Use ‘Powers’ to Build a Better Asset Protection Trust Az protection trust can provide a person with seeu- riey and peace of mind by ensuring that some asses are protected-agnnst future poratial liabilities. State and federal laws support the use of an asset pro- tection test that is designed and fandedin an ethical manner. Fraud tlene transfer laws prevent the use ofan asset protection erst to bin der, delay, or defraud a creditor. For the past several decades, most assec protection trusts have been based onthe concept of se setved rus Historically the gen- cera rule has ben to deny asset peo tection toa self settled wust2 This began to change when laws were passed in offshore jurisdictions, such as the Cook Islands and the Iele of Man, which protect the assetsin a selseted trust. Begin ning withthe Alaska Trust Act in 1997, 13 states now offer some degree of ase procection fora slf- settled teu: LEE S. MeCULLOUGH, II, ATTORNEY 1. Alaska. 2. Colorado, 3. Delaware 4. Hawaii 5. Missour 6 Nevada, 7. New Hampshire 8. Oklahoma. 8. Rhode Island, 10. Missouri. 11, Tennesse, 12. Uns, 13. Wyoming ‘Although this concept has dom- inated the discussion and the prac tice of designing aset protection trusts, its not the only option. The special power of appointment, sn old reliable tool, can be imple- mented to replace and improve on the concept of a sel-settled rus, {EES MOMLOUGL pate my ne nd senepoeng ast (a eae ease pe ante arog testy ‘The special power of appoint rent is perhaps the most powerful and unappreciated tol in estate planning and asset protection, ‘While most esate planners regu: lacy use special powers of appoint ‘ments to add lexiility to trom doc "uments, mos fal 0 recognize may of the most powerful uses of this tool. Whether designing a trust solely to protect against potential exeditors, orto protect against eseateraxesas wel a special power of appointment ean be used 0 build a beter asset protection seus. ‘The concep ofa power of appoint smenthas beens partof he English common law for hundred of ea. This concept is well recognized in all 50 states and in the federal x laws.2 Although some minor vari. ations in the law pertaining to pow ters of appointment have accursed ‘over time, the basic principles, ‘whieh form the basis ofthis arcle, have never varied. These basic principles are summarized below. Key terminology. Familiarity with the following terms crucial vo an understanding of the strategies dis- cussed below + Appower of appointment is a power that enables the donee ff the power, acting in & non fiduciary capacity, to designate recipieats of beneficial owner Ship interests inthe appoiative property + The “donor” isthe person who crested the power of appointment. + The “donee” isthe person on whom the power is conferred (and who may exercise the ower). + The “permissible appointees” for “objects” are the persons for whom the power may be exercised + An “appointee” is person to ‘whom an appoinement hae bhcen made. + Avtaker in defaule of appoint. sment™ isa person who will receive the property ifthe power isnot excrcised.= A powerof appointments “gen- eral” to the extent that the power isexercisablein favor ofthe donee, the donee’s estate oF the creditors ofthe donee or the donee's estate, regardless of whether the power is als exercisable in favor of oth- cre A power that ie not generals feferred to asa “special” or "non- teneral” power of appointment. Basic rules pertaining to asset pro= tection and estate ta inclusion Property thats subjet toa present. ly exercisable general power of appointments generally subjectto the creditors ofthe dance beeause ies a power that is equivalent ro ‘ownership.7 On the other hand, propery subjecrto a special power of appointment is exempt from ‘alis of the donee’ creditors! The donee ofa special power of appoint tment isnot considered to have @ property interest in the property ubjecto the power because itean- fot be exercised for the economic benef of the dance Beeause the donee has no property incerest, the property subject to the power of appointment is not included mong the property ofthe donee for purposes of judgment coletion, bankeupeeydivoree, Medicaid eli: sibility, estate tax inclusion, oF other determinations that involve the property of the donee, cee eed Similarly, a permissible appoincce (including the donor) ha no prop- cerry imterestin.a power of appoint ment: Any attempt to include the interest ofa permissible appointee for purposes of judgment coletion, bankrupey, divorce, Medicaid eg bile, estate raxinclasion, or other determinations that involve che property ofthe donee would be a logical and practical impossibility because most spe ‘of SEuteaemons Sea appoinementinclade everyone inthe ‘world asa permissible appointee, ‘except for the donee, the donee’s ‘estate, andthe creditors ofthe dance fand the donee’ estate An irrevocable tras with a spe- cial power of appointment that includes the donor asa permissible appointe (efeced to hevein as 2 “special power of appointment rust") cam be used to replace and improve on the concept ofa self- settled asst protection trast. Both ‘he self-seedassexprotecion rust and the special power of appoint: ‘ment trust can be designed so that tiftsta che trustare incomplete for sift tax purposes—and thus not subject ifttax at the time ofthe initial transfer Both ofthese russ can also be designed asa grantor tut for income tax purposes 40 thatincome from the trast is taxed to the settlor Ifthe tax ereatment for these two rust isthe same, and the ability to benefit the sedor is the same, what is the difference between a rele-setted asset pro- tection trust and s special power ‘of appoincment rust? ‘The pros and cons ofthese two alternatives may be summarized a follows 1, No ease lw supports the asset, protection provided bya sel settled asset protection tust because the seatutes that allow asset protection fora selFset- Speier Se arora propnod ye aie SSenedled tease are relatively new tnd untested. On the other hhand, the inability ofa ced tor ofa permissible appointee to reach the acts of «special power of appointment reas is Supported by centuries of com: mon law that is consatent thoughout all 50 states in addition co federal bankruptcy ‘courts. In addition, the asset, protection provided by a spe- «ial power of appointment trast i supported by the log cal and pracceal impossibility of ascribing tas liability for all peemissibie appointees ‘when thar class includes every person on earth other than the donee, the donee estate, and the creditors of the donee and the donee’ estate ‘Sapien aero aes 2 ‘The common law rule, fol lowed by the majority of states, is thatthe assets of 2 sellsetted tast are available tothe claims of the setlor's creditors." Many commenta- tors believe that a sate that doesnot rane asset protection for selt-serded trusts will not uphold che laws of a state chat does grant asset protection for self-stted eras, because doing so would violate the fiat state's public policy ® The asset protection provided by a Special power of appointment trast not dependent onthe state where the partes reside ‘or the state where the mater isadjudicared Many commentators question whether a selFsctled aster protection trust will hold up in 1 bankruptcy court. A least ‘wo bankruptcy courts have held tha the recognition of an offshore self seed trast would offend federal bank: ruptcy policies.” A persoa ‘who Fes bankraptey i pi cally required to disclose any ‘rust in which he or she i included as a beneficiny. In Addition, che 2005 changes to the Bankruptcy Code have cre- aed anew ten-year limitations period for transfers to selP-st Hed erase that ate meant 0 hinder, delay or defraud ere tors. Even ifa bankruptcy court is unable to bring the assets of a selfscteled trast ino the bankeuptey estate, the ‘court could dismiss the debtor’ ease and deny the debtor a diseharge under the hankeupeey lws In contrast, the special power of appoint= ment tust should be ierlevant toa bankruptey proceeding because the setlor has no en: lca incre inthe trust ‘Many ofthe state statutes that rant some form of set pro- tection for a self-setled trast, lo include exceptions that slow creditors to size the assets of a el-etled trust for child suppor, alimony, trans- fers made within certain tie periods, government creditoss, Dankruptey, or certain tort." Tn contrast, no stautory exceptions allow a creditor of «permissible appointee 10 reach the asets of «special power of appointment rust. Crusty dees nc end when you ce, make sure your support of ha ASPCA® ossn't ether: Your gift af siecle, fe rurance or cher bequests hae us oop aniral af rom harm whet haps ease te tax burden on your ett, ‘Since 1805, he ASPCA has alvaye been thereto ensure the eal nd eafey of Amorica’s animale. Make sre we say tat way sam more by contacting Kim Bressant Kibo, Esq, _ 646-291-4854, or Kmb@aspea.rs re