Trusts 101 for physicians

Physicians Practice, Physicians Practice 2022 Newsletter,

Not all trusts are equal, find out what kind you need.

Trusts can be effective and important legal tools, but they are not all the same and they are not universally interchangeable. We examine some of the trust law basics and terms every successful physician should know when evaluating their own legal planning needs.

What is a “trust”?

For the purposes of our discussion, a trust is a formal, binding, legal document that allows an individual to create and transfer title to property or value of any kind to the control of another, for the benefit of a third party.

  • The person who creates and funds a trust is known as a “Grantor” or “Settlor”. If there is more than one, they are known as “co-grantors” etc. i.e., husband and wife as co-grantors.
  • The trust is under the control of an individual known as a “Trustee”. If there is more than one trustee serving at the same time, they are known as “co-trustees”
  • The trustee manages the trust in accordance with the terms it provides, most commonly for the benefit of a 3rd party, known as the “Beneficiary”.
  • There may be one or more beneficiaries and some trusts name ‘primary’ and ‘contingent’ beneficiaries, i.e., wife leaves estate to her husband as primary and to her 3 children as contingent beneficiaries, if he pre-deceases her.

There are also cases where one may create and fund a trust for their own benefit, during their own lives, as opposed to those created solely for the benefit of third parties. These are referred to as “self-settled trusts” are commonly seen in various forms of asset protection trusts including both those used by successful, high risk professionals like doctors and those for Medicaid asset protection planning.

Trust situs – jurisdictional issues

The term “situs” refers to the jurisdiction and choice of law selected for the trust.Trusts may be established under the law your state, another U.S. state, or the laws of a foreign nation, “offshore”.Different jurisdictions may have significantly different laws, taxation, and compliance requirements including the asset protection benefits they provide.

  1. Offshore trust, aka, International Asset Protection Trust or (APT or IAPT)
  2. Domestic Asset Protection Trust (DAPT) established in one of 19 states that specifically allows

Some special purpose asset protection trusts don’t rely on specific creditor protection laws at all, but rather on other well-established legal principles including arm’s length sales transactions (i.e. you sell an asset to a trust for fair market value) and gifts to trusts that are considered “completed gifts” by the IRS for tax purposes and where you permanently relinquish title and control.

The myth of trust “secrecy”

Any asset protection plan or planner that uses the term “secret” should be a glaring red flag and most likely avoided. There is no such thing as “secrecy” in the law, (as opposed to privacy, which does exist and can be a trust benefit) and any plan that relies on assets being held in a trust, LLC etc. that you hope isn’t found will also require your willingness to actively lie to conceal it. Why? Because an experienced litigator will simply ask you, under oath in discovery, in a deposition, in a debtor’s exam etc. to disclose, “Any trust, partnership, corporation, foundation or similar device that you are a grantor, trustee, beneficiary, officer, member or director of”. You’ll either answer honestly, or you’ll be committing perjury.

As desirable as privacy is, it is not a substitute for careful drafting, compliance, and the right choice of jurisdiction all of which can lead to a trust being an effective and defensible, even when you disclose it to an adverse party.

Two key trust terms: “revocable” and “irrevocable”

These are key terms in any trust and understanding them is especially important to those that are using any trust as part of an asset protection plan. Fortunately, their usage in the law is plain-English usage. A revocable trust can be revoked at any time up until your last breath, allowing you to change the trust details, including the trust’s assets, and beneficiaries. As such, a revocable trust is defective against your creditors and liabilities, during your lifetime. An irrevocable trust on the other hand makes a permanent transfer of assets away from yourself to the trust so that the assets are trust property and not available for your personal or professional liability. With these basics in mind, we will continue our look at specific types of trusts in greater detail.