Executive Summary

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As it pertains to our

Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trusts

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Our Trusts were written to comply with "Scott on Trust Law" - Austin Wakeman Scott, the Restatement of Trusts, and the Internal Revenue Code.

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This structure was designed so the Trust corpus would be protected from turnover orders by any court or judge, with the exception of fraudulent conveyance.

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The structure that achieves these protections is a Non-Grantor, Irrevocable, Complex, Discretionary Spendthrift Trust Organization (NICDS).

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This type of Trust separates the Settlor, Trustee, and Beneficiaries so that no one individual holds both legal title and beneficial interest in the Trust property.

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Structure of the Trust

A Trust is created by a declaration of Trust, made by a Settlor who appoints Trustee(s) to manage the Trust for the benefit of named beneficiaries.

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Black’s Law Dictionary defines a Trust as:

     “A right of property, real or personal, held by one party for the benefit of another.”

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The trustee(s) hold the legal and equitable title to the property for the benefit of the beneficiaries and are designated the management authority of the Trust.

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Beneficiaries do not own the Trust property but hold a beneficial interest, meaning they may receive benefits, proceeds, and profits from the Trust according to the terms and conditions of the Trust instrument.

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This beneficial interest is contractually non-assignable, preventing creditors from attaching it.

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Key Structural Characteristics

 

Non-Grantor Status

The non-grantor designation exempts the Trust from alter-ego status that may arise when the Settlor retains management authority or beneficial enjoyment.

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If the creator of a Trust maintains control of the corpus or is a beneficiary, it becomes what is commonly known as a living trust, which generally provides limited asset protection and limited tax advantages.

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Irrevocable Structure

For asset protection to exist, the Trust must be irrevocable and non-grantor.

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When assets are irrevocably transferred into the Trust corpus, they may never revert to the Settlor. This separation establishes legal distance between the Settlor and the Trust assets.

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Under these conditions, the Trust corpus may not be breached by claimants of the Settlor.

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Complex Trust Governance

The Trust must be complex in nature, containing terms and conditions that fully state the powers and limitations of the Trustee(s).

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Complex Trusts are governed by the terms of the Trust instrument and these provisions may not be altered by the Trustee(s). The purpose of the Trust is established once and for all time.

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Trustee Discretion

The discretionary provisions of the Trust ensure the absolute and sole discretionary authority of the Trustee(s) in determining distributions of Trust assets.

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If any percentage of the Trust corpus were required to be distributed to a beneficiary, the discretionary designation of the Trust would be invalid. While this would not affect asset protection, it could adversely affect the tax structure of the Trust.

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Spendthrift Protection

The Spendthrift provision is a critical element of the Trust.

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A properly constructed Spendthrift Trust corpus may not be penetrated to reach the assets of that corpus. Case law has consistently upheld the validity of spendthrift protections.

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No judge or court may issue a turnover order against a properly constructed Spendthrift Trust, except in cases involving fraudulent conveyance when a Trust is created after litigation has already been initiated.

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Internal Revenue Code Compliance

The Trusts were written to operate in full compliance with the Internal Revenue Code, particularly provisions governing trust income and fiduciary discretion.

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Internal Revenue Code Section 643 provides that certain items allocated to corpus may not be considered income when they are not distributed to beneficiaries.

Specifically:

26 USC §643

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(3) Capital gains and losses from the sale of capital assets shall be excluded to the extent they are allocated to corpus and are not paid or credited to beneficiaries.

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(4) Extraordinary dividends and taxable stock dividends determined by the fiduciary to be allocable to corpus are not considered income to the Trust when retained within the corpus.

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The Code further states that the term “income” is determined under the terms of the governing instrument and applicable local law.

(By fiduciary standards, income to a trust is by default recognized as principal unless the Trustee states otherwise)

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Legal Precedent and Case Law

Courts have repeatedly affirmed that individuals and businesses may adopt lawful means to minimize or lessen tax burdens.

Relevant cases include:

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Weeks v. Sibley, DC 269 F. 155
Edwards v. Commissioner, 415 F.2d 532 (10th Cir. 1969)
Philips v. Blanchard, 37 Mass 510

 

These cases affirm the legality of trust structures used for tax planning.

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In Edison California Stores, Inc. v. McColgan, 30 Cal.2d 472, the court ruled that persons may adopt any lawful means for lessening the burden of income taxes.

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Similarly, Narragansett Mut. F. Ins. Co. v. Burnham, 51 RI 371 states:

It is not an evasion of legal responsibility to take what advantage may accrue from the choice of any particular form of organization permitted by law.

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The Internal Revenue Manual also distinguishes tax avoidance from evasion:

IRM 25.1.1.2.4 – Avoidance vs. Evasion

Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize taxes by legitimate means.

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Contract Law Foundation

A Spendthrift Trust Organization is created through contract law as a manifestation of intent expressed within the Trust instrument.

The right to contract is protected under Article I Section 10 of the United States Constitution, which prevents impairment of contracts.

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Once property is transferred into the Trust corpus, the property becomes subject to the Trust indenture governing its management and protection.

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Assets conveyed to the Trust are not gifts because equitable title is not transferred to any individual person or entity.

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Association Status

A Spendthrift Trust Organization is not considered a taxable association under tax law.

Black’s Law Dictionary defines an association as an entity possessing corporate attributes such as:

-centralized management

-continuity of existence

-free transferability of interest

-limited liability

 

Because a Spendthrift Trust does not possess all corporate attributes, it is not classified as a corporation or association.

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Asset Protection Characteristics

Property held in a properly structured Spendthrift Trust Organization is protected from attachment or execution for the personal debts of trustees or beneficiaries.

Relevant case law includes:

Hussey v. Arnold, 182 U.S. 461
Mayo v. Morin, 24 NE 1083

These rulings confirm that Trust property cannot be seized to satisfy the personal obligations of trustees or beneficiaries.

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Trustee Authority and Trust Management

-Trustees maintain sole authority to manage the Trust assets, determine distributions, and oversee the liquidity and operations of the Trust.

-Trustees hold legal title to the Trust property but do not personally own the assets.

-Beneficiaries likewise do not own Trust property but may receive benefits according to the terms of the Trust.

-Beneficiary Distributions and Care

-Trustees may distribute or retain Trust property for the benefit of beneficiaries in various ways.

     These may include:

     Direct distributions to beneficiaries

     Distribution to a guardian, conservator, parent, or family member responsible for the beneficiary

     Distribution to a custodian under the Uniform Transfers to Minors Act

     Distribution to other persons or entities providing benefit to the beneficiary

     Distribution to an agent acting under a valid durable power of attorney

     Retention of assets within the Trust until the beneficiary reaches age 21 or is no longer incapacitated

 

Trustees are encouraged to consider the beneficiary’s ability to responsibly manage prior distributions before making additional distributions.

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Education Provisions

The Trust permits distributions for education in accordance with Internal Revenue Code Sections 2041 and 2514.

Education may include:

-private elementary or secondary school
-college or graduate education
-vocational or professional training
-instruction in arts, athletics, or specialized skills
-educational travel or related development activities

 

Expenses may include tuition, room and board, books, supplies, transportation, tutoring, and reasonable living expenses.

Payments made directly to service providers may avoid income attribution to the beneficiary.

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Summary

Considering the legal authorities, case law, and provisions of the Internal Revenue Code, this Trust structure operates within established legal guidelines governing fiduciary relationships and trust law.

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A Non-Grantor, Irrevocable, Complex, Discretionary Spendthrift Trust provides a lawful framework for:

-asset protection
-fiduciary asset management
-beneficiary care
-and legitimate tax planning within the parameters of the law.