaware, Florida, Georgia, Maryland, Nevada, New York, and Pennsylvania. This paper is not designed or intended to provide legal, investment, or other professional advice because such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought. TABLE OF CONTENTS

2 I. INTRODUCTION... 1 II. PRELIMINARY MATTERS... 4 A. Reasons Against Recognizing Self-Settled Trusts One Should Pay One s Debts Preserve Liability System Self-Settled Trusts Always Are Fraudulent... 4 B. Reasons for Recognizing Self-Settled Trusts Authorities Do Not Support Professor Scott U.S. Is Unique Creditors Are Given More Rights Than Trustors Interests of Other Beneficiaries Are Ignored Continuing Control by Trustor Is Relevant Beneficiaries Are Punished for Failure of Benefactors to Plan Clients Who Accumulate Wealth Are Disfavored Other Self-Settled Vehicles Are Recognized Clients Want Self-Settled Trusts Preserve U.S. Business... 8 C. Fraudulent Transfer Rules Introduction Claims by Future Creditors Impact of Statutes of Limitations Recent Cases Applicable Law D. Ethical Principles E. Potential Liability for Attorneys III. DELAWARE QUALIFIED DISPOSITIONS IN TRUST ACT A. Introduction B. How to Take Advantage of the Delaware Act Qualified Trustee Trust Instrument C. Exceptions to the Delaware Act Introduction Creditors Who May Defeat Qualified Dispositions D. Consequences if Qualified Disposition Is Defeated E. Qualified Dispositions by Trustees F. Infrastructure IV. ALASKA ASSET PROTECTION TRUST ACT A. Introduction B. How to Take Advantage of the Alaska Act C. Exceptions to the Alaska Act D. Consequences if Transfer Is Defeated E. Moving Trusts to Alaska... 26

3 F. Infrastructure V. RHODE ISLAND QUALIFIED DISPOSITIONS IN TRUST ACT A. Introduction B. How to Take Advantage of the Rhode Island Act Trustee Trust Instrument C. Exceptions to the Rhode Island Act Introduction Creditors Who May Defeat Qualified Dispositions D. Consequences if Qualified Disposition Is Defeated E. Qualified Dispositions by Trustees F. Infrastructure VI. NEVADA ASSET PROTECTION TRUST ACT A. Introduction B. How to Take Advantage of the Nevada Act C. Exceptions to the Nevada Act D. Consequences if Transfer Is Defeated E. Moving Trusts to Nevada F. Infrastructure VII. UTAH ASSET PROTECTION TRUST ACT A. Introduction B. How to Take Advantage of the Utah Act C. Exceptions to the Utah Act D. Consequences if Transfer Is Defeated E. Moving Trusts to Utah F. Infrastructure VIII. OTHER STATUTES A. Missouri B. Colorado IX. FEDERAL INCOME TAX CONSEQUENCES X. FEDERAL TRANSFER TAX CONSEQUENCES A. Introduction B. Gift Tax C. Estate Tax I.R.C. 2038(a)(1) I.R.C. 2036(a)(1) I.R.C. 2036(a)(2)... D. Rights of Creditors... E. Domestic Asset Protection Trust Developments... 40

4 F. GST Tax XI. ASSET PROTECTION EFFECTIVENESS A. Introduction B. The Full Faith and Credit Clause Introduction Jurisdiction Choice of Law Principles Respect Due Statutes Respect Due Judgments Assessment C. Bankruptcy Introduction The Trust Exclusion Applicable Nonbankruptcy Law Implications for Offshore Trusts D. The Contract Clause E. The Federal Tax Lien The Lien Application to Trusts XII. POSSIBLE USES A. Employ Tax Benefits General Make Taxable Gifts to Reduce Federal Transfer Tax Make Taxable Gifts to Avoid State Death Tax A. Obtain Asset Protection General Protect Gifts and Inheritances Protect Young Adults Assets Protect Officers and Directors Protect Assets From Future Ventures Protect Vulnerable Persons Provide Premarital Planning Protect Personal Injury Awards B. Protect CRTs and Other Estate Planning Vehicles C. Avoid State Income or Intangible Tax D. Provide Preimmigration Planning E. Provide Protection for Trusts Moved From Offshore or Other Domestic Jurisdictions F. Enable Officers and Directors to Comply with Securities Laws XIII. A COMPARISON OF THE ALASKA AND DELAWARE ACTS A. Introduction B. Advantages of the Alaska Act... 74

5 1. No Recognition of Constructive Fraud Narrower Exception for Family Claims No Exception for Existing Tort Claims Limits Rights of Existing Creditors C. Advantages of the Delaware Act Much Longer Tradition of Trust Leadership Court System Superior Bars Judgments From Other States Harder to Prove Fraudulent Transfer Better Full-Faith-and-Credit Defense Counsel Fee Awards Less Creditor-Friendly More Distribution Options Surviving Spouse Cannot Reach Trust XIV. A COMPARISON OF THE NEVADA AND DELAWARE ACTS A. Introduction B. Advantages of the Nevada Act Might Have Shorter Claim Periods No Exception for Family Claims No Exception for Existing Tort Claims C. Advantages of the Delaware Act Much Longer Tradition of Trust Leadership Court System Superior Might Have Shorter Claim Periods Might Have Shorter Claim Periods for Enforcement of Foreign Judgments Better Full-Faith-and-Credit Defense Perpetual Trusts Possible Provides Protection to Advisers and Attorneys Addresses Consequences of Successful Attack More Distribution Options XV. A COMPARISON OF OFFSHORE AND DOMESTIC TRUSTS A. Introduction B. Advantages of Offshore Trusts Offer Protective Features Might Be Superior Full-Faith-and-Credit Not Due U.S. Judgments C. Advantages of Domestic Trusts Constitutional Issues Might Favor Less Financial Risk for Trustor Tax Treatment More Favorable Less Expensive Less Risk of Jail... 86

6 XVI. ESTABLISHING A DOMESTIC ASSET PROTECTION TRUST A. Introduction B. Due Diligence C. Involvement of Local Counsel D. Asset Selection E. Trustee Selection F. Drafting the Trust G. Funding and Administering the Trust H. Cost of Establishing the Trust XVII. PROPER DESIGN AND ADMINISTRATION OF A DOMESTIC ASSET PROTECTION TRUST A. Introduction B. The Finch Case C. Comments D. Wilmington Trust s Experience E. Recommendations Avoid Misunderstanding at Beginning Fund With Nest Egg Choose Proper Law Choose Proper Trustee Name Other Beneficiaries Create Domestic Trust Appendix A The Delaware Qualified Dispositions in Trust Act Appendix B The Alaska Asset Protection Trust Act Appendix C The Rhode Island Qualified Dispositions in Trust Act Appendix D The Spendthrift Trust Act of Nevada Appendix E The Utah Asset Protection Trust Act Appendix F A Comparison of the Domestic Asset Protection Trust Acts Appendix G Delaware Asset Protection Trust Case Studies Appendix H State Liability Systems Ranking Appendix I Solvency Letter Appendix J Delaware Asset Protection Trust Form PLANNING WITH DOMESTIC ASSET PROTECTION TRUSTS By Richard W. Nenno Wilmington Trust Company Wilmington, DE