STATEMENT OF THE LAW
Our 541 Trust® is built on two irrefutable legal principles:
1. With respect to an irrevocable trust, a creditor of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit (Essentially, if the trust is self-settled, it is vulnerable). See Uniform Trust Code Section 505; RESTATEMENT (SECOND) OF TRUSTS Section 156(2) and RESTATEMENT (THIRD) OF TRUSTS Section 58(2). This principle has been adopted in hundreds of cases throughout the country and many states have enacted statutes with this identical language. For example, see Alabama Code Section 19-3B-505; Ariz. Rev. Stat. Ann. §14-7705; Cal. Prob. Code § 15304; Ga. Code Ann. § 53-12-28(c); Florida Trust Code Section 736.0505(b); Ind. Code Ann. § 30-4-3-2; Kan. Stat. Ann, §33-101; La. Rev. Stat. Ann.§2004(2); Michigan Code Section 7506(c)(2), Mo. Ann. Stat. § 456.080.3(2); Mont. Code Ann. § 72-33-305; N.Y. Civ. Prac. L. & R. § 5205(c); Ohio Code Section 5805.06; Okla. Stat. Ann. tit. 60, §175.25G; Pennsylvania Code Title 20 §7745; R.I. Gen. Laws § 18-9.1-1; Tex. Prop. Code Ann. §112.035(d); Utah Code Section 75-7-505(b); Virginia Code Section 55-545.05 ); W. Va. Code §36-1-18 (1985); Wis. Stat. Ann. §701.06(1).
2. A settlor can retain a special power of appointment without subjecting the trust to the claims of creditors. See RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS Section 22.1; US Bankruptcy Code Section 541(b)(1), California Probate Code Section 681; Delaware Code Section 3536; Georgia Code Section 23-2-111; New York Code 10-7.1; Also see cases set forth below.
APPLICATION OF LAW TO THE 541 TRUST®
The 541 Trust® is an irrevocable trust that includes the following features:
1. The settlor is not a beneficiary and no distributions can be made to or for the settlor’s benefit.
2. The settlor retains a “special power of appointment” which allows the settlor to change the trustees, the beneficiaries, or the terms of the 541 Trust® at any time (except that the assets cannot be distributed to or for the settlor’s benefit). In addition, the settlor can appoint assets to any other person at any time.
Creditors have no claim against the 541 Trust® because no distributions can be made for the settlor’s benefit. The cases and statutes set forth below show that these powers of appointment do not give creditors any claim against the 541 Trust®. There are no statutes, cases, secondary sources or commentaries to the contrary.
COURT CASES
In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002) – Defendant funded irrevocable trust and retained an income interest and a special power of appointment over principal. 11th Circuit analyzes creditor’s access to an irrevocable trust. The trust principal was not included in the defendant’s bankruptcy estate. To read the case, follow this link: In re Jane McLean Brown
In Estate of German, 7 Cl. Ct. 641 (1985) (85-1 USTC Par 13,610 (CCH)) – Assets of an irrevocable trust were not subject to the creditors of the settlor despite the fact that the trustees and beneficiaries had power to appoint the assets to the settlor.
Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997) – 5th Circuit Court holds that the portion of the trust that was not self-settled is not included in the bankruptcy estate, and assets subject to a special power of appointment are excluded from the bankruptcy estate. To read this case, click Shurley v. Texas Commerce Bank
In re Hicks, 22 B.R. 243 (Bankr. N.D.Ga.1982) – A court cannot compel the exercise of a special power of appointment and the assets of the trust were not included in the bankruptcy estate of a permissible appointee. To read this case, click In-re-Hicks
In re Knight, 164 B.R. 372 (Bankr.S.D.Fla.1994) – The interest of a contingent beneficiary was included in the bankruptcy estate, but the interest of a permissible appointee of a power of appointment was too remote to be property and was not included in the bankruptcy estate. To read this case, click In re Knight
In re Colish, 289 B.R. 523 (Bankr.E.D. N.Y. 2002) – The interest of a contingent beneficiary was included in the bankruptcy estate. The court distinguished this from Knight and Hicks where the interest of a permissible appointee under a power of appointment was not included. To read this case, click Colish-v-United-States
Cooley v. Cooley, 628 A.2d 608 (1993) – A special power of appointment is not a part of the marital estate that can be awarded in a divorce action. As one of the possible objects of the defendant’s power, the plaintiff possesses no more than a mere expectancy. To read this case, click Cooley-v-Cooley
Cote v. Bank One, Texas, N.A., No. 4:03-CV-296-A, 2003 WL 23194260 (N.D. Tex. Aug. 1, 2003) – Permissible appointee is not an “interested person” with standing to sue the trust. This is relevant because if the permissible appointee has no standing to sue the trust, neither should a creditor of a permissible appointee.
Avis v. Gold, 178 F.3d 718 (1999) – Permissible appointee had no interest which could be included in the bankruptcy estate, or to which an IRS tax lien could attach, prior to the time the power was exercised in favor of the debtor.
Horsley v. Maher, U.S. Bankruptcy Ct. Case No. 385-00071 (1988) – debtor was a permissible appointee of Trust A and a beneficiary of Trust B. Trust A was not included in the bankruptcy estate because “the debtor holds no interest in Trust A.” The assets of Trust B were included in the bankruptcy estate.
- S. v. O’Shaughnessy, 517 N.W.2d 574 (1994) – Assets subject to discretionary special power of appointment not subject to tax lien
Spetz v. New York State Dep’t of Health, 737 N.Y.S. 2d 524 (Sup. Ct. Chautauqua Co, Jan. 15, 2002) – New York Supreme Court holds that special power of appointment does not cause trust assets to be taken into account for purposes of Medicaid qualification
Verdow v. Sutkowy, 209 F.R.D. 309 (N.D.N.Y. 2002) – Assets subject to special power of appointment not taken into account for purposes of Medicaid qualification
United States v. Baldwin, 391 A.2d 844 (1978) – Assets subject to special power of appointment not subject to tax lien
Estate of Ballard v. Commissioner, 47 BTA 784 (1942), aff’d, 138 F.2d 512 (2nd Cir. 1943) – Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
Kneeland v. COMMISSIONER OF INTERNAL REVENUE, 34 BTA 816 – Board of Tax Appeals (1936) – Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
Helvering v. Helmholz, 296 US 93 (Supreme Court 1935) – Assets of trust not included in wife’s estate merely because the beneficiaries had the power to terminate the trust and return the assets back to the wife.
Price v. Cherbonnier, 63 Atl 209 (1906) – Creditors of the donee of a special power of appointment cannot reach the assets subject to the power.
Gilman v. Bell, 99 Ill. 194 (1881) – Assets subject to power of appointment not subject to claims of creditors.
Jones v. Clifton, 101 US 225 (1879) – Assets subject to power of appointment not subject to claims of creditors.
Holmes v. Coghill, 33 Eng. Rep 79 (1806) – Assets subject to power of appointment not subject to claims of creditors.
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For an excellent summary of the law supporting this kind of trust (from an unrelated law firm), see Asset Protection Planning with Trusts – A Practical Overview by Alexander A. Bove, Jr. published in Journal of Practical Estate Planning (CCH Inc., April-May 2002).