The Function and Use of a Living Trust in Utah, March 26, 2002

Lawrence R. Barusch¹

I. Introduction

The revocable inter vivos (living) trust has evolved over the past half century to become one of the more popular ways of passing of assets at death. It has significant advantages both before and after death.

A. Elements
The living trust is a common law trust, although many states have adopted specific statutory provisions governing the entity. It has a trustor² (our client), a trustee (often our client), beneficiaries (our client and her family) and corpus (assets). The trustor must intend to create a trust and it must have a valid purpose. A writing is required if the trust contains real property to comply with the statute of frauds. 25-5-1 UCA³. In any event the terms must be clear enough for courts to enforce equitable duties. See Sundquist v. Sundquist 639 P 2d 181 (Ut 1981).

B. Revocable vs. Irrevocable
The trustor may usually change the revocable living trust at any time she is competent. Its creation has little estate or gift tax effect (although the CONTENT of the trust, like the content of a will, may have a major effect on estate tax). If, at the time of death, the trustor has the power to revoke, or relinquished such power within three years prior to death, the value of the trust corpus will be included in the trustor's estate for federal estate tax purposes. Code⁴ § 2038(a). The irrevocable trust is usually intended to reduce estate tax, and, as its name applies, cannot be altered, amended or revoked by the trustor.⁵

C. Inter vivos vs. Testamentary
The terms of a testamentary trust are set out in the testator's will. After the will has been admitted to probate and as part of the administration of the decedent's estate the court will establish the trust by a separate order and fund the trust through one or more distributions of the assets of the estate. The decedent is, of course, not in a position to revoke the trust by the time it is funded. The testamentary trust requires a probate. Assets of an inter vivos trust are not subject to probate.

D. No asset protection
The revocable inter vivos trust should be distinguished from devices intended to protect the assets of the trustor from his creditors. While creditors may face additional hurdles in reaching assets in a living trust, the persistent creditor will be able to reach them in the end. A retained power to revoke a trust becomes part of the bankruptcy estate and may be exercised by the trustee in bankruptcy. Bankruptcy Code § 541(a)(1), Collier on Bankruptcy 15th Edition, § 541.11[6]. Even when the trust contains a spendthrift clause but no power to revoke, whatever interest the settlor retains is reachable by his creditors Restatement (Second) of Trusts § 156(1) 1959; Collier § 541.11[2], footnote 15⁶. In Leach v. Anderson, 535 P.2d 1241 (Ut 1975) the trustor retained a right to income and principal to maintain her in a reasonable standard of living, and to pay for automobiles, vacations and home maintenance. Though the trust contained a spendthrift clause, and the transfers had occurred many years before, the creditor was allowed to satisfy his judgment from trust assets.⁷ A living trust is a slim reed compared to the irrevocable trust, family partnership or offshore trust⁸ and should not be relied upon for asset protection.

E. Funded vs. Unfunded
Living trusts may be funded or unfunded. The former may be a probate avoidance or asset management device. The latter is usually funded on death by a pour-over will, life insurance or pension plan. The same trust is often funded both before and after death.

F. Legal Questions
In the first half of the twentieth century the legal validity of the revocable trust was at issue. 43 Harvard Law Review 521, McEvoy v. Boston Five Cents Savings Bank, 87 N.E. 465 (Mass. 1909) (living trust void as testamentary transfer without necessary formalities). McEvoy was overruled by National Shawmut Bank v. Joy 53 N.E. 2d 113 (Mass. 1944). In 1954 the Utah Supreme Court declined to decide whether it would follow National Shawmut, but in fact cast grave doubt on the enforceability of any revocable trust, Alexander v. Zion's Savings Bank and Trust Company, 273 P. 2d 173 (Ut. 1954), reheard with same result, 287 P.2d 665 (Ut 1955). In Alexander the court found that the ability to revoke did not taint the trust, but the failure of the interests of the non-settlor beneficiaries to vest did. Recently Utah appears to have joined the main stream, In re Estate of Groesbeck, 935 P. 2d 1255 (Ut 1997). However Alexander was not overruled and may remain a trap for the unwary: i.e. interests in the non-settlor beneficiaries should be present interests, vesting on creation (subject to divestiture if the instrument is revoked), rather than interests that do not vest until the settlor's death. Other states may have idiosyncrasies under statutes and case law, which may become relevant if the client dies domiciled outside Utah. The draftsman should determine whether the critical questions have been answered in the applicable jurisdictions. These include:

The enumeration of these questions suggests the wisdom of providing at least a minimum funding for and execution of the trust before the will is executed. A statement that all interests are present interests (subject to the trustor's power to revoke) is also good practice.

II. Avoiding Probate

A. Background

B. Can Probate be avoided?
Any property owned by the decedent at death is subject to rights of creditors, the elective share of the surviving spouse and administration. 75-3-101 UCA. Further, a probate is generally necessary to determine who has title to the property. To avoid probate an individual should transfer all his property to a trust during his lifetime and designate the trust as beneficiary of life insurance, pension plans and other contract arrangements. If the decedent dies owning real property (other than through an arrangement such as joint tenancy that passes title by operation of law), a probate will be necessary in each jurisdiction where the property is situated. If personal property owned by the decedent has a value of not more than $25,000 net of liens and encumbrances, such property can be collected by affidavit. 75-3-1201 UCA. The discharge of the personal representative is a little more complex. See 75-3- 1203 and 1204 UCA, but does not necessarily require a probate. It is possible to avoid probate with a living trust, but care must be taken in transferring the trustor's property to it during her lifetime.

C. Administrative Costs The costs may be put in five categories:

Overall, a trust containing all of the decedent's property will be less expensive to administer on death than a probate. However the cost difference may be balanced out by the effort necessary to place all the decedent's assets in trust.

D. Court Supervision
Formerly testamentary trusts were subject to relatively close supervision by the courts (annual accounting, sales, and distributions reviewed by court.). This added to the time and expense (pleading, notice, hearing order) but added safeguards to the process as compared to the living trust that was not subject to these rules. Under 75-2-511(2) living trusts, even though funded at death, are not subject to court supervision as testamentary trusts. In probate, after the personal representative distributes to a trustee 75-3-913, the trust is administered as any other trust. 75-7-101 UCA et seq. Interested parties may apply to a court concerning trust affairs in either case, 75-7-201(1) without conferring continuing jurisdiction on the court 75-7-201(2). While there is a difference between probating and not probating an estate, once a testamentary trust is funded court supervision in Utah is the same for testamentary as for inter vivos trusts.

E. Pretermitted heirs
Children born or adopted after a will is executed and not provided for in the will are entitled to their intestate share of the probate estate 75-2-302 UCA. No such rule applies to trusts. In most cases such matters can be anticipated in drafting, so choice of instrument makes no difference. A special case is the client with a roving eye. A recent case involved an estate with assets valued in the nine-figure range where the decedent, an unmarried man, died leaving a will with bequests to his siblings and the residue to charity. At probate a young man claiming to be a son born after the will was made asked for his intestacy share, to wit, the entire estate. This issue could have been avoided by use of a living trust. Often the claims of illegitimate children are viewed as spurious⁹; the mother is alleged to have had many sexual partners. This view suggests the use of a trust. However with DNA testing now able to determine paternity with virtual certainty, the issue seems less clear. Suppose the decedent, on his deathbed, was presented with scientific proof the boy was his son. Would he have chosen to disinherit him?

F. Privacy
A will is a public document. Famous and wealthy persons should anticipate that their affairs will receive public scrutiny in a probate proceeding. Smaller estates may not attract as much attention and full accounting may not (or may) be necessary. A trust is a private document and almost always gives more privacy than a probate. However, it does not confer absolute privacy. Beneficiaries will often ask for copies of the trust instrument and its amendments (it is just these persons the trustor may not want to inform). Their success in obtaining copies will depend on the facts of the case. Transfers of real property in and out of the trust are matters of public record. Brokers and others dealing with the trust may ask to see copies of the trust, although the trend is to accept the trustee's certification of certain provisions (power to sell) without asking for others (dispositive provisions). Overall, the trust is a significant enhancement of the client's privacy.

G. Limiting Creditors' Claims
In a probate unasserted creditors' claims arising prior to death are barred 90 days after publication of notice. 75-3-801 UCA. This may be an advantage of a probate. However nothing prevents probate and notice to creditors even if all assets are in a trust. Further, pre-death claims against a decedent's estate are barred one year after death in any event. 75-3-803 UCA. As most claims against the trust would be derivative in nature (e.g. fraudulent conveyance) this gives significant protection to the trust one year after the trustor's death. Effective January 1, 1992 California adopted a procedure allowing trustees of revocable trusts to give notice and have a probate style creditors cut-off. California Probate Code 19000-19403. Utah might enact similar legislation some day.

III. Management

A. Continuity of Management
On death it is still necessary to probate the will, publish notice to creditors and transfer assets. Preliminary or partial distributions and payment of family allowances are possible but still take time and effort. No such problems exist with a trust (although debts and taxes must still be paid). Further, the beneficiaries (especially the surviving spouse) usually feel much more secure when they are directly in control of the assets.

B. Coordination of Management
A living trust is immediately available at the time of death to receive life insurance, pension distributions and distributions from the probate estate. Trusts have the advantage of permitting coordinated management of all assets.

C. Trial Run
Establishing a funded living trust with a non-trustor trustee gives the trustor the opportunity to observe the trustee's management and performance. The trustor may then change administrative provisions, change trustees or make other changes. This is particularly useful if there is a going business (although there are other ways to provide for trial runs of management of a business).

D. Incapacity
A funded living trust is one way (of several) to provide for the administration of the trustor's estate when the trustor is unable to make decisions, or when the trustor believes he is better served by another making such decisions. The alternative is not probate, but a durable power of attorney or other mechanism discussed below. A trust tends to have more record keeping associated with it, which can be desirable or undesirable depending on the circumstances.

E. Preserving the status of community property
Both the decedent's and the surviving spouse's share of community property get a step up in basis to the fair market value at the date of death or alternative valuation date, Code § 1014(b)(6). A revocable trust is sometimes used to attempt to preserve the community character of property. Consider H and W who lived in California since marriage and during marriage acquired property with earnings from their marriage, to wit, Wetacre, being real property in California, Dryacre in Utah and stock. H and W change their domicile to Utah. Wetacre and the stock are community property under California law and will continue to be community property after their move, In re Majot's Estate 92 N.E. 402 (1910) under the rule that property does not lose its community character because of change of domicile. What about Dryacre which was "quasi-community" property under California law? More critically, if after the move to Utah H and W sell community property and buy other property, the replacement property is not community. In re Majot's Estate, Rev. Rul. 68-80 1968-1 C.B. 348. The thinking goes that before the move, all community or quasi-community property should be transferred to a revocable trust. H and W now hold their interest in the trust as community property. They move to Utah and that interest is unchanged, even if the trustee buys and sells assets. This seems consistent with the rationale of Groesbeck. There appears to be no authority on whether the IRS will respect the community character of the interest in the property, but the absence of reported litigation gives some degree of comfort.¹⁰

F. Investment Advice and Management
A revocable trust is one means of obtaining investment advice and direction or to transfer record keeping and property management functions. This may be useful for the client who is absent frequently, particularly if her travel takes her beyond the range of cell phones and E-mail.

G. Multi-State Issues
If real property is located in several states, the use of a trust may bring some uniformity to the law governing it (in any event it avoids multiple ancillary probates). There is a similar uniformity advantage if the client moves often.

H. Segregating Assets
In the case of a second marriage, or a marriage when the client already has substantial assets, the use of a revocable trusts may help to trace separate property possibly avoiding rights of the second spouse (or first spouse) on divorce or to an elective share (discussed below).

IV. Rights of the Surviving Spouse

Surviving spouses can choose to take a statutory elective share, instead of a bequest under a will. In some states at some times a revocable trust defeated this right. Kerwin v. Donaghy, 59 N.E. 2d 299 (Mass. 1945). This is not the rule in Utah, and research should be undertaken before it is assumed to be the current rule anywhere. In Utah an "augmented estate" is computed by including (roughly) everything that would be included for federal estate tax purposes that is not separate property, see 75-2-203 to 208 UCA for a more accurate formulation. Revocable trusts are included in the augmented estate to the extent they are not separate property. 75-2-205(2)(b), 75-2-708. The surviving spouse is entitled to 1/3 of the augmented estate. 75-2-202(1) UCA. There is a complex formula for allocating the obligation to pay, but the trustee of the revocable trust may be liable, and will be liable if there are no other assets. 75-2-209(3) and 75-2-210 UCA. In short the revocable trust cannot defeat the spouse's elective share in Utah, although it may affect which of the other heirs and beneficiaries pays it.

V. The Modern Family
At one time, the model in common law jurisdictions was that the husband owned all of the property. Married women could not own property, although they might be beneficiaries of trusts set up by their parents. Often both spouses own substantial property today and there may be an understanding that each spouse will dispose of half the property acquired during marriage.

A. Reduced Documentation
In a "traditional" family, a single document, the husband's will establishing a testamentary trust would do the job. In a "modern" family two wills, both containing extensive testamentary trust provisions are required. Two short pour-over wills and a single inter vivos trust can reduce duplication and achieve some simplification.

B. Symmetry
With two testamentary trusts, H's side of the family gets bequests when he dies and W's side receives bequests when she dies. Many couples prefer to make bequests on the death of the first spouse and again on the death of the second, without regard to order of death. While this can be done in a pair of testamentary trusts, it is simpler with use of a revocable trust.

C. Protection of the Decedent Spouse (Mutual Wills)
Spouses often make their wills on the understanding that there is a joint plan embodied in the estate planning documents. If there are two wills, the survivor is free to change his will after the decedent's death.¹¹ Controversy may then arise. A funded living trust may be made irrevocable, in whole or part, when the first spouse dies. The instrument may spell out which portion the surviving spouse has power to dispose and which she does not. This unambiguously resolves the reciprocal or mutual will issue.

D. Remarriage
A couple with children and more assets than they will consume during their lives should almost always use a trust during the survivor's life. The surviving spouse may well live many years after the decedent and it is unwise and unrealistic to ask that he or she not remarry.¹² The second spouse cannot have the same relationship with the adult children as the deceased parent.¹³ Putting assets in trust for the surviving spouse, usually with income to the spouse and a power to invade principal in case of need, not only protects the inheritance of the children¹⁴, but reduces the risk of discord between the children and the second spouse. The living trust may be a better vehicle than the testamentary trust. The spouses can explain to each other the reasons for the trust, work out provisions so that the survivor will not feel insecure, possibly provide a vehicle for providing reasonable funding for a second spouse, and gain the children's blessing. The symmetry that tends to arise when a couple uses a single living trust reduces the chances of acrimony, or one spouse feeling a lack of trust, appreciation or love.

VI. Other uses of trusts

Trusts can be used for many purposes. A few are listed here. These purposes generally may be accomplished by any trust, revocable or irrevocable, inter vivos or testamentary.

A. Guardianship of Minor Children
A parent may appoint a guardian of her minor children through a revocable trust. 75-5-202.5 UCA. A trust is, perhaps, the best way to provide for the support of the children during guardianship. Failure to provide funds for support (when possible) is an undue hardship on the guardian. Leaving funds outright to the guardian does not assure that the funds will be used for the children.

B. Spendthrift Provisions
The client may wish to provide a continuing level of support to a beneficiary who has shown inability to handle funds, a tendency to excessive spending or a willingness to take undue financial risks. The client may be concerned about the claims of current or future creditors. One way of meeting these concerns is to put funds in trust with a spendthrift clause. ¹⁵ The expectation is that when the beneficiary is not the grantor, creditors will not be able to reach the trust corpus. A bankruptcy would discharge claims, so that the beneficiary has some leverage with creditors who try to take distributions as the beneficiary receives them.

C. Special Needs Trust
Another use for a trust is to provide for the special needs of an indigent person receiving government assistance, notably Medicaid and SSI (social security for those not having coverage under the regular system). Funds paid directly to the beneficiary as a gift or under a will would have to be used for medical treatment the government would otherwise finance or might disqualify the beneficiary from receiving benefits. By placing funds in trust the periodic payments can be used for items that enhance the beneficiary's quality of life. 42 USC 1396p. If the client is establishing a trust for the special needs of himself or his spouse the trust must not be revocable. 42 USC 1396p(d)(3)(A) and the grantor should not be trustee, see 42 USC 1396p(d)(4)(C). A parent or grandparent may establish a trust for the benefit of a disabled child under the age of 65 which will not affect the child's eligibility for benefits. Trusts must provide that the remainder on the beneficiary's death will be available to reimburse the government for benefits conferred. 42 USC 1396p(d)(4)(A). Usually this kind of objective will be pursued only after the grantor's death when the trust has become irrevocable.

VII. Some alternatives

For each estate-planning goal there are alternatives to the living trust. The principal ones are listed here.

A. Durable Power of Attorney

Assets can be managed for one person (principal) by another (agent) under a power of attorney. At common law agencies terminate when the principal becomes incompetent. Utah provides a "durable" power of attorney, which if appropriately drafted survives disability, incapacity or lapse of time. If the parties are uncertain whether the principal is alive, the agent's authority continues. Authority lapses when the parties are aware the principal is dead. 75-5-501 UCA. Any other power of attorney remains effective for good faith actions as long as the agent and third parties dealing with the agent have no knowledge of death disability or incompetency. 75-5-502 UCA.

The durable power of attorney ("DPA") is simpler and less expensive to implement than the revocable trust ("RT"). Like the RT, the DPA is not subject to court supervision, maintaining privacy and avoiding delay. A DPA is flexible and permits a "trial run."

The enumeration of powers and accounting responsibilities is usually less in a DPA than a RT. DPAs are especially useful for short periods (the principal is out of the country) where a full trust is not required.

Third parties tend to be less willing to accept DPAs than RTs, although this difference may decrease as more people become familiar with DPAs. However the ease with which a DPA may be drawn will inevitably permit unscrupulous agents and the exercise of unintended powers, which will continue to have some effect on third party acceptance.

If a DPA is to be used outside Utah, consider whether the other jurisdiction has enabling legislation. RTs have the advantage because trust relationships are recognized in all common law jurisdictions.

Since the DPA expires on death, it is not a probate avoidance device. It may complement a will, but may be unnecessary if there is an RT.

B. Conservatorship
The court, upon petition, notice and hearing may appoint a conservator to manage the property of a person (ward) unable to manage his affairs effectively for reasons such as mental illness or deficiency, physical illness or disability, chronic use of drugs or alcohol, disappearance or detention by a foreign power. A conservator may also be appointed if necessary to prevent the waste or dissipation of property or its application to the needs of another person entitled to support. 75-5-401(2).

A conservatorship has the same drawbacks as a probate, including delays and expense. The public showing of incompetency is likely to humiliate the ward. The conservatorship expires on death.

A conservatorship would generally only be considered when the ward is unable or unwilling to use a RT or DRA. In a conservatorship your client is usually the conservator, not the ward.

C. Joint tenancy
Joint tenancy is a form of ownership where two (or more) persons own property in equal undivided interests. Real property acquired by a married couple on or after May 5, 1997 is automatically joint tenancy in the absence of an express declaration to the contrary. 57-1-5 UCA.

This is a simple and easy probate avoidance device, particularly for a residence (assuming community property status is not available). Title companies have simple forms which when recorded with a death certificate establish clear title in the surviving tenant.

Other sorts of joint tenancies have drawbacks. Transferring property into joint tenancy with another means a loss of control for the transferor. The transferee does not necessarily have the fiduciary obligation to a transferor that a trustee has to a beneficiary. Joint tenancies over ride wills (because the decedent's interest expires on death). Of course property held in joint tenancy or otherwise is not affected by a trust unless the trustee has an ownership interest. Creation of a joint tenancy with a non-spouse would generally be subject to gift tax. Reg. 25.2511-1(h)(5). If the joint tenants are married, half the value of the property will be included in the decedent's estate, Code 2040 (b) and half will get a step up in basis Code § 1014(b)(9). If the joint tenants are not married the entire interest will be included in the decedent's estate unless it can be shown that the survivor contributed to the acquisition of the property. Code § 2040(a).

D. Community Property (outside Utah)
Utah does not recognize community property. In those jurisdictions that do, community property passes to the survivor much the way a joint tenancy does, in the absence of a will by the decedent passing the property to another. In some cases administration (sometimes summary administration) may be useful to establish that this was the case. Of course if the property passes by will (other than to the spouse) probate will be necessary. Both halves of community property get a step-up in basis for income tax purposes. Code § 1014(b)(6).

E. Totten Trusts/Pay on Death Accounts
Some financial institutions offer accounts in the name "X, trustee for Y", which are referred to as Totten Trusts. The more modern form is X, Pay on Death to Y or "P.O.D. accounts." These are governed by 75-6-101 to 115 UCA. P.O.D. accounts permit the client to keep full control of funds during life, revoke or amend the arrangement at will and pass the funds to the beneficiary on death. These apply only to cash or equivalents and permit virtually no tax planning.

F. Transfer on Death Security Registration
Securities, included certificates, brokerage accounts and dividend reinvestment plans can be held in the form X, Transfer on Death to Y or "T.O.D." 65-6-301 to 313. The consequences are generally the same as with a P.O.D. account. Utah law presumes such transfers are valid as a matter of contract law even with respect to securities issued by an entity organized in a jurisdiction without such a law. 75-6-304 UCA. Jurisdictional issues should not be a problem for widely traded securities or national brokerage firms, but for unusual issues or brokers consider that out of state law may govern and not recognize this form.

G. Contract Transfers
Provisions in insurance policies, pension plans, employment contracts, trusts, conveyances, notes and other contracts that direct the obligor to pay another (or release the obligor) following the obligee's death are valid in Utah without will formalities. 75-6-201 UCA.

H. No Probate and no Trust
For an estate small enough so that federal estate tax planning is not justified and where post-death trusts are not desired, several of these techniques may be combined to avoid probate. Suppose W a widow has a gross estate of $675,000. She can put her house, car and boat (if there is a certificate of title) in joint tenancy. Her securities and brokerage account can be held as T.O.D. Her checking and savings accounts can be held P.O.D. Her life insurance, I.R.A. and pension and profit sharing plans can have designated beneficiaries. That probably only leaves furniture, jewelry, clothing and personal possessions. Title to these is not an issue and as discussed above, $25,000 can be distributed without probate 75-3-1201. The principal drawback is lack of flexibility. It is hard in this case to even divide the assets evenly among the children.

I. Wills (see Probate, § II)

J. Irrevocable Trusts
In an irrevocable trust the grantor parts with the beneficial enjoyment of part or all of her property. These transfers are motivated by a combination of present donative intent and tax planning. In the absence of these, retaining a right to revoke, alter or amend is preferable.

VIII. Tax issues¹⁶

A. Income tax
A revocable trust is a "grantor trust," Code § 676(a)' and therefore the income, deductions and credits are included in the grantor's income tax computation, Code § 671. Applying this principal usually, but not always results in disregarding the trust for income tax purposes.

B. Gift Tax
A transfer to a revocable trust is not a completed gift and so does not attract gift tax. A completed gift may occur on distribution to a third party or on the lapse of the power to revoke. Reg. 25.2511-2(c) and 2(f).

C. Generation Skipping Transfer Tax
A transfer subject to the gift or estate tax (and other transfers) may be subject to the Generation Skipping Transfer Tax Code § 2601 et seq. whose consequences should be considered. For revocable trusts established after 1986 the difference between passage by probate or by living trust is minimal.

D. Estate Tax
The value of a revocable trust will be included in the decedent's estate for federal estate tax purposes. Code § 2038. Since an amendment made in 1997, gifts made from the revocable trust within three years of death are no longer brought back into his estate. Code § 2035(e).

E. State Tax Issues
State income tax laws generally follow federal. Transfers to a revocable trust generally do not attract sales tax. Transfers of real property sometimes result in reassessment or loss of favorable attributes. Generally transfers to a revocable trust do not have these results. However, check laws of other states if they may be applicable.

FOOTNOTES

Shareholder, Parsons Behle & Latimer, Salt Lake City, Utah: Visiting Associate Professor, University of Utah College of Law, 1999-2000; Adjunct Professor 2000-
The terms "trustor," "settlor" and "grantor" are used more or less interchangeably in the literature. In this paper "trustor" focuses on the rights of the trustor against the trustee, "settlor" focuses on the authorship role of the settlor which creates the trustee's duties to beneficiaries and "grantor" focuses on the trustor's gift to the beneficiaries. In an income tax context "grantor trust" means one in which income is taxed to the person who transferred property to the trust, Code § 671-677.
References to "UCA" mean Utah Code Annotated 1953 as amended.
References to "Code" mean the Internal Revenue Code of 1986 as amended, Title 26, United States Code.
Consideration should be given to whether a revocable trust established by a married couple becomes wholly or partially revocable on the first death. Generally estate tax provisions will suggest at least partial irrevocability. The failure to address this question has led to litigation in Utah. Perrenoud v. Harman 8 P 3d 293 (Ct. App. 2000); In re Estate of West 948 P 2d 351 (Utah 1997)
Alaska has attempted to put its self-settled spendthrift trusts beyond the reach of creditors, AS 34.40.110 effective April 2, 1997. However the settlor may not retain a power to revoke, or the right to compel the distribution to himself of principal or income. Delaware has enacted similar laws, 12 Del. Code 3570 et seq. These arrangements are not revocable trusts in the sense that term is generally used.
The Court relied on then § 25-1-118 of the Utah Code annotated, since repealed, but seemed to equally rely on common law. See footnotes 2 and 5 of Leach
At best asset protection is not clear sailing.
In re Lawrence 238 B.R. 498(S.D. Florida 1999). Bankruptcy debtor found in contempt for failure to turn over assets of trust in Mauritius, ordered to pay $10,000 penalty per day until he complied with order, given 6 days to pay over assets or be incarcerated. Debtor alleged he no longer had power to reach assets. "The law does not recognize the defense of impossibility when the impossibility is self created." It appears that Mr. Lawrence was jailed September 14, 1999 but released October 9,1999 when the district court ruled it was inappropriate to jail a debtor for failing to comply with an order when the order was on appeal. In re Lawrence 244 B.R. 868, (S.D. Florida 2/16/2000), footnote 2.

On appeal, the Eleventh Circuit agreed that impossibility is not a defense when the impossibility is self-created. However civil imprisonment is permitted for coercion, not punishment. "If the bankruptcy judge determines that, although Lawrence has the ability to turn over the Trust res, he will steadfastly refuse to do so, the judge will be obligated to release Lawrence because the subject incarceration would no longer serve the civil purpose of coercion?.. We instruct the bankruptcy court to reconsider Lawrence's incarceration at reasonable intervals." In re Lawrence 279 F. 3d 1294 (2002

FTC v. Affordable Media 179 F, 3d 1228 (9th Cir. 1999) upheld finding of civil contempt (and taking defendants into custody) because defendants "remained in control" of Cook Islands Trust and failed to pay over corpus. "We are unsure that we would find that the Anderson's' inability to comply with the district court's order is a defense to a civil contempt charge." See also FTC v. Affordable Media, unpublished opinion, 2001 WL 583900 (9th. Cir.)

SEC v. Brennan 230 F. 3d 65 (2nd Cir. 2000) concerned a fraud action begun by the SEC in 1985. In 1994, before trial of the action, Brennan transferred $5 million in municipal securities to a Gibraltar trust. Following trial, in July 1995 the District Court ordered Brennan to disgorge $75 million in profits.

On August 7, 1995 Brennan filed for bankruptcy, first not listing the Gibraltar trust and then listing its value at zero. The SEC alleged that Brennan was able to use trust assets to finance a "lavish globetrotting life style." Meanwhile the trust was relocated first to Mauritius and then to Nevis under a "flight" clause. On June 5, 1998 the Bankruptcy Court refused to order repatriation. The bankruptcy trustee sought the assets in St. Kitts and Nevis, but his action was dismissed July 28, 1999. On April 7, 200 the District Court hearing the fraud case ordered repatriation. However on appeal the Eleventh Circuit held that such relief was barred by the automatic stay provision of the Bankruptcy Code. The Court suggested the bankruptcy trustee should have appealed the bankruptcy court's order instead.
The pretermitted heir rule dates back to the days when illegitimate children could not inherit. Nearly a quarter of a century ago the United States Supreme Court held state law limiting the right of illegitimate children to inherit violated the constitution. Trimble v. Gordon 430 U.S. 762 (1977), in essence overruling Labine v. Vincent 401 U.S. 532 (1971). For retroactive effect see Reed v. Campbell 476 U.S. 852 (1986).
The logic is not totally clear. If the trust distributes property, even the original property, during life, is there not an exchange (decreased value of trust interest for distributed property) which eliminates the community character? On death the interests of H and W in the trust expire. The decedent's half interest in the trust property is included in the gross estate under Code § 2038(a)(1), but the TRUSTEE cannot hold title as community property. The interest included in the estate due to the prior transfer by the decedent to a revocable trust gets a step up in basis under Code § 1014(b)(3). At best Wetacre and the stock remain community property by ignoring the trust.
Sometimes it is alleged the survivor may not change his will under the argument that the wills were made in consideration of each other. A person retains the power to change her will at any time. However, she may bind herself to do certain things by contract, which a court may enforce after her death.
Barlow's Estate v. Brewster, 330 P.2d 1016 (Ut 1958). These issues are sufficiently unclear that reciprocal wills are generally viewed as poor estate planning.
The client often pictures her spouse in a May and December arrangement, concludes he's not that sort of person, and dismisses the issue. Consider also whether two seventy-five year olds, who may have another decade to enjoy, might seek companionship together.
We know how children view second marriages. Consider Agamemnon and Hamlet, and Hansel and Gretel, Cinderella, and SnowWhite.
In one case, H died leaving everything to W. W married S2. She died leaving her assets in trust, with income to S2, principal available in case of need, remainder to children. S2 then married Rich Widow. They drew as much as they could from S2's trust to maximize the inheritance to Rich Widow's children. No one did anything improper or foolish, but H and W (and their children) would have been better served by a joint living trust.
Cronquist v. Utah State Agricultural College, 201 P. 2d 280 (Ut. 1949) expressly reserves the question whether a spendthrift trust is valid in Utah. There is nothing in the results of cases since that time that provides comfort on this question. Grimm v. Roberts, 734 P.2d 1238 (Ut. Ct. of Appeals, 1989), Territorial Savings and Loan Association v. Baird 781 P.2d 452 (Ut. Ct. of Appeals, 1989), Leach v. Anderson 1235 P.2d 1241 (Ut 1975), Alexander v. Zion's Savings Bank 287 P. 2d 665 (Ut 1955). Still, including a spendthrift clause usually doesn't hurt, and will at least serve as a bargaining chip with creditors.