The super wealthy use Spthrift Trusts to shield wealth

The wealthy frequently use trusts to pass on their wealth to their heirs and pay as little tax as possible. By using trusts, Laurene Powell Jobs, the widow of Apple founder, saved at least $200 million in estate and gift taxes. Phil Knight, the founder of Nike, has utilized trusts to transfer billions of dollars worth of the company's shares to his heirs tax-free.

But taxes are not the only big advantage of trusts, lawyers to the uber-wealthy told Insider. The wealthy can shield their family wealth if their heirs get embroiled in bitter divorces or messy lawsuits.

It's so much more than just tax, said Karen Yates, partner at Withersworldwide. You can get better creditor protection from your parents than you can buy for yourself at any price. Rich parents set up irrevocable trusts for the benefit of their children or any third party - such as a spendthrift clause, which shields assets from creditors' claims. The spendthrift clause is a commonly used phrase that dates back to an 1875 Supreme Court case.

You'd almost be negligent as an attorney if you didn't put in the trust that creditors can't get access to the trust assets, BNY Mellon Wealth Management tax strategist Jere Doyle told Insider.

The safeguarding of an heir in any legal dispute can be done through spendthrift trusts. If an heir gets in a car accident and is sued by the other party for damages, their inheritance would be protected, Doyle said.

In divorces, spendthrift trusts frequently occur. If an heir receives guaranteed payments from the trust, those payments may be considered for spousal support. But if the payments are at the trustee's discretion the party in control of the trust it is much harder for a soon-to-be ex-spouse to claim them. If the trust has multiple beneficiaries, such as siblings, this strengthens an heir's defense that they don't have specific entitlements.

The trust acts as a barrier that makes sure the assets are not comingled with the marital assets, Yates said.

These trusts can function as prenuptial agreements, she said. Some clients don't want their prenups in a hurry, and they are often done in a rush. In order to be enforced, they also necessitate disclosure of a lot of personal information, which heirs may not even know.

Weinstock Manion partner Robert Strauss, who runs Weinstock Manion, does not view spendthrift trusts as a substitute for prenups. But they are valuable, particularly in states like California, in which all property and assets acquired during a marriage belong equally to each spouse. One of his clients was the trustee and beneficiary of a trust, which could have weakened his defense. But the spendthrift trust had a resemblance to him, he said.

He never did have to provide his spouse with any benefit from the trust at all, Strauss said. The protection is pretty real. However, there are a few strings attached.

The spendthrift trusts are not a Get out of Jail Free card and must for certain requirements and guidelines to hold water in court, including:

It's risky to have a beneficiary also serve as trustee since, in the event of a lawsuit, a judge could compel the trustee to make disbursements to a plaintiff.

Having separate trustees and beneficiaries is just one way to enhance the power of a spendthrift trust. Cindy Brittain, partner of Karlin Peebles, recommended having external investment advisors and professional, respected trustees. It also helps to have a business purpose for the trust, such as preserving privacy or taking advantage of another jurisdiction's tax laws, she said.

A trust can be contested within six months to six years, depending on the state where the trust was established. If a person who creates a trust files for bankruptcy, the statute of limitations is extended to 10 years from the date of the petition for bankruptcy per federal law.

Having a legal dispute that is foreseeable or ongoing can rankle a judge. The estate or the trustee can be held liable for knowingly putting assets out of reach, known as fraudulent conveyance. The asset transfer can be voided to repay the creditor. Convictions for fraudulent conveyance can result in jail time, if not for a misdemeanor.

The beneficiary must have limited access to any trust assets, preventing them from being used as collateral or reassigning the income to someone else. How can the trust be constructed so that the beneficiary is not completely powerless, such as allowing the beneficiary to make withdrawals for specific purposes such as medical expenses or education.

The same safeguards that can benefit yourself, known as self-settled trusts, do not enjoy the same protections even if they have a spendthrift clause, Doyle said.

However, as always with lawyers to the high-powered, there are backup options. A few states, such as South Dakota, provide exemptions for self-settled trusts. In a trust-friendly state like Delaware, he said, domestic asset protection trusts are very secure.

The spouse is pretty much out of luck in trying to get money out of that trust, Doyle said.