Section 541 Special Power of Appointment Trust

A Section 541 Special Power of Appointment Trust (“SPA Trust”) is an asset protection trust that relies on section 541(b) of the Bankruptcy Code, which provides that having a power of appointment over assets does not count as ownership of the assets. If you don’t own an asset, it can’t be taken from you. That’s asset protection 101.

Special Power of Appointment

What is it? It is a power that is granted to one or more people. The power allows the holder to appoint (or assign) assets to any person other than the person holding the power or that person’s creditors. For example, if you hold the special power of appointment over assets held in an SPA Trust, then you can’t appoint assets to yourself, nor can the assets be used to satisfy any judgments against you.

How to Get Assets Out of a Special Power of Appointment Trust

In the case of a Portable Offshore Asset Protection Trust, it’s very clear that the trust creator is also the trust beneficiary and, in many cases, even the trustee. This obviously makes it easy to get assets out of the trust. But in the case of a Special Power of Appointment Trust, the person holding the special power of appointment is expressly prohibited from appointing assets to him or herself.

In order to manage the assets, a Family Limited Liability Company is used. The special power holder is permitted to manage that LLC, so there is no problem when it comes to investing the assets owned by the Special Power of Appointment Trust. Getting assets out is another story.

In the case where the power holder is married, the solution is simple. Assets can simply be appointed to the spouse with no adverse tax consequences, since the the tax code permits unlimited marital gifts. However, in the case of an unmarried power holder, the situation is a little trickier. A gift tax will result if assets are appointed to children, siblings, trusted friends, or anyone other than a spouse of the person holding the power.

To get assets out of a Special Power of Appointment Trust, the power holder can actually assign the power of appointment to another trusted individual or committee of individuals. That committee or individual would then be free to appoint the assets to the original power holder free from taxation.

Those are the basics of a Section 541 Special Power of Appointment Trust. Please call us at (850) 803-1166 if you have questions.