Trusts 2 Flashcards
1
Q
asset protection is created through
A
- discretionary distribution terms
- spendthrift clauses
2
Q
Domestic Asset Protection Trust
A
Allows protection for self-settled trusts with certain conditions
3
Q
Special or supplemental needs trust
A
designed to allow an individual with medical needs to qualify for govermental assistance while still retaining assets in trust
4
Q
Courts have affirmed right of a trust settlor to restrict beneficiary rights to the trust assets to protect beneficaries from their own worst instincts or habits
A
A parent who wishes to protect a child from childs own financial irresposnibility can therefore create asset protection terms in a trust that thereby limits the reach of creditors
5
Q
restraint on alienation of a beneficial interest =
A
asset protection
6
Q
asset protection derives from a restraint on alienation
A
terms in a trust that forbid a beneficiary from doing something, act to restrain the beneficiary ability to alienate trust property or an interest in the trust
7
Q
Restraints on alienation create asset protection because
A
if a beneficiary does not have a present interest in trust assets, then the trust assets cannot go to satisfy creditors
8
Q
Once a beneficiary has a present interest -recieves a distribution, for example-
A
then the creditors are free to persue their claims
9
Q
Lack of ownership equivilance
A
Asset protection
10
Q
Less control a beneficiary has over the assets
A
The fewer rights creditors have
11
Q
3 forms of asset protection trusts
A
- discretionary trusts
- spendthrift trusts
- domestic asset protection trusts (DAPTS, self-settled asset protection trusts)
12
Q
Discretionary trusts are used as a tool to
A
protect wealth
13
Q
Simiplest way to decrease beneficiary access or rights to the trust assets is by creating trust distribution terms that
A
are discretionary rather then mandatory
14
Q
The more mandatory rights
A
less asset protection
15
Q
The more discretionary rights
A
more asset protection
16
Q
Asset protection is created by crafting distribution terms that
A
give as much discretion to the trustee as possible
17
Q
settlor may vary on if principle and income is
A
mandatory or discretionary
18
Q
discretionary support trusts
A
vests full discretion in the trustee but provide the guideline of support “I leave these assets in trust to provide for the comfort and support of my spouse in the trustee’s sole and absolute discretion”
19
Q
for asset protection purposes, the UTC treats discretionary and discretionary support trusts
A
the same way
20
Q
Common form of the disrectionary support trust is a discretionary trust with a
A
HEMS standard
21
Q
HEMS standard is also called an
A
ascertainable standard
22
Q
HEMS standard/ ascertainable standard
A
A discretionary trust that directs the trustee to make distributions for the
Health
Education
Maintence, and
Support
of the beneficiary
23
Q
2 categories of creditors
A
- ordinary
- exception
24
Q
Ordinary creditors
A
creditors with no special rights
25
Ordinary creditors include
banks, most providers of goods and services, friends who made a loan
26
The most effective tool that ordinary creditors have is the
Hamilton order, which a creditor must obtain from a court
27
With a hamilton order, an ordinary creditor cannot compel a distribution, but the order requires that
if any distributions are to be made to or for the benefit of the beneficiary, the creditor shall be paid first (UTC follows this rule)
28
The hamilton order saves
creditor from having to monitor distributions and fighting other creditors
29
The hamilton order disallows
the trustee to circumvent the creditors by paying directly for goods and services rendered to the beneficiary
(AKA, the beneficiary cannot avoid a creditor and have trustee pay others as beneficiary wishes )
30
Under the hamilton order, the creditor will be able to prevent
the beneficiary from recieving any benefits from trust until the creditors judgement is satisfied
31
Exception creditors have enhanced rights
they can under limited circumstances, compel a distribution
32
Under UTC execption creditors are primarily either
a child or an ex spouse enforcing a claim for support
33
# UTC 504 Discretionary trusts, effect of standard
To the extent a trustee has not compiled with a standard of distribution or has abused a discretion:
1. A distribution may be ordered by a court to satisfy a judgement or court order against a beneficiary for support or maintance of the beneficaries child, spouse, or former spouse, AND
2. The court shall direct the trustee to pay to the child, spouse, or former spouse, such smount as is equitable under the circumstances but not more then the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion
34
# UTC 504 Discretionary trusts, effect of standard
This section does not limit the right of a beneficiary to
maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard of distribution
35
In order to compel a distribution, the exception creditor must show that the trustee
has not complied with a standard of distribution or has abused a discretion
36
The amount that the exception creditor will receve is
no more then what the trustee should have distributed in the first place, had the trustee complied with the applicable standard of distribution
37
alternative model
Building into the trust a representative
38
Silent on trust
when to let them know
39
Know facts that would cause breach
| use
recklessness
gross negligence
willful misconduct
purposely
40
Remedy examples
compel to account, remove trustee, pay the difference
41
What to know before agreeing to be a trustee
8
1. key responsibilities
2. liability
3. time commitment
4. resignation/removal
5. benefits (payment)
6. expertise
7. get to know assets
8. get to know the people
42
any irrovocable trust with a spendthrift provision is called a
spendthrift trust
43
spendthrift trust
if any of the trusts income is payable to some other person, then the trust should immediately cease
| keeps the money from creditors
44
# UTC 502 spendthrift trust
A spendthrift provision is valid only if
it restrains both voluntary and involuntary transfer of a beneficiarys interest
45
# UTC 502 spendthrift trust
a term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust" or words of similar import, is
sufficient to restrain both voluntary and involuntary transfer of the beneficiaries interest
46
# UTC 502 spendthrift trust
A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and except
as otherwise provided in this article, a creditor or assignee of the beenficiary may not reach the interest of a distribution by the trustee before its recipt by the beneficiary
47
Once a spendthrift provision is inserted into a trust documenet, ordinary creditors can only
reach a beneficiary's assets in trust once the trustee has made a distribution to the beneficiary
48
# UTC 502 spendthrift trust
if distributions are mandatory, a creditor
may have to wait until the distribution reaches the beneficiary
49
# UTC 502 spendthrift trust
If distributions are discretionary, the creditor will have to
watch for the distributions and fight other credits for the money
(except here, they cannot procure a hamilton order)
50
How spendthrift trusts can be less friendly to creditors then discretionary trusts
may only attempt to collect directly from the beneficiary after a payment is made
51
# UTC 506 (b)
a creditor can attach a mandatory distribution that the trustee
has not made within a "reasonable time"
52
# UTC 503 spendthrift provision
in this section, "child" includes any person from whom
an order or judgement for child support has been entered in this or another state
53
# UTC 503 spendthrift provision
A spendthrift provision is unenforcable against:
1. a beneficiaries child, spouse, or former spouse who has a judgemetn or a court order against the beneficiary for support or maintance
2. A judgement creditor who has provided services for the protection of a beneficiaries interest in the trust, and
3. a claim of this state or the US to the extent a statute of this state or federal law so provides
54
# UTC 503 spendthrift provision
A claiment against which a spendthrift provision cannot be enforced may obtain from a court
an order attaching present or future distributions to or for a benefit of the beneficiary. The court may limit the award to such relief as is appropriate under the circumstances.
55
Spendthrift trusts can be more favorable to the creditors then discretionary trusts
There are more exception creditors with spendthrift trusts, including the goverment and the lawyer who drafted the spendthrift trust.
- Compelling a distribution with a spendthrift is easier than it is with a discretionary trust
- The exception creditor need only show the judgement or debt claim, and the court will create an ordering attaching "present or future distributions"
56
Bankrupcy code excludes any beneficial interest in trust that is not alienable
"under applicable nonbankrupcy law" from a debtors bankrupcy code
57
# UTC 505 Domestic Asset Protection Trusts
UTC States that individuals cannot shield assets from creditors by
placing them in a trust for their own benefit
58
# UTC 505 Domestic Asset Protection Trusts
UTC States that individuals cannot shield assets from creditors by placing them in a trust for their own benefit
Creditors therefore can
reach the maximum amount that the trustee could pay to the settlor or apply for the settlors benefit, even if a trust is a discretionary or spendthrift trust (or both)
59
In all states, Domestic Asset Protection Trusts must be
irrevocable
thereby taking away one form of ownership and control for the settlor
60
Any transfer made with the knowledge of a debt or the imminent possibility of one is a possible
fraudulent transfer and as such not protected by the trust terms
61
Fraudulent transfers may be challenged pursuant to the Uniform Fraudulent Transfer Act, which states that
transfers will be void if they were made with the intent to defraud or if "badges of fraud" are present
62
Domestic Asset Protection Trusts are coming under attack in divorce court because spouses are able to create these trusts during marriage, and often they place
what might be marital property in the trust
63
# Special or supplemental needs trusts/supplemental needs/medicade trusts
allow individuals and families to
retain assets in trust while still being able to qualify for govermental benefits when special care is needed by the beneficiary
64
# Special or supplemental needs trusts/supplemental needs/medicade trusts
Assets in the special needs trust do not count when
govermental agencies are qualifying the beneficiary for program eligibility
- so the trust beneficiary can enjoy the use of trust assets while accessing govermental benefits
65
# Special or supplemental needs trusts/supplemental needs/medicade trusts
are asset protection trusts because they protect the assets from govermental reach both in
determining eligibility for goverment reach both in determining eligibility for govermental assistance programs and in payment for such programs
- medicaid looks at all assets owned within 5 years when determining elegibility, but not the trust
66
Self-Settled Special Needs Trust
- very little protection without restriction of ownership
- uses "income only" mediicaid trusts, where a settlor puts property into trust with the right to recieve income only; the principal, then is distributable to people other then the settor.
- After the expriation of the look-back period, it is likely that only the income will be counted as assets available
- The settlor cannot just restrict distributions during the look back period without running in to trouble
- Any assets that cannot be paid to the settlor, the trust does not permit distribution during the look back period are considered available
- All of the assets in a trust are considered available to the exent the trust is revocable
67
Ascertainable Standard
health, education, maintance, and support (HEMS)
68
Non- Ascertainable Standard
best insterests, welfare, comfort, happiness
69
Trust assets in divorce
- mere expectancy is not considered
- include only if entitled to assets
- consider in equitable divison of marital esrarw
70
Domestic Asset Protection Trusts are
irrevocable
71
Under UVTA (Uniform Voidable Transfers Act) Transfers cannot be made with intent to
defraud
IE create a Domestic Asset Protection Trusts to avoid a known creditor
72
A sepcial needs trust is created to enable
beneficiary to maintain eleigibility for medicare benefits
73
Special needs trusts should only provide
supplemental distributions
which is different from the HEMS standard language
74
2 exceptions to the rule that self settled trusts are considered assets available for determination of medicaid eligiblity
1. Trusts establised at death by the decedent spouse for the benefit of the surviving spouse
As long as distributions are limited to providing for the surviving spouses "supplemental needs"
(AKA it cannot permit the surviving spouse to compel distributions for her general purposes, such as maintance or health care)
75
Supplemental needs trusts, are treated as if the trust that is set up by one spouse for another as though it was created by the beneficiary spouse
however there is an exception
if the spouse established the trust by will
76
2 exceptions to the rule that self settled trusts are considered assets available for determination of medicaid eligiblity
2. Trust established by a disabled person (or parent, grandparent, guardian, or court acting on behalf of the disabled individual) using the disabled persons assets
Commonly, the trust will be formed with money recieved from an insurance claim, a settlement agreement, or proceeds from judgement
(The trick is that the trust can provide only for supplemental needs during the beneficiaries life, that is needs not covered by govermental programs)
77
With Medicare trusts, usually the trust must provide that the state will be compensated from the trust upon the beneficiaries death
specifically, at the beneficiaries death the state will be entitled to recover from the trusts remainder the amount that the state spent on medical care
