Special Power of Appointment (SPA) Trust – GUIDE

A Special Power of Appointment Trust offers you superior asset protection and allows you to remove assets from the trust without being a named beneficiary. It allows you to pull the assets back out of the trust at any time. While the assets are in the trust, you are not the trustee or a beneficiary but a trusted person can name you as a beneficiary at some future date. At that future time, you can gain access to the income or to the assets once again.

COURTS AND THE SPA TRUST

If a Settler is a beneficiary of a trust, then the courts can attach the assets. The beauty of a Special Power of Appointment Trust is that since the Settler is not a beneficiary or a Trustee, then the creditor cannot get what the Settler cannot get. As the California Probate Code section 15304(b) states in part:

“If the settlor is the beneficiary of a trust…a creditor of the settlor may reach the maximum amount that the trustee could pay to or for the benefit of the settlor under the trust instrument.”

In addition, California Probate Code goes on to say in Section 681:

“Property covered by a special power of appointment is not subject to the claims of creditors of the done or of the donee’s estate or to the expenses of the administration of the donee’s estate.”

Most states have similar language in their probate codes. As you can see, these trusts are very powerful indeed.

California is one of the most creditor-friendly states around. However, even in that state, a SPA Trust was upheld in Wilmington Capital LLC vs. The Big Whale Trust. In May of 2012, the Los Angeles County Superior Court dismissed a case against The Big Whale Trust — a SPA Trust.

There are many cases nationwide that support the usage of a SPA Trust and the inability of a creditor to gain access to the assets.

THE PERSON WITH THE POWER

In our SPA Trusts, we like to use both a Trustee and a Protector. The Protector is the one with the power — the power to appoint you or anyone else in an approved class as a future beneficiary. That person with the power can appoint you as a beneficiary at any time that you want. It can be one day, one year, ten years, twenty years; it does not matter. They have the power to place the assets back in your hands.

THE USAGE OF A SPA TRUST

How the SPA Trust is used is very important. Like most trusts, the SPA Trust should not be used to directly hold assets. Just like if you hold all of your assets in your name, they are now available for a creditor to get access to. The same is true for a trust.

The actual assets are normally held in some form of additional entity and that entity is in turn owned by the SPA Trust. Real estate is normally held within an asset protected LLC. The SPA Trust then becomes an owner or a sole owner of the asset-protected LLC. Cash or stocks can be owned by an LLC and the SPA trust in turn will be an owner of that LLC.

Business entities may be held by an S Corporation or a C Corporation. The SPA Trust can then be a shareholder in those corporations.

You can make your spouse the trustee of the trust and have her open a bank account. The trust can deposit the money into that account and then she can transfer the money to your joint account. This now allows you to gain access to those trust funds.

NO PUBLIC RECORD OF TRUST

The SPA Trust is not filed with any government agency. Therefore, there is no public record of the trust. No other person can see the terms and conditions of the trust. It is all private. The only thing that may need to be revealed is a one-page Certificate of Trust that gives a very brief summary of the conditions of the trust. But the actual document in totally private.

THE SPA TRUST AND INCOME TAXES

There is no effect on your income taxes. This is what is called a Grantor Trust, and as such all income is reported on your personal return. If you put assets in or take them out, there is no difference in the tax that you owe. You can even have the assets taxed to your spouse if you want. In the event you file a separate tax return, this would keep the assets from showing up on your return at all. You could also invest in assets such as growth stocks assets that are not taxed until such time that you sell. Or you could invest in muni bonds so that the income and assets of the trust do not show on your return at all.

ASSETS IN YOUR TRUST

One of the great things about the SPA Trust is that there are no restrictions on the kinds of assets you can place into the trust. Anything you can think of can be placed into the trust. However, be careful that you do not mix valuable assets with risky assets or assets that are likely to incur liabilities. This is where asset-protected LLCs really come in handy. They can be used to separate the assets from each other and then the SPA Trust can be the owner of the asset-protected LLCs.

THE TRUSTEE

We like to use the Trustee of your SPA Trust as the administrator. He or she is the one who handles all administrative functions that arise from communicating with the CPA, opening bank accounts, and properly maintaining paperwork. This is obviously a trusted person to you. However, the most trust is the Protector who can make you a beneficiary of the trust now or in the future. The Trustee and Protector are persons that you trust who would not also be beneficiaries of the trust.

YOU DO NOT OWN THE ASSETS

You have no personal ownership of assets with the SPA Trust. The assets are owned by the irrevocable trust or the assets are owned by an asset protected LLC that, in turn, is owned by the SPA Trust. If you get sued or file bankruptcy, you are required to disclose your assets. But the assets in the SPA Trust will not have to be disclosed because you do not own them. If a creditor requests a list of your assets at a deposition, the assets in the SPA Trust would not have to be listed. You do not own them. The trust is the true owner. However, be sure to check things out with your attorney should the need arise.