The concept on irrevocably seems simple. Irrevocable means any action which once done, cannot be undone. For example, once you jump off a bridge, you are off. There is no undoing it and reversing yourself up (unless you have a bungee cord).
When it comes to the legal world the term has a much more nuanced interpretation. This is particularly true when it comes to its most popular use – Irrevocable Trusts.
As a starting point, creating an Irrevocable Trust is just like jumping off a bridge, once you do it then you cannot revoke it. Sometimes this means that its purpose and its terms are fixed in concrete – no changes allowed at all. However, not always.
It is possible to create a trust which is irrevocable, which means you cannot revoke the trust itself, but which still leaves some flexibility as to its terms, including who the beneficiaries are, how the assets may be distributed and even conditions under which certain action can or may be taken. In other words, you can attach a bungee cord to portions of the trust so that they can even be modified later.
In today’s world this type of “flexible irrevocability” is far more common than the “set in concrete” versions. And this makes sense, why not leave some flexibility in your planning to give future trustees options for situations which don’t exist today.
In general U.S. courts respect Trusts, particularly irrevocable trusts. And virtually all “Asset Protection” trusts are in one form or another irrevocable. They are also designed to attempt to balance control and access of trust assets with protection, which means designing in a lot of flexibility.
For example, let’s look at Spendthrift Provisions. An example of a popular Spendthrift Provision is one which would provide for access to the trust assets by the settlor directly as long as no creditors are involved and then providing for no access to the funds if there is a creditor involved. In fact this is the basis for virtually all of the Domestic Asset Protection Trust (DAPT) statutes which have been popping up. This type of provision is both legal and extremely effective, with one caveat.
The caveat is that it only works if the courts respect the provision and the trust itself. There is a huge difference between a technically correct provision which should work in a law school text book example, and a real world trust which works in front of a judge. And when it comes to U.S. courts and U.S. judges, there are a lot of variations in interpretation of these spendthrift provisions, especially when it comes to Asset Protection Trusts.
For example, in a 2012 case from California (Kilker vs. Stillman) at trial Stillman (defendant) testified that the primary purpose of setting up a Nevada Asset Protection Trust was to protect his assets since “soil engineers frequently get sued”. Surprisingly, the court found that under the California Uniform Fraudulent Transfer Act (CUFTA) the transfer would be considered a fraudulent conveyance. This was true even though at the time of the funding of the Trust there was no claim made against the Settlor. The court analyzed present and future creditors and found that the Kilkers were “reasonable foreseeable” as creditors. This reasonably foreseeable thus qualified them as “creditors” for the court and hence protected under CUFTA – at least in California.
The result as that a seemingly valid and timely use of an irrevocable trust, validly set up under the laws of Nevada just did work in front of a California court. And Mr. Stillman is far from alone as there is a growing body of case law which has had similar holdings when Domestic Asset Protection Trusts have been challenged.
So is there a way to use an irrevocable trust, and incorporate solid spendthrift provisions that will allow you access to your own money, while excluding creditors – and yet remove the risk of a U.S. court tossing your trust away? Yes, by using a trust which ultimately can be moved outside of the U.S. and away from the U.S. courts, we remove the single most uncertain aspect of enforcement of your trust. By choosing an offshore jurisdiction which provides for a statutory environment and a clear case history, you can obtain a much more certain result.
Taking control of your own financial, estate and asset protection planning is critical to your peace of mind. Let us help you gain that peace of mind.
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