Legal Tip 344: Unpaid Trust Entitlements and Asset Protection

Legal Tip 344: Unpaid Trust Entitlements and Asset Protection


Unpaid present entitlements are debts ‘owed’ by a trust to a beneficiary. They are an asset of the beneficiary. Therefore, they are available to creditors of that beneficiary.


Example

Homer thinks all his problems are solved when he sets up a discretionary trust for ‘asset protection’.

Over the years the trust has invested and distributed income to Homer on paper. Homer hasn’t taken the income but just left it in the trust where it was reinvested by the trustee.

Over time this builds up to $200,000.

Then Homer becomes bankrupt.

The trustee in bankruptcy for Homer sues the trustee of the Homer trust to recover this $200,000 for creditors.

Homer says “I though trusts provided asset protection!”

What could he have done?

One thing might have been setting up a bucket company so that the money never belonged to Homer.

 

Hmmm....but if the trust hasn’t got the funds/ assets it owes Homer, what does the trust give to the trustee in bankruptcy? Paper?

 

If the trust owes someone money it will likely have assets or have had assets. If it has disposed of assets the claw back provisions could apply. So the trustee in bankruptcy could sue the trustee to recover what is owed and them potentially clawback under market value transactions of the trust.

 

There was that politician Elliot a few years back who went bankrupt and sold a Mercedes under its true value. I remember reading it was clawed back.

 

If Homer is the working spouse, can he gift his UPE to his spouse each year so that it is no longer an asset for him?

 

He could but much to consider