Asset and Wealth Protection

The Denman Law Firm is committed to assisting our clients in their goal to protect and preserve the wealth they have accumulated. In the past, it was quite common to draft estate plans so as to distribute assets outright to beneficiaries at the decedent's death.  However, the increase in marital separation and divorce, and ever expanding legal theories of liability calls into question the prudence of this type of planning.  Wills or revocable living trusts can provide asset protection for a surviving spouse as well as remainder beneficiaries (typically children and grandchildren).  By utilizing these traditional estate planning vehicles along with spendthrift provisions, trustee discretion for distribution of income and/or principal, utilizing an "independent" trustee" (someone other than the ultimate beneficiary), co-trustees (the beneficiary and an "independent trustee"), and an independent trust protector who can remove and replace an "independent trustee".  By utilizing these drafting strategies and others, what was intended to benefit beneficiaries can often be protected from the claims of creditors, including claims for alimony and child support, judgment creditors, and governmental claims for taxes.

The Denman Law Firm is ready and equipped to review and update our clients existing estate plans or set up an estate plan for those who have none, utilizing asset and wealth protection strategies. A more detailed discussion of those strategies is discussed below: 

Spendthrift Trusts

A Spendthrift Trust is defined as a "trust created to provide a fund for the maintenance of a beneficiary and at the same time to secure the fund against his or her improvidence or incapacity". Black's Law Dictionary 1400, (6th Edition, West 1990).  The spendthrift provisions of such a trust are designed to prevent the beneficiary or his or her creditors from reaching the trust assets.  By giving only a certain portion of the trust assets to the beneficiary at a time, it protects the beneficiary from spending all of the assets in the beneficiary's trust.  The spendthrift provisions also prevent creditors of the beneficiary from attaching the assets of the trust.  Most states, including Florida, will enforce the spendthrift trust provisions.

State law generally provides that a creditor "steps into the shoes" of the judgment debtor.  As a result, a creditor may, after obtaining a judgment and a court order allowing execution, generally exercise any right or power that the beneficiary has to demand income or principal from a trust for the benefit of that beneficiary.  By drafting a spendthrift provision in a trust, the beneficiary can be prevented from assigning his trust interest.

Discretionary Trusts

Another asset protection strategy that can be employed with a spendthrift provision or independent of a trust containing a spendthrift provision, is to give the trustee discretion to pay income and/or principal to the beneficiary.  This is sometimes referred to as a Discretionary Trust.  A pure Discretionary Trust is one in which the trustee has absolute discretion "as to whether and when distributions may be made to beneficiaries".  Black's Law Dictionary, 1510, (6th Edition, West 1990).  These trust provisions can be applied to income and/or principal depending upon the level of protection desired.  This protection which is much greater than that afforded by a Spendthrift Trust, comes at the price of leaving the beneficiary at the mercy of the trustee's judgment to withhold or distribute trust income and principal. The fact that the beneficiary cannot compel a trust distribution is what provides the asset protection.  The Discretionary Trust is most appropriate when the beneficiary is at high risk and the grantor of the trust is comfortable that the trustee will act in accordance with the grantor's wishes.  

Support Trusts and Ascertainable Standards

A Support Trust is "a trust which empowers the trustee to pay to the beneficiary only so much of the trust's income (and principal) as is necessary for the beneficiary's support, education and maintenance".  Black's Law Dictionary, 1513, (6th Edition, West 1990).   The creditors of  the beneficiary of a Support Trust cannot reach his interest and such beneficiary cannot transfer his interest, not because of any prohibition against alienation, but because the beneficiary (and therefore his creditors) cannot compel distributions from the trustee other than for the restricted purpose set forth in the trust instrument.

Independent Trustee and Co-Trustees

The trustee of either a Spendthrift Trust or Discretionary Trust should not be allowed under any circumstances to serve as the sole trustee of a trust for that beneficiary.  Since the legal title to the trust property is vested in the trustee of a trust and the beneficial interest is vested in the beneficiary, should the beneficiary become the sole trustee of the trust those interests are united or merged in one person.  This is called the Doctrine of  Merger.  If this occurs the asset protection of the trust is lost.  

Federal Estate and Gift Tax Avoidance

On July 7, 2001 President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Tax Relief Act) into law.   The provisions of this law provide the estate planner and client opportunities to avoid estate and gift taxes if certain strategies are employed.  Examples are using the Applicable Exclusion Amount of both spouses and lifetime gift planning. The following is an overview of some of the provisions of the Act which significantly affect the estate planning area, planning strategies, and techniques. The table below outlines the increases in the Applicable Exclusion Amount and tax rates as they relate to Federal Estate and Gift taxes.

1.   Taxes under the Act

Year in Which Death Occurs	Amount that Can Be Transferred Free of Federal Estate Tax ("Applicable Exclusion Amount")	Highest Estate and Gift Tax Rates (Gift Tax Exemption Remains at $1,000,000)
2002	$1,000,000	50%
2003	$1,000,000	49%
2004	$1,500,000	48%
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	N/A (EstateTax Repealed)	Top Individual Rate for Gift Tax Only
2011	$1,000,000	55%

 

 

 

 

 

 

 

 

 

 

 

The sunset provisions of the Act provide that as of January 1, 2011, the 2001 legislation will sunset. The effect of a sunset of the provisions of the Act is that the 1997 Tax Act will again go into effect and the Applicable Exclusion will revert to $1,000,000. Estate planning strategies may be used to maximize the Applicable Exclusion Amount and the Gift Tax Exemption.

2.   Increases in Retirement Plan Contribution Limits.

Various expansions in retirement plan contribution limits and rules are included in the new legislation. They include voluntary employee contributions to traditional and Roth IRAs, increases in the maximum annual defined benefit contributions and increases in the annual compensation for qualified plan purposes. Increases in the allowable IRA contribution limits begin in 2002, including additional contributions ("catch up contributions") for those age 50 and older. These changes are outlined in the table below.

Year	Maximum Deductible IRA Amount (those under age 50)	Maximum Deductible IRA Amount (those age 50 and older)
2002	$3,000	$3,500
2003	$3,000	$3,500
2004	$3,000	$3,500
2005	$4,000	$4,500
2006	$4,000	$5,000
2007	$4,000	$5,000
2008 and Later	$5,000	$6,000

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