Selection of Asset Protection Trust Jurisdiction

By Monte L. Schatz

A lawsuit for wrongful death and negligence was filed February of 2017 in the Los Angeles Superior Court by parents of their 21 year old son who drowned July of 2015 in the pool of celebrity Demi Moore’s Beverly Hills residence. The suit is being filed against two individuals (Demi Moore’s employees who managed the house) as well as the Tree House Trust. Moore’s property was strategically titled in this trust for asset protection purposes. Moore is not likely to be named individually in the lawsuit because of her residence being held in an asset protection trust.

Most clients should consider effective asset protection strategies. Asset protection requires many legal and tax considerations unique for each client’s situation.

Historically, many trusts placed heavy reliance upon trust spendthrift clauses. These clauses often protected the trust from creditors from satisfying judgments against property held within the trust. However, once a distribution is made from the trust to a beneficiary, the creditor can attach those distributed trust assets to satisfy their judgments. Also, many states exempt certain classes of creditors as a matter of public policy from spendthrift provision. Examples include creditors who have provided essential services, or individuals who have judgments for unpaid alimony or child support liens.

Irrevocable asset protection trusts can provide additional protection from creditor claims. Asset protection trusts can be “domestic” or “offshore”. Before 1997, most asset protection trusts were set up in “offshore jurisdictions” outside the United States and generally were used by only the extremely wealthy. In 1997, Alaska adopted the first state laws for “domestic asset protection” statutes. Many states have since adopted similar laws and other states are considering adopting asset protection laws. The primary differences between the two types of asset protection trusts is that domestic asset protection trusts are not as likely to raise concerns with the IRS as offshore asset protection funds. Creditors may have a more ability to attack a domestic asset protection trust as they are within United States jurisdiction, the fact remains assets are kept offshore in a secure account is something that will raise IRS scrutiny due to prior historical IRS tax evasion scams utilizing offshore trusts.

© 2017 Vandenack Weaver LLC
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In re Castellano: A Strike at Third Party Spendthrift Trusts

By Mary E. Vandenack.

In In re Castellano,  a Bankruptcy Court in Illinois applied Section 548(e) of the  Bankruptcy Code to disregard a third party trust containing spendthrift provisions and conclude that the spendthrift trust was a device similar to a self-settled trust and that the assets of the trust were subject to seizure by the creditors of a trust beneficiary who filed bankruptcy.

Faith Campbell created the Faith M. Campbell Living Trust (“LT”) on February 18, 1997 in South Carolina, where she was a resident. The LT provided that upon Faith’s death, its assets would be divided equally among her children. The LT stated that “[upon] the death of Faith F. Campbell and upon settlement of her estate, this Living Trust shall terminate”.  The LT contained a spendthrift clause as follows:

“If any beneficiary should attempt to alienate, encumber, or dispose of all or any part of the income or principal of this trust before it has been delivered by the Trustee, of if by reason of bankruptcy or insolvency or any attempted execution, levy, attachment, or seizure of any assets remaining in the hands of the Trustee under claims of creditors or otherwise, all or any part of the income or principal might fail to be enjoyed by any beneficiary or might vest in or be enjoyed by some other person, the interest of that beneficiary shall immediately terminate…Thereafter, the Trustee shall pay to or for the benefit of that beneficiary only those amounts that the Trustee, in its sole and absolute discretion, deems advisable for the education and support of that beneficiary until the death of the beneficiary or the maximum period permissible under the South Carolina rule against perpetuities, whichever first occurs.”

Faith died on February 11, 2011, survived by all four of her children, including Linda Castellano (“D”), who was a debtor in the case. Bank of America declined to accept its appointment as trustee and in March 2011 Faith’s children, including D, named the husband of one of Faith’s grandchildren (a nephew by marriage) as trustee.

D filed bankruptcy on November 18, 2011. Prior to filing, D’s counsel sent a letter to the trustee of LT indicating that D was insolvent and directing the trustee to set aside and retain any assets that might otherwise be distributed to D in a spendthrift trust. On October 31, 2011, D signed a receipt acknowledging she would receive no distribution from LT.

The court applied Section 548(e)(1) of the Bankruptcy Code to conclude that the assets in the spendthrift trust were subject to seizure by D’s  creditors. The court concluded that D had made a transfer as a result of the combined effect of the letter from her counsel to the trustee, her signature on the receipt, release and refunding agreement and a “familial” Trustee.

 The court concluded that the transfer by D  was to a device similar to a self-settled trust because the trust was created to shield D from creditors and to preserve the rights of D to future distributions from the trust. The court indicated that D had indirectly created the trust by refusing to take a distribution of assets from LT and instead engaging in a course of action that resulted in setting aside her share of LT in the spendthrift trust.

The court’s decision in this case seems flawed. It is our understanding that counsel for D is considering an appeal.

© 2014 Parsonage Vandenack Williams LLC

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How Can a Lawyer Help Me With Artificial Reproduction?

A Video FAQ with Mary E. Vandenack.

The technical term is assisted reproduction, at least from a legal perspective, and a lawyer can help in a variety of ways. One thing that is really important is that each state’s laws vary on different aspects of  the assisted reproduction process.  You need to understand the state law and the state you are working in. Those laws affect such things as who the parents are. You also need to consider updating your wills and trusts to identify who your heirs are. So you might have a grandparent and one of their grandchildren is the child of assisted reproduction and you need to make decisions about including or excluding, exactly what you mean, when you refer to children and grandchildren in your trust and will documents.

© 2014 Parsonage Vandenack Williams LLC

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What Are the Important Laws Related to Artificial Reproduction?

A Video FAQ with Mary E. Vandenack.

There are a variety of laws that relate to what is actually called assisted reproduction. Most states have some version of a Uniform Parentage Act or some type of law like that. What those laws do is to specify who the father is in the case of a sperm donor and other similar issues. There are also surrogacy laws that define whether surrogacy is permitted, whether it can be paid for, and what type of things you can do in contracts. If you enter into any type of contract related to assisted reproduction, there are a variety of things to consider and each state’s laws govern those aspects.

© 2014 Parsonage Vandenack Williams LLC

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Inherited IRAs Are Not Protected From Creditors

By Mary E. Vandenack.

On June 12, 2014, the Supreme Court ruled that inherited IRAs are not “retirement funds” within the meaning of the federal bankruptcy exemption for retirement funds. In making its decision, the Court distinguished inherited IRAs from IRAs established and held by the owner who originally deposited the funds.

Heidi Heffron-Clark (“D”) became the owner of an inherited IRA in 2001 when her mother died designating Heidi as sole beneficiary of an IRA account. D and her husband filed bankruptcy in 2010 claiming the inherited IRA as an exempt asset under 11 U.S.C. §522(b)(3)(C). The Bankruptcy Court disallowed the exemption. The District Court reversed. The Seventh Circuit reversed the District Court. The Supreme Court granted certiorari to resolve a conflict between the Seventh and Fifth Circuits.

The Court based its conclusion that an inherited IRA is not a retirement fund on three legal characteristics of inherited IRAs. First, the holder of an inherited IRA cannot invest additional funds into an inherited IRA. Second, holders of inherited IRAs are required to withdraw money from the accounts regardless of their age when they inherit the IRA. Third, the holder of an inherited IRA can withdraw the entire IRA, without penalty, at any time whereas original IRA owners are subject to penalties on withdrawals before the age of 59 1/2.

The Court rejected the argument that the bankruptcy definition of retirement funds could be construed as any funds that were set aside for retirement simply because such funds were set aside for retirement by the original owner. The Court noted that such a definition would have the result of treating funds that had been set aside for retirement at some point in time being treated forever as retirement funds regardless of the withdrawal of such funds and later form. By way of example, the Court suggested that such definition would mean that an original IRA owner could withdraw funds, give the funds to a friend who would put the funds in a checking account and then later claim exemption based on the concept that the funds had previously been put in a qualified retirement account.

© 2014 Parsonage Vandenack Williams LLC

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Are There Any Lifetime Planning Options Available to Me to Reduce My Exposure to Estate Taxes?

A Video FAQ with Mary E. Vandenack.

There are a variety of techniques that can be used to reduce your exposure to estate tax. A really simple one is an annual exclusion. Every year you can make a gift to any individual for up to a certain amount–that amount changes from year to year. You can also make lifetime gifts to your heirs/beneficiaries that are going to add up to the maximum amount you can pass during your lifetime. Next you want to go ahead and set up a trust or consider other lifetime planning strategies. There are a variety of trust techniques that will allow you to reduce your exposure to estate taxes. There are also some newer techniques that just using portability in your estate plan that can minimize your exposure to estate taxes.

© 2014 Parsonage Vandenack Williams LLC

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What Is a Revocable Living Trust?

A Video FAQ with Ronald K. Parsonage.

A revocable living trust is a document that is created by yourself as the grantor and its purpose is to hold assets for the benefit of yourself and your family, typically during your and their lifetimes. The idea of a revocable trust is that the assets can pass to or for the benefit of your family without probate. It has another very unique value connected to it in the fact that you can coordinate a lot of tax activities by using skip generation planning within the trust and cause the assets to pass down to your spouse, children and grandchildren without being taxed again.

© 2014 Parsonage Vandenack Williams LLC

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What Benefits Does a Trust Offer?

A Video FAQ with Mary E. Vandenack.

A trust can offer a variety of benefits. One possibility is probate avoidance. If all of your assets are titled in a trust, then the assets are not going to go through the probate process in that state.

Another advantage that a trust can offer is to protect assets from creditors. If I create a trust for my son, depending on how I structure that trust, there are certain protections from his creditors or from a divorcing spouse.

Another benefit of using a trust is to reduce estate taxes. If you have an estate tax exposure, there are certain ways you can structure the trust to protect those assets.

You can also control disposition among a mixed family. If your particular estate plan involves a remarriage and kids from one or more families, you can set up a trust so that each is treated, in some respect, fairly within that trust.

© 2014 Parsonage Vandenack Williams LLC

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Do I Need a New Asset Protection Plan, Trust or Will If I Move to a New State?

A Video FAQ by Mary E. Vandenack.

Certain aspects of estate planning are governed by federal law and certain are governed by state law. It is important when you move from one state to another to give consideration to that state’s law. The asset protection piece of your plan would be very important as the protections provided by each state vary. The trust that you have is going to depend on the type of the trust and its purpose, but there are differences in state law and, at a minimum, you should have the trust reviewed. The same is true with your will. More importantly, you are going to want to review any powers of attorney for health care or legal powers of attorney. There are fairly significant differences in those documents from state to state. On the positive note, most states do have laws respecting documents that have been properly created in another state.

© 2014 Parsonage Vandenack Williams LLC

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Assisting Clients in Avoiding Potential Creditors, What Actions Can an Attorney Take?

By Mary E. Vandenack, Tax Attorney at Parsonage Vandenack Williams LLC, Omaha, Nebraska

The Iowa Supreme Court recently ruled that an attorney did not commit an ethical violation in assisting a client with transactions that were determined by a court to be fraudulent transfers. The opinion of the Iowa Supreme Court offers significant guidance to attorneys who assist clients with asset protection planning.

Mason James Ouderkirk, a longtime Iowa attorney, assisted Rodney Heemstra with a variety of legal matters. In January, 2003, Rodney Heemstra shot and killed his neighbor, Tommy Lyon. Heemstra was ultimately convicted of manslaughter. Lyon’s widow and Lyon’s estate obtained a significant judgment against Heemstra in a civil wrongful death action.

After the shooting and prior to conviction in the criminal proceeding and judgment in the civil proceeding, Heemstra and his spouse made a variety of asset transfers to revocable trusts and an irrevocable trust. After the transfers were held to be fraudulent transfers by a district court, Lyon’s widow filed an ethical complaint against Ouderkirk. The Iowa Supreme Court Disciplinary Board filed a complaint against Ouderkirk for assistance to the Heemstra’s alleging violations of four different provisions of the Iowa Rules of Professional Responsibility.

 In ultimately dismissing all of the complaint made against Ouderkirk, the Court noted that knowingly assisting a client with fraud would violate the ethical rule. In the case of Ouderkirk’s assistance to the Heemstra’s, the Court concluded that the Heemstra’s had made misrepresentations to Ouderkirk and that Ouderkirk had reasonably believed such representations and concluded that the Heemstra’s had a basis on which to proceed with the transfers that were made.

© 2014 Parsonage Vandenack Williams LLC

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