SPA Trust FAQ
Frequently Asked Questions About Special Power of Appointment
What does SPA stand for?
It stands for Special Power of Appointment.
What is a special power of appointment?
It is an irrevocable trust that almost every trust made includes. Several estate planning attorneys use SPA and call it an asset protection trust or an irrevocable trust. It also allows a person to change a trust or appoint the assets to any person or entity. For example, if the holder of the power is restricted and they cannot use the power for their self, their creditors, their estate, or their creditors of their estate, this is called a “special” power of appointment.
Can an SPA trust be irrevocable and flexible at the same time?
An irrevocable trust cannot be revoked by the grantor. The SPA Trust is irrevocable because the grantor retains no power to revoke the trust. However, the grantor can retain a special power of appointment over the trust which allows him to make certain changes as long as he has no power to revoke the trust. The grantor has the option to give powers to others which may be used by others to benefit the grantor.
How is SPA exercised?
You sign a document that refers to the paragraph in the trust where the power of appointment was given. You also state that you are exercising your power of appointment and describe the change you want to make.
How can you prove SPA works?
We can actually show you statutes and court cases that demonstrate how our trusts work. Hundreds of our trusts have been tested in divorce, lawsuits, bankruptcy, government collection actions, and changing family circumstances.
Why is the Grantor not included as a Beneficiary?
If a grantor is included as a beneficiary, most states do not provide any asset protection to a trust because this makes the trust a “self-settled trust”. If you create a self-settled trust, for example in Nevada that does allow asset protection for self-settled trusts, it may not hold up if you are sued in a different state or if you end up in a federal bankruptcy court. It may not hold up because they may use their own laws and not the laws of the state which allows asset protection for a self-settled trust. The SPA Trust is not a self-settled trust and all fifty states allow you to protect your assets by giving them away (before a problem occurs) to an irrevocable trust if you are not included as a beneficiary.
What if the trustees or beneficiaries get sued?
The SPA Trust is a safeguard against any potential future liabilities that may occur against the grantor, the trustees, the beneficiaries, or any other person. This includes lawsuits, future marriages and divorces, bankruptcy, government agencies, or any other possible liability. You are protected because no one has any personal ownership in the assets of the trust. You can use the special power of appointment if a trustee or beneficiary has a liability that concerns you, to eliminate the trustee or beneficiary so they no longer have any connection to the trust.
How can I be absolutely sure that the assets are protected?
For example, if you create and fund a SPA Trust in a proper manner, and then you are sued by an insistent creditor who has infinite resources and tremendous power, it is possible they will never discover the existence of the trust because it is not filed anywhere and it cannot be discovered through a search of public records or a review of your tax returns or personal financial statements.
Is there a Plan B that could be implemented in a worse-case scenario?
Yes, there is a Plan B that could be implemented in which the trustee could transfer the assets to a new SPA Trust in another jurisdiction that you did not create. This is not a fraudulent transfer because it is a distribution by the trustee and not made by you. So, if the creditor does discover that you once created a trust and transferred assets to it, you can explain that the trust is now terminated and does not exist.
How can I be sure that I won’t be ripped off by my trustees?
You could create an LLC and can name yourself as the manager and the trust as the member. This way, you can have access or control over the assets because they are held by the LLC and not the trust. You can also manage the assets and the trustees will have no knowledge.
How will this affect my income taxes?
The SPA Trust will not affect your income taxes. There are no tax consequences when you transfer assets into the trust or receive them back out, or when you pay rent or interest payments to the trust. Income and deductions from the trust are reported on your personal return in the same amounts as if you owned the assets yourself. If you inform your CPA the trust is a “grantor trust,” they will understand that no tax returns are required and everything is simply reported on your personal tax return.
How will it appear on my tax return?
Nothing on your tax return should refer to the trust. If the SPA Trust earns $10,000 in interest income, the trust will be issued a 1099 form from the financial institution; however, the trust is not required to file any returns. You would then add $10,000 of interest income to the income shown on your tax return without any reference to where it came from.
How can I keep the income off my tax return?
Here are some options: (1) you can invest inside of a low-cost life insurance wrapper so that all growth and income is tax free, (2) you can invest in assets that don’t produce taxable income such as muni bonds or growth stocks, or (3) the SPA Trust can be designed so it is taxable to a spouse or someone else instead of you. This option requires specialized planning and coordination with your CPA.
Are there limitations or rules as to what kind of assets I can contribute and how much I must invest the assets?
No, there are no limitations or rules as to how much you must invest. You can contribute any kind of asset that can be transferred and the trust can invest in any kind of asset. We recommend that you don’t put assets that create liabilities in the same entity with other valuable assets. The trust can create an LLC to hold assets that could create liabilities (including snowmobiles, cars, boats, certain real estate, etc.).
Will the SPA Trust protect assets from Medicaid?
If you fund the SPA Trust more than five years before you need to apply for Medicaid, the SPA Trust will shield your assets and allow you to qualify for Medicaid. Medicaid has a five-year look back rule that prohibits a person from qualifying for Medicaid if they have made a considerable transfer within five years.
Can I put my home in the trust?
Yes, if you put your home in the trust, you may want to pay rent to the trust so you can explain to a creditor how you are able to live in the home if you don’t own it. The rent payments have no tax effect and they increase the savings you have in your trust. You can put your home in the trust without losing any of the tax benefits of home ownership, but you should check to make sure this will not cause a change in your property taxes or cause any problems with your mortgage lender. Generally, we can work through those issues without any problem.
Can I put my car in the trust?
We wouldn’t put cars in the trust because cars are usually more of a liability than an asset. It is a good plan to keep enough in your name so you don’t look like you are hiding everything.
How can I protect my home, my cars, or my other assets which cannot be transferred to the trust?
An equity stripping lien can protect any asset (including homes, cars, inventory, accounts receivable or equity in real estate). But many equity stripping plans are ineffective because many plans rely on loans or lines of credit. The lien only protects the amounts you actually borrow. With an equity stripping plan, the entire value of the real estate will be fully protected throughout the amount of the lien because the owner of the asset pledges all of the equity as collateral for a letter of credit. Collateral for a letter of credit is deemed to be transferred immediately when the letter is used and this takes priority over any liens, judgments, or other liabilities that may arise after the letter is issued.
How does this compare to other asset protection strategies for example, a Nevada corporation, a Wyoming LLC, or a family limited partnership?
The SPA Trust is much better because those other entities are owned by you or your family members which means if any of you get sued, bankrupt, divorced, etc., your ownership must be included in a disclosure of your assets. Even if the charging order protection works, it may take years of litigation to prove it.
Is there a waiting period before this becomes effective?
No, there is no waiting period. The statute of limitations time period only applies to fraudulent transfers. If the transfer into the SPA Trust is not fraudulent, then the assets will be protected immediately. The sooner you make the transfer to the trust, the safer you will be. The timing of the transfer is a very important factor to avoid a fraudulent transfer.