Irrevocable Trust Education & The Laws supporting the Ultra Trust^®

The Ultra Trust^® is Based on Legal Precedent and Supported by Years of Favorable Court Rulings:
The Ultra Trust® is supported by the Uniform Trust Code Section 505 and the Restatement (second) of Trusts Section 156(2) and the Restatement (Third) of Trusts Section 58(2). The majority of states have adopted some or all of these codes. Because the Ultra Trust® adapts to many different state’s codes, the Ultra Trust® works in any state in the United States. Because it is flexible, the Ultra Trust® can take advantage of the added benefits of certain states, or more conservatively, adhere to the strictest state’s rules incase the trust changes situs to a more strict state.

LAW APPLICATION OF THE ULTRA TRUST^®

The Ultra Trust^® is an irrevocable trust that includes the following features:

Creditors have no claim against the trust because no distributions can be made for the settlor’s benefit. However, the settlor may exchange assets of equal value and grant a power of appointment to another person, the Trust Protector, who could potentially provide benefits to the settlor. The cases and statutes below demonstrate that these powers of appointment do not give creditors any claim against the trust. There are no statutes, cases, secondary sources or commentaries to the contrary.

THE ULTRA TRUST^® ORIGINATED FROM CASE LAW. HERE’S WHAT WE LEARNED TO HELP YOU:

In trusts we trust, even when drunk and broke. Jane inherited a sizable amount of money from her mother. Jane was also an active alcoholic but was aware of her alcoholism. Jane had a plan. She took her inheritance and put it into an irrevocable trust, out of her own reach. She did, however, keep an income stream from the trust, but did not have access to the principal in the trust. Later, as often happens in cases of alcoholism; Jane spent all of her money and ran up significant debt. She filed for bankruptcy. The creditors attempted to have the trust included in her bankruptcy estate. The court ruled that the corpus of the irrevocable trust was untouchable by Jane and therefore untouchable by the court and creditors. They ruled that as Jane had control over the payout of 7% of the trust each year, this amount is the only amount that could be included in the bankruptcy estate. The bulk of the trust money was safe for her daughter.

You can lend a helping hand even after you are gone. Shurley’s mother and father created an irrevocable trust and funded it with land…a lot of land. Shurley also contributed a tract of land to the trust. Eventually, Shurley’s mother and father passed away and Shurley and her sister were given ½ interests in the income of the trust. Shurley and her husband fell on hard times and had to file for bankruptcy. The debtors, as they tend to do in these cases, tried to attach the trust to the bankruptcy estate. The court ruled that all of the property in the irrevocable trust that was contributed by persons other than Shurley herself were safe from being included in the bankruptcy estate. The sole piece of property that Shurley contributed was included because Texas has a statute stating that if a grantor donates assets to a trust and is also a beneficiary then the spendthrift clause is invalid towards the grantor. But, Shurley’s parents successfully protected their assets from the bankruptcy court to continue to support their children, including Shurley.

Sometimes it is better if Mom doesn’t give you any money. James filed for bankruptcy. 10 years later, a debtor attempted to attach James’s interest in a trust set up by his deceased father. The trust was irrevocable and gave James’s mother the power to distribute the corpus of the trust and/or any interest in the trust to whomever she chose as long as they were descendants of her husband. She chose not to exercise that power and distributed nothing to James. The bankruptcy court ruled that they had no authority to compel her to use that power, but only the power that James had concerning his finances. Since James could not compel his mother to distribute assets to him, neither could the court. The trust was safe.

Sometimes in marriage you can’t do anything right, except an irrevocable trust. Timothy’s mother set up an irrevocable trust with a spendthrift clause for her son that was managed by an independent trustee. Timothy was in his second marriage to a woman named Mary. Timothy had a drinking problem and sought out help. He was at AA meetings from 3-5 nights a week. Mary was not happy that he was gone so much and filed for divorce. During the divorce, she attempted to get part of the irrevocable trust. The court ruled that because Timothy had no control over the trust, there was a spendthrift clause specifically mentioning divorce and because Mary was not a beneficiary, the trust would not be counted in the marital assets. The trust was safe for Timothy’s children.

An Ultra Trust^® is better than a prenup. Prior to a getting married, Charles put a significant amount of assets into an irrevocable trust. Charles then married Melanie and they started their lives together. Eventually, the marriage failed and they ended up in court. Melanie went after the assets in the trust as marital assets. The court reasoned that the assets were not owned by Charles, had never been owned by Charles during the marriage, so they could not be marital assets. The assets were safe for Charles and his family in the safety of an irrevocable trust.

Home is where the trust is. Jerome decided to transfer all of his assets, including the home he was living in into an irrevocable trust for his children. Jerome wrote into the trust the ability to live in the home, as long as he paid for the taxes, maintenance and other items of upkeep. Jerome also had the right to force the sale of the home and the purchase of a new home by the trust. Jerome created the trust in order to protect some of the property he brought into his marriage as it was failing. Six years later, Jerome had to file for bankruptcy. The bankruptcy estate tried to have the trust included saying that the trust was a sham. The court disagreed. The court found that Jerome was not a significant beneficiary of the trust as he was basically paying rent to live in the house and was not able to take the corpus of the trust. The court also found that Gerome had no control over the trust and that the trust was set up for the benefit of the children long before he filed for bankruptcy. The court ruled that the trust was outside of the bankruptcy estate and was not created to thwart creditors. Again,

One line in the trust document can sink the ship. A woman in Wisconsin, Lucille, thought she had her Medicaid planning all taken care of. In order to pass on her and her husband’s wealth and eventually qualify for Medicaid, they gave almost all of their assets to their children who then set up an irrevocable trust for the benefit of Lucille and her husband. All set, right? Irrevocable trust: check. Drafted and funded well ahead of time: check. Well, when Lucille had to enter a nursing facility, many years after the 5 year Medicaid look back period, she was denied Medicaid because the government said that she had access to the assets in the trust. It’s an irrevocable trust, so how can that be? Well, the trust stated that the “entire corpus and income of the trust is available for [Lucille and her husband’s] support and general welfare.” It turns out that nursing home care is general welfare and the court decided in favor of Medicaid. Lucille had to spend the trust money she wanted to go to her children on her nursing home care. A poorly written trust isn’t worth the paper it’s written on. A well written trust, such as the Ultra Trust, may turn out to be priceless to you and your family.

Isn’t spendthrift an oxymoron? A debtor, James, filed for bankruptcy and the bankruptcy court attempted to include James’s contingent interest in a trust held by his mother in his bankruptcy estate. The court determined that the contingent interest was part of the bankruptcy estate. How can a trust that hasn’t even been distributed yet be included in the estate? Well, the trust did not contain a “spendthrift clause” (a clause that allows the trustee to withhold distribution in the event of debt and other contingencies) and the court determined that since James was entitled to the trust in the future that the contingent interest could be included. If the spendthrift clause were included, such as the comprehensive one found in the Ultra Trust, the money could have been withheld from the debtor and the trust assets would have been safe.

Sometimes power is not such a good thing. Wayne decided to put his assets into an irrevocable trust with a spendthrift clause. Good thinking, right? Well, many years later he declared bankruptcy and the bankruptcy estate looked to the wording of his trust. Well, he was a beneficiary of the trust and also had the power to access the principle of the trust. The state law had a rule against having a spendthrift trust that covers the creator of the trust. The court ruled that the trust was still valid; but that Wayne had access to all of the trust assets and that they would all be included in the bankruptcy estate. The trust was executed at the right time, way before there was any issues, but it wasn’t written correctly and offered no protection for Wayne.

An alter-ego trust; who knew? Jacob owed back taxes. At or around the same time that he was being informed of this, he decided to put his assets in an irrevocable trust, which included the property in which he lived. Despite having an independent trustee, Jacob lived in the property tax free and also retained control of the property. When the IRS took Jacob to court, the court ruled that Jacob still had possession and control of the property, even thought the title was in the trust. The court determined that Jacob had so much control that the trust was his “alter-ego.” Basically, the court said that despite the language of the trust document, Jacob had too much control over the assets in the trust and therefore the trust was not truly an independent entity. For this and the reasons mentioned below, the court ruled that the government could collect Jacob’s tax bill from the trust.

You can’t give something for nothing and get protection in return. Jacob’s back and still not having a good day. Jacob, when placing his assets into the trust (see above) received no compensation for the property he gave up. The court ruled that the transfers to the trust, because Jacob received no compensation, were fraudulent in nature (a fraudulent conveyance) and being so were designed to “hinder, delay or defraud either present or future creditors.” Basically, the court said Jacob could not give his assets away to avoid paying his debts. As you know from reading the ruling above, the court ruled that the government may proceed to collect all taxes from the assets held in the trust. If the conveyance had done in such a way as to avoid the label of fraudulent, such as using the proven methods of Estate Street Partners, Jacob may have preserved his trust.

Spread the money around and bring it all back together. That’ll work, right? Jerrie was set to collect a significant amount of money from his mother’s trust. Sounds great, doesn’t it? Well, Jerrie owed a large amount of back taxes and was being taken to court by the IRS. His mother’s trust didn’t have a spendthrift clause, so when the proceeds of the trust were distributed to Jerrie he decided not to report this and to try and hide it. He took the assets and spread them out among many different accounts across the country and then the assets all rejoined in a limited partnership in Nevada. Jerrie just happened to be a general and limited partner owning 96% of the partnership. The IRS connected the dots and took Jerrie to court and succeeded in getting access to the assets to pay back his taxes. When an irrevocable trust is drafted correctly in the first place there is no need to hide assets. In fact, when done correctly, hiding assets can be more of a hindrance and may even be proof of a fraudulent conveyance used against a debtor.

Put your assets in an irrevocable trust when things are smooth sailing and the court will take notice. In 1990, George and Catherine decided to transfer their money, rental properties and other assets into an irrevocable trust to benefit their children. When they did this, they did not know they were going to be audited by the IRS for back taxes. Several years later, when the IRS determined that George and Catherine owed a significant amount of back taxes from both their private accounts and business payroll accounts, the IRS tried to collect from the irrevocable trust. The court determined that the trust was not formed with the intent to deny creditors because the trust was formed before they could have known that there were any creditors. The court also ruled that the trust was totally separate from George and Catherine, because although they derived some benefit from the trust, they did not control the trust at all. The trust was controlled by independent trustees. In the end, the court ruled that the IRS could not collect from the trust and George and Catherine’s transfer of their assets to the children was safe.