In the field of psychology, it has long been known that the loss of financial resources can cause an emotional response similar to the feelings experienced after the loss of a loved one, including feelings of grief and mourning (unsurprisingly, professionally referred to as "financial grief"). The loss of money can have multiple causes, whether mismanagement, fraud, bad business dealings, or legal problems. The threat of this loss leads many people to research ways to legally protect their assets -- research that frequently leads to a consultation with our firm.
While there is no "silver bullet" to protect your assets with absolute certainty, particularly where you have current creditors (a circumstance that cannot be "planned around" due to the legal concept of "fraudulent transfers"), sophisticated estate planners know that there are strategies to protect your assets from aggressive creditors. While "en vogue" strategies such as the use of out of state "self-settled" asset protection trusts (e.g., Alaska, Nevada, etc.) or "offshore" trusts (e.g., Cayman Island, Nevis, Marshall Islands, etc.) are often mentioned by planners and promoters, the author does not believe these types of trusts pass legal muster in the State of Arizona.
However, one frequently employed trust strategy for married couples that we do believe "works" is the implementation of a spousal lifetime access trusts ("SLATs"), which can provide significant creditor protection where there are no concerns of marital discord/mistrust. In essence, a SLAT is a transaction where one spouse (often the one with the higher income/net worth, or the one with greater potential creditor exposure) (the "Grantor") establishes an irrevocable trust for the sole benefit of their spouse and funds it with a gift of the Grantor's separate property assets (utilizing a portion of the Grantor's lifetime tax exemption). While this gift is truly irrevocable, and cannot be returned to the Grantor without adverse tax consequences, the presence of the Grantor's spouse as the sole beneficiary of the trust allows the Grantor to retain indirect "access" to the trust assets vis a vis their spouse's beneficial interest in the trust (i.e., the beneficiary spouse can take a distribution from the trust and use it for expenses that benefit the Grantor, such as the payment of a mortgage, purchase of groceries, etc.). From a legal perspective, this strategy works for creditor protection purposes because (i) the Grantor has fully departed from control of their separate property (see discussion below) assets via an irrevocable gift to the SLAT, and (ii) the beneficiary spouse has no legal obligation to give or share any portion of the trust assets with the Grantor spouse, as the distributed amounts are the separate property of the beneficiary spouse. Furthermore, this strategy is particularly effective in Arizona because Arizona has strong legal "spendthrift" protections to protect the trust from being attacked by aggressive creditors.
However, there are some caveats:
If the couple gets divorced, the Grantor will lose access to the trust resources and has no legal recourse to re-obtain them (i.e., the property truly belongs solely to the beneficiary spouse). This can be creatively planned around, but this strategy is ideal for long term, stable marriages;
Implementation of a SLAT requires that (i) the Grantor has significant pre-existing "separate property" assets before the gift, or (ii) a transmutation (i.e., transfer) of a portion of the couple's community property assets are made the separate property of the Grantor. The latter option raises a legal question of whether such transfer is a "post-nuptial" agreement, and could be significant in the context of a subsequent divorce. However, if a transmutation is done, best practices suggest that the "giving" spouse who is agreeing to the transfer have separate counsel review the agreement and/or represent the "giver" to ensure that (i) each spouse's interest are protected, and (ii) each is independently advised of the benefits/risks of such transfer;
If the couple has potential estate tax liability, the couple should not create "mirrored" (i.e., identical) trusts for each other due to the potential application of the "reciprocal trust doctrine" tax concept that may be used to "unwind" the arrangement for estate tax purposes;
No asset protection is bullet-proof; extremely aggressive creditors can often find creative ways to obtain payment of a debt. However, asset protection planning is not intended to provide absolute certainty -- it is designed to make it substantially more difficult for creditors to credibly obtain irrevocably gifted assets.
If you would like more information about this or other asset protection/tax strategies, please call us at (480) 930-5859.
Disclaimer: The content of this article is not legal advice, and is intended solely to provide an informational resource to potential clients.