On October 30, 2009, the IRS released Private Letter Ruling (PLR) 200944002, wherein the IRS privately ruled that a self-settled spendthrift trust, from the State of Alaska, was not includable in the settlor’s gross estate merely because the terms of the trust allowed the settlor to receive, in the discretion of the trustee, distributions of income and principal from the trust.
This ruling indicates the possibility that a settlor may transfer property into a Domestic Asset Protection Trust (“DAPT”), or Nevada On-Shore Trust (“NOST”), as we like to call it in the State of Nevada, in a way where such property is not includible in one’s gross estate for estate tax purposes, while such settlor remains eligible to receive trust distributions from the trust.
Even though 12 states have now passed some form of a DAPT statute, it appears that only Nevada and Alaska would have laws allowing for a transfer to such a trust to qualify as a completed gift, thereby making the transferred assets non-includable in the gross estate of the settlor for estate tax purposes. This is because Rev. Rul. 2004-64 seems to say that if any of the settlor’s creditors are able to reach the DAPT’s assets, the assets of the trust will be includable in the gross estate of the settlor.
As an example, many of the DAPT states provide access to the trust by a deceased settlor's spouse or minor children at the time of the settlor’s death. Because such statutory provisions would seem to allow access by “creditors,” a state having such a law would probably not be a good jurisdiction in which to avoid estate inclusion by a transfer to a DAPT. (See, Reg. § 20.2036-1(b)(2) which states that inclusion occurs "to the extent that the use, possession, right to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of the decedent, or otherwise for his pecuniary benefit. The term “legal obligation” includes a legal obligation to support a dependent during the decedent's lifetime.")
Utah’s DAPT statute provides another example of one potentially allowing a creditor of the settlor to reach assets. In Utah, the State can attach assets of the trust in satisfaction of the settlor’s debts owed to the State, such as for taxes owing to the State of Utah by the settlor. (See, Utah Code Ann. § 25-6-14(1)(c)(viii)) Thus, under Rev. Rul. 2004-64, the assets of a Utah DAPT would most likely be includable in the estate of its settlor.
Therefore, the NOST is the perfect self-settled trust tool, not only for protecting one’s assets from creditors, but also for providing significant estate tax and wealth transfer planning opportunities. For more information on the NOST, please visit the Jeffrey Burr website or call us at 702-433-4455.
Remember, PLRs give great guidance and insight but are only binding on the requesting taxpayer. They cannot be relied upon as legal precedent by others. A Copy of this PLR can be found at http://www.irs.gov/pub/irs-wd/0944002.pdf.
-Attorney David M. Grant