- Tax Effects
- Eligible Assets
Special Power of Appointment Trusts (SPA Trusts™) for Asset Protection, Estate, and Tax Planning
The defining feature of the SPA trust™ is the power of appointment. A power of appointment is the power vested by the donor in a person (the donee), now or in the future, to appoint someone or something (the appointee) the power to enjoy certain property. These powers can be general, meaning that the donee can appoint anyone including themself or their estate, as the person or thing to enjoy the property, or special, meaning that the donee can only appoint appointees within a certain class of persons. They can be granted over specific property or granted over all of the property within a trust.
General powers of appointment are not used in asset protection trusts, because a creditor could force the donee who exercises the power of appointment to appoint them the power to enjoy the property. But with a special power, because the donee can't pick themselves to benefit with a special power of appointment, they are considered not to have a property interest in the assets they have power over.
The effect of this when used in a trust focusing on asset protection is to ensure that the donee-trustee, the person who usually has this power vested in them, can only allow non-creditors to be appointees and therefore enjoy and use the property. Additionally, because this is a power to appoint someone or something to enjoy the property and not a transfer of the property itself, it is immune from scrutiny as a fraudulent transfer by the donee-trustee's creditors. No transfer occurs, least of all a transfer to hinder, delay or defraud creditors.
"There is no doubt that SPA Trusts and Hybrid Trusts represent a 'next generation' substantial improvement over Domestic Asset Protection Trusts"---Jay Adkisson, renowned creditor and asset protection attorney, author of Asset Protection.
The Tax Effects of a Special Power of Appointment Trust (SPA Trust™)
This trust can be considered either a grantor trust, meaning that the assets owned by the trust are taxed as though they are owned by the grantor and as if no trust existed, and pass through the grantor's estate for estate tax purposes, or a non-grantor trust, meaning that the assets owned by the trust are subject to state/federal trust taxation. Depending on the assets held by the trust, it may be appropriate to use a grantor trust. Examples abound: the taxable assessment credits given to senior home owners in life, the mortgage-interest deduction, and the step-up in taxable basis on a home owned at death.
For many clients, having two trusts, one that is conventional and one that is grantor that are similar in all other aspects, is the best approach. Alternatively, if grantor income tax treatment is desired for the asset, but the value of the asset is to be excluded from the grantor's estate for estate tax purposes, an intentionally-defective grantor trust may be used to accomplish that.
This also has beneficial tax effects, because the value of the power to use the property is included in the appointee's estate. This means that the generation-skipping transfer tax (GSTT) is not levied against assets that pass through an estate of an appointee under a special power of appointment, so long as the appointee is within one generation or less than 37.5 years younger than the donor. Transfers made via will or probate or outright gifted to grandchildren are subject to this tax; beneficial uses granted by this Trust are not.
So long as the grantor has capacity to contract, special power of appointments can be added into existing trusts as a separate contract in order to avoid the potentially-devastating effects of the GSTT. And alternative or subsequent donees can be named, or a class of persons can be named donees of the special power of appointment to effectively allow the trust to continue several generations from now.
Safety of Special Power of Appointment Trusts (SPA Trusts)
Powers of appointment have been a part of the English common law for centuries. Every state recognizes them, and most have a fair amount of decided cases upholding them. It is safe to say that this form of trust is more "future-proof" than some other developing and controversial methodologies, such as self-settled domestic asset protection trusts.
Unlike some other asset protection methods, state statutes and decided caselaw support the use of special powers of appointment:
Privacy of Special Power of Appointment Trusts (SPA Trusts™)
Because the creator of the special power of appointment trust no longer owns the property, it does not need to be disclosed for income tax (unless a grantor trust, in which case income from the trust must be disclosed only) or bankruptcy purposes. It does not need to be revealed in a debtor's examination, revealed in the disclosure related to a divorce proceeding, or to any governmental agency. Created properly, it is not a countable resource for Medicaid eligibility purposes.
For these reasons, the special power of appointment trust offers superior privacy and anonymity than any business entity used for an asset protection purpose. (Of course, having this trust own such entities as needed is also a good idea.)
Assets within a Special Power of Appointment Trust (SPA Trust™)
Assets within these trusts can be used for any purpose. The trust has a taxpayer identification number (similar to a social security number) that allows the IRS to recognize it, allowing the trust to open bank accounts, investment accounts, and take advantage of virtually all financial services.
Real and personal property can also be placed into the SPA trust and take advantage of its protections and privacy.
Compare the Special Power of Appointment Trust (SPA Trust™)
|Portable across states without changes|
|Strong against sister-state judgments being enforced in your state|
|Effective after the death of a creator, beneficiary, or member|
|Potentially no income tax effects|
|Caselaw to support method|
|Low Annual Maintenance|
|—||Depends on the Operating or Partnership Agreement involved. If you would like us to review yours, we will do so for free to see if you could benefit from revision or a different entity.|
"There is no doubt that SPA Trusts and Hybrid Trusts represent a 'next generation' substantial improvement over Domestic Asset Protection Trusts"---Jay Adkisson, renowned creditor rights and asset protection attorney, author of Asset Protection.