Episode Overview

Title: Use of Asset Protection Trusts for Estate Tax Planning Purposes
Date: January 6, 2025
Host: Connie Ister, ACTEC Fellow (Boulder, CO)
Guest Expert: Daniel Rubin, ACTEC Fellow (New York City)

This episode explores the intersection between asset protection and estate tax planning through the lens of asset protection trusts (APTs), also known as self-settled spendthrift trusts. Daniel Rubin provides an in-depth analysis of how these trusts are structured, their evolving use for estate tax efficiency, relevant IRS rulings, and practical considerations for practitioners advising high-net-worth clients.

Key Discussion Points and Insights

1. Introduction to Asset Protection Trusts (APTs)

• [00:38]
  • Domestic APTs are currently permitted by statute in 20 states in the U.S., allowing individuals to shield assets from future creditor claims via irrevocable trusts where the grantor retains a beneficial interest.
  • "Asset protection trusts ... can be used not only for creditor protection but also as a vehicle for estate tax planning." – Connie Ister

2. Historical Context & Terminology

• [01:17]
  • Traditionally, trusts created by an individual for their own benefit were fully accessible to their creditors, even those not contemplated at the trust’s creation.
  • Laws beginning in 1997 (first in Alaska) have permitted individuals to be both settlor and discretionary beneficiary, potentially shielding trust assets from future creditors.
  • Daniel Rubin distinguishes between “asset protection trusts” and “self-settled spendthrift trusts,” the latter emphasizing an estate tax planning purpose and distancing from creditor evasion intent.
  • "When these trusts are used for the purpose of estate tax savings, I prefer to call them self-settled spendthrift trusts rather than asset protection trusts..." – Daniel Rubin [01:41]

3. Structuring APTs for Gift vs. Estate Tax Purposes

• [03:19]
  • For Pure Asset Protection: Gifts to the trust are made incomplete for gift tax by retaining a veto power and testamentary power of appointment, reserving sufficient control to trigger estate inclusion upon death.
  • For Estate Tax Planning: Trust must be structured for completed gifts (settlor gives up veto/testamentary powers). Key concern: Avoiding estate inclusion under IRC Sections 2036 and 2038.

4. Estate Tax Inclusion Risks: Sections 2036 & 2038

• [04:55]
  • Retaining a mandatory distribution right (or even broad trustee discretion) risks estate inclusion under 2036, as settlor’s creditors may access trust assets. This amount to “retaining the economic benefit" of the property.
  • Intersection of asset protection and estate taxation: If creditors can reach the trust, it's likely includable in the estate.

5. IRS Rulings and Guidance

• [07:22]
  • PLR 9837007: IRS held that a completed gift occurred to an Alaska self-settled trust, despite the settlor being a discretionary beneficiary, but did not rule on estate tax inclusion.
  • PLR 200944002 (2009): Confirmed trustee’s discretionary authority alone did not cause estate inclusion, unless accompanied by a pre-existing arrangement or understanding regarding the exercise of discretion.
  • Rev. Rul. 2004-64: Discretionary reimbursement for grantor trust income taxes doesn’t trigger inclusion unless there’s an understanding or pre-existing arrangement.
    • "The IRS was careful to note ... we are specifically not ruling on whether the trustee’s discretion to distribute income and principal ... combined with other facts ... may cause inclusion." – Daniel Rubin [08:27]

6. The Implied Agreement Issue

• [09:34]
  • The “implied agreement” concern is not unique to self-settled trusts—it applies to third-party trusts as well (“SLATs” for spouses, or children’s trusts).
  • "[Treasury] regulation ... provides that for section 2036 purposes an interest or right is treated as having been retained... if at the time of transfer there was an understanding ... that the interest or right would later be conferred." – Daniel Rubin

7. Practical Guidance for Practitioners

• [10:19]
  • Mitigating Implied Agreement Risk:
    1. Retain sufficient personal assets outside the trust to maintain lifestyle.
    2. Use a corporate trustee to avoid personal relationships implying arrangements.
    3. Change trustees before any distributions to distance settlor from original arrangement.
    4. Consider partial decanting to new trust/corporate trustee before distributions, insulating the original trust.
  • Quoting Daniel Rubin: "It would seem much less likely that an implied agreement can be found between the settlor and a corporate trustee than would be the case where the trustee is the settlor's brother-in-law, best friend, or professional advisor." [10:43]

8. Client Suitability & Strategic Use-Cases

• [11:23]
  • Useful for:
    • Wealthy, unmarried (or childless) clients unwilling to make irrevocable gifts where they cannot be beneficiaries.
    • Married clients concerned about divorce, where a SLAT may not suffice.
    • Married clients worried about a spouse’s premature death and resulting loss of beneficial access.
    • Non-U.S. citizen spouses, who cannot benefit from tax-free spousal gifts.
  • These structures are particularly attractive ahead of the scheduled sunset of the “bonus exemption” at the end of 2025.

Notable Quotes & Memorable Moments

• On Shifting Purposes:
  "[Such] trusts are today more often used for the purpose of estate tax savings than for pure asset protection." – Daniel Rubin [01:31]
• On Retaining Creditor Access:
  "If the settlor's creditors can reach the settlor's interest in the trust, the settlor will be deemed to have retained an indirect right..." – Daniel Rubin [05:59]
• On Practical Risk:
  "I don't think that we should be particularly concerned [about implied agreements]... Of course we counsel that access to the trust should be considered only as a last resort and only if there are no other funds available to maintain the family's lifestyle." – Daniel Rubin [10:10]
• On Client Suitability:
  "[These] trusts meet a need that could not otherwise be met, especially in light of the impending sunset of the bonus exemption at the end of next year." – Daniel Rubin [11:23]

Timestamps for Key Segments

• Overview of Asset Protection Trusts: [00:38 – 01:40]
• Historical Changes & State Laws: [01:41 – 03:18]
• Structuring for Gift vs. Estate Tax: [03:19 – 04:54]
• Intersection with Creditors' Rights/Section 2036: [04:55 – 07:21]
• IRS Rulings & Guidance: [07:22 – 09:33]
• Implied Agreement Issue: [09:34 – 10:18]
• Practical Guidance for Practitioners: [10:19 – 11:22]
• Client Suitability & Strategic Use: [11:23 – 12:10]

Conclusion

Daniel Rubin provides a nuanced, practical analysis of self-settled spendthrift trusts, emphasizing both the technical requirements and real-world scenarios where such trusts can be highly effective for estate tax planning—especially for clients who require continued access to trust assets. He stresses the importance of carefully structuring and administering these trusts to avoid inadvertent estate inclusion, and addresses common practitioner concerns with clarity.

Host’s Comment:
"Thank you Daniel, for that really thorough analysis and interesting insight into the use of self settled asset protection trusts." – Connie Ister [12:10]