If the client declares bankruptcy within 10 years of the transfer, the bankruptcy trustee can avoid transfers to a self-settled trust or similar device. So, if you delay making the client a beneficiary beyond this time period, you can insulate the trust from that risk.
* Consider having the trust not name the client as a beneficiary at the time of its formation. Instead, give some person the power to appoint a class of beneficiaries (such as descendants of the client's grandfather) that might include the client.
Be aware, however, that this is a real risk. If the person holding this power is not a fiduciary, then there would be no standard that a court could impose on him or her to appoint your client. Would your client be able to sleep at night?
* The trust agreement could designate a person, such as the trust protector or independent trustee, as having the authority to remove the client as a discretionary beneficiary. If a claim were filed or the client were on his deathbed, he could be immediately removed as a beneficiary - which arguably could truncate the status of the self-settled trust.
As with all tax planning, an advisor who emphasizes being proactive and cautious might ultimately win the day.
Martin M. Shenkman,CPA, PFS, J.D., is a Financial Planning contributing writer and estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.
