A Trust using Section 541 is designed to take advantage of Section 541 of the U.S. Bankruptcy Code. That section of the code defines what property is included and what property may be excluded from the bankruptcy estate. Here it is:
11 U.S. Code § 541 – Property of the Estate (b) Property of the estate does not include— (1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor;
What this means is that the Bankruptcy Estate does NOT include a power to appoint an asset to someone other than the debtor. This is referred to as a Power of Appointment or often a Special Power of Appointment (SPA).
So there you have the Section 541 or Special Power of Appointment Trust freshly branded and marketed as something new (which they are not). So are these Asset Protection Trusts in the classic sense? No they are not. They are trusts in which the Settlors have irrevocably gifted assets away and reserved only a right to appoint the ultimate beneficiary (as long as it’s not themselves).
Is there anything wrong with retaining a Special Power of Appointment in your trust? No there isn’t. If you want to give your assets away and aren’t sure exactly who to benefit with your generosity, then its an appropriate tool. All of this is fine right up to the point at which someone advises you that you can use this type of trust to protect YOUR assets. In these trusts the assets are no longer yours! This misstatement is where all the problems begin.
To be clear, if you have no assets, then you really don’t need to worry about losing them. If you have assets and give them away, then again, as long as you didn’t do so intending to avoid a creditor, then you can rest assured that those assets are also safe from your problems (although not necessarily the problems of your giftee).
However, if you intend to use, benefit from, and ulitmately keep your assets, then setting up a Trust utilizing section 541 of the code is not the appropriate tool at all. Worse yet, attempting to do so can easily result in precisely the opposite occurring and actually exposing your assets! And this is where the promoted use of these trusts can be in serious error.
I have been receiving calls from people who have been told that they can set up this type of trust, contribute all their assets and then when they want them back, rely on the ‘friendly beneficiaries’, or if that fails, then the threat of changing the beneficiary, to simply give the assets back to them, or to use them for their benefit or some other such scheme.
This is by definition a sham transaction. This is even more true when the Trust is promoted as such on the Internet and a creditor can easily provide marketing material to a court laying out the exact nature of scheme. This plan is what courts call “Substance over Form.” In other words the form of the trust may be correct, but the substance of the transaction is easily seen through by a court as a sham. This is particularly true of a court set on achieving a certain result, as ultimately all courts are.
And that brings us to the final flaw of these types of trusts used (or misused) for Asset Protection. Ask yourself if you want to rely on a trust with a questionable application of substance over form and leaving both the trust, trustees and assets in the United States, for a U.S. court to consider and rule on.
If you are considering this type of trust make sure you are completely clear that the assets are no longer yours and you can retain no legal power to get them back! If anyone is telling you differently – Look again. If real Asset Protection of your own assets is the goal, then consider the power of ultimately having the ability to move both your trust and your assets out of the United States to achieve that protection.
This Post Has 0 Comments