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Wills & Trusts > Trusts 2 > Flashcards

Trusts 2 Flashcards

1
Q

asset protection is created through

A
  1. discretionary distribution terms
  2. spendthrift clauses
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2
Q

Domestic Asset Protection Trust

A

Allows protection for self-settled trusts with certain conditions

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3
Q

Special or supplemental needs trust

A

designed to allow an individual with medical needs to qualify for govermental assistance while still retaining assets in trust

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4
Q

Courts have affirmed right of a trust settlor to restrict beneficiary rights to the trust assets to protect beneficaries from their own worst instincts or habits

A

A parent who wishes to protect a child from childs own financial irresposnibility can therefore create asset protection terms in a trust that thereby limits the reach of creditors

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5
Q

restraint on alienation of a beneficial interest =

A

asset protection

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6
Q

asset protection derives from a restraint on alienation

A

terms in a trust that forbid a beneficiary from doing something, act to restrain the beneficiary ability to alienate trust property or an interest in the trust

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7
Q

Restraints on alienation create asset protection because

A

if a beneficiary does not have a present interest in trust assets, then the trust assets cannot go to satisfy creditors

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8
Q

Once a beneficiary has a present interest -recieves a distribution, for example-

A

then the creditors are free to persue their claims

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9
Q

Lack of ownership equivilance

A

Asset protection

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10
Q

Less control a beneficiary has over the assets

A

The fewer rights creditors have

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11
Q

3 forms of asset protection trusts

A
  1. discretionary trusts
  2. spendthrift trusts
  3. domestic asset protection trusts (DAPTS, self-settled asset protection trusts)
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12
Q

Discretionary trusts are used as a tool to

A

protect wealth

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13
Q

Simiplest way to decrease beneficiary access or rights to the trust assets is by creating trust distribution terms that

A

are discretionary rather then mandatory

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14
Q

The more mandatory rights

A

less asset protection

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15
Q

The more discretionary rights

A

more asset protection

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16
Q

Asset protection is created by crafting distribution terms that

A

give as much discretion to the trustee as possible

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17
Q

settlor may vary on if principle and income is

A

mandatory or discretionary

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18
Q

discretionary support trusts

A

vests full discretion in the trustee but provide the guideline of support “I leave these assets in trust to provide for the comfort and support of my spouse in the trustee’s sole and absolute discretion”

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19
Q

for asset protection purposes, the UTC treats discretionary and discretionary support trusts

A

the same way

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20
Q

Common form of the disrectionary support trust is a discretionary trust with a

A

HEMS standard

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21
Q

HEMS standard is also called an

A

ascertainable standard

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22
Q

HEMS standard/ ascertainable standard

A

A discretionary trust that directs the trustee to make distributions for the
Health
Education
Maintence, and
Support
of the beneficiary

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23
Q

2 categories of creditors

A
  1. ordinary
  2. exception
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24
Q

Ordinary creditors

A

creditors with no special rights

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25
Q

Ordinary creditors include

A

banks, most providers of goods and services, friends who made a loan

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26
Q

The most effective tool that ordinary creditors have is the

A

Hamilton order, which a creditor must obtain from a court

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27
Q

With a hamilton order, an ordinary creditor cannot compel a distribution, but the order requires that

A

if any distributions are to be made to or for the benefit of the beneficiary, the creditor shall be paid first (UTC follows this rule)

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28
Q

The hamilton order saves

A

creditor from having to monitor distributions and fighting other creditors

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29
Q

The hamilton order disallows

A

the trustee to circumvent the creditors by paying directly for goods and services rendered to the beneficiary
(AKA, the beneficiary cannot avoid a creditor and have trustee pay others as beneficiary wishes )

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30
Q

Under the hamilton order, the creditor will be able to prevent

A

the beneficiary from recieving any benefits from trust until the creditors judgement is satisfied

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31
Q

Exception creditors have enhanced rights

A

they can under limited circumstances, compel a distribution

32
Q

Under UTC execption creditors are primarily either

A

a child or an ex spouse enforcing a claim for support

33
Q

UTC 504 Discretionary trusts, effect of standard

To the extent a trustee has not compiled with a standard of distribution or has abused a discretion:

A
  1. A distribution may be ordered by a court to satisfy a judgement or court order against a beneficiary for support or maintance of the beneficaries child, spouse, or former spouse, AND
  2. The court shall direct the trustee to pay to the child, spouse, or former spouse, such smount as is equitable under the circumstances but not more then the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion
34
Q

UTC 504 Discretionary trusts, effect of standard

This section does not limit the right of a beneficiary to

A

maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard of distribution

35
Q

In order to compel a distribution, the exception creditor must show that the trustee

A

has not complied with a standard of distribution or has abused a discretion

36
Q

The amount that the exception creditor will receve is

A

no more then what the trustee should have distributed in the first place, had the trustee complied with the applicable standard of distribution

37
Q

alternative model

A

Building into the trust a representative

38
Q

Silent on trust

A

when to let them know

39
Q

Know facts that would cause breach

use

A

recklessness
gross negligence
willful misconduct
purposely

40
Q

Remedy examples

A

compel to account, remove trustee, pay the difference

41
Q

What to know before agreeing to be a trustee
8

A
  1. key responsibilities
  2. liability
  3. time commitment
  4. resignation/removal
  5. benefits (payment)
  6. expertise
  7. get to know assets
  8. get to know the people
42
Q

any irrovocable trust with a spendthrift provision is called a

A

spendthrift trust

43
Q

spendthrift trust

A

if any of the trusts income is payable to some other person, then the trust should immediately cease

keeps the money from creditors

44
Q

UTC 502 spendthrift trust

A spendthrift provision is valid only if

A

it restrains both voluntary and involuntary transfer of a beneficiarys interest

45
Q

UTC 502 spendthrift trust

a term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust” or words of similar import, is

A

sufficient to restrain both voluntary and involuntary transfer of the beneficiaries interest

46
Q

UTC 502 spendthrift trust

A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and except

A

as otherwise provided in this article, a creditor or assignee of the beenficiary may not reach the interest of a distribution by the trustee before its recipt by the beneficiary

47
Q

Once a spendthrift provision is inserted into a trust documenet, ordinary creditors can only

A

reach a beneficiary’s assets in trust once the trustee has made a distribution to the beneficiary

48
Q

UTC 502 spendthrift trust

if distributions are mandatory, a creditor

A

may have to wait until the distribution reaches the beneficiary

49
Q

UTC 502 spendthrift trust

If distributions are discretionary, the creditor will have to

A

watch for the distributions and fight other credits for the money
(except here, they cannot procure a hamilton order)

50
Q

How spendthrift trusts can be less friendly to creditors then discretionary trusts

A

may only attempt to collect directly from the beneficiary after a payment is made

51
Q

UTC 506 (b)

a creditor can attach a mandatory distribution that the trustee

A

has not made within a “reasonable time”

52
Q

UTC 503 spendthrift provision

in this section, “child” includes any person from whom

A

an order or judgement for child support has been entered in this or another state

53
Q

UTC 503 spendthrift provision

A spendthrift provision is unenforcable against:

A
  1. a beneficiaries child, spouse, or former spouse who has a judgemetn or a court order against the beneficiary for support or maintance
  2. A judgement creditor who has provided services for the protection of a beneficiaries interest in the trust, and
  3. a claim of this state or the US to the extent a statute of this state or federal law so provides
54
Q

UTC 503 spendthrift provision

A claiment against which a spendthrift provision cannot be enforced may obtain from a court

A

an order attaching present or future distributions to or for a benefit of the beneficiary. The court may limit the award to such relief as is appropriate under the circumstances.

55
Q

Spendthrift trusts can be more favorable to the creditors then discretionary trusts

A

There are more exception creditors with spendthrift trusts, including the goverment and the lawyer who drafted the spendthrift trust.
- Compelling a distribution with a spendthrift is easier than it is with a discretionary trust
- The exception creditor need only show the judgement or debt claim, and the court will create an ordering attaching “present or future distributions”

56
Q

Bankrupcy code excludes any beneficial interest in trust that is not alienable

A

“under applicable nonbankrupcy law” from a debtors bankrupcy code

57
Q

UTC 505 Domestic Asset Protection Trusts

UTC States that individuals cannot shield assets from creditors by

A

placing them in a trust for their own benefit

58
Q

UTC 505 Domestic Asset Protection Trusts

UTC States that individuals cannot shield assets from creditors by placing them in a trust for their own benefit
Creditors therefore can

A

reach the maximum amount that the trustee could pay to the settlor or apply for the settlors benefit, even if a trust is a discretionary or spendthrift trust (or both)

59
Q

In all states, Domestic Asset Protection Trusts must be

A

irrevocable
thereby taking away one form of ownership and control for the settlor

60
Q

Any transfer made with the knowledge of a debt or the imminent possibility of one is a possible

A

fraudulent transfer and as such not protected by the trust terms

61
Q

Fraudulent transfers may be challenged pursuant to the Uniform Fraudulent Transfer Act, which states that

A

transfers will be void if they were made with the intent to defraud or if “badges of fraud” are present

62
Q

Domestic Asset Protection Trusts are coming under attack in divorce court because spouses are able to create these trusts during marriage, and often they place

A

what might be marital property in the trust

63
Q

Special or supplemental needs trusts/supplemental needs/medicade trusts

allow individuals and families to

A

retain assets in trust while still being able to qualify for govermental benefits when special care is needed by the beneficiary

64
Q

Special or supplemental needs trusts/supplemental needs/medicade trusts

Assets in the special needs trust do not count when

A

govermental agencies are qualifying the beneficiary for program eligibility
- so the trust beneficiary can enjoy the use of trust assets while accessing govermental benefits

65
Q

Special or supplemental needs trusts/supplemental needs/medicade trusts

are asset protection trusts because they protect the assets from govermental reach both in

A

determining eligibility for goverment reach both in determining eligibility for govermental assistance programs and in payment for such programs
- medicaid looks at all assets owned within 5 years when determining elegibility, but not the trust

66
Q

Self-Settled Special Needs Trust

A
  • very little protection without restriction of ownership
  • uses “income only” mediicaid trusts, where a settlor puts property into trust with the right to recieve income only; the principal, then is distributable to people other then the settor.
  • After the expriation of the look-back period, it is likely that only the income will be counted as assets available
  • The settlor cannot just restrict distributions during the look back period without running in to trouble
  • Any assets that cannot be paid to the settlor, the trust does not permit distribution during the look back period are considered available
  • All of the assets in a trust are considered available to the exent the trust is revocable
67
Q

Ascertainable Standard

A

health, education, maintance, and support (HEMS)

68
Q

Non- Ascertainable Standard

A

best insterests, welfare, comfort, happiness

69
Q

Trust assets in divorce

A
  • mere expectancy is not considered
  • include only if entitled to assets
  • consider in equitable divison of marital esrarw
70
Q

Domestic Asset Protection Trusts are

A

irrevocable

71
Q

Under UVTA (Uniform Voidable Transfers Act) Transfers cannot be made with intent to

A

defraud
IE create a Domestic Asset Protection Trusts to avoid a known creditor

72
Q

A sepcial needs trust is created to enable

A

beneficiary to maintain eleigibility for medicare benefits

73
Q

Special needs trusts should only provide

A

supplemental distributions
which is different from the HEMS standard language

74
Q

2 exceptions to the rule that self settled trusts are considered assets available for determination of medicaid eligiblity
1. Trusts establised at death by the decedent spouse for the benefit of the surviving spouse

A

As long as distributions are limited to providing for the surviving spouses “supplemental needs”
(AKA it cannot permit the surviving spouse to compel distributions for her general purposes, such as maintance or health care)

75
Q

Supplemental needs trusts, are treated as if the trust that is set up by one spouse for another as though it was created by the beneficiary spouse
however there is an exception

A

if the spouse established the trust by will

76
Q

2 exceptions to the rule that self settled trusts are considered assets available for determination of medicaid eligiblity
2. Trust established by a disabled person (or parent, grandparent, guardian, or court acting on behalf of the disabled individual) using the disabled persons assets

A

Commonly, the trust will be formed with money recieved from an insurance claim, a settlement agreement, or proceeds from judgement
(The trick is that the trust can provide only for supplemental needs during the beneficiaries life, that is needs not covered by govermental programs)

77
Q

With Medicare trusts, usually the trust must provide that the state will be compensated from the trust upon the beneficiaries death

A

specifically, at the beneficiaries death the state will be entitled to recover from the trusts remainder the amount that the state spent on medical care

Wills & Trusts (26 decks)

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