Very often we meet clients looking for a more nuanced estate planning with specific assets – they may want to (1) protect assets from creditors; or (2) they would like to minimize the estate tax liability upon death. For these clients, Irrevocable Trusts are a critical piece of advanced estate planning that can accomplish these goals. It is important to remember here that these trusts are set up in addition to (and not in lieu of) their foundational planning, which typically consists of Wills or Revocable Living Trusts, as well as the Financial or Healthcare Powers of Attorney.
Irrevocable Trusts come in many flavors – insurance trusts or ILITs, gifting trusts for children, residence trusts or QPRTs, and a whole lot more in between. These trusts can either be established locally (i.e. situs of the trust is New Jersey), or a NJ resident can situs his or her trust in other U.S. states with favorable Domestic Asset Protection Trust laws (also called DAPT states).
This post discusses the popular Spousal Access Trusts or SLATs, where the spouse of the Grantor or Settlor of the trust is a named beneficiary, while the trust continues to accomplish its primary objectives regarding creditor protection and estate tax savings. It is key to remember here that if the 2-SLAT approach is being utilized (one trust each for the husband and the wife), then utmost care must be taken by the drafter of these trusts to ensure the trusts are not identical to one another, which would run afoul of the reciprocal trust doctrine.
Consider the following when establishing these trusts in New Jersey:
- There is no need to get an outside Independent Trustee who is a resident – a trusted friend would be able to serve in this role.
- There is no need for outside counsel review.
- You can accomplish the current asset protection goals even with the spouse as a beneficiary, but the Grantor of the trust cannot become a beneficiary of the trust if the two primary objectives of creditor protection and estate tax savings are desired.
- The Grantor cannot be (or be added back later) as a named beneficiary.
- Death of a spouse-beneficiary can make things problematic for the Grantor, who will now no longer have access to the funds in the trust.
- If the 2-SLAT approach is being used, then there is higher probability of IRS scrutiny if both trusts are sitused in NJ.
However, if we go outside the state of NJ to one of the DAPT states, these trusts become more sophisticated and robust, but are also expensive – not only for set up but also in annual costs. The following are some considerations:
- The Grantor can be added back as a beneficiary after the trust is set up.
- There are greater asset protection laws in these DAPT states, so creditor challenges are much harder.
- With the 2-SLAT approach, situsing these trusts in two different DAPT states ensures even greater asset protection.
- Resident Trustees can be Directed Trustees where they are only acting upon the direction of another – this keeps costs down each year.
- This approach has potential to avoid IRS/Creditor scrutiny, especially where an independent, objective third party is serving as a trustee.
- This route is more expensive, because these are sophisticated trusts part of advanced planning.
- Co-counsel needs to be retained to get the trusts reviewed by attorneys in that state.
- Resident Trustees are a requirement.
- Although trustees may be “Directed Trustees,” depending on the DAPT state, annual fees may vary between states and could become quite costly.
To minimize costs, some alternate solutions include:
- Staying within NJ and set up both trusts within the state, but be willing to give up some of the added benefits of DAPTs.
- Creating one trust in a DAPT jurisdiction and another trust in NJ, so you can take advantage of the “pros” for at least one trust, where the Grantor can be named back as the beneficiary.
 Grantor refers to the individual setting up the trust and is often used interchangeably with the terms Trustor or Settlor.
 As of 2020, there are at least 19 states that are now considered to be DAPT states and which have amended their statues to offer strong creditor protection and favorable treatment towards Grantors’ irrevocable trusts. http://www.actec.org/assets/1/6/Shaftel-Comparison-of-the-Domestic-Asset-Protection-Trust-Statutes.pdf