HigH net wortH
tested at the Supreme Court level.
In addition, these trusts have been
used with growing frequency for
nearly 15 years. Also: Laws supporting them have been enacted in a
growing number of states.
MINIMIZING RISK
If you have a high-net-worth client
who is planning to use a self-settled
trust, you can take prudent steps to
lessen the risks that trust assets will
be included in his or her estate.
• Demonstrate that the client was
solvent before and after any transfers to the self-settled trust. Show
that the client retained sufficient
nontrust assets to maintain his or
her lifestyle and pay debts. A bud-
self-settled trusts have been
used with growing frequency
for nearly
years.
self-settled trust.
• The assets transferred to the
trust should be viewed as a safety
net — and not as assets the client will
need to access for income, cash flow
or principal to live on.
• Corroborate that the creation of
the trust and the transfer of assets to
it was not a fraudulent transfer.
bankruptcy trustee can avoid transfers to a self-settled trust or similar
device. So, if you delay making the
client a beneficiary beyond this time
period, you can insulate the trust
from that risk.
• Consider having the trust not
name the client as a beneficiary at
the time of its formation. Instead,
give some person the power to
appoint a class of beneficiaries
(such as descendants of the client’s
grandfather) that might include the
client.
Be aware, however, that this is
a real risk. If the person holding
this power is not a fiduciary, then
there would be no standard that a
court could impose on him or her to
Make sure that the client setting up the trust retains enough other
assets to maintain his or her lifestyle and pay his debts.
get plan and investment plan demonstrating that remaining assets
should provide for the client’s needs
with a reasonable degree of probability may be one way to corroborate this.
For example, run Monte Carlo
simulations demonstrating an
80% or higher probability that the
retained, non-domestic asset protection trust assets will support the
client into his or her 90s.
There is no real guidance yet as to
what life expectancy, or what degree
of assurance, might be necessary to
demonstrate sufficient retained
assets. Therefore, this will be a judgment call.
• While rules of thumb can be
quite misleading, some suggest that
not more than one-third of a client’s
assets should be transferred into a
DIVORCE AND AGING
• If the client becomes a beneficiary of
the self-settled trust only if he or she
is no longer married to the spouse the
client had when the trust was established (in other words, after the spouse
has died or after a divorce), you may
avoid the issue. If the client dies before
the spouse, he or she will never have
been a beneficiary and the trust may
not be able to be classified as a self-settled trust.
• If the client is precluded from
being a beneficiary for some period
of years, it may similarly minimize
tax risks. If the trust prohibits the
client from being able to receive a
benefit for 10 years and a day, for
example, you might achieve additional security.
If the client declares bankruptcy
within 10 years of the transfer, the
appoint your client. Would your cli-
ent be able to sleep at night?
Martin M. Shenkman, CPA, PFS,
J.D., is a Financial Planning contributing writer and estate planner in
Paramus, N.J. He runs laweasy.com,
a free legal website.
