Trusts, Pt. 3: Advanced concepts

By F Hale Stewart, JD, LLM, CAM, CWM, CTEP

The Law Office of Hale Stewart

In this article, I’ll be looking at spendthrift trusts, asset protection trusts and trusts that freeze the value of assets for valuation purposes.

In this final article on trusts, I’m going to cover some more advanced areas. Just to review, in the first article, I discussed the basics of trusts, while in the second, I looked at some basic situations where trusts are used.

In this article, I’ll be looking at spendthrift trusts, asset protection trusts and trusts that freeze the value of assets for valuation purposes. As with the previous articles, the information presented is basic; if you want to implement these concepts, please contact an attorney in this field.

To quote my law school text, "Wills, Trusts and Estates" by Dukeminier, “In a spendthrift trust, the beneficiaries cannot voluntarily alienate their interests nor can their creditors reach their interests.” The Uniform Trust Code adds that, “a creditor of the beneficiary is prohibited from attaching a protected interest and may only attempt to collect directly from the beneficiary after payment is make.” In short, the beneficiary must have custody of the money distributed by the trust before a creditor may attempt to get the money. However, spendthrift provisions are not effective against claims of child support, claims of a spouse for alimony or the state or federal government.

This leads nicely into a discussion of an asset protection trust. Here, the grantor (remember, that’s the person creating the trust) is also the primary beneficiary of a trust that has a spendthrift provision. This means the grantor’s creditors can’t get to the trust money until it’s actually distributed to the grantor (who is also the beneficiary). Legal opinions differ on these types of trusts. However, I’ve never liked them and don’t recommend them for the following reasons. First, the Uniform Trust Code section 505 is specifically against this idea. The accompanying commentary states, “Subsection (a)(2) ... follows the traditional doctrine in providing that a grantor who is also a beneficiary may not use the trust as a shield against the grantor’s creditors.”). Second, there are other entities available (such as family limited partnerships) that have a far stronger limited liability feature. Third, in my opinion, recent court decisions place questions on the efficacy of asset protection trusts. As such I don’t use these.

Finally, there are trusts that utilize a “value freeze.” Here, a trust is formed that holds property, but does so in a way that the value of the property is constant. This allows the grantor to pass on the total amount of appreciation to the beneficiaries.

For example, suppose a person putting together an estate plan held real estate worth $10 million. Or suppose the property was comprised entirely of financial assets. Over a 20 year period, we can pretty much assume that the value of both will increase in some capacity. We then place some or all of the assets into either a grantor retained annuity trust (GRAT) or or an intentionally defective grantor trust (IDGT).

The type of trust chosen is very dependent on the facts and circumstances of each individual case. In addition, each of these transactions is very complicated and should only be planned and implemented by an experienced estate attorney.

I hope you have found these articles helpful. Please comment below if there are other topics you’d like to see addressed.