Who Should Be the Trustee of Your Irrevocable Asset Protection Trust?
There is a constant battle among lawyers as to who should be trustee of an irrevocable asset protection trust. The primary school of thought is that it should never be the grantor, and some schools of thought believe it should never be the beneficiary. We disagree with both of those positions, but we recognize the concerns and rely on sound principles of asset protection law in making the final determinations.
Let’s first discuss the question of whether the grantor should be trustee. Many practitioners believe that allowing the grantor to be trustee makes the assets of an irrevocable trust available to the grantor’s creditors. Such a proposition is ludicrous. The challenge with most lawyers is that they do not allow the grantor to be trustee of his or her irrevocable trust. When pushed to explain why, they typically assume that’s the way it was always done. Few dig further to see why it was done that way.
So let’s examine why grantors were not traditionally named trustee. The most adverse impact is that, if the grantor is trustee, they’re deemed to retain enough control to have the assets of the trust included in their taxable estate when they die. For many generations, this was the death knell of an asset protection trust. But in the last 15 years it’s become irrelevant because of the rise of the federal estate tax exemption.
Today only two in a thousand Americans have a taxable estate, so preventing the grantor from being trustee because of a potential inclusion of the trust asset in the estate of the grantor is not relevant to 99.8% of Americans. So why hold them to that standard?
The next major argument is a theory that if the grantor has control of the trust, then he could direct it back to himself. Well, that depends. What does the trust say? If the trust says that the grantor is not a beneficiary, or similarly the grantor is not a principal beneficiary but is entitled to the income, does that mean that the grantor as trustee all of a sudden gains a super power to violate the terms of the trust and give himself the principal when it’s not allowed for?
Hardly. In fact, there is consistent case law throughout all of the states, including cases that lead all the way up to the Supreme Court, that supports the notion that a grantor as trustee has all of the same fiduciary obligations as any other trustee and by no means has authority to act outside the powers granted to trustee. One caveat, however, is if the grantor does retain the right to the income, then absolutely the income will be available to the creditors of the grantor.
So are there circumstances when the “grantor as trustee trust is invaded? Absolutely, but in every single case the invasion was not due to the grantor being the trustee, but rather was due to the pattern of behavior by a grantor trustee who violated regularly the terms of the trust in favor of themselves, and the trust was thereafter deemed a sham.
In such cases, I concur with any court that makes that decision based on people who try to defraud the system. Irrevocable trusts must be managed in an arm’s length manner, and as lawyers we do not plan for someone to become fraudulent. They are fraudulent to their own peril. But a properly drawn trust when the trustee is the grantor in no way, shape or form creates any risk of loss of asset protection if the terms of the trust are followed, as they are required to be in every case whether the grantor is trustee or not.
Irrevocable Asset Protection Trusts with the Grantor serving as Trustee are very safe and a great estate planning tool.
How can I decide if a Trust is right for me?
Call today to schedule your complimentary estate planning consultation with Ed Matthews.
Ed Matthews is one of only a few attorneys in the state of Minnesota who is also a currently licensed Certified Public Accountant (CPA). Ed graduated summa cum laude from William Mitchell College of Law in 2003, where he served as Executive Editor of the Law Review. He is a former Minnesota Supreme Court law clerk. Perhaps, most importantly, he does not practice probate! Instead, he has dedicated his life to helping Minnesota families avoid probate and protect their hard-earned assets.
To schedule a complimentary consultation with Ed Matthews, call (651) 501-5608.
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