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Do Trusts Protect Assets? The answer to this question is a typical lawyer’s response - "it depends". In this
newsletter, we will trying to dispel some myths and answer some questions about trusts, what they can do
and what they can’t do.
General Types of Trusts. Trusts are usually broken down into two categories - inter vivos, which are trusts set
up during lifetime and testamentary, trusts set up by Will. The trend in the past couple of decades has been
toward inter vivos, or lifetime trusts, especially as the popularity and use of revocable trusts has grown.
The other type of inter vivos or lifetime trusts are irrevocable trusts, which are usually set up to make gifts to
family members or to purchase life insurance on the grantor so that the death benefits would not be included
in the grantor’s estate, for estate tax purposes. We will deal with some of the basics of each kind of trust and
what protections are offered by the trust mechanism. As pointed out in prior newsletters, asset protection
prompts the questions: Who is being protected? From whom is that person being protected?
Revocable Lifetime Trusts. Most of the common misunderstandings and misconceptions involve the effects
of a Revocable Lifetime Trust, sometimes generally called a "Living Trust". Generally, the grantor or grantors,
in the case of married couples, retain the power to revoke the trust and the assets in the trust consist of the
grantor’s assets.
The assets of a Revocable Living Trust are not protected from the grantor’s creditors during the grantor’s
lifetime or after the grantor’s death. Revocable Living Trusts are a good way to avoid probate, but they
generally have no effect on estate tax liability or on protection from pre-death creditor claims. However, in
Michigan a Revocable Trust is protected from the elective share of a surviving spouse. For Medicaid eligibility
purposes, a Revocable Living Trust may or may not be of help to establish eligibility, but that is an entirely
different subject. Insofar as the interests of other beneficiaries are concerned, generally they have no vested
interest in the trust until the grantor’s death and, therefore, the creditors of a beneficiary would not be able to
have access to the assets of a Revocable Trust established by someone else.
Death of Grantor. Generally, a Revocable Living Trust becomes irrevocable at the death of the grantor, and the
Trust then operates in a similar manner to an Irrevocable Trust established by a grantor during lifetime.
Assuming that the grantor leaves no outstanding debts and any tax liabilities are satisfied, the next question
becomes - for whom and against what are the trust assets protected?
The answers to these questions depends, of course, on the specific wording of the trust document itself. If
the assets of the trust are being held for a surviving spouse, with the children as remainder beneficiaries, the
trust assets would typically be protected against claims of the spouse’s creditors or a subsequent
remarriage, but this will, of course, depend upon the terms of the trust and the power that the surviving
spouse has over the trust assets, either as trustee or through the exercise of what is called a "power of
appointment".The latter term, "power of appointment", refers to any power held by a power holder to direct the
distribution and use of trust assets in a non-fiduciary capacity. That means the power to dispose of trust
assets or direct distribution without regard to any specific reason or standard.
A typical trust, after the death of a grantor, has a "spendthrift" provision, which refers to a limitation on the
power of a beneficiary to dispose of his or her trust interest either voluntarily or involuntarily (through claims of
creditors, divorcing spouse or bankruptcy). Michigan law recognizes spendthrift provisions and the protection
that they offer to a beneficiary. That is, a beneficiary’s creditors cannot reach the beneficiary’s interest in a
spendthrift trust. On the other hand, if the beneficiary has the power to withdraw trust principal, for example at
a specific age, those assets could be subject to creditor claims when the specified age is reached, absent
other specific provisions of the trust which could permit a trustee to defer or delay asset distribution.
Why Protect a Beneficiary? Many trust grantors are concerned about the financial responsibility of their
children, or other potential trust beneficiaries. These concerns include the possibilities of divorce or business
creditors, in addition to mere inability to manage money. Sometimes, substance abuse or special needs of a
beneficiary trigger specific trust provisions to protect the beneficiary’s interest in the trust from seizure by
creditors, government agencies or mere improvidence. These concerns seem to increase with the rise of
affluence. Money seems to trigger increased concerns for the preservation of the wealth the senior generation
has worked hard to achieve.
Michigan law does not protect the assets of a "self-settled trust" from the creditors of the grantor. Thus, if a
grantor can benefit from an irrevocable trust that he set up, a creditor can conceivably reach trust assets to
satisfy claims against the grantor. We noted in a prior newsletter that Michigan law protects property held as
tenants by the entireties (husband and wife) from the claims of one spouse alone. In the case of a joint trust,
established by husband and wife, it is doubtful whether those trust assets would be protected from the
creditors of one spouse. If there are creditor concerns, it is best to divide assets between husband and wife,
which is typically done for estate tax purposes anyway.
The overall cloud that can affect estate planning and the use of trusts is a matter of fraudulent transfers. Any
transfer of assets, to a trust or family member, which is a fraud on creditors can be attacked and the property
traced to the grantee or transferee. Where there are dangerous occupations or activities, the best course of
action is advance planning for asset protection, not waiting until a creditor knocks on the door.
New Legislation. There has been recent legislation by a number of states to protect assets in self-settled
trusts from creditors of the grantor. The states of Delaware, South Dakota, Alaska and Oklahoma are notable
in this respect and these laws will be the subject of a separate newsletter. If you would like to discuss any
aspect of asset protection in more detail, please call Jim Modrall or Dave Appleford or any of the attorneys
listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
newsletter, we will trying to dispel some myths and answer some questions about trusts, what they can do
and what they can’t do.
General Types of Trusts. Trusts are usually broken down into two categories - inter vivos, which are trusts set
up during lifetime and testamentary, trusts set up by Will. The trend in the past couple of decades has been
toward inter vivos, or lifetime trusts, especially as the popularity and use of revocable trusts has grown.
The other type of inter vivos or lifetime trusts are irrevocable trusts, which are usually set up to make gifts to
family members or to purchase life insurance on the grantor so that the death benefits would not be included
in the grantor’s estate, for estate tax purposes. We will deal with some of the basics of each kind of trust and
what protections are offered by the trust mechanism. As pointed out in prior newsletters, asset protection
prompts the questions: Who is being protected? From whom is that person being protected?
Revocable Lifetime Trusts. Most of the common misunderstandings and misconceptions involve the effects
of a Revocable Lifetime Trust, sometimes generally called a "Living Trust". Generally, the grantor or grantors,
in the case of married couples, retain the power to revoke the trust and the assets in the trust consist of the
grantor’s assets.
The assets of a Revocable Living Trust are not protected from the grantor’s creditors during the grantor’s
lifetime or after the grantor’s death. Revocable Living Trusts are a good way to avoid probate, but they
generally have no effect on estate tax liability or on protection from pre-death creditor claims. However, in
Michigan a Revocable Trust is protected from the elective share of a surviving spouse. For Medicaid eligibility
purposes, a Revocable Living Trust may or may not be of help to establish eligibility, but that is an entirely
different subject. Insofar as the interests of other beneficiaries are concerned, generally they have no vested
interest in the trust until the grantor’s death and, therefore, the creditors of a beneficiary would not be able to
have access to the assets of a Revocable Trust established by someone else.
Death of Grantor. Generally, a Revocable Living Trust becomes irrevocable at the death of the grantor, and the
Trust then operates in a similar manner to an Irrevocable Trust established by a grantor during lifetime.
Assuming that the grantor leaves no outstanding debts and any tax liabilities are satisfied, the next question
becomes - for whom and against what are the trust assets protected?
The answers to these questions depends, of course, on the specific wording of the trust document itself. If
the assets of the trust are being held for a surviving spouse, with the children as remainder beneficiaries, the
trust assets would typically be protected against claims of the spouse’s creditors or a subsequent
remarriage, but this will, of course, depend upon the terms of the trust and the power that the surviving
spouse has over the trust assets, either as trustee or through the exercise of what is called a "power of
appointment".The latter term, "power of appointment", refers to any power held by a power holder to direct the
distribution and use of trust assets in a non-fiduciary capacity. That means the power to dispose of trust
assets or direct distribution without regard to any specific reason or standard.
A typical trust, after the death of a grantor, has a "spendthrift" provision, which refers to a limitation on the
power of a beneficiary to dispose of his or her trust interest either voluntarily or involuntarily (through claims of
creditors, divorcing spouse or bankruptcy). Michigan law recognizes spendthrift provisions and the protection
that they offer to a beneficiary. That is, a beneficiary’s creditors cannot reach the beneficiary’s interest in a
spendthrift trust. On the other hand, if the beneficiary has the power to withdraw trust principal, for example at
a specific age, those assets could be subject to creditor claims when the specified age is reached, absent
other specific provisions of the trust which could permit a trustee to defer or delay asset distribution.
Why Protect a Beneficiary? Many trust grantors are concerned about the financial responsibility of their
children, or other potential trust beneficiaries. These concerns include the possibilities of divorce or business
creditors, in addition to mere inability to manage money. Sometimes, substance abuse or special needs of a
beneficiary trigger specific trust provisions to protect the beneficiary’s interest in the trust from seizure by
creditors, government agencies or mere improvidence. These concerns seem to increase with the rise of
affluence. Money seems to trigger increased concerns for the preservation of the wealth the senior generation
has worked hard to achieve.
Michigan law does not protect the assets of a "self-settled trust" from the creditors of the grantor. Thus, if a
grantor can benefit from an irrevocable trust that he set up, a creditor can conceivably reach trust assets to
satisfy claims against the grantor. We noted in a prior newsletter that Michigan law protects property held as
tenants by the entireties (husband and wife) from the claims of one spouse alone. In the case of a joint trust,
established by husband and wife, it is doubtful whether those trust assets would be protected from the
creditors of one spouse. If there are creditor concerns, it is best to divide assets between husband and wife,
which is typically done for estate tax purposes anyway.
The overall cloud that can affect estate planning and the use of trusts is a matter of fraudulent transfers. Any
transfer of assets, to a trust or family member, which is a fraud on creditors can be attacked and the property
traced to the grantee or transferee. Where there are dangerous occupations or activities, the best course of
action is advance planning for asset protection, not waiting until a creditor knocks on the door.
New Legislation. There has been recent legislation by a number of states to protect assets in self-settled
trusts from creditors of the grantor. The states of Delaware, South Dakota, Alaska and Oklahoma are notable
in this respect and these laws will be the subject of a separate newsletter. If you would like to discuss any
aspect of asset protection in more detail, please call Jim Modrall or Dave Appleford or any of the attorneys
listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| March 2006 ASSET PROTECTION - TRUST PRIMER by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |