Question: What is a Special Power of Appointment Trust?
- It is a trust that includes a Special Power of Appointment that limits the ability of a creditor to get at the assets of the Settlor.
- It is basically a trust that restricts the holder of the power from using the power for themselves, their creditors, their estate, or the creditors of their estates.
- It is basically a trust that keeps a creditor from getting what you cannot get. Since you are not the Trustee, Protector or Beneficiary, the creditor cannot get access to the assets.
- It is also considered to be a trust where you give up “dominion and control” over the assets. Yet, through the Protector, you can always get that back.
Question: How do I get access to my assets?
- Commonly in our trusts, the trust owns an LLC interest and you can manage the LLC. Thus as manager, you have complete control over the asset(s).
- The LLC interest can also be set up as voting or non-voting depending on your needs.
Question: Can I get my assets back?
- Our trusts have a Protector. That is your most-trusted person. He or she has the power to appoint you as a future income or asset beneficiary at some undetermined time in the future.
- The trust Protector can sign a document that refers to the appropriate paragraph in the trust and makes the changes that are desired. If that change is to appoint you (the Settlor) as a beneficiary, then that can be done.
Question: Is the trust irrevocable?
- Yes, it is. The grantor or settlor cannot revoke the trust. But, the grantor can give powers to others who can take actions that benefit the grantor.
Question: Can I be a beneficiary?
- No, you cannot. If you are, then the creditor(s) can get access to your assets. Only a few states allow a grantor of a trust to also be a beneficiary. Most states do not. But your Protector can always appoint you as a beneficiary in the future when things are safe.
Question: Is the trust a public document?
- No, the trust is not filed with any government agency. Therefore, no one can easily find out that you even have the trust. If the trust is used to hold interests in corporations, LLCs or LPs, there is no record of its existence.
- There are also no ongoing government renewal fees for the trust.
Question: Are there limits to the kind of assets I can place in the trust?
- No, you can put all kinds of assets into the trust except for retirement funds
- It is recommended that you use LLCs to hold most of your assets and then the trust to own the LLCs. This way you can manage the LLCs and still have control over the assets in terms of sale, distribution and overall management. In fact, the Special Power of Appointment Trust Trustee would not even have to know what you were doing if the trust is just a member.
Question: How do these trusts compare to the Domestic Asset Protection Trusts (DAPT)?
- A DAPT is a trust whereby the grantor or settlor is also a beneficiary. The problem with this is that most states say that if you are a beneficiary then there is no asset protection. A few states such as Nevada have different rules. But, if you are a California resident with California based assets and you set up a DAPT in Nevada, then you are unlikely to have any asset protection. California will simply ignore the Nevada DAPT.
- A Special Power of Appointment Trust is recognized in all 50 states and the creditor cannot get what you cannot get. Even in a very creditor-friendly state like California, the Special Power of Appointment Trust has been upheld.
Question: Does the trust have separate and additional tax liability?
- No, the trust is set up as a Grantor trust so all profits and losses flow to your personal return. Your taxes will stay the same.
Question: Can I put my home in the trust?
- Yes, your home can be transferred into the trust directly, or your home can first be moved into an LLC and then the trust can hold the LLC interest.
- If you move your home into the trust, then you should make payments to the trust as rent. Since you do not own the home anymore, then rent payments will show the arm’s length nature of the transaction.
Question: Do my Trustee and Protector have to live in the same state I do?
- No, they can live in any state. There is no requirement that they live in the state where you reside.
Question: Are creditor attorneys adept at understanding the Special Power of Appointment Trust?
- As a general rule that answer is “No.”
- The Special Power of Appointment Trust concept has been around for years, but the implementation of it has been relatively limited. This is because other structures such as LLCs and LPs have been much more widely used. But, the Special Power of Appointment Trust has such great benefits, such as being recognized in every state now that it is becoming more widespread. Creditor attorneys are not yet accustomed to the trust and the ins and outs of them. Also, the rock-solid asset protection nature of them makes them very difficult to break. Many states have case law supporting them.
Question: Is there a specific court case you can cite?
- Yes, it is Wilmington Capital LLC vs. The Big Whale Trust. Case No. 12C01113 in the Superior Court of the State of California for the County of Los Angeles-West District. The case is from 2012.
- California is known to be a creditor-friendly state, so when something goes in the debtor’s favor it is indeed a red letter day.
- It is too long to put the case here, but it is certainly worth a read as to why a creditor cannot attach property that is covered by a special power of appointment.
- This case was won on a Demurrer, which basically means that there was no legal basis to challenge the trust because California law — and other state’s laws — protect assets held by a power of appointment trust.
This Special Power of Appointment Trust is a powerful domestic asset protection tool. One that very possibly will fit into your asset protection and estate planning needs. Give us a call for further information on how the trust can be structured as part of your overall plan.