Protecting Your Children�s Inheritance

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					                                         TABLE OF CONTENTS


I.         Introduction ....................................................................................................... 1
II.        Transfers in Trust .............................................................................................. 2
III.       The Beneficiary Controlled Trust Concept ....................................................... 5
IV.        Designing the Beneficiary Controlled Trust ..................................................... 6
V.         Support Trusts Versus Discretionary Trusts ................................................... 11
VI.        What is a Property Interest? ............................................................................ 20
VII.       Spendthrift Provisions..................................................................................... 21
VIII.      Distribution Standard and the Current Beneficial Interest .............................. 24
IX.        Remainder Interest .......................................................................................... 27
X.         Conflicting Distribution Language ................................................................. 29
XI.        Hybrid Trust .................................................................................................... 31
XII.       The Uniform Trust Code ................................................................................. 32
XIII.      Creditor Remedies Prior to the UTC .............................................................. 33
XIV.       Current Distribution Analysis – Non-UTC State ............................................ 34
XV.        Remainder Interest Analysis - Non-UTC State .............................................. 35
XVI.       Remainder Interest in Trust Subject to Division in Divorce! ......................... 37
XVII.      Understanding the UTC .................................................................................. 42
XVIII.     The Cornerstone of the Common Law Discretionary Trust ........................... 43
XIX.       Ohio – A Tale of What Not to Do................................................................... 43
XX.        Uniform Trust Code and Restatement Third .................................................. 46
XXI.       Asset Protection for Discretionary and Support Trusts Now the Same? ........ 48
XXII.      Continuum of Discretionary Trusts More Protective? .................................... 50
XXIII.     Expansion of Exception Creditors? ................................................................ 50
XXIV.      Restatement (Third) of Trusts ......................................................................... 55
XXV.       Special Needs Trusts ....................................................................................... 56
XXVI.      Beneficiary as Sole Trustee ............................................................................ 56
XXVII.     Domestic Relations Case and Imputed Income .............................................. 57
XXVIII.    End Round to Force A Distribution For Any Creditors .................................. 59
XXIX.      Planning Around the Restatement Third and UTC ......................................... 59
XXX.       The Inheritor’s Trust™ ................................................................................... 60
XXXI.      Opportunity Shifting ....................................................................................... 61
XXXII.     Corporations, Limited Liability Companies and Limited Partnerships ............. 65
XXXIII.    Creditor Protection through Charging Orders................................................... 66
XXXIV.     Alternative Asset Protection Structures .......................................................... 74
XXXV.      The Inheritor’s Trust™/FLP Combo .............................................................. 75
XXXVI.     Sale of Voting Interest to Inheritor’s Trust™ ................................................. 77
XXXVII.    The Dual Spousal Trust Structure ................................................................... 79
XXXVIII.   The Dual Spousal Trust and FLP Structure .................................................... 81
XXXIX.     Asset Protection and Individual Retirement Accounts ................................... 81
XL.        Other Creditor Protection Strategies – Tenancy by the Entirety (Craft) ........ 84
XLI.       Other Creditor Protection Strategies – Disclaimers (Drye) ............................ 86




                                                          i
     Asset Protection other than Self-Settled Trusts: Beneficiary
     Controlled Trusts, FLPs, LLCs, Retirement Plans and other
                   Creditor Protection Strategies1
                                                  By

                                         Steven J. Oshins
                                     Oshins & Associates, LLC
                                          Las Vegas, NV




I.        Introduction

          A.       With the spiraling divorce rate of over fifty percent in the United States, as
                   well as the increasing number of lawsuits, creditor protection is often the
                   most important objective of our clients.

          B.       An irrevocable trust set up by someone other than a beneficiary provides
                   the ultimate in creditor protection. As the asset protection maxim goes --
                   "If you don't own it, nobody can take it away from you."2

          C.       Historically, the general rule has been that the creator of the trust can
                   dictate who may receive the beneficial enjoyment of the property and the
                   extent and circumstances under which this enjoyment may be obtained. As
                   a result, unless trust property is distributed to a beneficiary, it will
                   generally be protected from the beneficiary's creditors.

          D.       The general rule is that through accepted legal remedies a creditor of a
                   debtor stands in the shoes of the debtor and may exercise any property or
                   other right that the debtor may exercise. So does this mean that a creditor
                   may attach a beneficiary’s trust interest or force the trust to make a
                   distribution to the creditor in satisfaction of a beneficiary’s debt? Further,
                   could a creditor lien or attach a remainder interest? If this is the general
                   rule, does an estranged spouse have more rights to attach a beneficial
                   interest under domestic relations law than an ordinary creditor? Does a


1
 The author would like to thank Heidi C. Freeman and Kristen E. Simmons, attorneys at Oshins &
Associates, LLC, for their assistance in editing this outline. The author would also like to thank Mark
Merric, attorney at Merric Law Firm, LLC, for co-authoring the portions of this outline relating to the
Uniform Trust Code. More extensive materials can be read online at http://www.oshins.com.
2
    Howard D. Rosen, 810 T.M., Asset Protection Planning, BNA Tax Management Portfolio at A-1.




                                                 1
                  discretionary trust provide stronger creditor protection than a support trust?
                  This outline will answer these questions and others.

II.      Transfers in Trust

         A.       For transfer tax purposes and creditor protection purposes, properly
                  structured inherited wealth is a far more valuable commodity than wealth
                  earned and saved. Although it is generally true that neither our transfer tax
                  system nor our property law system distinguishes between wealth a
                  transferee taxpayer owns and retransmits and wealth that is earned and
                  subsequently transferred, proper planning can dramatically alter these
                  general rules. The vehicle that is generally used to achieve and maintain this
                  differential is an irrevocable trust, particularly a dynasty trust.

         B.       In the typical family setting, the trust is created by a senior family member
                  for the benefit of his or her descendants (and perhaps also for the spouse of
                  the trust creator). For the greatest flexibility, the permissible distributees
                  would also encompass spouses of descendants, 3 including the surviving
                  spouse of a deceased descendant (who was living with the descendant at the
                  time of his death or was unable to do so for health reasons), as well as trusts
                  under which the potential individual recipients are beneficiaries, whether set
                  up by a trustee under the original trust or by a third party.4

         C.       In order to achieve the maximum transfer tax savings, the trust should be
                  wholly exempt from the generation-skipping transfer tax ("GST tax"). This
                  will perpetually avoid the imposition of transfer taxes for successive
                  generations.

         D.       This outline has as a basic premise the philosophy that any gift or bequest
                  should be made in trust unless the size of the transfer does not justify the
                  expense of setting up a trust. The transfer of a gift or bequest in a trust can
                  confer more benefits upon a beneficiary than the beneficiary would have
                  received if the property had been conveyed outright. This outline generally
                  addresses the concept that trusts should be the vehicles of choice for all
                  dispositions to individuals, and in most instances should form the centerpiece
                  of the estate and creditor protection plan.

         E.       For mature, competent family members who would receive the property
                  outright were it not for the benefits that can be derived through the receipt of

3
 For example, if a descendant was being sued or going through bankruptcy, a distribution to the descendant's
spouse could finesse attachment by the descendant's present or potential creditors, yet still provide indirect
benefits to the descendant.
4
 See Malcolm A. Moore, New Horizons in the Grant and Exercise of Discretionary Powers, 15 U. Miami Inst.
on Est. Plan., Ch. 6 (1981).




                                                   2
                 property in a trust, the trust would be designed to give the primary
                 beneficiary the functional equivalent of outright ownership, including
                 undisturbed control over the property. Indeed, many candidates for this type
                 of planning would be unwilling to create such a structure unless the trust
                 benefits are coupled with the ability of the primary beneficiary or
                 beneficiaries to obtain control over the trust property virtually tantamount to
                 outright ownership.

        F.       A portion of this outline will focus on such a trust that will be referred to as a
                 "Beneficiary Controlled Trust." This ability to improve a gift or bequest by
                 arranging that the transfer be made in trust, particularly a flexible
                 Beneficiary Controlled Trust, is too often dismissed without a careful and
                 skilled analysis of the enhanced benefits obtainable through the trust vehicle.

        G.       Notwithstanding the dual tax and creditor protection benefits that trusts can
                 provide, many planners and their clients eschew the opportunity to take full
                 advantage of trusts in the estate planning process.5 To the knowledgeable,
                 experienced estate planning and creditor protection planner, it is evident that
                 most clients, and many of their advisors, are not fully aware of how trusts
                 work, nor are they aware that if drafted skillfully, trusts are not the inflexible
                 vehicles that restrict the beneficiary's enjoyment of the property that many
                 perceive.

        H.       To the contrary, in the hands of a proficient draftsman, trusts are extremely
                 flexible arrangements that can help the family cope with various problems,
                 both anticipated and unanticipated, that have occurred or may occur in the
                 future. Customized design of the trust can in almost every instance achieve
                 the client's goals, even where it is desired that virtually all major decisions be
                 lodged in the hands of the trust beneficiaries.

        I.       Sophisticated drafting in this instance includes incorporating provisions that
                 are often counterintuitive to most estate planning and creditor protection
                 practitioners. This approach often involves, among other things, negating the
                 prudent person rule and expanding the permissible investments to include
                 virtually everything imaginable that the beneficiary/trustee would acquire
                 individually. Traditional trust language usually precludes the types of
                 investments that a Beneficiary Controlled Trust encourages.

        J.       A surprisingly large number of wealthy estate owners and persons who are
                 otherwise astute in business and finance do not recognize the wealth
                 planning and creditor protection opportunities available to them, nor do they
                 realize the potential diminution of family assets that can be unnecessarily
                 and irretrievably lost through exposure to both the wealth transfer system

5
 See Malcolm A. Moore and Jeffrey N. Pennell, Survey of the Profession II, U. Miami 30th Inst. on Est. Plan,
Ch. 15 (1996).



                                                  3
                    and the failure to use creditor protection strategies. A properly structured
                    irrevocable trust can avoid this exposure.6 To maximize the goal of keeping
                    wealth within the family unit, the trust should be a dynasty trust, designed,
                    funded and managed in a manner that will enable the trust to grow rapidly
                    and avoid transfer taxes and creditors, including divorcing spouses, for
                    several generations, preferably into perpetuity. This philosophy should be
                    followed provided it is consistent with the objective of providing
                    comfortably for the trust beneficiaries. Under this tax avoidance and creditor
                    protection strategy, the trustee should be encouraged to acquire assets for the
                    "use" of the beneficiaries rather than funding the individuals' personal
                    acquisition of assets.7

           K.       The trust should be designed in such a way that distributions are permissible,
                    but operationally it is anticipated that they should not be made in the absence
                    of a compelling reason to make them. By retaining property in trust, the
                    assets will not be subject to creditors of the trust beneficiaries or
                    diminishment in a divorce. The trust corpus can form a "family bank" or
                    "asset pool" for the use of the descendants (and, if desired, the spouse) of the
                    creator. As a result, the beneficiaries will have the use and enjoyment of the
                    property without transfer tax problems or exposure to creditors. The
                    beneficiaries individually (or by utilization of assets in trusts not protected
                    by the GST tax exemption) should be expected to absorb most family
                    expenditures such as food, schooling and vacations. Additionally, the exempt
                    funds should generally not be expended on consumable assets, such as
                    clothing, automobiles, etc., since use of protected funds in this manner would
                    be wasteful.

           L.       In addition to providing tax savings, trusts are extremely useful and under-
                    utilized for non-tax purposes as well. It has been stated that, "[i]t is indeed a
                    rare client who should not at least seriously consider the use of a trust for
                    some circumstances, even if only to cover contingencies that ought to be
                    anticipated."8


6
  Note that the Mississippi Supreme Court ruled in Sligh v. First National Bank of Holmes County, No. 96-CA-
00033-SCT, 1997 Westlaw 620799 (Miss. Oct. 9, 1997), that a beneficiary's tort creditors could reach a
spendthrift trust for damages arising from gross negligence. Mississippi thus became the only state to recognize
a common law exception to the spendthrift trust doctrine, although a few states, such as Louisiana and Georgia,
have certain statutory exceptions. See Charles D. Fox IV and Rosalie Murphy, Are Spendthrift Trusts
Vulnerable to a Beneficiary's Tort Creditors?, Trusts & Estates (Feb. 1998). However, soon after this case was
decided, it was reversed by the enactment of a new state statute.
7
 See Richard A. Oshins, MegatrustsSM--Representation Without Taxation, 48 INST. ON FED. TAX’N § 19 (1990);
Richard A. Oshins and Lawrence Brody, Representation Without Taxation – MegatrustsSM and
MegainsurancetruststSM, University of Southern California 42nd Institute on Federal Taxation; Richard A.
Oshins and Jonathan Blattmachr, The MegatrustSM: An Ideal Family Wealth Preservation Tool, Trusts &
Estates (Nov. 1991).
8
    See Edward C. Halbach, Jr., Trusts in Estate Planning, The Probate Lawyer (Summer, 1975).



                                                    4
III.     The Beneficiary Controlled Trust Concept9

         A.      Most of our clients want to leave their property to their loved ones outright,
                 provided that at the time of the gift or bequest the desired recipient is
                 capable of managing the property wisely. For these clients, trusts, possibly
                 combined with various estate planning maneuvers to increase the size and
                 growth of GST tax exempt trusts, are generally recommended in place of
                 straightforward, outright transfers. For those clients who want to pass on
                 their wealth so that the preferred beneficiaries (typically members of the
                 oldest then living generation) obtain the enjoyment of the property in a
                 manner as close to outright ownership as possible, with possible trade-offs
                 in order to increase flexibility, tax and creditor benefits, a Beneficiary
                 Controlled Trust should be considered.

         B.       The Beneficiary Controlled Trust is designed to provide the primary
                  beneficiary with all of the rights, benefits and control over the trust property
                  that he would have had if he owned it outright, in addition to tax, creditor
                  and divorce protection benefits that are not obtainable with outright
                  ownership. The ability to derive more benefits in a trust than one would
                  obtain with outright ownership without giving up control leads one to
                  wonder why trusts are not the vehicle of choice in virtually every estate plan
                  and why Beneficiary Controlled Trusts are not used instead of outright
                  transfers in almost every instance in which the transferor otherwise would be
                  inclined to gift or bequeath the property outright.

         C.       The Beneficiary Controlled Trust concept is fairly simple. It is a trust in
                  which the primary beneficiary either is the sole trustee or has the ability to
                  fire any co-trustee and select a successor co-trustee. Typically, control of the
                  trusteeship is coupled with a broad special power of appointment that can
                  have the effect of eliminating any potential interference by remote
                  beneficiaries. Because the primary beneficiary/trustee possesses the ability to
                  eliminate all participation in the enjoyment of the trust assets by secondary
                  and more remote beneficiaries, the latter will not be inclined to interfere
                  because their rights could be eliminated.10

         D.       From a beneficiary's perspective, the beneficiary can be given more benefits
                  in a trust than he could obtain with outright ownership. For the client who
                  would transfer property to the objects of his bounty outright, it is difficult to
                  reconcile not making the transfer to a trust that the primary beneficiary

9
 See Frederick R. Keydel, Trustee Selection, Succession, and Removal: Ways to Blend Expertise with Family
Control, 23 U. Miami Inst. on Est. Plan., Ch. 4 (1989).
10
  Congress is well aware of the fact that a trust can be designed in such a manner whereby "...the intervening
generation could be given the equivalent of absolute ownership of trust assets through powers of appointment
and trust powers." George Cooper, A VOLUNTARY TAX? NEW PERSEPCTIVES ON SOPHISTICATED ESTATE TAX
AVOIDANCE, 56 (Studies of Government Finance: Second Series 1979), referring to testimony given by Prof. A.
James Casner to the Ways and Means Committee.



                                                   5
                   controls, since the primary beneficiary can control the trust virtually without
                   limitation and interference from any secondary beneficiaries and still receive
                   the tax and creditor protection benefits of the trust vehicle. A trust designed
                   with control in the hands of the primary beneficiary (and secondary
                   beneficiaries who become primary beneficiaries upon the demise of the
                   primary beneficiary), coupled with a special power of appointment that
                   would enable the primary beneficiary to cut out a complaining secondary
                   beneficiary, should be free of interference and thus is the singularly most
                   important component of the estate and creditor protection plan.

         E.        Obviously, not all clients share the foregoing philosophy, and sometimes
                   circumstances preclude or suggest that all power not be lodged in a
                   beneficiary. For such clients, the estate plan should be designed to take into
                   account and reflect the specific variations and desires of the client to
                   accomplish his objectives. Illustrations of circumstances where the client
                   would not select a Beneficiary Controlled Trust include situations where the
                   beneficiary is either legally (e.g., a minor) or practically (e.g., inexperienced,
                   disabled, lacking judgmental skills, etc.) incapable or unable to assume
                   managerial responsibility; where the client wants to limit the beneficiary's
                   enjoyment of the property, enabling others to enjoy and share in the wealth;
                   or where the client wants to limit the beneficiary's power of disposition over
                   the property. In such instances, a trust, although not a Beneficiary Controlled
                   Trust, should be considered, even for transfers in which tax considerations
                   are not a substantial factor.11

IV.      Designing the Beneficiary Controlled Trust

         A.        Once it has been decided that a trust should be used, the design of the trust to
                   achieve and maximize the desired results becomes important. In its simplest
                   structure, the trust could be designed whereby the beneficiary would be the
                   sole trustee and have the right to any or all of the income, plus access to
                   principal limited to health, education, support and maintenance, plus a broad
                   special power of appointment during life and/or at death to anyone other than
                   the beneficiary, his creditors, his estate, or the creditors of his estate.

         B.        However, in most instances this trust variation is not recommended because
                   greater flexibility, tax benefits and creditor protection can be obtained using
                   a discretionary Beneficiary Controlled Trust with multiple trustees. By using
                   friendly, independent trustees (or special trustees who could act under

11
   Interestingly, when queried as to whether or not a trust should be considered for a young couple with a young
child or two and few assets which, including life insurance, might total between $100,000 and $200,000, most
clients and advisors respond that a trust is inappropriate. The author respectfully submits that the majority
answer is incorrect; even here a trust is the best vehicle. The real question is whether the cost of setting up the
trust and the remote possibility that the trust would be used justify its creation. Certainly, if the parents were to
die prematurely with young children, having a trust in place would be preferable to any other alternative.




                                                       6
                     appropriate circumstances), certain powers can be woven into the trust
                     agreement that could not exist if there were no independent trustees. This is
                     so because powers that are rather innocuous in the hands of an independent
                     trustee would cause tax and creditor problems if lodged in the hands of a
                     beneficiary/trustee.

            C.       The primary factors that should be considered in designing the Beneficiary
                     Controlled Trust are:

                     1.       Income.

                              a.        Most trust scriveners draft trusts that pay out all of the
                                        income. This course of action moves the income from a tax
                                        and creditor protected area to one that is exposed.
                                        Distributions from the trust restrict the growth of the
                                        protected trust and are counterproductive from both a tax and
                                        creditor protection perspective. Distributions will increase the
                                        beneficiary's estate for both transfer tax and creditor purposes.

                              b.        In addition, the retention of income in the trust will help the
                                        trust beneficiaries in accomplishing their own estate planning
                                        and creditor protection goals. If income is retained in the trust,
                                        the trust will grow and create a large accessible fund for the
                                        primary beneficiary of the trust that is creditor and divorce
                                        protected. Based upon the security of the expanded trust fund,
                                        the primary beneficiary can establish an aggressive gifting
                                        posture and defund his own estate more rapidly and to a
                                        greater extent.

                              c.        In fact, as a result of the assets being beyond the reach of
                                        creditors, the trust offers greater comfort and security than
                                        outright ownership affords. From a creditor protection
                                        perspective, a trust that provides for a mandatory payout of
                                        the income may give creditors the ability to access the right
                                        to receive the income.12 Therefore, although trust corpus is
                                        generally shielded from creditors, some of the asset
                                        protection benefits inherent in the trust vehicle will be lost. In
                                        such instance, depending on state law, a court could either
                                        direct a sale of such right to income or direct that the income
                                        be paid to the creditor until the debt is discharged. 13 By
                                        eliminating a beneficiary's enforceable rights, his creditor's
                                        rights are also eliminated.


12
     See IRS v. Orr, 84 AFTR2d 99-5390, 1999 WL 486613 (CA-5, 1999).
13
     Scott, 2 Trusts 147-147.2 (2d ed. 1956).



                                                     7
                               d.       Alternatively, for maximum creditor protection, a
                                        discretionary trust should be used. The use of a discretionary
                                        trust, where distributions are subject to the absolute discretion
                                        of an independent trustee, has been described as "... the
                                        ultimate in creditor and divorce claims protection - even in a
                                        state that restricts so called ‘spendthrift trusts' - since the
                                        beneficiary himself has no enforceable rights against the
                                        trust."14

                               e.       Use of an independent co-trustee is generally acceptable
                                        when one realizes that the grantor may have broad removal
                                        and replacement powers as long as the replacement trustee is
                                        not a "related or subordinate party" as defined in IRC
                                        §672(c),15 or, alternatively, such powers may be lodged in the
                                        hands of the beneficiary.16

                               f.       Many clients will not accept anyone other than the intended
                                        beneficiaries as a fiduciary, notwithstanding the benefits and
                                        flexibility that a non-beneficiary fiduciary can offer, even if
                                        the "stranger" is their best friend. In such instance, the
                                        primary beneficiary should be the sole trustee subject to an
                                        ascertainable standard since there is no proscription in the
                                        estate tax laws that prevents a Beneficiary Controlled Trust
                                        from being designed in this manner. This route should be
                                        selected rather than the alternatives of selecting an outright
                                        disposition or a trust that distributes all the income. However,
                                        as discussed later in this outline, a discretionary trust with an
                                        independent trustee making the discretionary distribution
                                        decisions is far superior to a trust with the beneficiary as
                                        trustee with distributions subject to an ascertainable standard
                                        (a “support trust”), so the support trust design should only be
                                        a secondary alternative.

                               g.       The support trust alternative could authorize the
                                        beneficiary/trustee to distribute income and principal to
                                        himself based on the ascertainable standard of health,
                                        education, support and maintenance without taking into
                                        account his other assets. Under IRC §2041(b)(1)(A), the use
                                        of the ascertainable standard would prevent estate tax
                                        inclusion as a general power of appointment. If this option is
                                        selected, the draftsman should also include a clause
                                        prohibiting the beneficiary/trustee from making distributions
14
     Keydel, fn. 9, supra, at §409.1.
15
     Rev. Rul. 95-58, 1995-36 I.R.B. 16.
16
     LTR 9746007.



                                                     8
            that would discharge his legal obligations. The trust also
            should include special powers of appointment for maximum
            flexibility. An inter vivos power would enable the
            beneficiary/trustee/powerholder to make distributions to
            secondary beneficiaries by exercise of the power, thus
            avoiding gifts of his interests in the trust.

2.   "Use" concept.

     a.     The basic philosophy of this outline is that a transfer of
            property in trust improves the value of the property to the
            trust beneficiaries. The corollary of that thesis is that
            distributions from the trust, in the absence of a compelling
            reason to make distributions, such as onerous income tax
            consequences, should be avoided. The consequence of
            making distributions would be to move wealth from a tax and
            creditor protected environment into one that is exposed.

     b.     It is anticipated that the investment pattern would be
            designed to enable the trust to realize and optimize its goal of
            avoiding transfer taxes and creditor exposure for multiple
            generations. The trustee should be encouraged to acquire
            assets that are expected to appreciate in value for the "use" of
            the beneficiaries, rather than funding the individual's personal
            acquisition of the assets. The right to "use" the trust assets
            may be for any purpose and need not be limited by an
            ascertainable standard without coming within the general
            power of appointment proscription contained in IRC §2041
            even though the decision to allow the use is in the hands of a
            person acting in the dual capacity of beneficiary and trustee.
            Rather than being a power of appointment, use of the trust
            assets would be akin to a life estate.

     c.     The trust instrument, particularly where a Beneficiary
            Controlled Trust is the vehicle of choice, should contain
            specific language that permits investment in assets such as
            homes, artwork, jewelry, and business and investment
            opportunities (whether speculative or not), that have
            significant appreciation potential. This course of action is
            generally viewed by purists as being the antithesis of
            traditional trust investments, but is consistent with the
            philosophy of the Beneficiary Controlled Trust in that the
            trust wrapper is employed solely as an enhancement to
            provide benefits to the trust beneficiary without meaningful
            restrictions. Since the beneficiary would have had
            unrestricted investment power had he received the assets



                         9
            outside of the trust, it would be consistent with coming as
            close to outright ownership as possible to permit broad
            investment powers inside of the trust.

     d.     The beneficiaries individually (or by utilization of assets in
            trusts not protected by the GST tax exemption) are expected
            to absorb most family expenditures such as food, schooling
            and vacations. Additionally, trust funds should generally not
            be expended for consumable assets since use of protected
            funds in this manner would be wasteful from both a transfer
            tax and a creditor protection standpoint.

     e.     If the trust were to acquire and own assets such as the
            beneficiaries' businesses and homes, it would indeed be rare
            that an otherwise functional beneficiary could not fund the
            foregoing family expenditures and consumables with
            property outside of the trust. In fact, it is reasonable to
            conclude that if a beneficiary could not so provide, the trust
            alternative would be even more desirable as a creditor
            protection shield. In order to further protect the beneficiary,
            rather than making distributions to the beneficiary, the trustee
            should make secured loans to the beneficiary so that the trust,
            rather than the beneficiary's creditors, would have priority in
            case of bankruptcy.

3.   Special power of appointment.

     a.     A broad special power of appointment is often given to the
            primary beneficiary of a trust, particularly if it is a
            Beneficiary Controlled Trust. A power of appointment is a
            desirable ingredient in most trusts because it adds flexibility,
            and permits the trust to be modified in order to deal with
            changes in the law or family circumstances. Its importance
            increases when the trust is dynastic because there is a greater
            possibility of change in family circumstances, laws,
            particularly tax laws, etc. For many clients, the power of
            appointment is, and should be, an essential ingredient of the
            plan. They may not be inclined to proceed with their planning
            in its absence because of a concern of interference by a
            complaining beneficiary.

     b.     The use of a special power of appointment enhances the
            objective of using a Beneficiary Controlled Trust in that it
            provides added control in the hands of the primary
            beneficiary. For example, by giving the trustee broad latitude
            in investing, including high risk/reward opportunities, it can



                        10
                                  be anticipated that some transactions will fail. If there were
                                  no trust, there would be no accountability to more remote
                                  descendants. By coupling the power of appointment with
                                  broad discretionary powers in the hands of the
                                  trustee/beneficiary, the result would be that the
                                  trustee/beneficiary would have the functional equivalent of
                                  no accountability with respect to the trust. As Professor Ed
                                  Halbach has often stated, "[a] power of appointment is also a
                                  power of disappointment."

                          c.      If the creator of the trust desires to provide the beneficiary
                                  with rights that are as close to outright ownership as possible,
                                  the powerholder can be given the power to appoint the
                                  property in favor of anyone, in trust or outright, other than
                                  himself, his estate, his creditors or the creditors of his estate17
                                  without causing estate inclusion.

                          d.      A concern often voiced by dynasty trust candidates and some
                                  of their advisors is that they don't want to be irrevocably
                                  locked into a trust arrangement forever. A power of
                                  appointment that can be exercised by making outright
                                  distributions, thus terminating the trust, can easily finesse that
                                  perceived problem.

V.         Support Trusts Versus Discretionary Trusts

           A.      A trust is generally drafted as either: (1) a mandatory distribution trust, (2)
                   a support trust (i.e., distributions pursuant to an ascertainable standard), or
                   (3) a discretionary trust. Additionally, since many attorneys tend to
                   combine the language of a support trust with the language of a
                   discretionary trust, a handful of states have created a fourth type of trust
                   called a hybrid trust.

                   1.     Mandatory Distribution Trust

                          a.      A mandatory distribution trust is a trust in which the trustee
                                  must make the distribution required by the terms of the trust
                                  agreement.

                          b.      The trustee may not withhold or accumulate a mandatory
                                  distribution.



17
     IRC §2041(b)(1).




                                               11
                         c.       Some examples of mandatory distribution trusts include
                                  marital deduction trusts, grantor retained annuity trusts,
                                  charitable remainder trusts and charitable lead trusts. The
                                  trusts in these examples require mandatory distributions in
                                  order to qualify for certain tax benefits.

                         d.       However, many trusts are drafted with mandatory
                                  distributions even though there is no tax reason to do so.
                                  This often makes some or all of the trust assets available to
                                  the beneficiary’s creditors and divorcing spouses for no
                                  reason but that the trust scrivener was using a trust “form”
                                  which was inadequate for planning purposes.

                2.       Support Trust

                         a.       A support trust is created by the grantor to support one or
                                  more beneficiaries.

                         b.       A support trust directs the trustee to apply the trust’s
                                  income and/or principal as is necessary for the support,
                                  maintenance, education, and welfare (or other standard) of
                                  a beneficiary.18

                         c.       The beneficiary of a support trust can compel the trustee to
                                  make a distribution of trust income or principal merely by
                                  demonstrating that the money is necessary for the
                                  beneficiary’s support, maintenance, education, or welfare,19
                                  or whatever other standard is contained in the trust.

                         d.       Following is the most common example of language
                                  creating a support trust:      “The Trustee shall make
                                  distributions of income or principal for the beneficiary’s
                                  health, education, maintenance and support.”

                         e.       Implicit in this support language are two components: (1) a
                                  command that the trustee “shall” make distributions, and (2)
                                  under what standard or circumstances (i.e., health,
                                  education, maintenance and support) distributions are to be
                                  made.



18
 First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 399 A.2d 891 (Md. 1979);
RESTATEMENT (SECOND) OF TRUSTS, Section 154.
19
  Chenot v. Bordeleau, 561 A.2d 891 (R.I. 1989); Eckes v. Richland County Social Services, 621 N.W. 2d
851 (ND 2001); RESTATEMENT (SECOND) TRUSTS, Section 128, comments d and e.



                                               12
                            f.       A support trust typically includes mandatory language that
                                     the trustee “shall” make distributions.20 However, there are
                                     a few cases in which a trust has been classified as a support
                                     trust even though the discretionary word “may” or the
                                     words “discretion,” and even “sole discretion,” were used
                                     instead of the mandatory word “shall.”

                            g.       The standard for distributions often contains words such as
                                     “health, education, maintenance and support.” However,
                                     the standard may also include terms such as “comfort and
                                     welfare.”21

                            h.       A support trust gives the trustee discretion only with
                                     respect to the time, manner, or size of distributions needed
                                     to achieve a certain purpose, such as support of the
                                     beneficiary.22

                            i.       For example, in McElrath v. Citizens and Southern Nat.
                                     Bank, the language “[t]he Trustee shall use a sufficient
                                     amount of the income to provide for the grandchild’s
                                     support, maintenance and education” [emphasis added] was
                                     held to be a support trust.23

                            j.       Similarly, in In re Carlson’s Trust, the language “[t]he
                                     trustee shall pay…[to the grantor’s] daughters such
                                     reasonable sums as shall be needed for their care, support,
                                     maintenance, and education” [emphasis added] was
                                     determined to be a support trust.24

                            k.       Finally, in McNiff v. Olmsted County Welfare Dept., the
                                     court decided that the language “[t]he trustee shall
                                     administer the trust estate for the benefit of my wife and
                                     my said daughter, or the survivor of either, and the trustee

20
     Lineback by Hutchens v. Stout, 339 S.E.2d 103 (NC App. 1986).
21
  For estate tax purposes, under IRC §2041, the “welfare” standard would result in the trust failing the
definition of an ascertainable standard and thereby being deemed a general power of appointment.
However, for the definition of a support trust, it is included within the ascertainable standard. Further, in
some cases, language such as “comfort and general welfare” will also take the trust language outside that of
a general support trust. Lang v. Com., Dept of Public Welfare, 528 A.2d 1335 (PA 1987); RESTATEMENT
(SECOND) OF TRUSTS, Section 154 and comments thereto. But see Bohac v. Graham, 424 N.W.2d 144 (ND
1988).
22
     Eckes v. Richland County Social Services, 621 N.W.2d 851 (ND 2001).
23
     McElrath v. Citizens and Southern Nat. Bank, 189 S.E.2d 49 (GA. 1972).
24
     In re Carlson’s Trust, 152 N.W.2d 434 (SD 1967).




                                                  13
                                      shall apply the income in such proportion together with
                                      such amounts of principal as the trustee, it its discretion,
                                      deems advisable for the maintenance, care, support and
                                      education of both my wife and my said daughter”
                                      [emphasis added] created a support trust.25

                    3.       Discretionary Trust

                             a.       A discretionary trust allows the trustee complete and
                                      uncontrolled discretion to make allocations of trust funds if
                                      and when it deems appropriate. 26 Because the trustee is
                                      given such broad powers, the beneficiary can only compel
                                      the trustee to distribute funds if it can be shown that the
                                      trustee is abusing its discretion by failing to act, acting
                                      dishonestly, or acting with an improper purpose in regard to
                                      the motive in denying the beneficiary the funds sought.27

                             b.       Following is an example of language creating a
                                      discretionary trust: “The Trustee may distribute as much or
                                      more of the net income and principal as the Trustee, in its
                                      sole and absolute discretion, deems appropriate to or
                                      among any beneficiary or beneficiaries. The Trustee, in its
                                      sole and absolute discretion, at any time or times, may
                                      exclude any of the beneficiaries or may make unequal
                                      distributions among them.”

                             c.       Implicit in this magical discretionary language are three
                                      components: (1) a discretionary statement that the trustee
                                      “may” make a distribution, (2) the trustee has the “sole and
                                      absolute” discretion to determine whether a distribution
                                      shall be made and, if so, how much shall be distributed, and
                                      (3) the ability to exclude distributions from other
                                      beneficiaries.

                             d.       A discretionary trust generally uses permissive language
                                      such as the word “may” instead of the word “shall.” 28
                                      However, as noted below, there are a few cases where the
                                      courts have held that the word “shall” when combined with


25
     McNiff v. Olmsted County Welfare Dept., 176 N.W. 2d 888 (Minn. 1970).
26
     First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 399 A.2d 891 (Md. 1979).
27
  Town of Randolph v. Roberts, 195 N.E.2d 72 (Mass. 1964); Lineback, 339 S.E. 2d at 106 (NC App.
1986); Ridgell v. Ridgell, 960 S. W. 2d 144 (Tex. App. 1997); RESTATEMENT (SECOND) OF TRUSTS, Section
187, comment e.
28
     State ex. rel. Secretary of SRS v. Jackson, 822 P2d 1033 (KS 1991).



                                                    14
                                     the words “sole and absolute” discretion still resulted in a
                                     discretionary trust.29

                             e.      The permissive word “may” is still generally further
                                     qualified by granting the trustee unfettered discretion using
                                     words such as “sole and absolute discretion,” “absolute and
                                     uncontrolled discretion” or “unfettered discretion.”

                             f.      In some cases, explicit language that permitted the trustees
                                     to exclude or discriminate between beneficiaries when
                                     making distributions was a major factor the court
                                     considered when determining whether a trust was a
                                     discretionary trust.30

                             g.      For example, in In re Matter of Leona Carlisle Trust, the
                                     court determined that the language “[t]he Trustee shall
                                     expend such sums from the principal of the trust for the
                                     benefit of [appellant]…as the trustee, in its full discretion,
                                     deems advisable,” [emphasis added] and it “is expressly
                                     understood the trustee is under no obligation to make any
                                     expenditures,” created a discretionary trust.31 Furthermore,
                                     the trust language provided that the trustee shall not make
                                     any distributions for appellant’s “basic necessities as
                                     provided or to be provided by any governmental unit,” and
                                     the trustee “shall make distributions only to supplement and
                                     not to supplant such public assistance available for
                                     maintenance, health care or other benefits.”32

                             h.      Similarly, in Zeoli v. Commissioner of Social Services, the
                                     court found that the language “[t]o pay or apply so much of
                                     the net income to or among either one or both of my
                                     daughters as shall be living from time to time during the
                                     term of such trust, and in such proportions and amounts as
                                     my trustee shall determine in his absolute and uncontrolled
                                     discretion...” [emphasis added] created a discretionary trust.
                                     The language in that case continued, “[m]y trustee shall not
                                     be required to distribute any net income of such trust
                                     currently and may, in his absolute and uncontrolled
                                     discretion, accumulate any part or all of the net income of

29
     Myers v. Kansas Dept. of Social and Rehabilitation Services, 866 P.2d 1052 (Kan. 1994).


30
     McNiff v. Olmstead County Welfare Dept., 176 N.W.2d 888 (Minn. 1970).
31
     In re Matter of Leona Carlisle Trust, 498 N.W.2d 260 (Minn. App. 1993).
32
     Id.



                                                   15
                                      such trust, which such accumulated net income shall be
                                      available for distribution to the beneficiaries as aforesaid.33
                                      [Emphasis added.]

                             i.       As yet another example, in Simpson v. State Dept. of Social
                                      and Rehabilitation Services, the trustees were required to
                                      distribute trust income and assets to any one or more of the
                                      group of beneficiaries as the trustees “in their absolute
                                      discretion” may determine from time to time. The
                                      instrument further provided that “the Trustees shall have
                                      the absolute discretion, at any time and from time to time,
                                      to make unequal payments or distributions to or among any
                                      one or more of said group and to exclude any one or more
                                      of them from any such payment or distribution.” 34
                                      [Emphasis added.]

                    4.       Hybrid Trust or “Discretionary Support Trust”

                             a.       There are three states and possibly a fourth (Iowa,
                                      Nebraska, North Dakota, and possibly Pennsylvania) that
                                      have taken the position that there is an additional type of
                                      trust – a “discretionary support trust”.

                             b.       This type of trust includes elements of both a support trust
                                      and a discretionary trust.35 A discretionary support trust is
                                      created when the grantor combines the explicit
                                      discretionary language “with language that, in itself, would
                                      be deemed to create a pure support trust.”36

                             c.       Under the case law of these three or four states, the hybrid
                                      trust covers the middle ground between a classic support
                                      trust and a classic discretionary trust.37 If a trust is neither a
                                      traditional support trust nor a traditional discretionary trust,
                                      these courts have followed one or the other of the following
                                      two approaches. They have either (a) allowed extrinsic
                                      evidence to determine the classification as either a
                                      discretionary or a support trust, or (b) required the trustee
                                      to carry out the purposes of the trust based on a “good

33
     Zeoli v. Commissioner of Social Services, 425 A.2d 553 (Conn. 1979).


34
     Simpson v. State Dept. of Social and Rehabilitation Services, 906 P.2d 174 (Kan. App. 1995).
35
     Eckes v. Richland County Social Services, 621 N.W.2d 851 (ND 2001).
36
     Elvelyn Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273, 279, n. 26 (1983).
37
     Bohac v. Graham, 424 N.W.2d at 144 (ND 1988).



                                                    16
                                 faith” standard and required the trustee to make minimal
                                 distributions.

                           d.    For an example of a court allowing extrinsic evidence to
                                 make the determination, in Bohac,38 the provisions of the
                                 trust allowed the trustee to distribute principal as the
                                 “Trustee may deem necessary” for the beneficiary’s
                                 “support, maintenance, medical expenses, care, comfort,
                                 and general welfare.” [Emphasis added.] The court noted
                                 that the trust provisions created a hybrid trust, but decided
                                 that extrinsic evidence must be admitted to determine the
                                 grantor’s intent with respect to whether the trust was a
                                 support trust or a discretionary trust. Even though the court
                                 noted that the words “comfort and general welfare” may
                                 result in the classification of the trust as a discretionary
                                 trust, the court held the trust was a support trust.

                           e.    As another example, in Kryzsko v. Ramsey County Soc.
                                 Services 39 the trustee was given sole discretion to invade
                                 trust principal for the “proper care, maintenance, support,
                                 and education” of the beneficiary. The court held that the
                                 trustee did not have unfettered discretion and must follow a
                                 standard of providing proper support. The court noted that
                                 unlike a discretionary trust, which fixes no standard on the
                                 trustee’s absolute discretion as to whether to pay income or
                                 principal to a beneficiary, a support trust gives the trustee
                                 discretion only as to the time, manner, and size of the
                                 payments needed to achieve a certain purpose such as
                                 support of a beneficiary.

                           f.    As yet another example, in Lang v. Com., Dept. of Public
                                 Welfare,40 the terms of the trust provided that “the trustee
                                 shall pay the income periodically to or for the support,
                                 maintenance, welfare, and benefit of my son or may, in the
                                 trustee’s discretion, add part or all of the income or
                                 principal to be invested as such.” [Emphasis added.] The
                                 trust continued, “[t]he trustee may distribute such part of
                                 the income not necessary for the support of my son, in
                                 equal shares to my children.” After looking at extrinsic
                                 evidence suggesting that it was the grantor’s intent to
                                 preserve trust assets, particularly where public benefits


38
     Id. at 146.
39
     607 N.W.2d 237 (ND 2000).
40
     528 A.2d 1335 (PA 1987).



                                             17
                                   were available to the beneficiary, the court held that the
                                   trust was discretionary.

                            g.     In contrast, in Smith v. Smith, 41 the Nebraska Supreme
                                   Court held that the trustee of a discretionary support trust
                                   can be compelled to carry out the purpose of the trust in
                                   good faith. The trust provided that “[T]he trustee shall pay
                                   over to, or for the benefit of one or more of the living
                                   members of a class composed of my son Richard and his
                                   issue, so much of the net income and principal of the trust
                                   as the Trustee shall deem to be in the best interests of each
                                   such person, from time to time. Such distributions need not
                                   be made equally unto all members of the class. In
                                   determining the amount and frequency of such distributions,
                                   the Trustee shall consider that the primary purpose of the
                                   trust is to provide for the health, support, care, and
                                   maintenance of my son Richard during his life.” [Emphasis
                                   added.] The court determined that the above language
                                   constituted a “hybrid trust” where the trusts were not only
                                   created to support the primary beneficiary, but also to grant
                                   the trustee greater liberty in decision-making than that of a
                                   trustee of an ordinary support trust.

                            h.     A few courts have held that the effect of a discretionary
                                   support trust is to establish the minimal distributions a
                                   trustee must make in order to comport with the grantor’s
                                   intent of providing basic support, while retaining broad
                                   discretionary powers in the trustee. 42 In these cases, the
                                   courts held that the minimum distribution may be reached
                                   by a creditor.43

                            i.     In Bureau of Support in Dep’t of Mental Hygiene &
                                   Correction v. Kreitzer,44 the Ohio Supreme Court, without
                                   using the term “hybrid trust,” found the trust language to

41
     517 N.W.2d 394 (Neb 1994).
42
  In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566 (Iowa App. 1999); In re
Sullivan’s Will, 12 N.W.2d 148 (Neb. 1943); Elvelyn Ginsberg Abravanel, Discretionary Support Trusts,
68 Iowa L. Rev. 273, 290 (1983); 3 Austin Wakeman Scott & William Franklin Fratcher, The Law of
Trusts §187 at Page 15 (4th ed. 1988).
43
  In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566 (Iowa App. 1999); Elvelyn
Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273, 290 (1983); Lawrence A Forlik,
Discretionary Trusts for a Disabled Beneficiary: A Solution or a Trap For the Unwary?, 46 U. Pitt L. Rev.
335, 342 (1985).
44
     243 N.E. 2d 83 (Ohio 1968).




                                                18
                                     create neither a purely discretionary trust nor a purely
                                     support trust. Therefore, the court held that the trust should
                                     be governed by a “reasonableness” standard that would not
                                     permit the beneficiary to become destitute. The result was
                                     that the governmental agency could recover against the
                                     trust assets under the exception for necessary expenses of a
                                     beneficiary. Further, the Ohio Supreme Court seemed to
                                     lean further toward becoming a “hybrid trust” state when it
                                     stated in a subsequent case that “[a] trust conferring upon
                                     the trustees power to distribute income and principal in
                                     their absolute discretion, but which provides standards by
                                     which that discretion is to be exercised with reference to
                                     the needs of the trust beneficiary for education, care,
                                     comfort, or support is neither a purely discretionary trust
                                     nor a strict support trust.”45

                            j.       This Ohio Supreme Court ruling is particularly troubling
                                     because it used a “reasonableness” standard. For over a
                                     hundred years, the strong majority view has been that the
                                     appropriate standard is bad faith or abuse (i.e., the trustee
                                     acts dishonestly with an improper motive or fails to act).46
45
     Martin v. Martin, 374 N.E. 2d 1384 (Ohio 1978).
46
   Different courts define the term “bad faith” slightly differently. As used in this outline, the term bad faith
means the trustee (1) acts dishonestly, (2) acts with an improper motive, or (3) fails to use his or her
judgment. In Re Jones, 812 P.2d 1152 (Colo. 1991) (citing SCOTT ON TRUSTS, Section 130 at Page 409 (4th
ed. 1989)). Also see the detailed analysis of Scott on Trusts, Section 187 at Page 15 where it is noted that if
the distribution standard includes enlarged or qualifying adjectives such as “sole and absolute discretion”
combined with “no fixed standard by which the trustee can be determined is abusing his discretion…the
trustee’s discretion would generally be deemed final.” Furthermore, Section 187.2 provides, “[e]ven though
there is no standard by which it can be judged whether the trustee is acting reasonably or not, or though by
the terms of the trust he is not required to act reasonably, the court will interfere where he acts dishonestly
or in bad faith, or where he acts from an improper motive.” This analysis by SCOTT ON TRUSTS remains
consistent through the 2003 supplemental volume.
George Taylor Bogert also seems to hold relatively the same definitional analysis as Scott in THE LAW OF
TRUSTS AND TRUSTEES, 2nd Edition 1980, Supplement through 2003. Section 560 of the Supplement at
Page 183 provides that if a settlor has given a discretionary power (without qualification), the court is
reluctant to interfere with the trustee’s use of the power…Hence, in the absence of one or more of the
special circumstances mentioned hereinafter, the court will not upset the decision of the trustee. These
special circumstances (at Page 196) are (1) a trustee fails to use his judgment; (2) an abuse of discretion; (3)
bad faith; (4) dishonesty; (5) an arbitrary action. Regarding the issue of “arbitrary action,” Bogert provides,
“[i]f the trustee has gone through the formality of using his discretion, but has not deliberately considered
the arguments pro and con, and thus has made a decision for no reason at all, his conduct may be
characterized as arbitrary and capricious, as amounting to a failure to use his discretion. In this respect,
Bogert suggests that the “arbitrary” action is a subset of a trustee failing to act.
Also, both Scott and Bogert note that a few states have statutes where unless the trust agreement contains
language such as the “sole and absolute discretion” of the trustee, the trustee may not act arbitrarily. Bogert
2003 Suppl. at 199, footnote 85; Scott, Section 187.2, Page 39, footnote 12; CALIFORNIA PROBATE CODE
§1608, ENACTED 1986 C.820; MONTANA CODE §72-23-306 (1983); NORTH DAKOTA CENT. CODE §59-02-
12; SOUTH DAKOTA CODIFIED LAWS §55-3-9 (1967).



                                                    19
                                    Further, the purpose of a discretionary trust is to prevent
                                    the courts from reviewing the “sole and absolute”
                                    discretion of the trustee. With a discretionary trust, the
                                    grantor has chosen to put his faith in the trustee rather than
                                    the courts. However, a support trust takes the opposite
                                    approach. With a support trust, the grantor wants the
                                    beneficiary to have a right to enforce the ascertainable trust
                                    terms if the trustee does not follow the standard drafted into
                                    the trust agreement.

                           k.       By using a standard less than that of bad faith and closer to
                                    reasonableness, the Ohio Supreme Court has now given the
                                    beneficiary of this hybrid type of trust the right to sue the
                                    trustee for unreasonably not making a distribution or not
                                    distributing enough. Furthermore, this legal right will most
                                    likely be a property right (i.e., a right enforceable under
                                    state law) that can cause the creditor to stand in the shoes of
                                    the beneficiary.

VI.      What is a Property Interest?

         A.       If the beneficiary of a trust comes under the attack of a creditor, most
                  courts first determine whether the beneficiary has a property interest in the
                  trust under state law.47 Rather than using a property analysis, some courts
                  will find that the beneficiary’s interest has no ascertainable value. 48 In
                  essence, the analysis is the same. In the latter approach, there is no interest
                  or enforceable right that a creditor may attach because the beneficial
                  interest has no value.

         B.       Assuming the property analysis approach is used, the initial step in
                  determining whether a creditor may recover against an interest in a trust is
                  to determine whether the interest is a property interest under state law.

         C.       If the beneficiary’s interest in the trust is not a property interest, then the
                  analysis proceeds directly to whether the beneficiary held too much
                  control over the trust, followed by any state nuances under domestic
                  relations law.49


47
  Carlisle v. Carlisle, 194 WL 592243 (Superior Ct. Connecticut 1994); Lauricella v. Lauricella, 565 N.E.
2d 436 (Mass. 1991).
48
  Miller v. Department of Mental Health, 442 N.W.2d 617 (Mich. 1989); Henderson v. Collins, 267 S.E.2d
202 (Ga. 1980); In re Dias, 37 BR 584 (D. Idaho 1984).
49
   A creditor cannot recover against a beneficial interest that is not a property interest. Magavern v. U.S.,
550 F.2d 797 (2nd Cir. 1977) (reversing the state court, but still discussing the property interest issue).
However, due to some state domestic relations statutes, a value may be assigned to a discretionary interest
in a trust to determine what the other spouse should receive upon the divorce.


                                                  20
           D.      On the other hand, if the beneficiary holds a property interest, does the
                   creditor stand in the shoes of the beneficiary, and may the creditor enforce
                   the beneficiary’s property right? The answers to these questions depend
                   upon whether the trust has a spendthrift provision and how much creditor
                   protection the spendthrift provision provides.

           E.      State law determines what constitutes a property interest. While state law
                   may vary, “property” is generally defined as everything that has an
                   exchangeable value or which goes to make up wealth or estate.50

           F.      An “equitable interest” in trust property is regarded as a property interest
                   of the same kind as trust res and is more than a mere chose in action.51
                   Simply, there are two methods for determining whether something
                   constitutes property: (1) something that may be sold or exchanged, or (2)
                   an enforceable right.

           G.      With regard to the first type of property, such property is freely alienable,
                   and as such has a fair market value that may be determined by a market
                   price.

           H.      However, beneficial interests in trusts are generally restricted by
                   spendthrift provisions that prevent the transfer of any beneficiary’s interest.
                   In this respect, there is no fair market value because the property cannot be
                   sold. On the other hand, under the second test, in many situations, a
                   beneficiary has an enforceable right (i.e., a property interest).

           I.      For example, with support trusts, a current beneficiary has a right to sue
                   the trustee to force a distribution pursuant to a standard in the trust. Also,
                   if a beneficiary has a vested remainder interest, the beneficiary will most
                   likely receive property at some time in the future.

VII.       Spendthrift Provisions

           A.      A spendthrift provision is a provision in a trust agreement that provides
                   that the beneficiary cannot sell, pledge or encumber his beneficial interest,
                   and a creditor cannot attach a beneficiary’s interest.




50
  Graham v. Graham, 194 Colo. 429; 574 P.2d 75, 76 (Colo. 1978) (citing Black’s Law Dictionary, 1382
[4th ed.]).
51
     Senior v. Braden, 295 U.S. 422 (1935); Brown v. Fletcher, 235 U.S. 589 (1915); II W. Fratcher SCOTT
ON TRUSTS,     Section 130 at 406 (1987).




                                                 21
           B.       At common law, the purpose of a spendthrift trust was to protect a
                    beneficiary other than the grantor of the trust from his own spending
                    habits. The idea was to provide for someone who could not provide for
                    himself, and to keep such beneficiary from becoming dependent on public
                    assistance. Therefore, if a spendthrift clause was added to a trust, the
                    common law developed a legal principle that a creditor could not recover
                    from the beneficiary’s interest. 52 If the mere insertion of such a clause
                    could protect a beneficiary’s interest, why not include such a provision in
                    almost all trusts? Today, this is in fact the case.53

           C.       A beneficiary of a discretionary dynasty trust does not need to rely on a
                    spendthrift provision because neither the current distribution interest nor
                    any subsequent interest is a property interest under state law. Therefore, in
                    a non-UTC state, neither the beneficiary nor the creditors of the
                    beneficiary have any right to force a distribution from the trust. However,
                    as a matter of course, trust scriveners should nearly always include
                    spendthrift provisions.54 This is especially true should the UTC become
                    law in the applicable state.

           D.       However, the same analysis is not true for a trust that is classified as a
                    support trust. In this case, beneficiaries in many states may force a
                    distribution from the trust pursuant to the standard provided in the trust
                    instrument.

           E.       So the question becomes, can a creditor stand in the shoes of the
                    beneficiary and force such a distribution? The language of a spendthrift
                    provision on its face generally prohibits a creditor from doing so.

           F.       However, under what circumstances will courts make exceptions to
                    spendthrift protection? Except for certain types of creditors, a spendthrift
                    provision protects the trust’s assets from attachment.55

           G.       The Restatement Second, Section 157 carves out the following four key
                    exceptions 56 to spendthrift protection, where a creditor may attach the
                    assets of a support trust:
52
  The U.S. Supreme Court followed the common law view of spendthrift protection in Nichols v. Eaton, 91
U.S. 716 (1875).
53
   Even though almost all scriveners include a spendthrift provision in a trust, the trust instrument must still
be examined to make sure that this is indeed the case. If a spendthrift clause is not included, a creditor
stands in the shoes of the beneficiary and may enforce any right that he has - mandatory distribution,
ascertainable standard distribution or a remainder interest. In re Katz, 203 B.R. 227 (E.D. Pa. 1996);
Chandler v. Hale, 377 A.2d 318 (Conn. 1977).
54
  This is particularly true should the governing state law of the trust ever adopt the UTC or the
RESTATEMENT (THIRD) OF TRUSTS.
55
     In Re Graham 726 F.2d 1268 (C.A.8. Iowa 1984); In re Stephens, 47 B.R. 85 (Bkrtcy. D. Vt. 1985).
56
     RESTATEMENT (SECOND) OF TRUSTS, Section 157.


                                                    22
                    1.       Alimony or child support - Almost all, if not all, recent cases hold
                             that a spouse may reach a beneficiary’s interest for alimony or
                             child support.57 Therefore, if a trust is classified as a support trust,
                             an estranged spouse may almost always reach the assets of the trust
                             to satisfy a maintenance or child support claim. However, this
                             exception does not apply to a division of marital property pursuant
                             to a divorce.

                    2.       Necessary services or supplies rendered to the beneficiary - Most
                             cases in this area arise when a federal or state institution is
                             attempting to attach a beneficiary’s interest for medical services
                             rendered on behalf of the beneficiary.58 Furthermore, in almost all
                             of these cases, the drafting attorney conflicted the magical words
                             found in a discretionary trust with those of a support trust.

                    3.       Services rendered and materials furnished that preserve or benefit
                             the beneficial interest in the trust - These are generally claims by
                             attorneys for fees incurred to either sue the trust or protect a
                             beneficial interest. Fortunately, while the other three exceptions of
                             the Restatement Second are almost universally applied by the
                             states, this one is not. In other words, attorneys are frequently not
                             allowed to recover their fees from the trust.

                    4.       A claim by the U.S. or a state to satisfy a claim against a
                             beneficiary - Generally, these are tax liens. The Internal Revenue
                             Service may often reach a beneficiary’s interest in a support trust
                             for payment of a tax lien.59 In First Northern Trust Co. v. Internal
                             Revenue Service,60 the court noted that it is a well established legal
                             principle that the income from a spendthrift trust is not immune
                             from federal tax liens notwithstanding any state laws or recognized
                             exemptions to the contrary.61




57
     In re Threewitt, 20.B.R. 434 (Bkrtcy. D. Kan. 1982); Payer v. Orgill, 191 N.E.2d 373 (Ohio 1963).
58
  Department of Mental Health and Development Disabilities v. First Nat. Bank of Chicago, 432 N.E. 2d
1086 (Ill. App. 1 Dist., 1982); Department of Mental Health and Developmental Disabilities v. First Nat.
Bank of Chicago, 432 N.E. 2d 1086 (Ill. App. Dist. 1982); State v. Rubion, 308 S.W. 2d 4 (Tex. 1957);
Lang v. Com., Dept of Public Welfare, 528 A.2d 1335 (Pa. 1987); Sisters of Mercy Health Corp. v. First
Bank of Whiting, 624 N.E. 2d 520 (Ind. App. 3 Dist. 1993).
59
     Bank One Ohio Trust & Co., 80 F.3d 173 (6th Cir. 1996).
60
     622 F.2d 387 (8th Cir. 1980).
61
     But see U.S. v. Riggs Nat. Bank, 636 F. Supp 172 (D.D.C. 1986).




                                                   23
          H.      In summary, there are four exception creditors that can reach a support
                  trust’s assets to satisfy their claim. In a non-UTC state, these exception
                  creditors, including the federal government, would have no claim against
                  the trust assets if the trust had been drafted as a discretionary dynasty trust.

VIII. Distribution Standard and the Current Beneficial Interest

          A.      Almost all courts will classify a beneficiary’s interest as being (1) a
                  mandatory distribution, (2) a support distribution, or (3) a discretionary
                  distribution. However, as previously noted, there is a problem when a
                  scrivener conflicts the elements of a discretionary trust with those of a
                  support trust.

                  1.      Mandatory Distribution Trust

                          a.      When the terms of a trust require a mandatory distribution
                                  to be made, there is no question that the beneficiary has an
                                  enforceable right to this distribution. The beneficiary
                                  unquestionably may sue the trustee to force a distribution.
                                  Therefore, a fixed interest, which is an interest that creates
                                  an enforceable right in the beneficiary, is a property interest.
                                  For example, in In re Question Submitted by the United
                                  States Court of Appeals for the Tenth Circuit, the Tenth
                                  Circuit held that a beneficiary’s future right to receive
                                  $1,000 per month was a property interest.62

                          b.      With respect to a mandatory distribution right, the creditor
                                  is not attaching the trust’s assets. Rather, the creditor is
                                  attempting to attach to the mandatory distribution stream.63
                                  Since this interest is a property right, the only question is
                                  whether a spendthrift provision provides some type of
                                  protection for a mandatory distribution received from a
                                  trust.

                  2.      Support Trust

                          a.      The common law purpose of a support trust is to provide
                                  support for a beneficiary based on a “standard.”

                          b.      The most common standard used is that of health,
                                  education, maintenance and support.

62
  In re Question Submitted by the United States Court of Appeals for the Tenth Circuit, 191 Colo. 406,
411; 553 P.2d 382, 386 (1976).
63
     RESTATEMENT (THIRD) OF TRUSTS, Section 56, comment a; UNIFORM TRUST CODE, Section 501.




                                               24
                            c.        Such a support standard must be definite enough for a court
                                      to be able to determine whether a trustee is following the
                                      support standard. In this respect, magical words such as
                                      health, education, maintenance and support have been
                                      determined by courts to be definite.

                            d.        Words such as comfort and welfare may or may not be
                                      sufficiently definite depending on state law.

                            e.        On the other hand, words such as joy and happiness are not
                                      capable of interpretation on a reasonable basis, and may
                                      easily result in a trust not being classified as a support trust.

                            f.        If a trust is classified as a support trust, a beneficiary of a
                                      support trust can compel the trustee to make a distribution
                                      of income or principal merely by demonstrating that the
                                      money is necessary for the beneficiary’s support,
                                      maintenance, education, or welfare, 64 or whatever other
                                      standard is used in the trust agreement.

                            g.        In other words, a beneficiary has a right to sue the trustee
                                      for failing to make a distribution from a support trust. If a
                                      beneficiary has the right to sue the trustee, the beneficiary
                                      most likely has a property interest under state law.65

                            h.        If this is the case, does the creditor stand in the
                                      beneficiary’s shoes and have the power to sue the trustee to
                                      force the payment of the beneficiary’s debt? Absent
                                      spendthrift provisions, this would definitely be the case.

                            i.        Therefore, whether a creditor (including an estranged
                                      spouse) may recover must be determined under the analysis
                                      in the spendthrift portion of this outline.

                   3.       Discretionary Interest

                            a.        Under the Restatement Second and almost all of the case
                                      law to date, a discretionary beneficiary has no contractual
                                      or enforceable right to any income or principal from the

64
  Chenot v. Bordeleau, 561 A.2d 891 (R.I. 1989); Eckes v. Richland County Social Services, 621 N.W. 2d
851 (ND 2001); RESTATEMENT (SECOND) OF TRUSTS, Section 128, comments d and e.
65
  Each state law must be analyzed in this respect. However, there is at least one case where state law held
that a beneficiary of a support trust did not have a property right (i.e., an enforceable right) to force the trust
to make a distribution pursuant to the support standard.



                                                     25
                                  trust, and therefore the beneficiary cannot force any action
                                  by the trustee.66

                         b.       This is because a court may only review a discretionary
                                  trust for abuse and bad faith. There is no reasonableness
                                  standard of review by a court with respect to a discretionary
                                  trust. Further, the discretionary interest is not assignable.67

                         c.       In this respect, a discretionary beneficiary’s interest is
                                  generally not classified as a property interest. Rather, it is
                                  nothing more than a mere expectancy.68 If a beneficiary has
                                  no right to force a distribution from a trust, then the same
                                  rule applies to the beneficiary’s creditor. The creditor may
                                  not force a distribution.

                         d.       Similarly, whether the assets of a discretionary trust are
                                  protected does not depend on spendthrift provisions with
                                  respect to the current beneficial interest. As discussed in the
                                  spendthrift section of this outline, the creditor protection
                                  features of a discretionary trust are much stronger than
                                  those of a support trust or a mandatory distribution trust
                                  that must rely on spendthrift protection.

                 4.      Hybrid Trust or “Discretionary Support Trust”

                         a.       If a judge does not classify a trust with conflicting language
                                  as either a discretionary trust or a support trust, the case law
                                  in Iowa, Nebraska, North Dakota, and possibly
                                  Pennsylvania, has indicated that it is a hybrid trust. In
                                  general, a beneficiary of a hybrid trust only has the right to
                                  sue the trustee for a minimal distribution.69

                         b.       This being the case, the hybrid trust does not provide the
                                  same degree of protection as a discretionary trust. Rather, it
                                  is more similar to a support trust than a discretionary trust,

66
  In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991); G. Bogert, Trusts and Trustees, Section 228 (2nd
ed. 1979).
67
     Id.
68
  U.S. v. O’Shaughnessy, 517 N.W. 2d 574 (Minn. 1994); In re Marriage of Jones, 812 P.2d 1152 (Colo.
1991).
69
  In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566 (Iowa App. 1999); In re
Sullivan’s Will, 12 N.W.2d 148 (Neb. 1943); Elvelyn Ginsberg Abravanel, Discretionary Support Trusts,
68 Iowa L. Rev. 273, 290 (1983); 3 Austin Wakeman Scott & William Franklin Fratcher, The Law of
Trusts Section 187, at 15 (4th ed. 1988).




                                               26
                                   and an analysis of the spendthrift provisions must be done
                                   to determine whether the trust assets are protected.

IX.       Remainder Interest

          A.      A remainder interest has a slightly different analysis than that of a current
                  beneficial interest. While divorce cases tend to use the word “property” in
                  determining a remainder interest,70 the rule under the Restatement Second,
                  Section 160 requires a determination as to whether there are “inseparable
                  interests.”

          B.      In essence, the “inseparable interest” rule functions quite similar to the
                  property analysis used for a current beneficial interest. Further, the
                  Restatement adds to the analysis an “indefinite” or “contingent” interest
                  analysis as another hurdle a creditor will most likely need to cross. If the
                  remainder interest is not a property interest, or if a creditor cannot
                  overcome the indefinite or contingent interest rule, then the analysis
                  proceeds directly to whether the debtor/beneficiary retained too much
                  control.

          C.      According to the Restatement Second, if a beneficial trust interest is “so
                  indefinite or contingent that it cannot be sold with fairness to both the
                  creditors and the beneficiary, it cannot be reached by creditors.” 71 There
                  are two parts to this rule. First, is the remainder interest indefinite? Second,
                  can the remainder interest be sold with fairness to both the creditors and
                  the beneficiary?

                  1.      Indefinite and Contingent Interests

                          a.       A vested interest is not a contingent interest. A vested
                                   interest is one where the debtor/beneficiary or the
                                   debtor/beneficiary’s estate will take at some point of time
                                   in the future.

                          b.       The clear majority rule appears to be that a vested
                                   remainder interest may be sold at a judicial foreclosure sale
                                   unless it cannot be sold with fairness to both the creditors
                                   and the beneficiary, or unless the trust contains spendthrift
                                   provisions.72


70
  Balanson v. Balanson, 25 P.3d 28 (Colo. 2001); Davidson v. Davidson, 474 N.E. 2d 1137 (Mass. App.
Ct. 1985); Trowbridge v. Trowbridge, 114 N.W.2d 129, 134 (Wis. 1962).
71
     RESTATEMENT (SECOND) OF TRUSTS, Section 161.
72
  Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980) [vested remainder interest in a discretionary trust may
be sold at judicial foreclosure sale]; Burrell v. Burrell, 537 P.2d 1 (Alaska 1975); Moyars v. Moyars, 717
N.E. 2d 976 (Ct. App. Ind. 1999); Benston v. Benston, 656 P.2d 395 (Or. App. 1983); Lauricella v.


                                                 27
                           c.       These cases follow the general property rule that a
                                    remainder interest in property may be sold even though it is
                                    a future interest.73

                           d.       Many estate planners consider a remainder interest to be a
                                    contingent interest where either (1) one party must outlive
                                    the other party in order to take, or (2) the trust property is
                                    subject to complete divestment due to a special power of
                                    appointment. However, Restatement Second, Section 162,
                                    Illustration 1 indicates that the mere fact that a child must
                                    survive a parent in order to take the trust property is not too
                                    contingent, and, therefore, unless the remainder interest
                                    cannot be sold with fairness to both the creditors and the
                                    beneficiary, absent spendthrift protection, a creditor would
                                    be able to judicially foreclose on the remainder interest.74

                  2.       Sold With Fairness

                           a.       Would a willing buyer or willing seller pay much for an
                                    interest in trust that is contingent on a child outliving his
                                    parent? Most likely, the interest would be highly
                                    discounted.

                           b.       However, what if the interest was subject to a special
                                    power of appointment that could divest the child of the
                                    entire remainder interest? In this case, a purchaser at a
                                    judicial foreclosure sale would likely pay little for the
                                    interest when compared to the amount that would
                                    ultimately be received by the remainder beneficiary.




Lauricella, 565 N.E. 2d 436 (Mass. 1991) [under all of these cases, a vested remainder interest was
considered marital property for division purposes].
73
  Mid American Corp. v. Geisman, 380 P.2d 85 (Okla. 1963) [A debtor received a remainder interest under
a will. Once the death of the will maker had occurred, the remainder interest was vested. It was not in trust,
and a simple future property analysis provided for the property to be received under the will to be sold at a
judicial foreclosure sale.].
74
  In Re Neuton, 922 F.2d 1379 (9th Cir. 1990) [where the fact that the debtor would need to outlive his
mother in order to take the trust property was not so contingent as to prevent the judicial foreclosure sale of
a 25% of the debtor’s interest by a bankruptcy trustee]; Balanson v. Balanson, 25 P.3d 28 (Colo. 2001);
Davidson v. Davidson, 474 N.E. 2d 1137 (Mass. 1985); Benston v. Benston, 656 P.2d 359 (Or. App. 1983);
Trowbridge v. Trowbridge, 114 N.W. 2d 129 (Wis. 1962) [Under all of these cases, vested remainder
interests were not too indefinite to be classified as marital property for purposes of division.]; but see Loeb
v. Loeb, 301 N.E. 2d 349 (Ind. 1973) where the contingency of outliving the debtor’s mother was
considered too indefinite for purposes of equitable division in a divorce.



                                                   28
                           c.      There are very few reported cases where anyone other than
                                   a former spouse attaches the remainder interest. 75 Most
                                   creditors do not attempt to judicially foreclose on a
                                   remainder interest because in almost all cases the “sold
                                   with fairness rule” would apply. Even if the “sold with
                                   fairness rule” does not apply, several states have passed
                                   state statutes preventing the forced sale of remainder
                                   interests.76

X.         Conflicting Distribution Language

           A.      With respect to the current distribution interest, a discretionary trust
                   generally provides the strongest asset protection features because the
                   discretionary distribution interest is generally not a property interest under
                   state law. If a beneficiary does not hold a property interest, then a creditor
                   cannot attach it. Unfortunately, there is a tension between the asset
                   protection features of a discretionary trust and who can be a trustee
                   without possible estate tax inclusion issues.

           B.      Clients generally wish to have a family member, such as a spouse or child,
                   serve as the trustee. If distributions are limited to an ascertainable standard,
                   there are times when a spouse/beneficiary or a child/beneficiary may serve
                   as the sole trustee of a trust without an estate tax inclusion issue.77 On the
                   other hand, if the spouse or child is the sole trustee and a beneficiary of a
                   discretionary trust, the spouse or child will be considered to hold a general
                   power of appointment, thereby resulting in estate inclusion.78

           C.      Many estate planners attempt to get the best of both worlds. These
                   planners would like a trust that would be considered discretionary for state
                   law purposes so that a creditor of a beneficiary cannot attach the trust.
                   They also would like the trust to be deemed to have an ascertainable
                   standard for estate and gift tax purposes, giving the client greater selection
                   over who can be a trustee.


75
  Mid America Corp. v. Geisman, 380 P.2d 85 (Okla. 1963) [In a one paragraph holding, the Supreme
Court of Oklahoma reversed the appellate court decision to sell the remainder interest, noting the proper
remedy was a lien. The Supreme Court thought the remedy was too drastic a measure as related to the
beneficiary.].
76
     RESTATEMENT (THIRD) OF TRUSTS, Section 56, comment e.
77
  For example, if the beneficiary children are adults (i.e., the spouse has no support obligation) and the
distribution is pursuant to an ascertainable standard, the spouse may be the sole trustee without IRC §2041
estate inclusion.
78
  As a trustee, the spouse or child would have unlimited power to distribute any amount of the trust assets
to himself as a beneficiary of the trust.




                                                 29
        D.       In an attempt to accomplish both of these objectives, these planners draft
                 distribution language that uses magical words from both a support trust
                 and a discretionary trust. For example, the trust document may read:

                 “The Trustee may, in his sole and absolute discretion, make distributions
                 of income or principal based on health, education, maintenance and
                 support to any beneficiary.”

        E.       The magical discretionary words “may,” and “discretion” have been
                 conflicted with the trust support words “health, education, maintenance
                 and support.” Furthermore, the discretionary language allowing the
                 trustee to make distributions to one beneficiary and not the others has been
                 implied.

        F.       Naturally, the Service would like to argue that this language creates a
                 discretionary trust because the distribution trustee would have a general
                 power of appointment at death and would therefore have estate inclusion
                 under IRC §2041.79

        G.       Conversely, the taxpayer would like to argue that distributions are
                 pursuant to an ascertainable standard in order to avoid the estate inclusion
                 issue.

        H.       Furthermore, if it is a governmental agency that is the creditor of the
                 beneficiary and is seeking to recover payment from the trust, the
                 governmental agency will argue that distributions are pursuant to an
                 ascertainable standard and that the trust should be classified as a support
                 trust. The client will argue that the distributions are discretionary.

        I.       The court will almost always find that the trust is either (1) a “support”
                 trust (i.e., ascertainable standards) or (2) a discretionary trust.

        J.       Almost all non-UTC courts will decide one way or the other, but not both
                 ways.80

        K.       By attempting to accomplish the best of both worlds, the estate planner
                 typically does more damage than good. The planner either creates a
                 possible estate inclusion issue or allows a creditor to recover from the trust
                 assets. For this reason, the trust scrivener should avoid conflicting trust


79
   Estate of Carpenter, 45 AFTR 2d 80-1784, 80-1 USTC 13,339 (D. Wis. 1980); Independence Bk.
Waukesha (N.A.) v. U.S., 761 F.2d 442 (7th Cir. 1985) – tangential reference to “without court approval”;
analogy – PLR 9118017; but see Best v. U.S., 902 F. Supp. 1023 (D. Neb. 1995) where “sole and absolute”
language was not argued by the Service.
80
  The only exceptions are Iowa, Nebraska, North Dakota, and possibly Pennsylvania, each of which has
taken the position that there is a third type of trust – a “discretionary support trust.”



                                                30
                  language and should draft either a purely discretionary trust or a support
                  trust (i.e., distributions based on ascertainable standards).81

XI.      Hybrid Trust

         A.       In the few states that recognize a hybrid trust, 82 the hybrid trust is by
                  definition a conflicting language trust.

         B.       The problem with this is that most of the states require the trustee to make
                  a minimal distribution for the beneficiaries’ needs. This being the case, a
                  creditor for necessary expenses of the beneficiary most likely becomes an
                  exception creditor.83

         C.       Furthermore, what about child support and alimony? One could easily
                  argue that child support is a necessary expense.

         D.       Similarly, are taxes a necessary expense of a beneficiary?

         E.       At present, the answers to these questions are unknown. However, in the
                  few states that recognize a hybrid trust, it seems that such a trust provides
                  little more protection than that of a support trust.

         F.       Support Trust Conflicting Language - The following court decisions noted
                  that the language of the trust used both discretionary and support language,
                  but held that the trust was a discretionary trust:

                  *Myers v. Kansas Depts of SRS, 866 P.2d 1052 (Kan. 1994).
                  *Roorda v. Roorda, 300 N.W. 294 (1941).
                  *Lineback by Hutchens v. Stout, 339 S.E.2d 103 (NC App. 1986).
                  *Chenot v. Bordeleau, 561 A.2d 891 (RI 1989).



81
   One would hope that various judges throughout the states would agree whether similar conflicting
language constituted a discretionary trust or one based on an ascertainable standard. Unfortunately, this is
generally not the case. The judges appear to be equally confused on the issue. Further, even if in one state
the judges would be consistent on what similar conflicting language meant, what if the trust jurisdiction
changes to another state or nation? Will the new jurisdiction agree with the old jurisdiction’s interpretation
of the conflicting language?
82
   Iowa, Nebraska, North Dakota, and possibly Pennsylvania. Also, as previously discussed, Ohio imposes
a reasonableness standard as to whether the trustee must make distributions to a beneficiary, but Ohio does
not use the term “hybrid trust.”
83
  In Strojek ex re. Mills v. Hardin County Bd. of Supervisors, 602 N.W. 2d 566 (Iowa App. 1999); Elvelyn
Ginsberg Abravanel, Discretionary Support Trusts, 68 Iowa L. Rev. 273, 290 (1983); Lawrence A Forlik,
discretionary Trusts for a Disabled Beneficiary: A Solution or a Trap For the Unwary?, 46 U. Pitt L. Rev.
335, 342 (1985).




                                                   31
        G.       Discretionary Trust Conflicting Language - The following court decisions
                 noted that the language of the trust used both discretionary and support
                 language, but held that the trust was a support trust:

                 *Bohac v. Graham, 424 NW 2d. 144 (ND 1988).
                 *Button by Curio v. Elmhurst Nat. Bank, 522 N.E.2d 1368 (Ill. App. 1988).
                 *Kryzsko v. Ramsey County Social Services, 607 N.W.2d 237 (ND 2000).
                 *Bureau of Support in Dept. of Mental Hygiene and Correction v. Kreitzer,
                 243 N.E. 2d 83 (Ohio 1968).
                 *McNiff v. Olmsted County Welfare Dept., 176 N.W.2d 888 (Minn. 1970).

XII.    The Uniform Trust Code84

        A.       Presently, nine states - Kansas, Maine, Missouri, Nebraska, New
                 Hampshire, New Mexico, Tennessee, Utah and Wyoming - have enacted
                 the UTC. The UTC is under review in numerous other states. The District
                 of Columbia has also enacted the UTC.

        B.       On the other hand, Arizona enacted the UTC in May of 2003. Within a
                 year, due to the public outcry and the estate planning attorneys’ strong
                 opposition to the UTC, it was repealed by unanimous vote of both the
                 House and the Senate.

        C.       The UTC was also defeated in the Colorado legislature and killed in a
                 Senate Committee in Oklahoma despite the support of both Bars. After
                 intensive study in Texas, Minnesota, and Indiana, some minor portions of
                 the UTC were adopted, but most of the provisions of the UTC were
                 rejected. Furthermore, the Texas Bar is currently drafting anti-Restatement
                 (Third) of Trusts legislation.

        D.       One of the principal reasons the UTC was repealed in Arizona and is
                 receiving strong resistance in several other states is the radical departure
                 that the UTC and Restatement Third take from common law regarding the
                 traditional asset protection afforded by discretionary dynasty trusts as well
                 as spendthrift trusts in general.

        E.       For well over four hundred years, trust law has been based on the property
                 concept that a donor may make a gift subject to whatever restrictions he
                 wishes. While there are some limited public policy exceptions to this rule,
                 such as restrictions on marriage, the common law has generally allowed
84
  Most of the material in this outline related to the UTC and support trusts versus discretionary trusts is
based on the analysis made in the three-part article titled The Effect of the UTC on the Asset Protection of
Spendthrift Trusts, Estate Planning (Aug., Sept. and Oct. 2004), co-authored by Mark Merric and Steven J.
Oshins. That article is based on extensive research done by Mark Merric. The article can be read at
www.oshins.com/estate_planning_8910.04.htm.




                                                  32
                  trusts to follow the grantor’s intent. The UTC and the Restatement Third
                  are both built on the opposite assumption.

           F.     As related to discretionary trusts, the UTC and Restatement Third are built
                  on the assumption that the beneficiaries should have a much greater right
                  to challenge the grantor’s wishes through litigation than prior law has
                  allowed.

           G.     In addition to changing the fundamental property assumption behind trust
                  law, both promulgations overturn one hundred twenty-five years of well-
                  established trust law by equating the asset protection features of a
                  discretionary trust with those of a support trust.

           H.     For this reason, in the area of traditional asset protection through non-self-
                  settled trusts, should a state legislature adopt the UTC or should a court
                  decide to follow the Restatement Third, a completely separate analysis of
                  asset protection is provided below.

XIII. Creditor Remedies Prior to the UTC

           A.     To the extent a trust beneficiary has a “property right,” even if the trust
                  includes a spendthrift clause, certain “exception creditors” may attach the
                  beneficiary’s interest. These “exception creditors” are generally the
                  following exception creditors specifically listed in the Restatement Second
                  of Trusts:

                  1.      Alimony and child support;

                  2.      Necessary expenses of a beneficiary (i.e., governmental claims for
                          medical expenses); and

                  3.      Governmental claims.85

           B.     There is a fourth exception creditor listed in the Restatement Second - a
                  creditor for expenses incurred to preserve a beneficial interest (i.e.,
                  attorneys’ fees). 86 However, most states have not adopted this fourth
                  exception creditor.

           C.     Exception creditors are allowed to attach the beneficial interest of a trust
                  pursuant to the distribution standard in the support trust (e.g., health,
                  education, maintenance and support). As discussed later in this outline, in
                  a non-UTC state or non-hybrid trust state, exception creditors may only
85
     RESTATEMENT (SECOND) OF TRUSTS, Section 157.
86
     Id.




                                               33
                  recover against a trust that is classified as a support trust, not against a
                  trust that is classified as a discretionary trust.

          D.      Since the beneficiary has a right to force a distribution pursuant to the
                  distribution standard, the exception creditor also succeeds to such a right.
                  In this respect, the exception creditor is able to reach part or all of the
                  assets necessary to satisfy the creditor’s claim directly from the trust
                  property.

XIV. Current Distribution Analysis – Non-UTC State

          A.      In general, a current distribution interest is an interest where the trustee
                  may make a current mandatory distribution, discretionary distribution, or
                  distribution based on a support standard. Generally, if the beneficiary does
                  not have a property interest (i.e., an enforceable right 87), a creditor has
                  absolutely no right of recovery. The theory is that if the beneficiary does
                  not have a right of recovery that he may enforce, the creditor can obtain no
                  more rights than the beneficiary has over the trust assets. This rule that
                  prevents recovery by a creditor is not dependent upon spendthrift
                  provisions. Rather, a creditor cannot compel the trustee to pay anything
                  because the beneficiary cannot compel a payment.88 Therefore, so long as
                  the governing law of the trust is not that of a state that has adopted the
                  UTC, absent control issues, or, in a few states, certain divorce issues, if a
                  beneficiary has no property interest, the analysis is generally concluded
                  and the creditor has no right of recovery.

          B.      However, not all state courts use a direct property analysis in determining
                  whether a creditor may reach a beneficial interest. Rather, some courts
                  will examine whether the beneficiary’s interest has an ascertainable
                  value.89 In essence, the analysis is the same. If the beneficiary’s interest
                  has no value, then there is no interest or enforceable right that a creditor
                  may attach.

          C.      On the other hand, if the beneficiary has a property interest, then the trust
                  must be reviewed to determine whether it contains a spendthrift clause.

87
  Rather than using a property analysis, some courts will find that the beneficiary’s interest has no
ascertainable value. Miller v. Department of Mental Health, 442 N.W.2d 617 (Mich. 1989); Henderson v.
Collins, 267 S.E.2d 202 (Ga. 1980); In re Dias, 37 BR 584 (D. Idaho 1984). In essence, the analysis is the
same - there is no interest or enforceable right that a creditor may attach because under this analysis the
beneficial interest has no value.
88
     RESTATEMENT (SECOND) OF TRUSTS, Section 155, comment b.
89
  Miller v. Department of Mental Health, 442 N.W.2d 617 (Mich. 1989); RESTATEMENT (SECOND) OF
TRUSTS, Section 157; Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980); In re Dias, 37 BR 584 (D. Idaho
1984).




                                                 34
                    Almost all trusts have such a clause. In general, a spendthrift clause
                    protects a beneficiary’s interest from attachment by a creditor.

           D.       However, under the Restatement Second, there are four types of creditors
                    that may attach a beneficiary’s interest regardless of the spendthrift
                    provisions. These creditors are referred to as exception creditors. Most
                    states have adopted three of the four exception creditors. The exception
                    creditor for expenses required to protect a beneficial interest (i.e., attorney
                    fees) has not been adopted by many states.

           E.       In addition, even if a the creditor is not an exception creditor, or even if
                    the trust is a discretionary trust, if the beneficiary holds too much control
                    over the trust, a creditor will still be able to attach to the beneficiary’s
                    interest and reach the trust’s assets. For example, if the beneficiary is the
                    sole trustee and sole beneficiary of a trust, then the trust assets may be
                    available to a creditor.90

           F.       With respect to alimony and child support claims, a former spouse and
                    minor children are exception creditors, and the former spouse may attach a
                    current beneficial interest of a support trust on behalf of minor children.
                    However, except for states that have adopted the UTC or Restatement
                    Third, a spouse generally does not have any claim against a discretionary
                    trust.

XV.        Remainder Interest Analysis - Non-UTC State

           A.       Absent spendthrift provisions, a beneficiary may transfer the remainder
                    interest, and a creditor may attach such interest.91 This would include an
                    estranged spouse as well as any other creditor.92

           B.       On the other hand, if spendthrift provisions are present, ordinary creditors
                    may not attach a remainder interest. This is true even in bankruptcy court.

           C.       The Federal Bankruptcy Court is required to look to state law to apply
                    property rules.93 For example, in In Re Neuton, a California state statute
                    provided that spendthrift provisions protected 75% of the remainder



90
     In re Bottom, 176 B.R. 950 (N.D. Fla. 1994).
91
  RESTATEMENT (SECOND) OF TRUSTS, Section 161; Henderson v. Collins, 267 S.E.2d 202 (Ga. 1980)
[noting that in this case a remainder interest was a future property interest].
92
  Martin v. Martin, 374 N.E.2d 1384 (Ohio 1978); Miller v. Department of Mental Health, 442 N.W. 2d
617 (Mich. 1989).
93
   However, in the highly controversial case U.S. v. Craft, 122 S. Ct. 1414 (2002) the Supreme Court
overturned 50 years of well-established property law when it stated that federal law determined property
rights.


                                                    35
                    interest. 94 The debtor’s ordinary creditor could not recover against the
                    amount protected by state law.

           D.       However, if the creditor is one of the four exception creditors and the
                    “sold with fairness” rule does not apply, the creditor may attach and/or
                    judicially foreclose and sell the remainder interest.95

           E.       The remainder interest analysis varies from the current distribution
                    analysis in a few key areas. First, similar to a current beneficial interest,
                    one must first determine whether the interest is a property interest.
                    However, the Restatement Second adopts a different approach than that
                    which is used in the current beneficial interest analysis. If an interest is
                    created for a group of persons, it is inseparable and a creditor cannot reach
                    it.96 For example, a dynasty trust is a trust in which an interest never vests
                    in anyone. Hence, an interest in a dynasty trust would not be a property
                    interest and would be “inseparable” as defined in the Restatement Second.

           F.       The Restatement Second also provides that if an interest of a trust “is so
                    indefinite or contingent that it cannot be sold with fairness to both the
                    creditors and the beneficiary, it cannot be reached by his creditors.” 97 If
                    this is the case, a creditor should not be able to recover from the trust.
                    However, if this is not the case, then the analysis shifts to whether the trust
                    has a spendthrift provision.

           G.       Similar to the analysis for a current distribution interest, spendthrift
                    protection must be analyzed within the confines of the four exception
                    creditors. Here again, a former spouse is an exception creditor who may
                    attach a remainder interest for child support or alimony.

           H.       The control issue analysis is substantially identical for a current beneficial
                    interest and a remainder interest. Even if a the creditor is not an exception
                    creditor or even if the trust is a discretionary trust, if the beneficiary holds
                    too much control over the trust, a creditor will still be able to attach to the
                    beneficiary’s interest and reach the trust’s assets.

           I.       In the domestic relations area, courts have granted a former spouse greater
                    rights than an ordinary creditor or an exception creditor. As noted above, a
                    spouse is an exception creditor, but only for the purposes of alimony or
                    child support. However, in many states, courts have allowed a spouse to
                    attach a remainder interest as part of a property settlement.

94
     In Re Neuton, 922 F.2d 1379 (9th Cir. 1990).
95
     Miller v. Department of Mental Health, 442 N.W. 2d 617 (Mich. 1989).
96
     RESTATEMENT (SECOND) OF TRUSTS, Section 161.
97
     RESTATEMENT (SECOND) OF TRUSTS, Section 162.



                                                    36
XVI. Remainder Interest in Trust Subject to Division in Divorce!

           A.       Until recently, in the event of divorce, almost all asset protection planners
                    thought that a remainder interest was free from division of marital
                    property. Most Colorado estate planners went into shock when the
                    Colorado Supreme Court handed down the In re Balanson decision.98 The
                    Colorado Supreme Court had held that the appreciation on a vested
                    remainder interest subject to complete divestment was marital property
                    eligible for equitable division. Colorado law holds that an inheritance is
                    exempt from the definition of marital property, and any appreciation on
                    inherited property is considered marital property. Prior to this, Colorado
                    had held that remainder interests in trusts were indivisible.99

           B.       The disturbing facts of Balanson began when the daughter married. A few
                    years later, Mom and Dad create the standard estate plan that creates a
                    marital trust and credit shelter trust upon the death of the first spouse.
                    Several years later, Mom died and the first $1 million of her assets funded
                    the credit shelter trust, and the remainder funded the marital trust. Dad was
                    the sole trustee of both trusts. All income of the marital trust was required
                    to be distributed to Dad. However, distributions of income of the credit
                    shelter trust and any corpus of either trust were based on an ascertainable
                    standard.

           C.       Dad was in good health and could easily live many more years.
                    Furthermore, Dad had a testamentary general power of appointment over
                    the marital share that would allow him to completely extinguish the
                    daughter’s interest should he desire by appointing all of the trust property
                    to his son.

           D.       Several years after Mom dies, Daughter filed for divorce.

           E.       Son-in-law claimed that Daughter’s vested remainder interest was marital
                    property eligible for division in the divorce.

           F.      Daughter’s remainder interest was contingent since she had to outlive Dad.
                   Also, Daughter’s interest was subject to complete divestment because Dad
                   could exercise his special power of appointment solely in favor of his son.

           G.      However, the Colorado Supreme Court ruled that even if a vested
                   remainder interest is subject to complete divestment, such an interest is still


98
     In re Balanson, 25 P.3d 28 (Colo. 2001).
99
     In re Marriage of Rosenblum, 602 P.2d 892 (1979).




                                                  37
                   a property interest that can be valued for the purpose of division in a
                   divorce.

           H.      The logic behind the decision was that the Court frequently values interests
                   that are hard to value such as retirement plans and businesses and that,
                   therefore, each side needs to merely bring in its experts since it is only a
                   valuation issue.

           I.      In Balanson, the Colorado Court cited two other cases – Davidson v.
                   Davidson (a Massachusetts case) and Trowbridge v. Trowbridge (a
                   Wisconsin case) 100 and held that a vested remainder interest subject to
                   complete divestment is eligible for marital property division.

           J.      At first blush, following in Massachusetts’ footsteps, the Colorado
                   Supreme Court appears to be crossing new legal ground. However, this
                   does not quite appear to be the case. Rather, it appears that this is a national
                   trend rather than being just a few states with isolated occurrences.

           K.      The following courts, listed alphabetically by state, have found a remainder
                   interest to be a marital asset eligible for division in a divorce:

                    1.       Alaska - Burrell v. Burrell101 - In 1975, the Alaska Supreme Court
                             found a vested remainder interest subject to division.

                    2.       Colorado - Balanson v. Balanson 102 - In 2001, the Colorado
                             Supreme Court held that any appreciation on a vested remainder
                             interest subject to complete divestment was eligible for division as
                             a marital asset.

                    3.       Connecticut - Carlisle v. Carlisle103 - In 1994, the Superior Court
                             of Connecticut found remainder interests in a credit shelter trust,
                             marital trust, and an irrevocable trust to be marital property.

                    4.       Indiana – Moyars v. Moyars104 - In 1999, the Court of Appeals of
                             Indiana distinguished Loeb v. Loeb. 105 Loeb had held that a
                             contingent remainder interest was too remote to be considered

100
  Davidson v. Davidson, 474 N.E. 2d 1137 (Mass. App. Ct. 1985); Trowbridge v. Trowbridge, 114
N.W.2d 129, 134 (Wis. 1962).
101
      537 P.2d 1 (Alaska 1975).
102
      25 P.3d 28 (Colo. 2001).
103
      194 WL 592243 (Superior Ct. of Conn. 1994).
104
      717 N.E.2d 976 (Ct. App. Ind. 1999).
105
      301 N.E. 2d 349 (Ind. 1973).




                                                    38
                            marital property because if the husband predeceased his mother the
                            entire trust property would pass to the husband’s siblings. In
                            Moyars, the husband owned a vested one-third remainder interest
                            in real estate. The remainder interest was not contingent on him
                            outliving his mother’s life estate. Rather, the remainder interest
                            would pass to his estate if he predeceased his mother. Therefore,
                            the Court of Appeals held that a vested remainder interest was
                            marital property.

                   5.       Massachusetts - Davidson v. Davidson 106 - In 1985, the
                            Massachusetts Supreme Court held that neither uncertainty of
                            value nor inalienability of a husband’s vested remainder interest in
                            a discretionary trust were sufficient to preclude division.

                   6.       Montana - Buxbaum v. Buxbaum 107 - In 1984, the Montana
                            Supreme Court held that a husband who had benefited from his
                            future interests, which were vested interests, by using them as
                            collateral, could not construe them as a mere expectancy and
                            preclude them from property division.

                   7.       New Hampshire - Flaherty v. Flaherty 108 - In 1994, the New
                            Hampshire Supreme Court held that an anti-alienation clause and
                            circumstances that the defendant’s contingent remainder interest
                            will not have value until his last parent dies did not preclude the
                            treatment of the interest as marital property.

                   8.       North Dakota - van Ossting v. van Ossting109 - In 1994, the North
                            Dakota Superior Court held that when the present value of the
                            husband’s vested credit trust was subject to contingencies and was
                            too speculative to calculate, the proper method of distribution was
                            to award the wife a percentage of future payments.

                   9.       Ohio - Martin v. Martin 110 - In 1978, the Ohio Supreme Court
                            found that a future interest, whether contingent or executory, is
                            alienable.




106
   474 N.E. 2d 1137 (Mass. 1985). See also Lauricella v. Lauricella, 565 N.E. 2d 436 (Mass. 1991) where
a vested remainder interest in an irrevocable trust subject to a term of years was subject to division as
marital property.
107
      692 P.2d 411 (Mont. 1984).
108
      638 A.2d 1254 (N.H. 1994).
109
      ND Sup Ct., No 940003 (1994).
110
      374 N.E. 2d 1384 (Ohio 1978).



                                                39
                    10.     Oregon - Benston v. Benston 111 - In 1983, the Oregon Appeal
                            Court found that a vested, as well as a contingent, remainder
                            interest is subject to division.

                    11.     Vermont - Chikott v. Chilkott112 - In 1992, the Vermont Supreme
                            Court held that techniques of actuarial valuation of pension
                            interests were applicable to determining the present value of the
                            husband’s vested, defeasible trust interest for the purposes of
                            property division at dissolution.

                    12.     Wisconsin - Trowbridge v. Trowbridge113 - In 1962, as dictum, the
                            Wisconsin Supreme Court held that remainder interests in trust
                            subject to conditions of survivorship, depletion of corpus, and
                            spendthrift clause, were part of a marital estate subject to division
                            at divorce.

           L.       To date, twelve states have held that a vested remainder interest is
                    property that is eligible for division in a divorce. Some of these states
                    require the property to be vested, but most of them hold that a vested
                    remainder interest, even if subject to complete divestment, is a marital
                    asset. In this respect, the Balanson case is not the shock that many people
                    first suspected. Rather, it appears to be a common finding in many courts
                    when all or part of a remainder interest is considered marital property.

           M.       One may ask why more states have not found a vested remainder interest
                    to be property eligible for division. First, as noted above, a handful of
                    states still follow the theory that a vested remainder interest is not divisible,
                    or that it is a mere expectancy, or that it is too remote to be classified as
                    marital property.

           N.       However, the primary reason more states have not found that a remainder
                    interest is marital property is because in most states an inheritance,
                    including any appreciation on the inheritance, is separate property.

           O.       On the other hand, many of the aforementioned states that have concluded
                    that a remainder interest is marital property have state statutes that in
                    general are based on one of the following types:

                    1.      An inheritance is classified as a marital asset.

                    2.      An inheritance is classified as separate property. However, the
                            appreciation on an inheritance is considered a marital asset.
111
      656 P.2d 395 (Or. App. 1983).
112
      607 A.2d 883 (Vt. 1992).
113
      114 N.W. 2d 129 (Wis. 1962).



                                                40
                  3.       There is a test using certain factors for dividing all property owned
                           by either spouse at the time of dissolution. More specifically, based
                           on the applicable state statute, the judge has complete authority to
                           give the separate property of one spouse to the other spouse for
                           various reasons such as the length of the marriage, the
                           contributions to the marriage of the receiving spouse, the needs of
                           the spouse who has custody of the children, and the lower income
                           level of the receiving spouse.

         P.       In the states that hold that a remainder interest is property eligible for
                  division on the dissolution of a marriage, an estranged spouse has greater
                  rights than an ordinary creditor.

         Q.       Under the Restatement Second, an ordinary creditor cannot generally
                  attach the remainder interest until it is distributed because the interest is
                  either contingent or subject to a spendthrift provision.114

         R.       However, a spouse is an exception creditor for purposes of child support
                  and alimony, not with respect to the division of marital property.115

         S.       Furthermore, it appears from the older cases that the general rule was that
                  a spouse attempting to receive a property settlement has a standing no
                  better than that of any other creditor.116

         T.       Unfortunately, in all but one of the cases cited above, the courts did not
                  discuss the spendthrift issue.

         U.       In one case, Davidson v. Davidson, however, the Supreme Court of
                  Massachusetts did mention the spendthrift provisions. Later in the opinion,
                  without discussing the spendthrift provisions, the Court stated that it
                  rejected the contention that “the content of estates of divorcing parties
                  ought to be determined by the wooded application of the technical rules of
                  the law of property.” The opinion continued, “[w]e [the Supreme Court of
                  Massachusetts] think an expansive approach, within the marital

114
   RESTATEMENT (SECOND) OF TRUSTS, Section 162; Henderson v. Collins, 267 S.E. 2d 202 (Ga. 1980)
[noting that a remainder interest was future property].
115
   Some state statutes on domestic relations issues do not separate alimony and property settlements.
Rather, these states view the two as integrated in a divorce settlement. In these states, the spouse would be
an exception creditor.
116
   Loeb v. Loeb, 301 N.E. 2d 349 (Ind. 1973) [where a wife’s interest under a trust in which she is not a
beneficiary can never be greater than her beneficiary-husband’s interest]; Buckman v. Buckman, 200 N.E.
918 (Mass. 1936) [where a former spouse attempting to enforce alimony stood “no better than any other
creditor”]. Note that Buckman appears to have been reversed by the holding in Davidson v. Davidson, 474
N.E. 2d 1137 (Mass. 1985). However, while the Davidson court cited Buckman, it did not specifically state
that such holding was reversed.



                                                  41
                   partnership concept, is appropriate.”117 Therefore, as applied to remainder
                   interests, a former spouse in many states has greater rights to a remainder
                   interest than an ordinary creditor.

           V.      In light of these issues, it is shocking that more estate planners do not
                   create discretionary multigenerational dynasty trusts 118 as a matter of
                   course. Presumably, this is either because most attorneys’ formbooks do
                   not have this option, or simply because many attorneys do not strive to do
                   the best job possible for their clients.

           W.      Regardless, it should be inexcusable for a planner not to recommend a
                   multigenerational trust, and if the client chooses not to use one, then at a
                   minimum the attorney should make note in the client’s file that this option
                   was discussed, and probably should obtain a signed waiver from the client.

XVII. Understanding the UTC

           A.      The UTC and the Restatement Third are interrelated. In fact, the
                   comments from the UTC have over one hundred specific references to the
                   Restatement Third’s text, comments, and reporter notes. Additionally, the
                   comment under Section 106 of the UTC implies that the Restatement
                   Third should even be given a preference over common law when
                   interpreting the UTC.

           B.      Furthermore, the committees of both the Restatement Third and the UTC
                   worked hand in hand to draft several areas of new trust law. While there
                   are minor differences in the asset protection issues between the two
                   pronouncements, for the most part the two pronouncements read as though
                   they were written by the same authors. With respect to traditional asset
                   protection, the Restatement Third is for the most part not a restatement of
                   trust law at all. Rather, it is a new and untested approach to trust law. The
                   same is also true for Article 5 of the UTC, which appears to be an
                   abbreviated version of the Restatement Third, Sections 50 and 56-60.119

           C.      Finally, if one is to read Article 5 of the UTC without reading
                   corresponding Restatement Third Sections, such person might easily
                   conclude that the UTC is incredibly confusing and poorly drafted.
                   However, if one reads the Restatement Third prior to reading Article 5 of
                   the UTC, even though it is still poorly drafted, Article 5 of the UTC begins
                   to make some sense. Therefore, in order to understand Article 5 of the

117
      Davidson v. Davidson, 474 N.E.2d 1137 (Mass. 1985).
118
      RESTATEMENT (SECOND) OF TRUSTS, Section 161; Henderson v. Collins, 267 S.E. 2d.
119
      RESTATEMENT (THIRD) OF TRUSTS.




                                                 42
                   UTC, the reader may wish to first read the aforementioned Sections of the
                   Restatement Third.

XVIII. The Cornerstone of the Common Law Discretionary Trust

           A.      Under the common law, a court would only interfere with a trustee’s “sole
                   and absolute” discretion of a discretionary trust if the trustee (1) acts
                   dishonestly, (2) acts with an improper motive, or (3) fails to use his or her
                   judgment.

           B.      A beneficiary had little if any standing to sue for a distribution or question
                   the amount of a distribution unless the beneficiary could prove one of the
                   above factors was present.

           C.      In almost all states, there was no reasonableness or good faith standard for
                   a discretionary trust that used qualifying adjectives such as the trustee’s
                   “absolute,” “unlimited” or “uncontrolled” discretion. In fact, Section 187
                   of the Restatement Second held that such qualifying adjectives dispensed
                   with the standard of reasonableness.

           D.      Since the beneficiary had such a high threshold to meet, the beneficiary
                   had virtually no enforceable right (i.e., property interest). This lack of an
                   enforceable right is the fundamental cornerstone for the asset protection
                   behind a discretionary trust. The principle is simple. A creditor cannot
                   compel the trustee to pay anything because the beneficiary cannot compel
                   payment.120

           E.      This is the common law asset protection difference between a support trust
                   and a discretionary trust. A support trust has a reasonableness judicial
                   standard of review, whereas the judicial review of a discretionary trust is
                   typically limited to the trustee acting dishonestly, acting with an improper
                   motive, or failing to use his or her judgment (i.e., “bad faith” standard).

XIX. Ohio – A Tale of What Not to Do

           A.      The following analysis of Ohio law demonstrates the beginning of the
                   problems that occur with the judicial standard of review is dropped to
                   Ohio’s possible definition of abuse, good faith or reasonableness.

           B.      In Ohio, it appears that the standard of review of a discretionary trust has
                   gradually been shifting from a bad faith type of concept to more of a
                   reasonableness standard.


120
      RESTATEMENT (SECOND) OF TRUSTS, Section 155, comment b.




                                               43
            C.       In 1945, the Ohio Supreme Court held that “[w]here the terms of a trust
                     provided that the trustee shall pay to a beneficiary only so much of the
                     income and principal, or either, as the trustee in his uncontrolled discretion
                     shall see fit to pay, the beneficiary cannot compel the trustee to pay him
                     any part of the income or principal.” 121 This would mean that the
                     beneficiary would have little, if any, standing in court. However, by 1955
                     it appears that the standard was shifting to one of “good faith” in Ohio.122

            D.       Adding more confusion, in 1962, in Culver v. Culver 123 the Appellate
                     Court stated that “[o]f course the courts have supervision over
                     discretionary trusts; but the sole inquiry is whether the discretion exercised
                     by the trustee has been abused; if the bank, in the exercise of good faith,
                     failed to exercise its discretion, or having exercised it, was guilty of bad
                     faith, 124 then the courts can interfere, but not before.” Here the Court
                     appears to be stating that both a good faith standard and an abuse standard
                     apply.

            E.       In 1968, in a supplemental needs case, the Ohio Supreme Court held that
                     even if a discretionary distribution standard utilized the qualifying
                     adjectives of “sole and absolute” discretion, if the distribution language
                     was coupled with an enforceable standard, it was an abuse of discretion if
                     the trustee did not make minimum distributions to a destitute
                     beneficiary.125 The Court did not discuss what abuse standard Ohio had
                     adopted or what category of abuse into which the above situation would
                     fall. Rather, the Court merely held that the fact pattern constituted abuse.
                     Further, the Court held that because of the enforceable standard, the trust
                     was neither purely a discretionary trust nor purely a support trust. The
                     standard was “care, comfort, maintenance, and general wellbeing.”

            F.       The result of this analysis was that the governmental agency was able to
                     recover directly from the trust assets by forcing a distribution pursuant to
                     the standard. This would not be the case in almost all common law states
                     that retain the discretionary/support dichotomy.

            G.       In 1978, the Ohio Supreme Court extended the concept of Kreitzer to
                     allow a spouse to recover for child support from a discretionary trust that

121
      McDonald v. Evatt, 62 N.E. 2d 164 (Ohio 1945).
122
   Caswell v. Lenihan, 126 N.E.2d 902 (Ohio 1955); Huntington Natl. Bank v. Aladdin Crippled
Children’s Hosp. Assn., 157 N.E.2d 138 (Ohio App. 1959).
123
      Culver v. Culver, 169 N.E.2d 486 (Ohio App. 1960).
124
      It is uncertain how the Court is using the term “bad faith” in this case.
125
  Bureau of Support in the Department of Mental Hygiene and Correction v. Kreitzer, 243 N.E.2d 83
(Ohio 1968).




                                                       44
                    was coupled with a standard. Further, the Ohio courts for the most part
                    consistently continued to apply the Kreitzer analysis, with the result that
                    Medicaid and governmental agencies would recover from a discretionary
                    trust’s assets.126

           H.       The unreported 1997 and 2001 cases of In the Matter of Trust Created by
                    Item III of Will of Zemuda127 and Buoscio v. Estate of Buoscio128 added
                    further confusion to what review standard Ohio has for a discretionary
                    trust. In these decisions, the courts used a standard of abuse requiring that
                    the trustee act unreasonably, unconscionably, or arbitrarily.

           I.       Finally, in 2001, an Ohio Appellate Court held that a discretionary trust
                    was an available resource and it was proper that the beneficiary was
                    denied Medicaid eligibility.129 The Ohio Appellate Court reasoned that the
                    beneficiary had an enforceable right under Kreitzer. As such, the Ohio
                    Department of Human Services was correct in denying benefits since the
                    discretionary trust was an available resource under Ohio’s definition of
                    abuse.

           J.       In the 1989 case In re Estate of Winograd130 the Ohio Appellate court used
                    a “reasonableness” standard in reviewing a discretionary trust. Unlike the
                    Kreitzer line of cases where the Ohio definition of “abuse” or the “good
                    faith” standard allowed the governmental Medicaid and special needs
                    creditors to either recover from the trust or deny benefits, Winograd
                    attacks the basis of a beneficiary controlled trust.131

           K.       One of the key ideas behind a beneficiary controlled trust is that the reason
                    a beneficiary is happy to receive his share of an inheritance in trust is
                    because should the beneficiary need the funds, the trustee may distribute
                    all of the trust funds to him. In other words, the trustee may completely
                    exclude any other beneficiaries from any distributions, and all amounts
                    may be paid to the primary beneficiary if needed. In applying a

126
   The following are unreported appellate cases that follow the Kreitzer analysis: Matter of Gantz, 1986
WL 12960; Samson v. Bertok, 1986 WL 14819 (however, the creditor did not recover because it was not a
governmental claim); Matter of Trust of Stum, 1987 WL 26246; Schierer v. Ostafin, 1999 WL 493940
(however, the creditor did not recover because it was not a governmental claim).
127
      No. L-96-073 (Ohio App. 6 Dist. 1997).
128
      2001 WL 1123960 (Ohio App. 7 Dist).
129
      Metz v. Ohio Dept. of Human Services, 762 N.E. 2d 1032 (OH App. 2001).
130
      582 N.E.2d 1047 (Ohio 1989).
131
    For more information about the beneficiary controlled trust concept, see Richard A. Oshins and Steven
J. Oshins, Protecting & Preserving Wealth into the Next Millenium, Trusts & Estates (Sept. and Oct. 1998)
at http://www.oshins.com/trusts_&_estates_9_98.htm.




                                                 45
                   reasonableness standard, the Ohio Appellate Court held that the trustee
                   abused his discretion by distributing all of the income to the primary
                   beneficiary.

           L.      The Court came to this conclusion even though the trust had specific
                   language stating that the trustee could make distributions of income “to or
                   for the benefit of any one or more to the exclusion of any one or more” of
                   the beneficiaries, and the trustee should consider the primary beneficiary
                   first and the primary beneficiary’s descendants second in making
                   distributions. Unfortunately, Ohio is not alone in destroying one of the
                   fundamental aspects of a beneficiary controlled trust. The Restatement
                   Third also takes the same position as the appellate court in Winograd.132

XX.        Uniform Trust Code and Restatement Third

           A.      Both the UTC and the Restatement Third expand the approach used in
                   Ohio that caused so many problems from an asset protection perspective.
                   The UTC makes it clear that a “good faith” standard applies, and the
                   Restatement Third makes it clear that a “reasonableness” standard applies.

           B.      Whereas comment b of the Restatement Third provides that “judicial
                   intervention is not warranted merely because the court would have
                   differently exercised its discretion,” Section 50, comment b provides that
                   “a court will not interfere with a trustee’s exercise of a discretionary
                   power when that exercise is reasonable and not based on an improper
                   interpretation of the terms of the trust.”133 The comment continues, “[a]
                   court will also intervene if it finds the payments made, or not made, to be
                   unreasonable as a means of carrying out the trust provisions.” [Emphasis
                   added.]

           C.      The UTC does not impose a reasonableness standard. Rather, Section
                   814(a) provides a good faith standard. According to that Section,
                   “[n]otwithstanding the breadth of discretion granted to a trustee in the
                   terms of the trust, including the use of such terms as “absolute,” “sole,” or
                   “uncontrolled,” the trustee shall exercise a discretionary power in good
                   faith in accordance with the terms and purposes of the trust and the
                   interests of the beneficiaries.”

           D.      The Restatement Third, Section 50, comment c, has a similar construction
                   whereby it provides that words such as “absolute,” “unlimited,” “sole” and
                   “uncontrolled” discretion “are not interpreted literally.” Rather, the trustee
                   must still accomplish the purposes of the discretionary power. In essence,
132
      RESTATEMENT (THIRD) OF TRUSTS, Section 50, comment c., last paragraph.
133
      RESTATEMENT (THIRD) OF TRUSTS, Section 60, comment a.




                                                 46
                   both the UTC and the Restatement Third use a relatively equivalent
                   standard of review by a court, and this standard of review provides a much
                   lower threshold for a beneficiary than the bad faith standard of prior
                   law.134

           E.      When drafting discretionary trusts, many attorneys also include a broad
                   standard for making distributions. According to the Restatement Third, an
                   abuse of discretion depends upon “the proper construction of any
                   accompanying standards, and on the grantor’s purpose in granting the
                   discretionary power.” In other words, if a discretionary trust states that the
                   trustee may make distributions in the trustee’s sole and absolute discretion
                   for health, education, maintenance, support, comfort, general welfare,
                   happiness and joy, each separate standard listed may well need to be
                   examined to determine whether the trustee’s discretionary decision to
                   distribute or not to distribute was reasonable.

           F.      On the other hand, the Restatement Third also goes to great lengths to
                   prevent attorneys from drafting out of this problem. Many attorneys
                   suggest that a discretionary trust should not even include a distribution
                   standard. By eliminating any distribution standard, it would be unlikely
                   that a judge would conclude that the trust is anything other than a
                   discretionary trust since the judge could not mistake the trust as a support
                   trust.

           G.      Furthermore, it would be unlikely that a judge would question the trustee’s
                   distribution decisions. Unfortunately, Section 50, comment b of the
                   Restatement Third provides “[i]t is not necessary, however, that the terms
                   of the trust provide specific standards in order for a trustee’s good-faith
                   decision to be found unreasonable and thus constitute an abuse of
                   discretion.” If a standard is omitted, the court will still apply a
                   reasonableness or good-faith judgment “based on the extent of the
                   trustee’s discretion, the various beneficial interests created, the
                   beneficiaries’ circumstances and the relationships to the grantor, and the
                   general purposes of the trust.”135

           H.      Once the threshold for the judicial standard of review has been reduced to
                   reasonableness or good faith, in almost all cases, the beneficiary should
                   have an enforceable right to a distribution.



134
  For purposes of this outline and under case law, the term “bad faith” is not defined as the antithesis of a
good faith standard. Rather, bad faith means the trustee is acting dishonestly, acting with an improper
motive, or failing to use his or her judgment.
135
      RESTATEMENT (THIRD) OF TRUSTS, Section 50, comment d.




                                                  47
           I.      This being the case, may a creditor stand in the beneficiary’s shoes under
                   the UTC or the Restatement Third? Even if a creditor may not stand in the
                   beneficiary’s shoes, similar to the Metz case in Ohio, may a governmental
                   agency deny benefits by considering a discretionary trust as an available
                   resource? Also, would the discretionary trust be considered an equitable
                   factor in determining child support, alimony, and possibly an equitable
                   division of marital property? Finally, should a beneficiary be imputed
                   income from a trust for the purpose of computing child support and
                   alimony? All of these issues are discussed in the following material.

XXI. Asset Protection for Discretionary and Support Trusts Now the Same?

           A.      The traditional trust analysis has explained in detail the enhanced degree
                   of asset protection provided by a discretionary dynasty trust. The asset
                   protection under common law afforded by a discretionary dynasty trust is
                   based on a property analysis (i.e., regardless of whether there is an
                   enforceable right). On the other hand, for a support trust, the asset
                   protection is based on spendthrift protection, subject to the four exception
                   creditors.

           B.      In addition to changing the standard of review, both the UTC and the
                   Restatement Third eliminate the discretionary trust property analysis. The
                   provisions in the Restatement Third make it clear that asset protection will
                   be based solely on the same spendthrift protection analysis. 136 In other
                   words, there is no property analysis for a discretionary trust under the
                   Restatement Third or the UTC.137 For a number reasons, this is quite a
                   dramatic change from an asset protection perspective.


136
      RESTATEMENT (THIRD) OF TRUSTS, Section 60, comment a.
137
   However, it should be noted that due to the incredibly confusing language in Article 5 of the UTC, some
estate planners claim that the discretionary analysis may have only been abolished for the exception
creditor for child support or alimony.
First, Section 503 provides that all exception creditors may pierce a spendthrift provision. No distinction is
made between a discretionary trust and a support trust. The second paragraph of the comments under
Section 503 of the UTC references Section 59(a) of the RESTATEMENT (THIRD) OF TRUSTS. The fifth
paragraph of the comments under Section 503 of the UTC references Section 59(b) of the RESTATEMENT
(THIRD) OF TRUSTS. General comment (a) of the Restatement Third specifically states that “certain
categories of creditors [i.e., the exception creditors] can reach beneficial interests in spendthrift trusts…,
including discretionary interests in those trusts.”
Second, Section 60 provides as to discretionary trusts that a spouse, former spouse, or a spouse acting on
behalf of a child may reach the trust assets for child support or alimony. So at first blush, it appears that the
UTC may be eliminating the discretionary/support distinction for only this purpose. However, the first
paragraph of the comments under Section 60 provides that “[t]his section, similar to the Restatement Third,
eliminates the distinction between discretionary and support trusts, unifying the rules for all trusts fitting
within either of the former categories.” If the rules have been unified (i.e., the discretionary property
analysis has been eliminated), then the argument that alimony and spousal support is the only exception to
a discretionary trust has little merit.



                                                    48
                  1.        First, third-party Medicaid trust planning or special needs trust
                            planning is based on meeting the definition of a discretionary trust
                            under state law. Whereas a governmental agency, as an exception
                            creditor, may recover from a support trust, a governmental agency
                            cannot recover from a discretionary trust. Unfortunately, under the
                            UTC and the Restatement Third, the change of the standard of
                            judicial review, equating a discretionary trust to a support trust,
                            and the probable expansion of exception creditors as discussed
                            below, may soon make it possible for a governmental medical
                            agency to recover directly from a discretionary trust.

                  2.        Second, claims of the U.S. or state governments, including the
                            Internal Revenue Service, have never been enforced against a
                            discretionary trust. Again, this is because a beneficiary has no right
                            of recovery. Therefore, a creditor does not receive greater rights
                            than the beneficiary.

                  3.        Third, except for the one Massachusetts Court of Appeals case,
                            which appears to have relied on a draft of the Restatement Third
                            for its holding, a former spouse has no right of recovery against a
                            discretionary trust, even for alimony or child support.

                  4.        Fourth, attorney fees incurred on behalf of a beneficiary suing a
                            discretionary trust for a distribution would most likely not be
                            recovered from the trust.

         C.       Therefore, under the Restatement Third and the UTC, virtually all of the
                  asset protection of a discretionary trust is lost, and the discretionary trust is
                  forced to rely on the much lesser protection afforded by a spendthrift
                  trust.138

Third, adding more confusion to an already confusing Article 5, Section 503(c) provides no limit to any
state or federal claim to the extent the statute provides. By the literal terms of this Section, this means that
all of these types of federal claimants may directly access the trust assets, regardless of whether it is a
federal or state claim. Therefore, this also appears to support the argument that the discretionary/support
distinction has been completely eliminated.
Fourth, again adding more confusion to Article 5, there is no definition of a discretionary trust or a support
trust provided by the UTC. Both Section 504 of the UTC and Section 60 of the RESTATEMENT (THIRD) OF
TRUSTS say that they apply to discretionary interests. But unlike the RESTATEMENT (SECOND) OF TRUSTS,
there is no definition.
138
   RESTATEMENT (THIRD) OF TRUSTS, Section 60, comment a goes to some length to explain a continuum
of discretion under a reasonableness standard. Unfortunately, when courts are given a factor test, a
balancing test, or a continuum to choose from, it is usually nothing more than a blank check for a court to
decide the case almost any way it chooses. For an example of such, in the divorce case apparently using a
Restatement (Third) of Trusts analysis with a discretionary trust, see Dwight v. Dwight, 756 N.E.2d 17
(Mass. Ct. of App. 2001).




                                                    49
XXII. Continuum of Discretionary Trusts More Protective?

        A.       One might argue that under the UTC and Restatement Third all trusts
                 should now receive greater asset protection because all trusts are now on a
                 “continuum of discretionary trusts.” However, this conclusion is incorrect.
                 The reason that a creditor could not force a distribution from a
                 discretionary trust was because the beneficiary could not do so. This was
                 because the beneficiary had very little standing in court under the bad faith
                 review standard.139

        B.       Under the UTC the review standard has been changed to good faith, and
                 under the Restatement Third the review standard has been changed to
                 reasonableness.

        C.       The issue is whether the beneficiary has an enforceable right if the
                 beneficiary can force a distribution. Unfortunately, the case law from Ohio
                 proves this to be the case.

XXIII. Expansion of Exception Creditors?

        A.       Similar to the Restatement Second, both the UTC and the Restatement
                 Third have a list of exception creditors.

        B.       Some have argued that, at least in the short term, since the UTC list of
                 exception creditors is smaller than that of the Restatement Second, the
                 UTC is more protective for support trusts (but not for discretionary trusts).
                 In the short term, this may be the case.

        C.       However, since the Restatement Second was promulgated almost fifty
                 years ago, only three of the four exception creditors have generally been
                 adopted by state courts. On the other hand, when legislators have been
                 given the ability to determine exception creditors, the magnitude of the
                 exception creditors appears to be much more expansive than the judicial
                 exception creditors. Therefore, this greater asset protection for a support
                 trust may last for only a relatively short period of time.

        D.       Restatement (Second) of Trusts - The Restatement Second lists the
                 following four exception creditors:

                 1.       Alimony and child support;


139
    A beneficiary could only bring an action if the trustee acted dishonestly, with an improper motive, or
failed to act.




                                                 50
                   2.     Reasonable needs of a beneficiary;

                   3.     Expenses to preserve a beneficial interest; or

                   4.     Any federal or state claim.

                   The exception for expenses to preserve a beneficial interest (i.e., attorney
                   fees for a beneficiary, or an exception creditor standing in the shoes of the
                   beneficiary suing the trust) never gained much acceptance in the state
                   courts. It is for this reason, in the fifty-year period since its promulgation,
                   only three of the four exception creditors have gained acceptance by the
                   state courts.

           E.      Uniform Trust Code - From an asset protection perspective, at first glance
                   it appears that the UTC is an improvement over the Restatement Second
                   since it reduces the number of exception creditors to three exception
                   creditors. The exception creditor for “necessary expenses of the
                   beneficiary” appears to have been deleted.

                   1.     “...a beneficiary’s child, spouse, or former spouse who has a
                          judgment or court order against the beneficiary for support or
                          maintenance, or

                   2.     a judgment creditor who has provided services for the protection of
                          a beneficiary’s interest in the trust, may obtain from a court an
                          order attaching present or future distributions to or for the benefit
                          of the beneficiary.”140

                   3.     “A spendthrift provision is unenforceable against a claim of this
                          State or the United States to the extent a statute of this State or
                          federal law so provides.”


                   However, for the most part, this is not really the case. The UTC has
                   actually combined most of the necessary expenses of a creditor cases (i.e.,
                   Medicaid and special needs trust cases) with the third exception for claims
                   by the federal or state government. Whereas exception creditors had no
                   claim against a discretionary trust under common law, all exception
                   creditors would be allowed to directly attach the assets of a discretionary
                   trust under the UTC or Restatement Third. Furthermore, future exception
                   creditors may now be added both judicially and legislatively.



140
      UNIFORM TRUST CODE, Section 503.




                                               51
           F.      At first glance, the UTC appears to be an improvement for Medicaid and
                   special needs trusts over the common law of most states. This is because a
                   state or federal government must now pass a statute in order to recover
                   from a Medicaid or special needs trust. Governmental agencies that
                   provide benefits are no longer automatically considered an exception
                   creditor (i.e., the necessary expenses of a beneficiary under the
                   Restatement Second).

           G.      Once the state government agencies realize that they no longer may
                   recover from this type of trust, it may be only a matter of time before the
                   state or federal government is able to convince the state legislators to add
                   them as an exception creditor. At this time, a state or federal governmental
                   agency would be able to recover from all trusts in a UTC state, including
                   third party discretionary Medicaid or special needs trusts. In almost all
                   states, the UTC is retroactive. It applies to all trusts regardless of whether
                   they were created before or after the effective date of the UTC.

           H.      Under UTC §504(d), a beneficiary is never limited “to maintain a judicial
                   proceeding against a trustee for an abuse of discretion or failure to comply
                   with a standard for distribution.” The term “abuse” has been redefined to
                   mean “good faith” under the UTC or “reasonableness” under the
                   Restatement Third. Therefore, even with respect to a discretionary trust,
                   the beneficiary now has a right to reach the underlying assets pursuant to a
                   good faith or reasonableness standard.

           I.      Under §541 of the Bankruptcy Code,141 upon the filing of a bankruptcy,
                   the bankruptcy estate receives all of the assets of the debtor. Due to the
                   decrease in the review standard to good faith, all beneficiaries of a
                   discretionary trust have an enforceable right that is also most likely
                   considered to be a property interest under state law. Therefore, this
                   discretionary beneficial interest is now part of the bankruptcy estate.

           J.      Further under §541, the bankruptcy trustee stands in the shoes of the
                   debtor for all purposes. Does this mean that the bankruptcy trustee may
                   now exercise the beneficiary’s rights to force a distribution pursuant to
                   UTC §504(d)? Under §541(c)(1), any contract clause or other arrangement
                   calling for the termination of rights upon the filing of a bankruptcy may be
                   voided by the Bankruptcy Court. Prior to the UTC and the Restatement
                   Third, this was not an issue with a discretionary trust because the
                   beneficiary of a discretionary trust did not have a right to force a
                   distribution.

           K.      Furthermore, the list of exception creditors may easily be expanded under
                   the UTC. For example, for many years, the trial bar has attempted to

141
      11 U.S.C. §541.



                                              52
                    create an exception for tort creditors. The Mississippi Supreme Court
                    actually adopted this view in Sligh v. First National Bank of Holmes
                    County.142 Approximately a year from the Supreme Court rendering this
                    landmark decision, the Mississippi legislature specifically overturned the
                    Mississippi Supreme Court by statute due to the anticipated loss of trust
                    business that would migrate to other states with more favorable trust
                    legislation. 143 Under the UTC, the state legislature may easily do this
                    statutorily by simply appending an unnoticed exception as part of any
                    other bill that passes through the legislature.

           L.       In addition to the tort creditor exception, what if the federal bankruptcy
                    code one day references the UTC exception creditor list? Section 503(c)
                    provides that “[a] spendthrift provision is unenforceable against a claim of
                    this State or the United States to the extent a statute of this state provides.”
                    The federal bankruptcy code could take advantage of this loophole by
                    enacting a statute such as, “[t]he Federal Bankruptcy Trustee is an
                    exception creditor pursuant to Section 503(c) of any State that has adopted
                    this provision of the Uniform Trust Code.”

           M.       All a creditor need do is file an involuntary bankruptcy against the debtor,
                    assuming the requirements for such a filing are met, and the creditor
                    would have easy access to the trust assets. In essence, this would mean all
                    judgment creditors - not just alimony, child support, necessary expenses of
                    the creditor, federal claims, state claims and tort creditors - but anyone
                    who had a debt greater than $11,625. 144 Should federal bankruptcy law
                    ever allow recovery against a trust in a UTC state, there is virtually no
                    asset protection provided by a spendthrift provision. In other words, all
                    credit card companies as well as any other creditors could easily recover
                    from any spendthrift trust through this possible bankruptcy end run
                    approach.

           N.       Many asset protection attorneys have indicated that, with a spendthrift
                    trust, all the trustee need do to avoid attachment and still support the
                    beneficiary is to pay the debtor/beneficiary’s expenses directly rather than
                    making a distribution to the beneficiary.145 Both the UTC and Restatement
                    Third end this possibility. Section 501 of the UTC provides that a creditor
                    may attach “present or future distributions to or for the benefit of the

142
      704 So 2d 1020 (Miss. 1997).
143
      Miss. Code Ann. Section 91-9-503 (Family Trust Preservation Act 1998).
144
   If there are twelve or less creditors, any one creditor with a claim greater than $11,625 may file an
involuntary bankruptcy. If there are more than twelve creditors, then any three with claims aggregating
greater than $11,625 may file an involuntary bankruptcy. 11 U.S.C. §303(b).
145
      Duncan v. Elkins, 45 A.2d 297 (NH 1946).




                                                  53
                   beneficiary.” Section 60, comment c and Illustration 4 of the Restatement
                   Third provide that, “[i]f the trustee has been served with process…, the
                   trustee is personally liable to the creditor for any amount paid to or applied
                   for the benefit of the beneficiary in disregard of the rights of the creditor.”

           O.      The inability of the trustee to pay the expenses of a beneficiary is much
                   more expansive that one might think. This is how most special needs trusts
                   pay beneficiaries’ expenses so that a distribution is not considered an
                   available resource. Also, the interpretation of UTC §501 may lead to the
                   unfortunate conclusion that all creditors may attach present or future
                   distributions.

           P.      This is because UTC §501 provides that “[t]o the extent a beneficiary’s
                   interest is not protected by spendthrift provisions, the court may authorize
                   a creditor or assignee of the beneficiary to reach the beneficiary’s interest
                   by attachment of present or future distributions to or for the benefit of the
                   beneficiary…” Pursuant to the Restatement Second, 146 any distributions
                   received by a beneficiary are not protected by spendthrift provisions.147
                   The result is that spendthrift provisions only protect assets while held in
                   trust. Therefore, if spendthrift provisions only protect assets that are held
                   in trust, does UTC §501 allow attachment by any creditor? If UTC §501 is
                   interpreted this way, it for the most part almost completely defeats the
                   asset protection benefits of using a trust since any creditor could attach
                   and merely wait for satisfaction of his or her claim.

           Q.      The UTC does not limit the courts from adding judicially created
                   exception creditors. Furthermore, the Restatement Third encourages the
                   expansion of exception creditors. Comment a(2) specifically provides that
                   “[s]pecial circumstances or evolving policy may justify recognition of
                   other exceptions, allowing the beneficiary’s interest to be reached by
                   certain creditors in appropriate proceedings….[p]ossible exceptions in this
                   case require case-by-case weighing of the relevant considerations and
                   evolving policies.”

           R.      In essence, this part of the Restatement Third gives the courts a blank
                   check to create an exception at the court’s whim. So while the UTC
                   exception list is incredibly troublesome from an asset protection
                   perspective, interpretation of the UTC by the Restatement Third is much
                   worse.



146
      RESTATEMENT (SECOND) OF TRUSTS, Section 152, comment j.
147
   See also Lundgren v. Hoglund, 711 P.2d. 809 (Mont. 1985); Guidry v. Sheet Metal Workers, Int’l Ass’n,
10 F.3d 700 (10th Cir. 1993).




                                                54
           S.      Furthermore, this portion of the Restatement Third continues, “[i]n some
                   circumstances, to permit attachment despite the spendthrift restraint may
                   not undermine, and may even support, the protective purposes of the trust
                   [emphasis added] or some policy of law.” Since it is inconceivable that a
                   client would ever ask the trust scrivener to draft the trust so that creditors
                   of the beneficiaries can recover from the trust, it is unlikely that this could
                   ever be a “purpose” of the trust.

           T.      Under the Restatement Second, it appeared that when attorneys sued the
                   trust for fees to protect a beneficial interest, the courts seldom adopted the
                   exception. The UTC takes the opposite position of common law by
                   codifying this exception for attorney’s fees.148 The comment under Section
                   503 provides that “[t]his exception allows a beneficiary a modest means to
                   overcome an obstacle preventing the beneficiary’s obtaining services
                   essential to the protection or enforcement of the beneficiary’s rights under
                   the trust.” However, almost all discretionary trusts are created with the
                   purpose that the beneficiaries have virtually no right to challenge the trust.
                   Hence, the terms “sole,” “absolute,” “unfettered” and “uncontrolled”
                   discretion were used to mean exactly what they say.

           U.      Under the UTC and the Restatement Third, a reasonableness standard (or
                   good faith standard) is now imposed on the trustee. Does the attorney fee
                   exception under the UTC now mean that the trust is obligated to pay for a
                   challenge by the beneficiary where most likely such challenge is against
                   the grantor’s wishes? Furthermore, does this mean that an exception
                   creditor may challenge a discretionary trust when suing under the
                   distribution standard, and that the trust is obligated to pay for it?
                   Unfortunately, with the first situation this may easily be the case, and,
                   with the second situation, neither the statutory language of the UTC nor its
                   Comments clearly establish whether this is in fact the case.

XXIV. Restatement (Third) of Trusts

           A.      The Restatement Third adopts a substantially similar approach to that of
                   the UTC by imposing a reasonableness standard of review. In this respect,
                   the Restatement Third is in no sense a restatement of the current law of
                   trusts at all. As related to the common law of almost all states, the
                   Restatement Third is a complete rewrite of history in this area.

           B.      At first blush, the Restatement Third appears to have narrowed the
                   exception creditors to three:

                   1.     Support of a child, spouse, or former spouse;


148
      UNIFORM TRUST CODE, Section 503.



                                               55
                    2.      Services or supplies provided for the necessities; or

                    3.      For the protection of the beneficiary’s interest in the trust.149

           C.      However, comment a(1) specifically provides that governmental claimants,
                   and other claimants as well, may reach the interest of a beneficiary of a
                   spendthrift trust to the extent provided by federal law or an applicable
                   state statute.

XXV. Special Needs Trusts150

           A.       With respect to Medicaid or special needs trusts, the UTC and
                    Restatement Third create two big concerns. First, will a federal or state
                    government be able to attach the beneficial interest? Second, will the
                    Medicaid or special needs trust be considered an available resource of the
                    beneficiary?

           B.       For states that pass the UTC, it may only be a short period of time before
                    third party 151 Medicaid or special needs type planning will be greatly
                    curtailed and eventually eliminated. If the discretionary trust and support
                    trust distinction no longer exists, then the federal government or state
                    legislature can pierce any trust by enacting a statute saying that the
                    government may attach the beneficiary’s interest and reach some or all of
                    the trust assets.

           C.       In states that do not follow the UTC or Restatement Third, an interest in a
                    discretionary trust is not a property interest (i.e., an enforceable right).
                    Both Medicaid trust and special needs trust planning depend on the
                    dichotomy between discretionary and support trusts related to this
                    property issue.

           D.       In fact, the federal or state government need not necessarily attach a
                    beneficiary’s interest. The federal or state government may merely
                    consider the trust as an “available resource” and deny benefits.152

XXVI. Beneficiary as Sole Trustee


149
      RESTATEMENT (THIRD) OF TRUSTS, Section 59.
150
   See also Mark Merric and Douglas W. Stein, A Threat to All SNTs, Trusts & Estates, November 2004, at
38.
151
   A third party Medicaid or special needs trust is a trust where the parents or grandparents have created
the trust for the benefit of a child. It is not the self-settled trust under 42 U.S.C. §1396p(d)(4)(A) (many
times commonly referred to as a "d4A Trust").
152
      Metz v. Ohio Dept. of Human Services, 762 N.E. 2d 1032 (Ohio App. 2001).




                                                   56
           A.       In the event a creditor cannot attach the trust assets under one of the
                    aforementioned theories of recovery, then a creditor may attempt to
                    recover under the theory that the debtor/beneficiary held too much control.

           B.       The purpose of a spendthrift provision is to protect the beneficiary from
                    his own improvidence. If the sole beneficiary is the sole trustee, he cannot
                    protect himself from his own improvidence.

           C.       In In re Bottom, the spendthrift provision protection was not upheld since
                    the sole beneficiary was the sole trustee,153 and the creditor was able to
                    reach the assets of the trust. On the other hand, at least two courts have
                    held that the beneficiary/trustee did not control a trust in which the
                    beneficiary was a co-trustee and there were multiple beneficiaries.154

           D.       Many attorneys draft trusts with an ascertainable standard for distributions
                    and the primary beneficiary (i.e., the child) as the sole trustee of the trust.
                    The trust has both the primary beneficiary and the primary beneficiary’s
                    children as beneficiaries. One court has directly addressed this issue, and a
                    second court that mentioned the issue as dicta.

           E.       Unfortunately, under the Restatement Third, Section 60, when a
                    trustee/beneficiary is the sole trustee, any creditor, not just an exception
                    creditor, may reach the maximum amount that the trustee may properly
                    take.155 The Restatement Third departs from common law.

           F.       Originally, the UTC was silent on this issue. However, after opponents to
                    the UTC expressed their concern over this issue, the UTC was amended in
                    August of 2004 so that a sole trustee/beneficiary’s interest would not be
                    subject to creditor attachment if such interest is limited by an ascertainable
                    standard.

XXVII.              Domestic Relations Case and Imputed Income

           A.       In Dwight v. Dwight,156 upon dad’s death, sixty percent of the estate went
                    to his two daughters outright, and the other forty percent of the estate went
                    to the son in a discretionary trust.157 The trust was created approximately

153
      In re Bottom, 176 B.R. 950 (N.D. Fla. 1994).
154
  In re Hersloff, 147 B.R. 262 (M.D. Fla. 1992); In re Schwen, 43 Collier Bankr. Cas. 2d 255 (D. Minn.
1999).
155
      RESTATEMENT (THIRD) OF TRUSTS, Section 60, comment g.
156
      756 N.E. 2d 17 (Mass. Ct. of App. 2001).
157
   For an excellent analysis of Dwight v Dwight, see Another Look at “Dwight” and Spendthrift Trusts,
Alexander A. Bove Jr. and Melissa Langa, Massachusetts Lawyers Weekly, December 10, 2001.




                                                     57
                   two years after this second son was divorced. The trust was discretionary,
                   and the distribution provisions provided that the trustee may make
                   distributions of income and principal as the trustee deems to be necessary
                   or desirable for the support, comfort, maintenance or education of the
                   beneficiaries. The court concluded that this was a discretionary standard.
                   The beneficiaries were the son and the son’s issue.

           B.      During the nine years prior to the Massachusetts Appellate Court decision,
                   the trust made one discretionary distribution of $7,000 to the son. During
                   this period of time, the trust corpus grew from $435,000 to a value of
                   $984,000.

           C.      The trial court judge stated that it was highly likely that the principal
                   reason the son received his inheritance in trust rather than outright was in
                   order to defeat a claim for alimony. The trial court further found that the
                   son had access to additional funds at anytime he desired based on two
                   facts:

                   1.      The broad purposes for which the trustee may make payments to
                           the son; and

                   2.      A statement the son made to the trustee that he did not need any
                           additional money.

           D.      The trial court found that the son’s earnings should be imputed from the
                   discretionary trust for purposes of alimony. The Massachusetts Court of
                   Appeals agreed with the trial court.

           E.      Without any discussion, the Appellate Court dismissed the son’s
                   contention that the trust was a discretionary trust. Rather, the opinion cites
                   the Restatement of Trusts (Third), Section 59 (Ten. Draft No. 2, 1999) as
                   authority for dismissing the son’s claim.

           F.      Under the Restatement Third as well as the UTC158 a spouse can reach the
                   assets of a discretionary trust for alimony and child support. Furthermore,
                   a judge may determine what amount the trustee should “reasonably”
                   distribute or what amount should distributed in “good faith.”159 The broad
                   standards for the purpose of the distributions must be analyzed to
                   determine whether distributions should have been made (and therefore be
                   part of the alimony computation). Here, the court determined that
                   defeating an alimony claim was not an acceptable purpose. Therefore,
                   under both the UTC and the Restatement Third, the court was within its
158
      UNIFORM TRUST CODE, Section 504.
159
      RESTATEMENT (THIRD) OF TRUSTS, Section 50, comment b.; UNIFORM TRUST CODE, Section 814(a).




                                                58
                   authority to impute income to the husband for the basis of alimony, even
                   though he only received a token of what was imputed to him.

           G.      Although Dwight v. Dwight relied on the Restatement Third in reaching its
                   conclusion, the case was decided before the Restatement Third was even
                   finalized. Furthermore, Massachusetts has not yet adopted the UTC.
                   However, if Massachusetts had adopted the UTC, to add insult to injury, it
                   appears that the former spouse would also be able to recover legal fees
                   from the trust.

XXVIII.            End Round to Force A Distribution For Any Creditors

           A.      Any creditors may attach an “overdue” or “mandatory” distribution under
                   UTC §506. Unfortunately, the terms “overdue” and “mandatory” are both
                   undefined. Further problems are created when one refers to the Third
                   Restatement for interpretation of a mandatory distribution under the newly
                   created theory of a “continuum of discretionary trusts.”160 This is because
                   a judge must now interpret the distribution language of the trust to
                   determine where the trust should be classified on this new undefined
                   continuum of discretionary trusts.

           B.      Once this determination has been made, the judge would then determine
                   when and how much should be periodically distributed to the beneficiary.
                   This is the amount that would become an overdue distribution in the event
                   it was not timely paid.

           C.      For example, distribution language such as “the trustee may make
                   distributions, in the trustee’s sole and absolute discretion, for health,
                   education, maintenance, and support” may create a scenario in which the
                   judge concludes that the trustee should periodically make distributions to
                   the beneficiary. If this is the result, then these deemed distributions would
                   be subject to attachment by any creditor.

XXIX. Planning Around the Restatement Third and UTC

           A.      Both the UTC and the Restatement Third seem to have gone to great
                   lengths to greatly reduce the asset protection provided by creating a
                   reasonableness or good faith standard, even if the terms of the trust
                   provide for the opposite.

           B.      Therefore, the trust scrivener should consider providing absolutely no
                   standard whatsoever when drafting a discretionary trust. For example, the
                   trust could be drafted such that “the trustee may make distributions in his
                   sole and absolute discretion to any beneficiary.”

160
      RESTATEMENT (THIRD) OF TRUSTS, Section 60 comment e and e(1).



                                                59
        C.       While this will provide some help to mitigate the asset protection
                 problems posed by the Restatement Third, it may not solve the problem.
                 This is because, under Section 50, comment d, when no standard is
                 provided, the Restatement of Trusts Third provides that “even then a
                 general standard of reasonableness, or at least a good-faith judgment, will
                 apply to the trustee, based on the extent of the trustee’s discretion, the
                 various beneficial interests created, the beneficiaries’ circumstances and
                 relationships to the grantor, and the general purposes of the trust.”

        D.       Regardless, not including a standard of distribution will make it more
                 difficult for a judge to conclude that the intent of the grantor was to create
                 an enforceable right in the beneficiary for a distribution.

        E.       Although any exception creditors may generally attach a remainder
                 interest, it appears that a remainder interest in a dynasty interest would not
                 be able to be attached because it is an interest that does not vest with
                 anyone. In this respect, drafting trusts with multigenerational interests
                 should still avoid many creditor issues and should be a matter of course
                 for most clients, not just a technique for the ultra-wealthy.

XXX. The Inheritor’s Trust™161

        A.       Estate planners often fail to realize the opportunity to plan in
                 contemplation of an inheritance, even if the expected inheritance will not
                 be received for many years.

        B.       Instead, the emphasis is often focused on planning with existing wealth
                 rather than future wealth, thereby missing numerous planning
                 opportunities.

        C.       This is perhaps one of the most missed planning opportunities since most
                 planners fail to ask their clients whether they expect to receive any
                 inheritances.

        D.       The Inheritor’s Trust™ is a special type of dynasty trust that is designed
                 by the inheritor to receive an inheritance that would otherwise have been
                 passed outright to the inheritor as a result of inferior single generation
                 planning by the attorney for the future decedent.

161
    Inheritor’s Trust™ is a trademark of Steven J. Oshins, Richard A. Oshins and Noel Ice. See The
Inheritor's Trust™: The Art of Properly Inheriting Property, Estate Planning, Vol. 30, Nos. 9 and 10 (Sept.
and     Oct.    2003),      co-authored   by    Richard    A.    Oshins     and     Noel    C.    Ice    at
http://www.oshins.com/estate%20planning%209.03%20and%2010.03.htm. Also see The Inheritor's
Trust™: Planning in Contemplation of an Inheritance, Lawyers Weekly USA (Jan. 2004), authored by
Steven J. Oshins, at http://lawyersweekly.p2ionline.com/Sections/trusteeandestate2004/p14s1m.htm.




                                                 60
        E.       By receiving the inheritance in trust rather than outright, the inheritance is
                 not unnecessarily subjected to estate tax, creditors and divorcing spouses
                 even though the inheritor controls the trust.

        F.       Essentially, the Inheritor’s Trust™ concept is to plan for our clients in the
                 same manner and with the same high level of sophistication that we
                 provide for our clients’ descendants.

        G.       This works particularly well in the situation where our client’s parents
                 want to use their own estate planning attorney to draft their will or
                 revocable trust, but they are willing to make a simple amendment to their
                 trust to pour our client’s inheritance into the Inheritor’s Trust.

        H.       In many cases, our client is able to use all of the parents’ GST tax
                 exemptions since our client’s siblings will receive their share of the
                 inheritance outright thereby not using any GST tax exemption. This
                 benefits our clients’ children and other descendants.

XXXI. Opportunity Shifting162

        A.       One of the best, yet often overlooked, techniques to avoid the transfer tax
                 system is the shifting or deflecting of the opportunity to earn income or
                 generate wealth from the client to others, including trusts.

        B.       In addition to the transfer tax benefits, opportunity shifting also provides a
                 means of creditor protecting additional wealth. Those who utilize this
                 strategy often focus primarily on the transfer tax savings. However, arguably
                 the creditor and divorce protection benefits are even more valuable than the
                 transfer tax savings.

        C.       The opportunity shifting strategy protects future wealth much in the same
                 way as the Inheritor’s Trust™ does. The difference is that each strategy
                 protects a different kind of future wealth. The Inheritor’s Trust™ protects
                 future wealth derived from an inheritance. Opportunity shifting protects
                 future wealth derived from business and investment opportunities.

        D.       For both transfer tax planning purposes and creditor protection purposes, it is
                 far simpler, less risky and more tax efficient to shift the opportunity to create
                 wealth at the inception of an undertaking than to move wealth to a protected
                 spot once value has matured and has become substantial. The shifting of an
                 opportunity does not involve a transfer and therefore finesses the transfer tax


162
   See Steven J. Oshins, Opportunity Shifting: A Life Insurance and Estate Planning Technique, Journal of
Financial Service Professionals (May 1999) at http://www.oshins.com/journal_5_99.htm.



                                                61
                      and avoids a transfer with a retained interest that would open the property to
                      creditors of the transferor.

            E.        In its simplest form, if a person were to refer business, customers or clients
                      to another person, or give some gratuitous advice to the other person, no one
                      would think a transfer subject to the gift tax has occurred. Those activities
                      happen frequently. Similarly, the shifting of a business or investment
                      opportunity is not an event that gives rise to the imposition of a gift tax, even
                      if the result is detrimental to the referring party.

            F.        Thus, when a new business is formed, a new product is being developed, a
                      new location is being considered, or the family has an investment
                      opportunity, a new entity should also be formed, and some or all of the
                      equity interests offered in the new entity should be placed in irrevocable
                      trusts. In many instances, the "seed" money is negligible to enable the
                      recipient of the opportunity to acquire a significant interest in a venture that
                      can reasonably be predicted to explode in value.

            G.        This exploding value will occur in an irrevocable trust set up by somebody
                      other than a beneficiary so that all of the value will be held in a trust that is
                      transfer tax protected, and creditor and divorce protected.

            H.        Moreover, a referring family member can determine how much of the
                      opportunity to shift, and can structure the entity accordingly. Thus, the entity
                      design can include a scenario whereby the opportunity provider obtains
                      complete control of the new venture even though he or she owns only a
                      small sliver of it.163 For example, control of the general partner of a limited
                      partnership or holder of the only share of voting interest in a corporation or
                      limited liability company will obtain such a result.

            I.        A capital structure whereby the opportunity shifter receives control of the
                      entity will subject to the transfer tax system only the interest owned and not
                      the opportunity "transferred." In addition, at such time as the retained
                      interest is ultimately transferred, it should be taxed at a mere fraction of what
                      the interest really means to its owner.

            J.        An often-cited illustration of the opportunity shifting strategy occurred
                      where the senior members of the Lauder family, which owned the Estee
                      Lauder Company, shifted the opportunity to develop the successful Clinique
                      and Aramis products down a generation.164

163
   Cooper, fn. 10, supra, at p. 19; Owen G. Fiore, Ownership Shifting to Realize Family Goals, Including Tax
Savings, 37 NYU Inst. on Fed. Tax., Sec. 38 (1979); Owen G. Fiore, Estate and Value Opportunity Shifting
Through Installment Sales, Private Annuities and Interest-Free Loans, U. Miami 13th Inst. on Est. Plan., Ch. 7
(1980).
164
      Cooper, fn. 10, supra, at p. 20.



                                                   62
     1.      Had the senior Lauder family members desired control, the new
             entity could have been structured whereby the senior Lauders owned
             a 1% controlling interest in the entity.

     2.      Moreover, additional tax and creditor protection benefits could have
             been obtained had the wealth shifting opportunity been given to
             trusts for the benefit of their children, Leonard and Ronald, and their
             descendants rather than to them outright.

     3.      The Lauder-type plan is not an isolated instance, but only one
             illustration of the opportunity shifting concept.

K.   These opportunities to shift wealth into a place where it is protected from
     estate taxes, creditors and divorce occur often.

L.   The problem is that very few of these potential value-shifting possibilities
     are exploited in the real world. This inaction is probably due to several
     factors, including that many opportunity shifting situations are not
     recognized; to a large degree there is indifference on the part of many
     planners and their clients; and also possibly because the concept is more one
     of common sense than being a technical legal planning device that would
     likely be the subject of articles, speeches and other professional training.
     Further, since this is a strategy for moving wealth outside the scope of the
     transfer tax system, it is usually also not the subject of cases or rulings unless
     an error was made.

M.   The reason little attention is given by the IRS to this type of undertaking is
     that in most instances where opportunity shifting occurs there is no reporting
     of the transaction since there is no "transfer" that necessitates the filing of a
     tax return.

N.   Thus, it is reasonable to assume that much of this planning is not a result of
     strategizing, but rather it is the result of wealthy people just using some
     common sense without recognizing that their actions have favorable estate
     planning and creditor protection results. Hopefully, they will recognize the
     beneficial implications of such actions and that the recipient of the wealth
     generating activity should be an irrevocable trust.

O.   There are a number of situations in which this type of tax-free, intrafamily
     diversion of wealth is often overlooked. For instance, assume that a child
     wishes to go into the same business as his parents, just like the Lauder
     children. Rather than join the parents, irrevocable trusts can be set up to hold
     a newly formed entity, and the parents can refer some of their companies'
     business to the trust-owned entity.




                                  63
P.   A striking illustration of this occurs in the situation where both the parents
     and the children are developers, and the parents wish to retire during the next
     few years and pass the business to their descendants.

     1.     A direct transfer often has costly tax implications.

     2.     With proper advance planning, the tax bite can be mitigated or
            negated through the process of referrals by the parents to the
            children's trust-owned entity.

     3.     This will have the dual effect of ballooning the value of the trust
            while concomitantly reducing the value of the parents' entity, perhaps
            over time even to zero, negating the necessity of selling or gifting the
            parents' entity to the trust.

     4.     For creditor protection purposes, this has the effect of protecting one
            hundred percent of each referral.

Q.   An impressive variation of the opportunity shifting strategy exists where the
     child's trust owns a collateral business to which the parents may refer
     business.

R.   To illustrate, assume that the owner of a retail business wants to shift wealth
     that would inure to his own benefit if the estate and business planning
     process is not undertaken.

     1.     The business owner could set up trusts for the benefit of his
            descendants (and perhaps his spouse) that forms an entity to do
            installation, repairs and warranty work on products sold by the retail
            business.

     2.     The business owner would refer customers to the trust-owned entity
            for the service work.

     3.     Additional sources of collateral fees could be generated by having a
            trust-owned entity (separate from the installation and repair shop for
            liability purposes) acquire, own and lease furniture, equipment, or an
            office building to the business.

S.   The fact patterns under which opportunity shifting strategies can be
     employed are extensive and are virtually limited only by the imagination of
     the planner as long as the planner and/or client have been sensitized to the
     existence of the technique and its effectiveness as a tax avoidance and
     creditor protection device.




                                 64
     T.   Estate planners tend to look down generations for planning purposes.
          Typically, the only upstream inquiries made as to the economic situation of
          the parents are (i) whether the client anticipates an inheritance that should be
          taken into account in planning the client's estate, and (ii) whether the client
          may need to provide support for a parent in case of an unusual order of
          deaths.

     U.   Planners often overlook inquiring as to whether the client's parent has the
          ability and inclination to fund a trust for the client's benefit. Even persons of
          somewhat modest means can often come up with, and are willing to part
          with, sufficient seed money for a predictably "hot" investment or business
          venture, such as a new business entity that will be designed to receive
          referrals from a present successful business, or another opportunity shifting
          scenario.

     V.   An extraordinary opportunity exists by looking up a generation as part of the
          planning process. When the client is about to embark on a new venture or
          has an investment opportunity with significant potential, consideration
          should be given to having the client's parent(s) create and fund a trust for the
          client. This is the same concept as that used in the context of the Inheritor’s
          Trust™ discussed above.

     W.   Money placed in a dynastic Beneficiary Controlled Trust funded by the
          client's parent(s) would provide the "seed" money for any such anticipated
          business venture or investment.

     X.   As long as the client is not the original source of the "seed" money (which
          course of action would result in the transaction being recast as a trust created
          by the client under the step transaction or agency theories), the normal rules
          of taxation should apply and the existence of the trust should be respected for
          both tax and asset protection purposes.

     Y.   Thus, the client can control the trust by being trustee, and can benefit from
          the trust assets as the primary beneficiary.

XXXII.    Corporations, Limited Liability Companies and Limited Partnerships

     A.   In addition to using trusts, various business entities should also be used to
          provide an additional layer of creditor protection. The entities do not
          necessarily have to own a business. Business entities are often used to
          protect investment assets as well.

     B.   There are two types of business entity creditors – (1) internal creditors and (2)
           external creditors.




                                       65
     C.   Internal creditors are those creditors who sue the business entity itself. The
          goal is often to keep minimal assets at risk in the business entity and to use a
          business entity that will shield the owners from personal liability.

          1.      Both a corporation and a limited liability company, if operated
                  properly, protect the business owners’ personal assets (i.e., those
                  assets outside of the business entity) from liability against a claim
                  arising against the business entity itself.

          2.      A limited partnership does not protect the general partners from
                  personal liability. However, if the general partner is a corporation or
                  limited liability company, then the liability of that general partner is
                  limited to its assets.

          3.      However, it is generally not advisable to use a corporation as the
                  general partner since the corporate general partner is exposed to the
                  creditors of the owners of the corporate general partner because the
                  corporation does not get charging order protection, as described
                  below. Thus, a creditor who attaches the corporate stock would gain
                  control of the entire limited partnership as well.

     D.   External creditors are creditors of individuals who own interests in the
          business entity, but who are not creditors of the entity itself. The goal is to
          protect the business entity from the owner’s personal creditors.

          1.      A corporation does not provide any statutory protection from the
                  owner’s personal creditors since the creditor may attach the corporate
                  stock to satisfy a judgment against the owner of the stock.

          2.      Depending on the choice of state law, limited liability company
                  assets and limited partnership assets may be protected from the
                  creditor’s judgment.

          3.      In certain states, the “charging order” is the exclusive remedy of a
                  judgment creditor against a limited liability company interest or a
                  limited partnership interest. In most states the charging order is not
                  the exclusive remedy.

          4.      Those clients who reside in states where the charging order is not the
                  exclusive remedy should forum shop by forming their entities in a
                  different state.

XXXIII.   Creditor Protection through Charging Orders

     A.   A charging order is a statutorily created means for a creditor of a judgment
          debtor who is a partner of a limited partnership or a member of a limited



                                      66
                   liability company to reach the debtor’s beneficial interest in the
                   partnership or limited liability company, without risking dissolution of the
                   entity. The court grants an order instructing the entity to distribute the
                   partner's or member’s share to the creditor instead of to the debtor. In
                   effect, it is a court ordered lien on the partnership interest or membership
                   interest of the debtor.

           B.      A charging order gives the creditor only the rights of an assignee. Essentially,
                   it is only an economic interest. The creditor only receives distributions from
                   the entity if the entity makes distributions. The creditor does not have any
                   right to inspect the entity’s records or to vote the charged interest.

           C.      If there are no distributions made, then the creditor may never get his
                   judgment satisfied. The threat of possibly receiving nothing often encourages
                   a favorable settlement with the debtor.

           D.      Many practitioners believe that the creditor having the charged interest will
                   be responsible for the income taxes attributable to that interest based on
                   Revenue Ruling 77-137.165 This concept is often referred to as “KO by the
                   K-1”. However, there is strong authority to the contrary.166 Regardless of the
                   income tax outcome, just the threat of having to pay tax on income never
                   received is generally enough to force the creditor into a favorable settlement
                   for the debtor.

           E.      In Revenue Ruling 77-137, a partner assigned his interest to a third party
                   assignee, and the assignee was held to be taxable on the distributive share
                   of income attributable to the assignor's partnership interest. However,
                   Revenue Ruling 77-137 did not deal with the situation where there is a
                   judgment creditor and a debtor partner, so a strong argument can be made
                   that it does not apply to a debtor/creditor scenario.

           F.      Following are many of the existing charging order cases. 167 This list is not
                   intended to be exhaustive, and there is no guarantee that the cases listed
                   below do not have any more current developments.

                   1.       Alabama

                            *Reynolds v. Colonial Bank, No. 1020186 (Ala. 08/15/2003).
                            *Reynolds v. Colonial Bank, No. 1020186 (Ala. 06/20/2003).


165
      Rev. Rul. 77-137, 1977-1 C.B. 178. GCM 36960 (Dec. 20, 1976).
166
  See Christopher M. Riser, Tax Consequenses of Charging Orders: Is the K.O. by K-1 K.O.’d by the
Code? Asset Protection Journal (Winter 1999) at http://www.riserlaw.com/publications/ap/credtax.htm.
167
   See http://www.assetprotectionbook.com/chargingorderscases.htm, authored by Attorneys Jay Adkisson
and Chris Riser. Also see another web site of theirs, http://www.chargingorders.com.



                                                 67
2.   Alaska

     No known cases

3.   Arizona

     *Chandler Medical Building Partners v. Chandler Dental Group,
     855 P.2d 787, 175 (Ariz.App.Div.1 05/25/1993).

4.   Arkansas

     *Addis v. Addis, 288 Ark. 205, 703 S.W.2d 852 (Ark. 02/18/1986).
     *Warren v. Warren, 12 Ark.App. 260, 675 S.W.2d 371 (Ark.App.
     09/19/1984).
     *Riegler v. Riegler, 243 Ark. 113, 419 S.W.2d 311 (Ark.
     10/02/1967).

5.   California

     *Beach Park Associates v. Heron, No. H023320 (Cal.App. Dist.6
     08/25/2003).
     *Heron v. Kelley West Santa Clara Associates, No. H024719
     (Cal.App. Dist.6 08/25/2003).
     *Brown Wood Products v. Interlab Robotics, No. H022232
     (Cal.App. Disk.6 04/22/2002).
     *Sonju v. Dawson, No. G024324 (Cal.App. Dist.4 12/19/2001).
     *Great Western Bank v. Kong, 90 Cal.App.4th 28, 108 Cal.Rptr.2d
     266 (Cal.App. Dist.5 06/22/2001).
     *Northern Trust Bank v. Pineda, 58 Cal.App.4th 603, 68
     Cal.Rptr.2d 357 (Cal.App. Dist.2 10/16/1997).
     *In re Hilde, 120 F.3d 950 (9th Cir. 07/15/1997).
     *Hellman v. Anderson, 233 Cal.App. 3d 840, 284 Cal. Rptr. 830
     (Cal.App. Dist.3 08/26/1991).
     *Long Beach Unified School District v. California, 225 Cal. App.
     3d 155, 275 Cal. Rptr. 449 (Cal.App. Dist.2 11/15/1990).

6.   Colorado

     *Union Colony Bank v. United Bank of Greeley National
     Association, 832 P.2d 1112 (Colo. 05/14/1992).
     *Berge v. Berge, 522 P.2d 752, 33 Colo. App. 376 (Colo.App.
     03/19/1974).

7.   Connecticut




                       68
      *Merchants Bank & Trust Co. v. Chestnut Tree Hill Partnership,
      et. al, CV 900033304S (Conn. 06/06/2003).
      *Cadle Company v. Robert A. Ginsburg, CV 950076811S (Conn.
      03/28/2002).
      *Michael Kononver, et. al v. Tig-Rfa, Inc., et. al, CV 980583516
      (Conn. 03/27/2001).
      *P.G.S. Realty Company v. ZPP&W (Bloomfield) Associates, et. al,
      CV 930531233 (Conn. 02/16/2001).
      *Statewide Grievance Committee v. Joseph S. Dey, III, CV
      980063144S (Conn. 09/29/1998).
      *PB Real Estate, Inc. v. Dem II Properties, et. al, 50 Conn.App.
      741; 719 A.2d 73 (Conn.App. 06/09/1998).
      *Madison Hills Ltd. v. Madison Hills, Inc., 1994.CT.11663, 644
      A.2d 363 (Conn.App. 06/06/1994).

8.    Delaware

      *Robert F. Jeffreys v. Gerald Exten Topside, 1988 DE 626 (DE
      07/15/1988).
      *Felicia MacDonald v. Robert B. MacDonald, and HKM
      Associates, L.P., 1986 DE 412 (DE 05/09/1986).

9.    Florida

      *Givens v. National Loan Investors, L.P., 724 So.2d 610 (Fla.App.
      Dist.5 12/18/1998).
      *Donald Gache' and D.G. Enterprises v. First Union National
      Bank Florida, 1993.FL.50698 ; 625 So. 2d 86 (Fla.App.
      09/29/1993).

10.   Georgia

      *Stewart v. Lanier Park Medical Office Building, Ltd., 578 S.E. 2d
      572, (Ga.App. 02/26/2003).
      *Prodigy Centers/Atlanta No. 1 L.P. v. T-C Associates, 147 F.3d
      1324 (11th Cir. 07/29/1998).
      *Prodigy Centers v. T-C Associates, Ltd., 269 Ga. 522, 501 S.E. 2d
      209 (Ga. 06/08/1998).
      *Nigri v. Lotz, 1995.GA.24411, 453 S.E.2d 780, 216 Ga. App. 204
      (Ga.App. 02/01/1995).

11.   Hawaii

      No known cases

12.   Idaho



                        69
      *Tudor Engineering Company v. John B. Mouw, 1985 ID 15345;
      709 P.2d 146; 109 Idaho 573 (Idaho 10/31/1985).
      *Max F. (Rip) Sewell v. Neilsen, Monroe, Inc., 1985 ID 15280 ;
      706 P.2d 81; 109 Idaho 192 (Idaho App. 08/29/1985).
      *J.K. Merrill & Son v. R.G. Carter, 1985 ID 15198 ; 702 P.2d 787;
      108 Idaho 749 (Idaho 06/17/1985).

13.   Illinois

      *In re Marriage of Todd J. Chapman and Florence Adele
      Chapman, 297 Ill. App. 3d 611;697 N.E.2d 365 (Ill.App.
      06/19/1998).

14.   Indiana

      No known cases

15.   Iowa

      No known cases

16.   Kansas

      *City of Arkansas City v. Anderson, 752 P.2d 673, 242 Kan. 875
      (Kan. 03/25/1988).

17.   Kentucky

      No known cases

18.   Louisiana

      No known cases

19.   Maine

      No known cases

20.   Maryland

      *Keeler v. Academy of American Franciscan History, Inc., No.
      DKC 2001-0888 (D.Md. 02/14/2002).
      *Green v. Bellerive Condominiums LP, 135 Md.App. 563, 763
      A.2d 252 (Md.Sp.App. 11/03/2000).




                        70
      *Lauer Construction Inc. v. Schrift, 123 Md.App. 112, 716 A.2d
      1096 (Md.Sp.App. 09/02/1998).
      *91st Street Joint Venture v. Goldstein, 691 A.2d 272, 114
      Md.App. 561 (Md.Sp.App. 03/28/1997).

21.   Massachusetts

      No known cases

22.   Michigan

      No known cases

23.   Minnesota

      *Windom National Bank of Windom and Others v. Charles H.
      Klein and Another, 1934.MN.136, 254 N.W. 602, 191 Minn. 447
      (Minn. 04/27/1934).

24.   Mississippi

      No known cases

25.   Missouri

      *Geraldine Deutsch, et. al v. Eugene Wolff, et al, 7 S.W.3d 460
      (Mo.App. 10/05/1999).

26.   Montana

      No known cases

27.   Nebraska

      *Linda Novak v. Gerald H. Novak, 1994.NE.143, 513 N.W.2d 303,
      245 Neb. 366 (Neb. 03/18/1994).

28.   Nevada

      No known cases

29.   New Hampshire

      *The Cadle Company v. Maurice Bourgeois, 149 N.H. 410
      (4/28/2003).




                         71
      *Baybank v. Catamount Construction, 1997 N.H. 36 (N.H.
      04/24/1997).

30.   New Jersey

      *Zavodnick v. Leven, 340 N.J.Super. 94, 773 A.2d 1170
      (N.J.Super.App.Div. 04/27/2001).

31.   New Mexico

      *Galef v. Buena Vista Dairy, 117 N.M. 701, 875 P.2d 1132
      (N.M.App. 05/16/1994).

32.   New York

      *Iser Abramovitz v. Kew Realty Equities et. al, 652 N.Y.S.2d 737
      (N.Y.App. Div. 01/23/1997).

33.   North Carolina

      *Herring v. Keasler, 563 S.E.2d 614 (N.C.App. 06/04/2002).

34.   North Dakota

      No known cases

35.   Ohio

      *In the Matter of The Estate of Richard C. Lanning, No. 00 CA
      110 (Ohio.App. 03/13/2003).
      *Geoffrey E. Webster v. Dalcoma Limited Partnership Four,
      CA2000-11-028 (09/17/2001).
      *Monroe v. Berger, No. C-980269 (Ohio App. Dist.1 09/05/2001).
      *Larson v. Kaley, No. 2000-P-0041 (Ohio App. Dist.11
      06/09/2000).
      *Banc One Captial Partners v. Robert Russell, No. 74086
      (Ohio.App. 06/24/1999).

36.   Oklahoma

      *Major Real Estate & Investment Corp. v. Republic Financial, 695
      P.2d 893, 1985 OK CIV APP 6 (Okla.App.Div.1 02/12/1985).

37.   Oregon




                        72
      *Shinn v. Vaughn, 83 Or.App. 251, 730 P.2d 1290 (Or.App.
      12/31/1986).

38.   Pennsylvania

      *Carol Diament v. John Diament, 2003 PA Super 19; 816 A.2d
      256 (Pa. 01/23/2003).
      *Advanced Telephone Systems, Inc. v. Com-Net Professional
      Mobile Radio LLC, 59 PA D.&C.4th 286 (Pa. 05/15/2002).
      *Rugg v. Green Acres Contracting Co., Inc., 55 PA D.&C.4th 149
      (Pa. 11/28/2001).

39.   Rhode Island

      No known cases

40.   South Carolina

      No known cases

41.   South Dakota

      No known cases

42.   Tennessee

      No known cases

43.   Texas

      *Liptak v. Richard E. Colgin I, Ltd., No. 05-99-00583-CV
      (Tex.App. Dist.5 03/12/2002).
      *Angelo Dispensa v. University State Bank, 1997 TX 2375
      (Tex.App. Dist.6 08/13/1997).
      *Rosedale Partners v. 131st Judicial District Court, No. 04-93-
      00732-CV (Tex.App. Dist.4 01/12/1994).

44.   Utah

      *Aspenwood, LLC v C.A.T., LLC, 73 P.3d 947 (Utah App.
      02/06/2003).

45.   Vermont

      No known cases




                         73
                 46.      Virginia

                          *Ainslie v. Inman, 265 Va. 347, 577 S.E.2d 246 (Va. 02/28/2003).

                 47.      Washington

                          *Koh v Inno Pacific Holdings Ltd, 114 Wash App 268, 54 P.3d
                          (Wash App Div 1 10/07/2002).

                 48.      West Virginia

                          No known cases

                 49.      Wisconsin

                          No known cases

                 50.      Wyoming

                          *Robert Christensen v. John Oedekoven, 1995.WY.3 (Wyo.App.
                          03/23/1995).

XXXIV.           Alternative Asset Protection Structures

        A.       One of the objectives of this outline is to describe some creditor protection
                 alternatives to a self-settled asset protection trust structure.

        B.       Many of the creditor protection alternative structures are superior to the
                 typical self-settled asset protection trust/family limited partnership
                 structure because of the ability to combine creditor protection planning
                 with estate tax planning.

        C.       The typical self-settled asset protection trust structure is set up as follows:

                 1.       The grantor sets up an irrevocable trust for the benefit of himself
                          and certain family members such as his spouse and his descendants.
                          An independent trustee has the discretion to make distributions to
                          the grantor or to any of the other beneficiaries. The trust is
                          established in either an offshore jurisdiction or in one of the five
                          domestic jurisdictions that allows self-settled asset protection trusts,
                          such as Nevada.168



168
   The five domestic jurisdictions that have a full self-settled creditor protection statute are Alaska,
Delaware, Nevada, Rhode Island and Utah. Nevada is generally considered the best of the five states
because it has the shortest statute of limitations period.



                                                74
         2.     The grantor and the trustee of the self-settled asset protection trust
                set up and fund a family limited partnership. Usually, the grantor
                will own a 1% general partnership interest, and the asset protection
                trust will own a 99% limited partnership interest. This basic
                structure gives the grantor 100% of the management and control
                over the partnership assets, yet 99% of the assets are protected in
                the asset protection trust.

         3.     If the family limited partnership has been domiciled in a
                jurisdiction in which the state law makes the charging order the
                exclusive remedy of a judgment creditor, then even if the trust does
                not work (such as a situation where the state of limitations has not
                yet run prior to the creditor filing a lawsuit), the charging order
                protection provides a second layer of defense, although not quite as
                protective as the asset protection trust would have been (since the
                debtor cannot access the assets).

         4.     It is clear that completed gifts may be made to a domestic self-
                settled asset protection trust, but it is unclear whether the gifted
                assets will also be excluded from the grantor’s taxable estate.

    D.   Certain more sophisticated alternative structures can provide similar and
         often better protection, often with estate tax benefits as well.

    E.   Some examples, already discussed above, include the dynasty trust, the
         Inheritor’s Trust™ and opportunity shifting. But each of those concepts
         relates to protecting future wealth. How can we structure our clients’
         existing assets to protect those assets from creditors? The following
         Sections of this outline lay out some alternative structures.

XXXV.    The Inheritor’s Trust™/FLP Combo

    A.   Assume that you client has a $1 million publicly traded securities portfolio
         that is currently owned outright and therefore is exposed to the client’s
         creditors, including a spouse in the context of divorce.

    B.   Consider setting up an Inheritor’s Trust™ and, rather than waiting for the
         parent (or grandparent or other third party) to die, have the client’s parent
         fund it now with a gift of $10,000.

    C.   Since the trust is funded with a gift from a third party, it is creditor
         protected and, if designed correctly, estate tax protected.

    D.   The client/primary beneficiary is named as investment trustee, and such
         primary beneficiary selects a close friend as distribution trustee with the




                                    75
     trust drafted where the independent trustee has absolute discretion over
     both income and principal distributions.

E.   As investment trustee, the primary beneficiary forms a family limited
     partnership with himself individually (or his revocable trust) as the other
     partner.

F.   The client, on behalf of the Inheritor’s Trust™, contributes its $10,000 to
     the partnership for a 1% general partnership interest, and the client
     individually contributes $990,000 worth of his marketable securities
     portfolio for a 99% limited partnership interest.

G.   These relatively simple maneuvers create the following results:

     1.    The client still has access to 100% of the $1 million worth of assets.

     2.     The client controls 100% of the assets as the investment trustee of
            the Inheritor’s Trust™ which holds the 1% general partnership
            interest.

     3.     If the family limited partnership is established in one of the states
            in which the charging order is the exclusive remedy of a judgment
            creditor, then the best case scenario for a creditor, short of settling
            the lawsuit, is to obtain a charging order over the 99% limited
            partnership interest.

     4.     The 1% general partnership interest is protected from creditors
            since it is owned by a trust that was set up and funded by a third
            party.

     5.     Upon the death of the client, the 99% limited partnership interest is
            reported on his estate tax return. The 1% general partnership is not
            reported on his estate tax return since it is owned by the Inheritor’s
            Trust™, not by the client. Therefore, the limited partnership
            interest is valued on the estate tax return at a discount from pro rata
            value to reflect minority and marketability discounts. Assuming a
            30% valuation discount, this saves the heirs almost $150,000.

H.   What do we do if the client has a $10 million asset to protect rather than a
     $1 million asset?

     1.     Although there is no statutory prohibition against the Inheritor’s
            Trust™ contributing $10,000 for a 0.1% general partnership
            interest and the client contributing $9,990,000 for a 99.9% limited
            partnership interest, it would be safer to create a less thinly




                                76
                 capitalized general partnership interest to take away the argument
                 that this structure is a sham.

          2.     Assuming the client’s parent is not willing and able to make a gift
                 of $100,000 to the trust in order to increase the trust’s ability to
                 buy in for a larger interest, one alternative is for the grantor to gift
                 $10,000 to the trust, and then have the client loan the other
                 $90,000 to the trust in exchange for a low interest promissory note.
                 Using this additional step, the trust now has enough money to
                 make its capital contribution to the partnership.

     I.   Another option to decrease the required capital contribution obligation of
          the Inheritor’s Trust is to create a limited liability company to own the 1%
          general partnership interest. The limited liability company would be
          structured with a 1% voting membership interest and a 99% non-voting
          interest so that the real control of the assets is lodged in the hands of
          whoever owns the 1% voting interest of the LLC (which owns the
          controlling interest of the partnership). Thus, the capitalization needed by
          the Inheritor’s Trust™ is 1% of 1% of the total assets. This strategy is
          especially useful when we are dealing with $100 million and $1 billion or
          larger estates where even 1% is a high number.

     J.   Each of the strategies outlined in this section also work with a limited
          liability company structured with a 1% voting membership interest and a
          99% non-voting interest, or with a corporation structured with 1% voting
          stock and 99% non-voting stock. If a corporation is used, then if it is a
          Subchapter S corporation, the Inheritor’s Trust™ would need be a
          qualified owner of such stock.

XXXVI.    Sale of Voting Interest to Inheritor’s Trust™

     A.   Assume that the client owns a business worth $1 million. The business
          may be owned as a corporation, a limited liability company or a limited
          partnership. Regardless of the form of ownership, the following strategy
          may be utilized to create the same end result as the Inheritor’s
          Trust™/FLP combo outlined above, but with some slightly different steps,
          and with some additional issues which can be handled as discussed below.

          1.     First, recapitalize the business entity into 1% voting and 99% non-
                 voting.

          2.     Next, have the business owner’s/client’s parent (or other third
                 party) set up and fund an Inheritor’s Trust™ for the benefit of the
                 client and the client’s family. Assume that the grantor gifts
                 $20,000 to the trust.




                                     77
                    3.      After that, have the client sell the 1% voting interest to the trust in
                            exchange for cash (or in exchange for a promissory note in the case
                            where the trust does not have enough cash to pay for the voting
                            interest). The fair market value of the voting interest should reflect
                            a small control premium so that the sales price will be a little
                            higher than 1% of the value of the business.

                    4.      This moves the voting interest to the Inheritor’s Trust™ where it is
                            protected from creditors. This is especially valuable for our clients
                            who own their businesses in corporate form since their personal
                            creditor can take their corporate stock if it is not insulated in a
                            creditor protected structure.

                    5.      If the Inheritor’s Trust™ is designed and funded so that the
                            primary beneficiary is treated as the owner of the trust for income
                            tax purposes under §678 of the Code, then the sale to the trust will
                            not have any income tax consequences.169

           B.       Similar to the results obtained using the Inheritor’s Trust™/FLP combo as
                    explained in the previous section of this outline, the following results are
                    obtained:

                    1.      The client still has access to 100% of the business assets.

                    2.      The client controls 100% of the business as the investment trustee
                            of the Inheritor’s Trust™ which holds the 1% voting interest.

                    3.      The 1% voting interest is protected from creditors since it is owned
                            by a trust that was set up and funded by a third party.

                    4.      Upon the death of the client, the 99% non-voting interest is
                            reported on his estate tax return. The 1% voting interest is not
                            reported on his estate tax return since it is owned by the Inheritor’s
                            Trust™, not by the client. Therefore, the non-voting interest is
                            valued on the estate tax return at a discount from pro rata value to
                            reflect minority and marketability discounts.

           C.       How do we protect against an undervaluation or an overvaluation of the
                    1% voting interest for purposes of the sale?

                    1.      To protect against an undervaluation or overvaluation, we structure
                            the sales agreement as a part sale and part trust distribution using a



169
      Rev. Rul. 85-13, 1985-1 C.B. 184.



                                                78
                           defined value clause170, and then we intentionally have the trustees
                           of the Inheritor’s Trust™ “overpay” for the interest.

                   2.      For example, assume an appraiser concludes that the 1% voting
                           interest has a pro rata value of $10,000 and a fair market value of
                           $14,000 to reflect a 40% control premium.171

                   3.      The parties might execute a part sales agreement/part discretionary
                           distribution agreement using a defined value formula whereby both
                           the investment trustee (i.e., the client) and the distribution trustee
                           of the Inheritor’s Trust™ sign on behalf of the trust agreeing to
                           pay $20,000 to the client (i) to purchase the 1% voting interest, and
                           (ii) to make a discretionary distribution to the client for any
                           amount of the $20,000 that exceeds the purchase price. The
                           investment trustee is signing the agreement to make the purchase
                           of the voting interest, and the distribution trustee is signing the
                           agreement to approve any “overpayment” as a discretionary
                           distribution.

                   4.      As long as the purchase price does not exceed $20,000, this
                           defined value clause and intentional “overpayment” should protect
                           the client from inadvertently making a transfer with a retained
                           interest into the trust. A transfer with a retained interest would
                           cause both estate tax problems172 and creditor problems173.

XXXVII.            The Dual Spousal Trust Structure

           A.      It is well established that an irrevocable trust set up by a third party is
                   generally protected from the creditors of the beneficiaries of the trust
                   subject to certain exceptions examined elsewhere in this outline. This rule
                   holds true even when the grantor’s spouse is a beneficiary of the trust.




170
   See McCaffrey and Kalik, Using Valuation Clauses to Avoid Gift Taxes, 125 Trusts & Estates 47
(October 1986); see also McCaffrey, Some Tips on Tax Tuning Gifts, 137 Trusts & Estates 87 (August
1998). These articles do an excellent job of explaining defined value clauses, although the context of the
clauses in these articles are somewhat different than that which is being used in this outline.
171
   Note that if the fair market value is going to be very small, it may not be economically feasible to hire a
business valuation appraiser to determine the control premium. In such a case, the transaction should be
structured with a much greater “overpayment” to reflect the additional amount of uncertainty involved.
172
      IRC §2036.
173
    Unless the trust were set up under the law of one of the five states that allows self-settled asset
protection trusts, and unless the trust terms qualified under the requirements of such law, this self-settled
trust would be open to creditors to an extent because the client would be treated as having made a transfer
without fair and adequate consideration to a trust in which he is a beneficiary.



                                                   79
           B.       However, if each spouse sets up nearly identical trusts for each other, for
                    estate tax purposes they run the risk of violating the reciprocal trust
                    doctrine.

           C.       The reciprocal trust doctrine may be applied when two grantors create
                    nearly identical trusts at approximately the same time, generally for each
                    other’s benefit. The seminal case defining the reciprocal trust doctrine was
                    the Estate of Grace.174

           D.       However, in Estate of Levy175, the decedent and his wife had each created
                    a trust for the other on the same day. The trusts were identical except that
                    the trust Mr. Levy set up for Mrs. Levy gave her a special power of
                    appointment, whereas the trust Mrs. Levy set up for Mr. Levy did not give
                    Mr. Levy a special power of appointment. The court found that because a
                    power of appointment was granted in one trust, but not in the other, they
                    had substantially different interests in the trusts and, consequently, the
                    trusts were not interrelated for purposes of the reciprocal trust doctrine.

           E.       For estate tax purposes, the Levy case would seem to stand for the absolute
                    minimum degree of differences that may be acceptable in planning around
                    the reciprocal trust doctrine. However, in the opinion of the author, the
                    cautious planner should do much more to avoid the doctrine than simply
                    creating that one difference between the two trusts.

           F.       In creating a Dual Spousal Trust Structure, the planner should consider
                    creditor protection planning objectives as well as estate tax planning
                    objectives, which is the reason the reciprocal trust doctrine has been
                    explained above.

           G.       The Dual Spousal Trust Structure involves each spouse setting up a trust
                    for the other spouse’s benefit. Each trust will be sufficiently different from
                    the other in order to avoid the reciprocal trust doctrine.

           H.       The assets gifted and/or sold on an installment basis to the trusts are
                    protected from creditors and estate taxes.

           I.       This is a very simple yet effective creditor protection structure. The only
                    drawback to this structure is that each spouse loses access to the assets that
                    spouse transferred in trust for the other. As long as the beneficiary/spouse
                    is still living, the grantor/spouse has indirect access to the transferred
                    assets. But after one spouse dies, the surviving spouse only has access to
                    the trust the deceased spouse set up since the other trust would be for the
                    benefit of the descendants at that time.

174
      395 U.S. 316 (1969).
175
      52 T.C.M (P-H) P 83,453 (1983).



                                               80
        J.      However, this negative attribute can be minimized to a large extent by
                combining the Dual Spousal Trust Structure with a family limited
                partnership.

XXXVIII.        The Dual Spousal Trust and FLP Structure

        A.      The Dual Spousal Trust and FLP structure involves the creation of two
                spousal trusts and a family limited partnership. Each spouse might own a
                1% general partnership interest, and each spousal trust might own a 49%
                limited partnership interest. Because this ownership structure is identical
                (in this example), it is of utmost importance that every precaution be taken
                to avoid the reciprocal trust doctrine. The trusts should be very, very
                different from each other.

        B.      The advantage to using the family limited partnership structure is that the
                survivor of the spouses will inherit the decedent spouse’s general
                partnership interest and therefore still control the partnership. Although
                the survivor would lose access to 49% of the partnership, the retention of
                the control will enable the survivor to access some of the income as a
                management fee.

        C.      The ability to obtain such strong creditor protection, as well as the ability
                to get paid a management fee is often an acceptable trade-off versus the
                loss of 49% of the partnership distributions.

        D.      Therefore, in the right situation this structure works very well.

XXXIX.          Asset Protection and Individual Retirement Accounts176

        A.      This portion of the outline deals with the state and federal exemptions that
                may apply to an Individual Retirement Account (IRA).

        B.      Potential Federal Exemption

                1.      For a debtor who lives in a state that has exercised its right to opt
                        out of the Bankruptcy Code (Code) exemptions contained in
                        §522(d), the Code exemptions discussed below are not available.
                        However, if a debtor lives in a state that has not exercised its right
                        to opt out of the Code exemption, either the Code exemptions or
                        the state law exemptions are available.

                2.      The elect out provisions are contained in Code §522(b)(1).

176
   The author would like to thank Rod Goodwin MST, Anderson & Dorn, Ltd., Attorneys, Reno, NV, for
his extensive research and assistance in preparing this section of the outline.



                                             81
                     3.       The states currently electing out are: Alabama, Arizona, Arkansas,
                              California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois,
                              Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
                              Mississippi, Missouri, Montana, Nebraska, Nevada, New
                              Hampshire, New York, North Carolina, North Dakota, Ohio,
                              Oklahoma, Oregon, South Dakota, Tennessee, Utah, Virginia,
                              West Virginia, and Wyoming.177

                     4.       In these states, the federal exemptions, including Code
                              §522(d)(10)(E), discussed immediately below, would not be
                              available and the state exemption statues would control.

                     5.       Code §522(d)(10)(E) exempts “…a payment under a stock bonus,
                              pension, profitsharing (sic), annuity or similar plan or contract…”
                              The Supreme Court addressed the application of Code
                              §522(d)(10)(E) to an IRA in Patterson v. Shumate. 178 The
                              Patterson Court first noted that “pension plans that qualify for
                              preferential tax treatment under 26 U.S.C. section 408 (individual
                              retirement accounts) are specifically excepted from ERISA's anti-
                              alienation requirement.” Because the IRA was excepted from
                              ERISA’s anti-alienation requirement, the Court found that the
                              exceptions provided in Code §541(c)(2) were inapplicable.
                              However, the Court recognized that the exceptions provided in
                              Code §541(c)(2) were much more narrow than the exemptions
                              provided in Code §522(d)(10)(E). Therefore, the Court held that
                              an IRA is excluded from a Bankruptcy Court proceeding under the
                              broader provisions of Code §522(d)(10)(E).

                     6.       Patterson was followed by Appeals Court decisions in: (i) In re
                              Carmichael, 179 which held that the debtor’s IRA was exempt as “a
                              similar plan or contract” under Code §522(d)(10)(E), (ii) In re
                              Dubroff,180 similar holding, (iii) In re Mckown,181 similar holding,
                              and (iv) In re Dubroff, 182 similar holding. However, in In re
                              Rousey, 183 the court held that IRAs are not exempted by Code
                              §522(d)(10)(E) because the court was bound by precedent in the

177
   Spero, Asset Protection: Legal Planning, Strategies and Forms: Warren Gorham & Lamont 2001,
updated to 2004, 12-63.
178
      504 U.S. 753 (1992).
179
      100 F.3d 375, (5th Cir. 1996).
180
      119 F.3d 75, 78 (2nd Cir. 1997).
181
      203 F.3d 1188, 1190 (9th Cir. 2000).
182
      119 F.3d 75, 78 (2nd Cir. 1997).
183
      347 F.3d 689 (8th Cir. 2003).



                                                 82
                              8th Circuit. Rousey is currently before the Supreme Court,184 and
                              we must await the final determination.

            C.       Pre-bankruptcy Planning: The Transfer of IRA Funds to a Qualified Plan,
                     or Other Exempt Asset, as Allowable or Treated as a Fraudulent
                     Conveyance

                     1.       The transfer of a non-exempt or limited exemption IRA balance to
                              a completely exempt ERISA qualified plan, or to another exempt
                              asset, may be an acceptable pre-bankruptcy planning option,
                              depending upon the jurisdiction in which the debtor files.

                     2.       In the 9th Circuit two cases have examined this issue.

                     3.       In Schwartzman v. Wilshinsky,185 the court held that the conversion
                              of non-exempt assets to exempt assets was a permitted action
                              under the relevant statutes:

                              “The very purpose of the exemption is to permit a judgment debtor
                              to place funds beyond the reach of creditors, so long as they
                              qualify for the exemption under the law. (See Yaesu Electronics
                              Corp. v. Tamura, supra, 28 Cal.App.4th at p. 13.) Thus, a transfer
                              which might otherwise be fraudulent is permitted if the funds
                              qualify for an exemption. There is nothing in the statute, however,
                              which would permit denial of an exemption on the ground that
                              unrelated funds are ineligible and have been fraudulently
                              transferred.”

                     4.       The 9th Circuit Court of Appeals made an even stronger statement
                              regarding the ability of a debtor to convert non-exempt funds into
                              exempt funds as part of pre-bankruptcy planning. In In re
                              Stern, 186 the Court of Appeals dealt with a debtor who had
                              transferred $1.4 million from an IRA to a qualified plan as part of
                              the pre-bankruptcy planning. At issue was whether the transfer to
                              the qualified plan was fraudulent. The court cited a prior case,
                              Wudrick v. Clements, 187 which held “that the purposeful
                              conversion of non-exempt assets to exempt assets on the eve of
                              bankruptcy is not fraudulent per se.” Relying on this precedent, the
                              court found that a mere inference that “non-exempt assets were
                              converted to exempt assets immediately prior to bankruptcy . . . . is
                              insufficient as a matter of law to establish a fraudulent transfer.”
184
      cert. granted, 124 S. Ct. 2817 (2004).
185
      50 Cal. App. 4th, 619, 629 (1996).
186
      317, F.3rd 1111 (9th Cir. 2003).
187
      451 F2d 988, 989 (9th Cir. 1971).



                                                 83
                      5.     Contrasting with this strong policy towards allowing conversions,
                             is the 11th Circuit’s decision in In re Levine.188 The issue in Levine
                             again was whether the conversion of funds from non-exempt to
                             exempt status constituted a fraudulent transfer under Florida
                             Statute § 726.105. Relying on the precedent of a previous case, In
                             re Gefen, 189 the Court found that the conversion of the debtor’s
                             IRA into exempt-status annuities was made with the intent to
                             hinder, delay or defraud a known creditor, and that the transferred
                             funds were includable in the debtor’s bankruptcy estate.

                      6.     The determination of the conversion of IRA balances to exempt, or
                             more exempt qualified plans or annuities, is ultimately governed
                             by the policy of the jurisdiction at issue regarding the ability to
                             convert as an acceptable pre-bankruptcy planning step. As such, it
                             is necessary for the planner to check the fraudulent transfer
                             decisions in the relevant jurisdiction as to how the courts apply the
                             standards to conversions from non-exempt to exempt assets.

XL.        Other Creditor Protection Strategies – Tenancy by the Entirety (Craft)

           A.         A tenancy by the entirety is a form of property ownership whereby a
                      husband and wife own property as a marital unit. Similar to a joint tenancy,
                      the tenancy by the entirety offers survivorship, so that upon the death of
                      one spouse the property automatically passes to the surviving spouse in
                      fee simple. However, unlike a joint tenancy, a tenancy by the entirety is
                      not severable unilaterally. Instead, the tenancy by the entirety may be
                      severed only by divorce or by the consent of both parties.

           B.         Although the tenancy by the entirety developed out of common law, only
                      about half of the states retain this form of ownership.

           C.         Property held as tenants by the entirety is generally thought to be protected
                      from creditors because the marital unit, not the individual debtor spouse,
                      owns the property. Additionally, because both spouses are required to
                      approve any conveyance of the property, a creditor cannot compel the
                      distribution of tenancy by the entirety property. This generalization holds
                      true for claims brought under state law, such as tort actions.




188
      No. 96-28903.
189
   35 B.R. 368 (Bankr.S.D.Fla.1984) (holding that a the cash value of an IRA may be withdrawn by a
creditor when the transfer from the IRA to a deferred annuity had the legal effect of defrauding, delaying or
hindering creditors).



                                                  84
           D.       In United States v. Craft, 190 the Supreme Court limited the scope of
                    protection afforded by a tenancy by the entirety, deciding that a federal tax
                    lien against a husband could attach to his share of property held with his
                    wife as tenants by the entirety.

           E.       Don Craft, after failing to file federal income tax returns for eight years,
                    accrued almost $500,000 in unpaid income tax liabilities. After he failed
                    to pay his debt to the government, a federal tax lien attached to “all
                    property and rights to property, whether real or personal, belonging to”
                    him.191 At the time the lien attached, Don and his wife, Sandra Craft,
                    owned a piece of real property in Michigan as tenants by the entirety.

           F.       After Don Craft received notice of the federal tax lien, he transferred his
                    interest in the Michigan real property to his wife for consideration of one
                    dollar. Years later, when Sandra Craft attempted to sell the Michigan
                    property, a title search returned with a cloud from the lien. The IRS agreed
                    to allow the sale by releasing the lien, provided that one-half of the
                    proceeds be held in escrow until a determination of the Government’s
                    interest in the property.

           G.       Sandra Craft brought an action to quiet title to the escrowed proceeds of
                    the sale. The Government argued that the federal tax lien attached to all
                    property and rights to property owned by Don Craft, including his interest
                    in the tenancy by the entirety. The District Court granted summary
                    judgment for the Government, finding that the lien attached when the
                    tenancy by the entirety terminated, specifically, when the husband
                    transferred his interest in the Michigan property to his wife.

           H.       On appeal, the Sixth Circuit Court of Appeals found that the tax lien did
                    not attach to the Michigan real property because under Michigan state law,
                    Don Craft had no separate interest in the property held as tenants by the
                    entirety. After remand, the case was appealed to the United States
                    Supreme Court.

           I.       The central issue before the Supreme Court was whether Don Craft’s
                    interest in the entirety property qualified as “property” or “rights to
                    property” under IRC § 6321. Relying on the reasoning of Drye v. United
                    States192 (see discussion below), the Court found that it must first analyze
                    state law in order to determine what rights the taxpayer has to the property
                    subject to the lien, and secondly it must analyze federal law in order to
                    determine whether the rights held by the taxpayer under state law qualify
                    as “property” or “rights to property” under the federal tax lien statute. The
190
      535 US 274 (2002).
191
      IRC § 6321.
192
      528 U.S. 49 (1999).



                                               85
                 Court ruled that the first prong of the determination, the analysis of state
                 law, required examination of the substance of the rights provided by state
                 laws.

            J.   Michigan law treats property in tenancy by the entirety as owned by the
                 marital unit, and therefore under state law, Don Craft had no separate
                 interest in the property. However, the Supreme Court looked beyond the
                 language of the law. Specifically, because Don Craft had the right to use
                 the property, to exclude others from the property, to become a tenant in
                 common upon divorce and to unilaterally block the sale or encumbrance
                 of the property, the Court found that he had a right to the property under
                 the definition of IRC § 6321.

            K.   In concluding that the husband’s interest in the tenancy by the entirety
                 property was “property” or a “right to property,” the Court also focused on
                 the fact that if an interest in entireties property were not so categorized,
                 then no one would own the property for purposes of IRC § 6321. Because
                 the entireties property was “property” or a “right to property” under IRC §
                 6321, the Court found that a federal tax lien against one spouse could
                 properly attach to the tenancy by the entirety property.

            L.   As a result of the Craft case, the strength of asset protection afforded by a
                 tenancy by the entirety is weakened. Although it appears that entireties
                 property retains its protection from state creditors, it is no longer protected
                 from federal creditors.

XLI. Other Creditor Protection Strategies – Disclaimers (Drye)

            A.   A person may disclaim an interest in inherited property within nine
                 months of a decedent’s death. The effect of a disclaimer is to treat the
                 person disclaiming as though he had predeceased the decedent. As a result,
                 the disclaimant’s share of the inheritance passes according to will or to the
                 decedent’s state’s intestacy statutes. The disclaimer has long been used as
                 a method of making tax-free gifts to the eventual beneficiary of the
                 property. In addition, those who may be subject to attack from creditors
                 may utilize a disclaimer to pass inherited property to a more protected
                 individual, such as a young child.

            B.   In 1999, the Supreme Court issued a ruling in Drye v. United States,193
                 finding that a disclaimed inheritance qualified as “property and rights to
                 property” under IRC § 6321.

            C.   Irma Drye died in 1994, leaving her estate to pass by intestacy. Her sole
                 heir under Arkansas law was her son, Rohn F. Drye, Jr., an insolvent man

193
      Id.



                                             86
                    who at the date of his mother’s death owed the government more than
                    $300,000 in tax deficiencies. After petitioning to become the administrator
                    of his mother’s estate, Drye, Jr. served for six months and then filed a
                    written disclaimer of all interests he held in his mother’s estate. Once he
                    disclaimed his interest, under Arkansas law, Drye, Jr.’s daughter, Theresa
                    Drye, became the sole beneficiary of Irma Drye’s estate. When the estate
                    was fully administered and Theresa Drye received the final distribution,
                    she thereupon took the proceeds she received from her grandmother’s
                    estate and used it to create a spendthrift trust under which she and her
                    parents were HEMS beneficiaries.

           D.       While negotiating his tax liabilities with the IRS, Drye, Jr. divulged that
                    he had a beneficial interest in the trust his daughter established. Shortly
                    thereafter, the IRS attached a federal tax lien against the trust. The trust
                    filed a wrongful levy action against the government in the District Court.
                    The District Court found for the government, and the Court of Appeals
                    affirmed. The case was then appealed to the Supreme Court.

           E.       In analyzing whether the government properly attached a federal tax lien
                    against the disclaimed property, the Supreme Court looked to IRC § 6321.
                    It noted that the language of that statute is very broad, and is “meant to
                    reach every interest in property that a taxpayer might have.”194 The Court
                    stated that it must look first to whether the taxpayer has a state-law right to
                    the property, and then to whether the state-law right qualifies as
                    “property” or “rights to property” within the meaning of IRC § 6321.

           F.       Drye argued that once he disclaimed his inheritance, he no longer had a
                    right to the property. The Court noted that Drye indeed had a right to
                    disclaim his inheritance under Arkansas law. However, the Court found
                    that the right to disclaim, in itself, was “a right of considerable value,”
                    because Drye could choose to inherit or to pass his inheritance off to a
                    family member. The Court cited Morgan v. Comm’r195 for the proposition
                    that “[t]he important consideration [in determining whether state-law
                    rights are ‘property’ or ‘rights to property’ under IRC §6321] is the
                    breadth of control the [taxpayer] could exercise over the property.”
                    Because a person controls the very disposition of inherited property when
                    they choose to disclaim it, disclaimed property is “property” or a “right to
                    property” and therefore subject to federal tax liens.

           G.       As a result of the Drye case, a disclaimer is no longer an effective tool to
                    protect an inheritance from a federal creditor. However, like the tenancy
                    by the entirety, it may still provide protection from creditors bringing suit
                    under state law.

194
      Id. (citing United States v. National Bank of Commerce, 472 U.S. 713, 719-720 (1985)).
195
      309 U.S. 78, 83 (1940).



                                                    87
H.   The application of the Drye case extends beyond disclaimed property. The
     Court extended the definition of “property” or “rights to property” to any
     property a taxpayer has control over pursuant state law. The impact of this
     extension was seen in the Craft case, where the court attached a federal tax
     lien against property held as tenancy by the entirety. The likely result of
     the Court’s broad ruling is weakened creditor protection, at least on the
     federal level, of other asset protection tools which allow the taxpayer to
     retain some control over his property.




                                88

				
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