SPA Trust

Last updated February 19, 2019

In United States trust law, a SPA Trust is an irrevocable trust that includes a special power of appointment. Unlike general powers of appointment, a special power of appointment is limited to a certain class of persons or entities that may receive the benefit of the power (appointee) from the person in whom the power is vested (donee). Generally, SPA trusts are used to hold property for asset protection purposes, because of the benefits and control a SPA trust offers over the assets protected within the trust.

Asset protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of asset protection planning is to insulate assets from claims of creditors without perjury or tax evasion.

The purpose of a SPA Trust is to protect assets from a person's potential future liabilities by removing the assets from the person's legal ownership. A SPA Trust is created by a legal document which is prepared by an attorney who has expertise with debtor—creditor law, income tax law, gift and estate tax law, and trust law.

Attorney at law or attorney-at-law, usually abbreviated in everyday speech to attorney, is the preferred term for a practising lawyer in certain jurisdictions, including South Africa, Sri Lanka, and the United States. In Canada, it is used only in Quebec. The term has its roots in the verb to attorn, meaning to transfer one's rights and obligations to another.

An income tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits. Income tax generally is computed as the product of a tax rate times taxable income. Taxation rates may vary by type or characteristics of the taxpayer.

In economics, a gift tax is the tax on money or property that one living person gives to another. Items received upon the death of another are considered separately under the inheritance tax. Many gifts are not subject to taxation because of exemptions given in tax laws. The gift tax amount varies by jurisdiction, and international comparison of rates is complex and fluid.

The SPA Trust is built upon the following legal principles:

1. With respect to an irrevocable trust, a creditor of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit.^[1]

A creditor is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust or a third party may be the trustee. In British common law it has been held, controversially, that where a trustee declares an intention to transfer trust property to a trust of which he is one of several trustees, that is a valid settlement notwithstanding the property is not vested in the other trustees.

2. A settlor can retain a special power of appointment without subjecting the trust to the claims of creditors.^[2]

By retaining a special power of appointment, the settlor should receive the following benefits: (1) The settlor can transfer unlimited amounts to the trust at any time without gift tax consequences, (2) the assets of the trust are entitled to a step-up in basis upon the settlor's death, (3) the settlor can pay the income taxes on the earnings of the trust and allow the trust to grow tax free, (4) the settlor can put a home in the trust and retain all the tax benefits of home ownership if the trust is a grantor trust, (5) the trust is eligible to own stock in an S corporation, and (6) the settlor can change the trustees, the beneficiaries, or the terms of the trust at any time.

Under Internal Revenue Code § 1014(a), when a person receives an asset from a giver after the benefactor dies, the asset often receives a stepped-up basis, which is its market value at the time the benefactor dies. A stepped-up basis is often much higher than the before-death cost basis, which is primarily the benefactor's purchase price for the asset. Because taxable capital-gain income is the selling price minus the basis, a high stepped-up basis can greatly reduce the beneficiary's taxable capital-gain income when the beneficiary sells the inherited asset.

An S corporation, for United States federal income tax purposes, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

The SPA Trust is a sophisticated and highly technical legal agreement and its effectiveness in accomplishing any particular purpose will depend upon the expertise of those who create it and the circumstances of each particular case.

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References

↑ See Uniform Trust Code Section 505; RESTATEMENT (SECOND) OF TRUSTS Section 156(2) and RESTATEMENT (THIRD) OF TRUSTS Section 58(2). This principle has been adopted in hundreds of cases throughout the country and many states have enacted statutes with this identical language. See, e.g., Alabama Code Section 19-3B-505, Florida Trust Code Section 736.0505(b), Michigan Code Section 7506(c)(2), Ohio Code Section 5805.06, Utah Code Section 75-7-505(b), Virginia Code Section 55-545.05.
↑ RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS Section 22.1; US Bankruptcy Code Section 541(b)(1), California Probate Code Section 681; Delaware Code Section 3536; Georgia Code Section 23-2-111; New York Estates, Powers and Trusts Law 10-7.1; SeeIn Estate of German, 7 Cl. Ct. 641 (1985) (85-1 USTC Par 13,610 (CCH)); In re Hicks, 22 B.R. 243 (Bankr. N.D.Ga.1982); In re Knight, 164 B.R. 372 (Bankr.S.D.Fla.1994); In re Colish, 289 B.R. 523 (Bankr.E.D. N.Y. 2002); Cooley v. Cooley, 628 A.2d 608 (1993); Avis v. Gold, 178 F.3d 718 (1999); US v. O’Shaughnessy, 517 N.W.2d 574 (1994); Spetz v. New York State Dep't of Health, 737 N.Y.S. 2d 524 (Sup. Ct. Chautauqua Co, Jan. 15, 2002); Price v. Cherbonnier, 63 Atl 209 (1906); Gilman v. Bell, 99 Ill. 194 (1881); Jones v. Clifton, 101 US 225 (1879); Holmes v. Coghill, 33 Eng. Rep 79 (1806).

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[1] See Uniform Trust Code Section 505; RESTATEMENT (SECOND) OF TRUSTS Section 156(2) and RESTATEMENT (THIRD) OF TRUSTS Section 58(2). This principle has been adopted in hundreds of cases throughout the country and many states have enacted statutes with this identical language. See, e.g., Alabama Code Section 19-3B-505, Florida Trust Code Section 736.0505(b), Michigan Code Section 7506(c)(2), Ohio Code Section 5805.06, Utah Code Section 75-7-505(b), Virginia Code Section 55-545.05.

[2] RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS Section 22.1; US Bankruptcy Code Section 541(b)(1), California Probate Code Section 681; Delaware Code Section 3536; Georgia Code Section 23-2-111; New York Estates, Powers and Trusts Law 10-7.1; SeeIn Estate of German, 7 Cl. Ct. 641 (1985) (85-1 USTC Par 13,610 (CCH)); In re Hicks, 22 B.R. 243 (Bankr. N.D.Ga.1982); In re Knight, 164 B.R. 372 (Bankr.S.D.Fla.1994); In re Colish, 289 B.R. 523 (Bankr.E.D. N.Y. 2002); Cooley v. Cooley, 628 A.2d 608 (1993); Avis v. Gold, 178 F.3d 718 (1999); US v. O’Shaughnessy, 517 N.W.2d 574 (1994); Spetz v. New York State Dep't of Health, 737 N.Y.S. 2d 524 (Sup. Ct. Chautauqua Co, Jan. 15, 2002); Price v. Cherbonnier, 63 Atl 209 (1906); Gilman v. Bell, 99 Ill. 194 (1881); Jones v. Clifton, 101 US 225 (1879); Holmes v. Coghill, 33 Eng. Rep 79 (1806).