Domestic asset protection trust planning in Wyoming dates back to 2007, when the state enacted legislation recognizing a form of trust labeled the “Qualified Spendthrift Trust.” A settlor may create a Qualified Spendthrift Trust with a trust instrument appointing a “qualified trustee” for “qualified trust property” if the trust agreement meets the following requirements:[1]
- The trust agreement stipulates that the trust is a qualified spendthrift trust under Wyoming Statutes § 4-10-510(a);
- The trust agreement expressly incorporates the laws of Wyoming to govern the validity, construction, and administration of the trust;
- The trust agreement provides that the interest of the settlor in the trust income or principal, or both, is held subject to a spendthrift provision under Wyoming Statutes § 4-10-502, and such provision of the trust instrument shall be deemed to be a restriction on the transfer of the settlor’s beneficial interest in the trust that is enforceable under applicable non-bankruptcy law within the meaning of Section 541(c)(2) of the Bankruptcy Code; and
- The trust is irrevocable.
Wyoming law confers tremendous flexibility in designing the trust agreement for the Wyoming QST, and the following provisions or factors will not undermine the efficacy of the agreement for QST purposes:[2]
- A settlor’s power to veto a distribution from the trust;
- An inter vivos or testamentary general or limited power of appointment held by the settlor;
- The settlor’s potential or actual receipt of income, including rights to the income retained in the trust instrument;
- The settlor’s potential or actual receipt of income or principal from a charitable remainder unitrust or charitable remainder annuity trust as those terms are defined in Internal Revenue Code § 664;
- The settlor’s receipt each year of a percentage, not to exceed five percent (5%), specified in the trust instrument, of the initial value of the trust or its value determined from time to time pursuant to the trust instrument;
- The settlor’s potential or actual receipt or use of principal when a qualified trustee, including a trustee acting at the direction of a trust advisor other than the settlor, makes such distribution or grants such use in the trustee’s sole discretion or pursuant to an ascertainable standard contained in the trust instrument;
- The settlor’s right to add or remove a trustee, trust protector, or trust advisor, and to appoint a new trustee, trust protector, or trust advisor, other than the settlor;
- The settlor’s potential or actual use of real property held under a qualified personal residence trust within the meaning of the term as described in Internal Revenue Code § 2702(c);
- A trust protector as provided in Wyoming Statutes § 4-10-710 has the power to add beneficiaries to the trust who are not the trust protector, the estate of the trust protector, the creditors of the trust protector, or the heirs of the trust protector;
- The settlor’s right to serve as an investment advisor to the trust, with the powers provided in Wyoming Statutes § 4-10-712(a)(iii) and (iv);
- The settlor’s receipt each year of income or principal from a grantor retained annuity trust or grantor retained unitrust that is allowed under Internal Revenue Code § 2702;
- The transferor’s potential or actual receipt of income or principal to pay, in whole or in part, income taxes due on income of the trust if the potential or actual receipt of income or principal is pursuant to a provision in the trust instrument that expressly provides for the payment of the taxes and if the potential or actual receipt of income or principal would be the result of a qualified trustee’s acting: (i) In the qualified trustee’s discretion or pursuant to a mandatory direction in the trust instrument; or (ii) At the direction of a trust advisor (other than the settlor) and who is acting in the advisor’s discretion.
- The ability, whether pursuant to discretion, direction or the settlor’s exercise of a testamentary power of appointment, of a qualified trustee to pay, after the death of the transferor, all or any part of the debts of the transferor outstanding at the time of the transferor’s death, the expenses of administering the transferor’s estate, or any estate or inheritance tax imposed on or with respect to the transferor’s estate.
After reading this list of thirteen exceptions (there are fourteen in the statute, but one is irrelevant to this discussion), you may be asking yourself: What is the importance of these thirteen exceptions? These exceptions are all based on various principles of asset protection planning that we have covered in previous chapters or which are relevant for estate planning. The important point is this: The competent asset protection or estate planning trust can easily serve as a Wyoming Qualified Spendthrift Trust so long as the four core requirements of a Wyoming QST are satisfied.
[1] Wyo. Stat. § 4-10-510(a).
[2] Wyo. Stat. § 4-10-504(a)(iv)(A) – (P).