The Wyoming Qualified Spendthrift Trust is a kind of asset protection trust. Asset protection trusts can often benefit high-net-worth individuals. However, they are especially beneficial for professional practitioners such as physicians and attorneys, who are often exposed to personal liability in the provision of their services. Not many states provide favorable asset protection trust legislation. Wyoming stands apart as a leading trust situs for asset protection.
An asset protection trust is an irrevocable trust, for which an independent trustee has complete discretion in making distributions to beneficiaries. Thus, if the beneficiary’s creditor pursues trust assets to satisfy the beneficiary’s debt, the trustee may refuse to make a distribution. This keeps the trust assets out of the hands of these creditors. In such a situation, the trust assets are preserved for the use and enjoyment of future generations.
The Wyoming Qualified Spendthrift Trust
In most U.S. jurisdictions, the settlor of an asset protection trust cannot receive distributions from the trust. The result is that anyone looking to protect their assets in an asset protection trust will also lose the use and enjoyment of these assets. However, the Wyoming legislature has specifically drafted statutes permitting “self-settled” asset protection trusts (referred to as Qualified Spendthrift Trusts by statute). A Wyoming Qualified Spendthrift Trust (a “Wyoming QST”) is a type of trust that allows a settlor to protect assets from potential creditors while retaining a beneficial interest and some level control over the assets. It is an effective tool for asset protection planning that is available to individuals, families, and business owners alike.
Moreover, Wyoming has robust trust protector and advisor statutes. Under these laws, settlors can be named as investment advisors to the trust, allowing them to retain control over the management of assets held in trust. Wyoming has further distinguished itself as a lead asset protection jurisdiction with the passage of W.S. 4-10-507.1. Under this statute, a Wyoming trustee is expressly prohibited from enforcing a judgement, decree, or order from another U.S. or foreign jurisdiction until a Wyoming court has determined whether such decree is consistent with Wyoming asset protection laws.
Despite the many opportunities of the Wyoming QST, there are a few important considerations for attorneys and their clients to consider before setting one up. This post does the following:
- Explains how a Wyoming QST works.
- Emphasizes the importance of proper planning before any outstanding problems arise.
- Provides a workflow for establishing a WY QST.
- Discusses the express or implied agreement as an important consideration.
- Discusses the income and estate tax consideration in establishing a Wyoming QST.
How the Wyoming Qualified Spendthift Trust Works
In a Wyoming Qualified Spendthrift Trust, the assets held in the trust are subject to a fully discretionary distribution standard and spendthrift provision. A fully discretionary standard means that assets can only be distributed from the trust at the discretion of the trustee. A spendthrift provision is a clause in a trust that restricts a beneficiary’s ability to transfer or assign his or her interest in the assets of the trust. These two attributes work together to prevent a creditor from compelling a distribution from the trust. The trustee cannot be forced to distribute assets, and the beneficiary is not able to assign a creditor as an interested party to the trust assets.
Planning Before Problems Arise
Individuals who want to access the asset protections benefits of a Wyoming Qualified Spendthrift Trust must plan ahead. Under applicable federal and state law, if assets are transferred to a Wyoming QST with the intention of defrauding creditors, the transfer can be deemed fraudulent and set aside. This means that a creditor could potentially reach those assets despite their placement in a trust. Therefore, it is crucial that a Wyoming QST be established, and assets transferred into it, before any legal claims and financial troubles arise.
Most states, Wyoming included, have a “look-back” period for fraudulent transfers. This means that if a transfer is challenged, the court will look back at the transfer to determine if it was made with the intention to defraud creditors. In Wyoming, for most transfers, the look-back period is four years from the transfer or one year from when the creditor could have reasonably discovered the transfer, whichever is later. However, under Wyoming’s unique QST statute, this look back period is accelerated if proper notice of the transfer is provided. The look-back period for transfers to a Wyoming QST is 120 days if constructive notice of the transfer through publication is provided to unknown creditors and/or actual notice is provided to known creditors.
Workflow for Establishing a Wyoming QST
Establishing a Wyoming Qualified Spendthrift Trust involves a series of steps. First, the settlor must select a trustee that is a Qualified Trustee under Wyo. Stat. Ann. § 4-10-103, defined either as a resident of Wyoming, or a trust company or bank licensed to do business in the state of Wyoming. Second, the QST trust agreement must be drafted by a qualified attorney. This agreement, which must comply with Wyoming law, includes the spendthrift provision, the terms of the trust, the identity of the settlor, trustee, and beneficiaries, as well as any special instructions for the trustee.
Fourth, the settlor transfers assets into the QST. This step should be done with care and consideration, as improperly transferring assets could lead to potential complications and might expose those assets to creditor claims. Finally, the QST must be administered properly to ensure its ongoing effectiveness. This includes following the terms of the trust, ensuring that the formalities of the structure are scrupulously honored, and keeping detailed records of all transactions involving the trust.
Express or Implied Agreement Consideration
Often, trusts will include an express or implied agreement that effectively mandates the trustee to make distributions to the settlor or pay the settlor’s debts on demand. However, this kind of agreement could potentially undermine the asset protection offered by the Wyoming QST. In such cases, a court would simply disregard the trust as distributions from the trust are not actually subject to the trustee’s discretion. Thus, it is vital to ensure that there is no such express or implied agreement between the trustee and the settlor and beneficiaries. The best way to avoid the appearance of an agreement is to honor the form of the trust. This means that distribution requests should be made to the trustee and that the trustee should document the rationale for approving or denying the distribution in accordance with the terms of the trust.
Estate and Income Tax Implications of the Wyoming QST
While a Wyoming Qualified Spendthrift Trust can provide robust asset protection, it is important to consider its potential income and estate tax implications. In general, if the settlor retains a beneficial interest in the assets of the trust, the trust will be treated as a grantor trust for income tax purposes, meaning that income is treated as belonging directly to the grantor (settlor).
This may or may not be beneficial depending on the circumstances. If the settlor resides in a high tax jurisdiction, it may be advantageous for the trust to be its own taxpayer. In this case, in order to avoid grantor trust status, the settlor may use adverse parties with respect to some distributions. Assets held by the trust that cannot be sourced to another jurisdiction (such as gains from the sale of marketable securities), would be sourced in the tax situs of the trustee (Wyoming in this case). Wyoming does not levy an income tax, potentially reducing the overall income tax burden of the assets held in the Wyoming QST.
Contributions to a Wyoming QST can be structured as completed gifts for estate tax purposes. This means that assets contributed to the trust are outside of the settlor’s estate for estate tax purposes. This would necessitate the filing of a gift tax return and could use some of the settlor’s lifetime gift tax exemption or trigger a gift tax, depending on the size of the gift. Structuring the trust in this manner allows the settlor to benefit from both asset protection and estate tax planning, as assets held by the trust would be free of estate taxes. If desired, the trust can be drafted in a manner such that contributions to the trust are incomplete gifts for estate tax purposes. These assets would be included in the settlor’s taxable estate.
Case Study (Fictitious)
Roger is an orthopedic surgeon with a successful practice. He is also an active investor with a diversified portfolio of private, public, and real property investments. Due to the litigious nature of the medical field, Roger is concerned about protecting his assets from potential creditors. Roger places his various investment interests into a Wyoming Qualified Spendthrift Trust (QST), administered by a Wyoming trustee. Roger is the current beneficiary of the QST and can receive distributions of income and principal at the trustee’s sole discretion. His children are remainder beneficiaries. Roger is also named as an Investment Trust Advisor, allowing him to continue to manage the trust assets as he sees fit. He has sufficient medical malpractice insurance, a general liability policy of $1,000,000, and signed a qualified transfer affidavit prior to transferring any assets to the QST.
A few years after transferring property to the QST and enjoying various distributions from it, Roger is subjected to a malpractice claim. The claim is heard by a jury that awards the plaintiff with damages far in excess of what is warranted by the claim. The damages exceed Roger’s malpractice coverage; thus, the plaintiffs seek to enforce the judgement against the assets held in Roger’s QST. Because the assets are held in a Wyoming QST, they are only attachable by Roger’s creditors if and until they are distributed to him. The trustee of the QST will, in his sole discretion, refuse to make any more distributions to Roger.
Because this is a validly created Wyoming QST, any attempt to attach trust assets must go through Wyoming courts. Assuming the QST is properly drafted and administered, Wyoming courts will generally enforce the validity of the QST and will not permit the attachment of the assets or compel the trustee to make distribution to Roger or his creditors in satisfaction of the judgment. While Roger will likely be unable to enjoy an additional distribution from the trust (as any distribution would be made available to Roger’s creditors), the assets held by the QST will continue to be held in trust for the benefit of Roger’s children.
Establishing a Wyoming Qualified Spendthrift Trust requires careful planning and attention to detail. However, when properly designed and administered, a Wyoming QST can offer strong asset protection benefits, allowing you to retain a beneficial interest over your assets while protecting them from potential creditors. Additionally, the structure allows settlors to incorporate income and estate tax planning into their overall plan. Consulting with a qualified attorney is essential in this process to ensure compliance with the complex legal and tax aspects of creating a Wyoming QST.
For more information or questions, do not hesitate to contact us.