Companion chart to OSBA Wealth Transfer Planning CLE June 13, 2013, Part VI of OBIT white paper. Please consult those for more detailed explanation.
Abbreviations: DAPT = Domestic Asset Protection Trust, including Ohio Legacy Trust Act, Ohio’s DAPT statute at Ohio R.C. 5816.01 et seq.
LLPOA = lifetime limited power of appointment. For this chart, assumes settlor/donor is not the powerholder, but a mere potential appointee.
GPOA = general power of appointment. LPOA = limited power of appointment. PH = powerholder. All trusts in chart assumed irrevocable, not QTIP.
SOL = Statute of Limitations, FT=fraudulent transfer, UFTA = Uniform Fraudulent Transfers Act
| Key Features | Gift to non-DAPT Ordinary SLAT (no LLPOA to appoint to settlor) | Self-Settled DAPT (OH OLT or other) Settlor is bene | Non self-settled, non-DAPT Trust (incl SLAT) w/LLPOA Settlor is not bene | Non Self Settled Trust (incl SLAT) w/LLPOA that is also DAPT Settlor is not bene |
| How Donor Could Access Funds Post-Transfer | ||||
| There is a fiduciary duty owed to donor as a beneficiary | no | yes | no | no |
| Reimburse income tax paid due to grantor trust status | yes | yes | yes | yes |
| Powerholder/trustee can give back arbitrarily, w/ no fiduciary duty (PH need not consider other beneficiaries, can be arbitrary, but if PH is also trustee, best to resign in light of Peterson v. Peterson , 835 S.E.2d 651 (Ga. App. 2019). |
N/A | no | yes | yes |
| Possible grounds for suit from benes if all funds revert to settlor (e.g. Roenne v. Miller , 475 P.3d 708 (Kan Ct. App. 2020), distribution pursuant to “uncontrolled discretion” to one bene not others violated duty of impartiality) |
n/a | yes | no | no |
| Gift Taxation of Any Donor Access Post-Transfer | ||||
| Taxable gift if/when funds come back to donor (assumes trust is designed as a completed gift, but sometimes DAPTs are established as incomplete gift trusts, which would be n/a |
n/a | no | Perhaps If the PH is a beneficiary and exercises LLPOA that reduces their interest, a partial gift |
Perhaps |
| Ongoing Income Tax Treatment and Flexibility | ||||
| Easy to Structure as a Grantor Trust | yes | yes | yes | yes |
| Easy to Structure as a Non-Grantor Trust (but possible if bona fide adverse parties must appoint or approve distributions to settlor/spouse) |
no | no | no | no |
| Estate/GST Tax Treatment and Flexibility | ||||
| Completed Gifts Remain Outside of Estate, no 2036 issue (though there is always “prearrangement”/”understanding” risk) |
yes | uncertain, and PLRs will not address | yes | yes |
| Could double as inter-vivos QTIP to exploit “poorer spouse” funding and use $5.25 million GST via reverse QTIP | yes | no | yes, if the LLPOA is limited < SS’s death | yes, if the LLPOA is limited < SS’s death |
| Can help protect special self-settled trusts (CRT, QPRT, GRAT) | n/a | yes | n/a | n/a |
| Asset Protection Considerations | ||||
| In discovery/bankruptcy filing – must disclose being beneficiary
(what is duty if trust protector can add settlor as beneficiary?) |
n/a | yes | no | no |
| Clear that 11 USC 548(e) 10 year FT SOL could apply (Mortensen, Huber cases) |
n/a | yes | no | no |
| Risk of court “freezing” distributions by trustee (A.Grant case) | n/a | yes | much less | much less |
| Possible piercing as self-settled due to tax reimbursement clause (e.g. should trust allow reimbursement of decades of build up?) |
depends on state | no | depends on state | no |
| Exception creditors of settlor can reach assets even if there is no fraudulent transfer, by spendthrift exception | no | yes (e.g. child support) |
no | no |
| Shorter SOL, tougher fraudulent transfer standards apply to help donor and deter later creditors (nonbankruptcy) | no | yes | no | yes |
| Requires Affidavit of Solvency for all Transfers | no | Depends on state | no | no |
| Potential Medicaid/govt benefits advantage > 5 yrs | yes | no | possibly | possibly |
| Greater chance of other state law applying in conflict | no | yes | no | no |
| Strong chance of continued creditor protection even if state of residency (non-DAPT) law held to apply | yes | no | yes | yes |
| Chance of Federal Tax Lien attaching to Settlor/beneficiary | no | yes | no | no |
| Property is subject to beneficiary’s creditors (absent 5% power, FT, mandatory interest or termination date, etc) |
no | no | no | no |
| State (Ohio) Income Tax Features | ||||
| May escape Ohio income taxation if structured as non-grantor (many variables apply – assumes trust is non-grantor, no K-1 to bene) |
no | no | yes | yes |
Each state is different, however, and there are several factors involved. See 50 state chart on avoiding state income tax of trusts:
state-residency-and-source-income-factors-for-state-income-taxation-of-irrevocable-non-grantor-trusts
© 2013 Edwin P. Morrow III. Permission to reprint liberally granted, criticism welcome Email: [email protected]
Updated March 2021 for ACTEC/ALI-ABA Webinar.