A Short History Of Trust Law

This article takes you on a time machine ride back to the Roman Empire where Trust Law started its well grounded roots. “The Romans had developed a surprisingly sophisticated trust law, which utilized the trust, known as a fidei commissum,
mostly for testamentary transfer as an adjunct to the Roman’s equally
sophisticated body of law relating to wills. It was the Romans who first
realized that allowing a person to set up a trust for themselves made
for bad policy, and thus prohibited the self-settled trust.”

It might be said that the purpose of asset protection planning is to
take some chips off the table when times are good, and make the rest of
the chips difficult for creditors to get at when times are bad.

The first part is often easy so long as there are not existing
creditors, and typically consists of gifting assets into trusts for
heirs, and converting non-exempt assets such as cash into exempt assets
such as personal residences, life insurance and annuities, retirement
plans, etc., to the extent those things are protected by the exemption
laws of particular states. Indeed, the challenge here is not so much
creditor issues, as tax issues arising from the gifts or transfers, or
leaving assets within the client’s taxable estate.

Here, most trusts are irrevocable and are not self-settled, i.e., the
settlor is not also a beneficiary of the trust. The assets being moved
are typically those assets that the client by now has an idea that she
will not need in retirement, and there is no compelling need for the
client to hold the puppet strings over the assets or have an emergency
lever ready to bring them back to the client.

Things get more difficult when you get to the second part, which is
trying to protect the chips that you didn’t take off the table. Here,
most of the planning is with self-settled trusts. The theory, yet borne
out as of the time of this writing in any published court opinion, is
that one can create a trust for her own benefit and fund the trust with
her own assets, but when a creditor comes along can then step back and
say, “I’m merely a discretionary spendthrift beneficiary of this trust,
and you have no power to access the trust assets.”