On May 27, 2010, Governor Henry signed into law the Oklahoma Discretionary and Special Needs Trust Act. The Act seeks to strengthen the existing statutory protection, and codify protections that may exist in the common law, regarding spendthrift provisions of trusts.

Spendthrift provisions are designed to protect a beneficiary’s interest in a trust from creditors. Existing Oklahoma statutes authorize spendthrift provisions but allow creditors to reach the beneficiary’s interest in trust income (accrued income or income earned in the current period) to the extent that the income exceeds $25,000.00 per calendar year. 60 O.S. 175.25. Existing statutes protect the beneficiary’s interest in trust principal from creditor claims. As a result, existing Oklahoma statutes create some level of vulnerability for beneficiaries of spendthrift trusts generating substantial income or holding substantial accrued income. Trusts without spendthrift provisions lack protection under existing statutory law.

Even with the protection of spendthrift provisions, some creditors have used creative methods of reaching beneficial interests in trusts. The Act seeks to cut off certain of these methods. For example, a creditor cannot use court processes to force the sale of a beneficial interest in a trust, regardless of whether the trust contains a spendthrift provision. 60 O.S. 175.83 (new). The Act has tightened up the legal standard for determining whether a trust is a sham for purposes of piercing a trust to gain access for creditors. 60 O.S. 175.84 (new).

The Act differentiates between several types of beneficial interests in determining the level of protection available against creditors. When a beneficiary is entitled to a distribution not subject to the trustee’s discretion, these interests are protected by a spendthrift provision and cannot be reached until received by the beneficiary.

The Act provides substantially greater protections against creditors for trust interests that are within the trustee’s discretion. Even if a trust lacks a spendthrift provision, a creditor cannot reach a beneficiary’s interest in a trust if the interest is entirely within the trustee’s discretion. 60 O.S. 175.89 (new). In this way, the Act protects special needs trusts from the reach of creditors.

Both the existing statutes and the new Act make clear that you cannot create a spendthrift trust for your own benefit. In other words, if you establish a trust for your own benefit, you cannot use a spendthrift provision to shield the trust from creditors. Notably, the new Act specifically references the Oklahoma Family Wealth Preservation Trust Act and in doing so suggests that it is the only method of using a trust to shield your own assets from creditors under Oklahoma law. Of course, one must be very cautious in using trusts for asset protection, taking note of the practical effect of irrevocably setting monies aside for others (beyond the settlor’s reach) and also the risks created by the Oklahoma Uniform Fraudulent Transfers Act.

The Oklahoma Discretionary and Special Needs Trust Act becomes effective on November 1, 2010 and applies to all trusts created or modified on or after that date.

The text of the enrolled House Bill can be found here: http://bit.ly/bTStwj.

Doerner, Saunders, Daniel & Anderson’s Wealth Management Practice Group is closely monitoring the proposed transfer tax legislation in Congress, and we hope this confusion and uncertainty can be clarified by Congress soon. If you have any questions about any of the issues outlined above or a concern that you would like to discuss further, or if you would like us to review your estate planning documents in light of the estate tax repeal, please contact one of the following Doerner, Saunders, Daniel & Anderson attorneys who specialize in trusts and estates:

Jeffery C. Rambach
jrambach@dsda.com
918-591-5202

Harry V. Rouse
hrouse@dsda.com
918-591-5325

Kassandra M. Bentley
kbentley@dsda.com
918-591-5259

Varley H. Taylor, Jr.
vtaylor@dsda.com
918-591-5288