What do you mean I won’t be the Beneficiary of “my own” irrevocable trust? A self-settled trust is another name for being the beneficiary of your own trust. What are the cons of being the beneficiary of your own trust?
We understand the confusion. Some lawyer told you that you could be “your own beneficiary,” and some other lawyer told you that they did not recommend it, and we are telling you that it might be safer if you were not a beneficiary of the trust depending on the state you are in. It might be prudent to temporarily leave yourself off…with the Ultra Trust irrevocable trust and its special power of appointment, you can always add yourself later.
What is a Self-Settled Trust?
Now let’s take a look at being a beneficiary of your own trust. This is commonly known as a self-settled trust. First Alaska, then several other states created statutes that allow the asset protection benefits to extend to self-settled trusts. The vast majority of states do not. I am certain that your wheels are turning. Why not base the trust in one of those states? Well, we could do that without too much complication, but will the trust always be domiciled there? As part of the Estate Street Partner’s Ultra Trust® irrevocable trust we include in the powers of the “trust protector” the power to move the situs of the trust if it benefits the beneficiaries. We do this so that down the line, if state taxes or the laws of the state change, the trust protector can move the trust to a better place.
What are the Cons of Being a Beneficiary of your own Trust (i.e. Creating a Self-Settled Trust)?
So what are the perils of the being a beneficiary? You would be surprised, but we aren’t. In most causes of action and bankruptcy cases, the court determines your assets using a relatively simple idea: any assets that you have access to. Assets that you have access allow those that seek to collect from you too (i.e. your creditors). At the very least, the court will grant those that seek to take your assets access to your “income” from the trust if there is any. At the most, the court may decide that the wording of the trust allows you access to the principal of the trust whenever you would like and therefore those that seek to take your assets have access to the entire trust. (link to “Being Your Own Trustee”). If you choose to be a beneficiary, we can’t help you with the first scenario. As for getting access to the principal of the trust, the Ultra Trust® is designed to protect the principal.
Here is an example of the best case scenario involving a grantor-beneficiary:
In Re: Jane Mclean Brown, No. 01-16211, (2002).
Jane inherited a sizable amount of money from her mother. Jane was also an active alcoholic but was aware of her alcoholism. Jane had a plan. She took her inheritance and put it into an irrevocable trust, out of her own reach. She did, however, keep an income stream from the trust, but as this particular trust was written, did not have access to the principal in the trust. Later, as often happens in cases of alcoholism, Jane spent all of her money and ran up significant debt. She filed for bankruptcy. The creditors attempted to have the trust included in her bankruptcy estate. The court ruled that the corpus of the irrevocable trust was untouchable by Jane and therefore untouchable by the court and creditors. They did, however, rule that as Jane had control over the payout of 7% of the trust each year, this amount is the only amount that could be included in the bankruptcy estate.
Here is an example of where a trust was invaded because the grantor was a beneficiary that did not respect the legal structure and with too much control:
U.S. v. Evseroff, No. 00-CV-06029 (E.D.N.Y., April 30, 2012).
Jacob owed back taxes. He decided to put his assets in an irrevocable trust, which included the property in which he lived. Despite having an independent trustee, Jacob lived in the property and retained total control of the property without any involvement of the trustee what-so-ever, made all decisions concerning the property without consent of the trustee, invoked these decisions as they pertained to third parties and paid all of the bills using Jacob’s own personal checks.
In essence, there were absolutely no trustee activities pertaining to the property or even an acknowledgement to third parties that there was a trustee, other than the actual trust document, that a trustee existed. When the IRS took Jacob to court, the court ruled that Jacob still had possession and control of the property, even though the title was in the trust. The court determined that Jacob had so much control that the trust was his “alter-ego.” Basically, the court said that despite the language of the trust document, Jacob had too much control over the assets in the trust and therefore the trust was not truly an independent entity. For this reason the court ruled that the government could collect Jacob’s tax bill from the trust.
Here is another example where being a beneficiary didn’t work out so well for the grantor in which the grantor set up a spendthrift clause:
In Re: Wayne H. Schultz, Jr., Case No: 4:04-bk-2062 E, United States Bankruptcy Court Eastern District of Arkansas, 2005.
Wayne decided to put his assets into an irrevocable trust with a spendthrift clause. Many years later he declared bankruptcy and the bankruptcy estate looked to the wording of his trust. He, the grantor, was a beneficiary of the trust and also had access to the principle of the trust. The state law had a rule against having a spendthrift trust that covers the creator of the trust. The court ruled that the trust was still valid; but that Wayne had access to all of the trust assets and that they would all be included in the bankruptcy estate. The trust was executed at the right time, way before there was any issues, but the grantor was a beneficiary and offered no protection.
Again, Estate Street Partners is aware of the anxiety involved in moving one’s assets to an irrevocable trust without being a beneficiary or trustee. Rest assured that we have done hundreds of these types of trusts and have never had a client complain after they experienced that there was very little change to their daily life. We want you to have to safest option for your assets. We recommend that you avoid being a trustee or beneficiary of your trust. The power of appointment we include allows for the grantor to change the beneficiary stream at any time. This includes potentially adding yourself at any time, but nobody can force you to amend the beneficiaries.