New York Estate Planning & Elder Law Blog
In times of economic uncertainty, estate plans can benefit substantially from flexibility. As the country both continues to recover from the COVID-19 pandemic as well as face the challenges brought on by new strains of COVID-19, it’s a good idea to consider how to make your estate plan flexible. Not to mention, looming changes brought on by changes to tax law also make it a good idea to consider flexibility while creating an estate plan.
What SPA Trusts Do
Special power of appointment (SPA) trusts (or as they are sometimes called SPAT trusts) is a type of irrevocable trust in which either the creator or settlor of the trust grants appointment power to another person. The person who receives these powers functions in a non-fiduciary role to direct the trustee to make distributions to anyone except for the person who made the appointment of powers.
The Advantage of SPA Trusts
Sufficiently created SPA trusts let a person remove substantial amounts of wealth from that individual’s estate as well as make the most of existing gift tax exemptions while holding onto the power to access assets found within the trust. SPAs are also not considered trusts, which means that they offer asset protection that’s greater than what is available through asset protection trusts.
Potential Shortcomings of SPA Trusts
Because SPA trusts are irrevocable, a person might be fearful of giving up control of assets found within the trust during uncertain periods. Concurrently, however, if a person situates assets outside of a trust, these assets can end up exposed to creditors’ claims as well as estate or gift taxes.
Also, similar to other trusts, SPA trusts are often funded through gifts. Following fraudulent transfer laws, gifts are the most easily reversible type of transfer. This means that sometimes a judgment creditor can undo a transfer even if a creditor was not a creditor at the time the gift was made provided the transfer was a gift and the debtor is unable or unwilling to pay the creditor.
Additionally, if routine distributions are made from the trust to the settlor, creditors sometimes argue that settlors are beneficiaries of the trust even though they are not listed on the trust paperwork. This can result in a trust being treated as if it were self-settled.
Without a provision limiting the power of appointment, an appointer can distribute trust assets to anyone besides himself, the estate, or associated creditors. To make sure an improper appointment is not made, it’s possible to appoint a trust protector who has the power to veto an appointer’s actions or terminate and replace an appointer.
LLCs and SPA Trusts
For assets held by businesses, SPA trusts work well in conjunction with limited liability companies. Because transfers to LLCs involve an exchange of equivalent value rather than a gift, a combined SPA trust, an LLC structure, is often less susceptible to claims.