¶ 5401
Overview
Scope of the chapter. A protective structure is tested years after it is created, by a creditor, a trustee in bankruptcy, a divorcing spouse or a taxing authority who examines how the structure was operated as well as how it was drafted. This chapter addresses the work that keeps a plan effective after the documents are signed and the assets transferred: the formalities of the entities that hold assets, the administration of trusts, the conduct of the settlor, the tax and information reporting that each structure requires, the response to changes in the client's circumstances, the review of insurance, and the annual review that draws these together. The chapter closes with the place of maintenance in the Threat Matrix.
The premise. Courts decide challenges to protective structures on evidence, and much of the evidence is created after the structure is formed. Bank statements show whether entity funds were used for personal expenses. Trustee minutes show whether distributions were considered by the trustee or ordered by the settlor. Emails show whether the settlor was described as the owner of assets he claims to have given away. Tax returns show whether the client reported the structure as the documents describe it. A plan drafted with care and operated carelessly gives the creditor the evidence it needs to argue that the structure is a sham, an alter ego, a nominee or a device for retaining control. The cases discussed in this chapter, and the failed plans collected in chapter 55 (see infra ch. 55), show that operation decides more cases than drafting.
Three doctrines. The attacks that lapses in maintenance invite fall into three groups, which should be kept distinct.
- Sham. A sham is a document that the parties did not intend to create the rights it appears to create. The test is subjective, and in the Commonwealth authorities it requires a common intention of settlor and trustee (see infra ¶ 5410.03).
- Ineffective disposition and powers tantamount to ownership. A trust may be genuine and still fail to protect if, on its true construction, the settlor reserved so much power that no effective disposition was made, or if the settlor's powers are themselves property that a creditor or a divorce court can reach. The test is objective and turns on the documents (see infra ¶ 5410.05).
- Alter ego, nominee and retained control. United States courts reach similar results through veil piercing, nominee liens, the public policy against self-settled trusts, and the rejection of impossibility defenses in contempt. Each of these doctrines relies heavily on conduct (see infra ¶¶ 5420, 5440).
Relationship to other chapters. The governance provisions of trusts are addressed in chapter 19 (see supra ch. 19), entity selection and the charging order in chapters 15 and 16 (see supra chs. 15, 16), and the information reporting regimes in chapters 43 and 44 (see supra chs. 43, 44). The intake and engagement procedures that precede the plan are addressed in chapters 52 and 53 (see supra chs. 52, 53). This chapter assumes those materials and addresses the recurring work of maintaining the plan.