Description/Scope

IRREVOCABLE DOMESTIC TRUSTS - THE NEST EGG TRUST

1 Protection from Creditors

We want many things from our retirement trust but probably the most important is that it will still be there when we reach
retirement age. In today's litigious world, the chances of making it through life without getting served with some frivolous
lawsuit seem to be slimmer and slimmer. In addition to the "off-shore trust" one needs to consider irrevocable trusts
established in California.

Trusts are comprised of simple concepts once you've mastered the vocabulary. A "trustor" or "settlor" is the person
that sets up the trust, the person who puts the assets into the trust. The "principal" or the "corpus" is the name given
to the assets once they are in the trust (we use the word "corpus"). The "beneficiary" is the person who receives the
benefit of the trust - the one who receives the monies from the trust. A "lifetime beneficiary" is a beneficiary that
receives income during his or her lifetime. (In such a circumstance the "remainder" of the corpus goes to someone
else, usually the children of the trustor.) The "trustee" is the person who administers the trust assets once those
assets have been placed in to trust by the trustor. The trustee also distributes money to the beneficiary in strict
compliance with the terms of the trust document. The trustee can distribute income generated by the corpus or can
"invade" the corpus if permitted by the trust document. For example, if the trust provides that the beneficiary is to
receive $1000 per month but the income generated by the corpus does not equal $1000 in any one month, the trust
document may provide that the trustee can invade the corpus - that is to say, take money from the corpus and
distribute those monies to the beneficiary. The corpus of the trust plus the income generated by the corpus in the
trust are generally referred to as the trust "assets" or trust "property". In California ,the same person can be the
trustor, the trustee, and the lifetime beneficiary.

2 Revocable Trusts, such as Living Trusts, Generally Don't Work as Retirement Trusts.

Generally speaking, a trust that can be revoked and terminated by the trustor cannot protect trust assets from a creditor of
the trustor.

"If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to claims of
creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor." Probate Code Section
18200. Bank One Texas v Pollack (1994) 24 CA4th 973, 980, 29 CR2d 510.

3. The Irrevocable Trust

The best retirement trust is irrevocable, that is to say, the settlor can't revoke, amend, change, or modify the terms of the
trust, and the trust contains what is called a "spendthrift provision." The spendthrift provision came into the law when the rich
uncle wanted to create a trust for his wayward nephew but didn't want the nephew wasting the trust assets on gambling and
other pursuits frowned upon by the uncle. The spendthrift provision says that creditors of the nephew shouldn't loan the
nephew money on the basis of his rights in the trust because the trust assets can't be used to pay the nephew's creditors.

The somewhat modified form of the spendthrift provisions became part of California law and are codified in the California
Probate Code. Creditors are retarded as they seek to go after the trust assets in that the creditor can only get to 25% of the
amount the beneficiary is entitled to from the trust. The 25% restriction can be further reduced if the beneficiary can
establish to the satisfaction of the court that he or she needs the 25% monies for his/her support.

"The assets of an irrevocable trust created by the trustor, who is also, the trustee with a right to invade principal, with
income for life for the benefit of the trustor and remainder to his children is not subject to execution except subject to
the limitations of a spendthrift provision. Probate Code section 15306.5 limits execution on a spendthrift trust to 25%
of the amount the beneficiary is entitled, but that amount may be reduced by the court as necessary for the support
of the beneficiary. Merely because the same person is trustor, trustee and lifetime beneficiary does not terminate the
trust by merger since there are contingent remainder beneficiaries, the children. Ammco Ornamental Iron, Inc. v Wing
(1994) 26 CA4th 409, 418-419, 421, 31 CR2d 564.

4 The Private Retirement Plan

California law exempts "private retirement plans" from creditors. See Code of Civil Procedure Sections 704.155(a) and (d).
This exemption is not, like the spendthrift provisions in the prior paragraph, limited to monies needed for support of
themselves and their dependents.

Although the law is unsettled, the courts seem to tend to broadly define "retirement plans". For example In re Hutton 893
F.2d 1010, 1990, the federal court's 8th circuit (California is in the 9th circuit) was faced with the question of whether a
savings and investment plan was exempt under Iowa law that is similar to California law.

Under the investment and savings plan in that case, the employee could contribute a percentage of earnings which the
employer would match by 50%. On retirement, the employee was entitled to the value of the account in installments or in a
lump sum. The plan also allowed withdrawal before retirement for financial hardship.

This court held that the plan constituted a plan similar to a pension or an annuity. In so holding, the court considered the
general characteristics common to pensions and annuities:

1. They are formal plans or funds established for the benefit of the debtor, usually as a part of a relationship with an
employer or employee organization.

2. The benefits of the plan or fund are related to future earnings of the debtor and are intended either as retirement
income, or income deferred during the employee's employment to provide future support for the debtor.

3. Access to and control of the plan or fund are in the hands of someone other than the debtor, with strong limitations
on withdrawal or distribution expressed in the formal plan or fund.

4. Payments under the plan or contract are to be on account of illness, disability, death, age or length of service.

An independent committee responsible for administering the plan determines whether an illness, disability or financial
hardship justifies distribution.

"This last element is particularly important. If there were no independent intervening power that possessed the power
to prevent distribution, the participant would have complete control and there would be no assurances that the money
would be used for retirement purposes and were in the nature of future earnings." In Re Huebner 986 F.2d 1222, 1225
(8th Cir.1993). (An annuity contract was not similar to a retirement plan because the debtor controlled the plan and
the timing of distribution.)

It is likely that the reasoning adopted by the Huebner court will be applied to those state statutes, such as
California's, that refer to the broad category of "retirement plans". Under these statues, plans such as top-hat plans
(see Paragraph 5) and secular trusts (see Paragraph 6), would be exempt, as well as any arrangements that
incorporate the enumerated characteristics. Accordingly, to the extent that these plans qualify for state exemption,
they are exempt from creditor attachment in both nonbankruptcy and bankruptcy proceedings.

However, the Federal Court's 9th Circuit seems to have a broader approach to private retirement plans, which helps us in
California until the United States Supreme Court makes a final decision. The Supreme Court is the final arbiter of differing
opinions amongst the circuit courts. The 9th Circuit's position can perhaps be best summarized by three cases, Yaesu
Electronics Corp. v Tamura, Bloom v Robinson, and In Re MacIntyre a 1996 case that reaffirms Yaesy and Bloom. These
cases have extremely broad language when defining private retirement plans.

"The purpose of the exemption set forth in Cod Civ. Proc. @ 704.115 for private retirement plan assets is to safeguard
a source of income for retirees at the expense of creditors. ... Without regards to its label, a plan not used and
designed for retirement purposes is not a retirement plan entitled to the benefit of the statutory exemption. ... All
factors are relevant; but no one is dispositive. Rather all of them must be considered in the light of the fundamental
inquiry--whether the plan was designed and used for retirement purposes." Yaesu Electronics Corp. v Tamura (1994,
2nd Dist) 28 Cal App 4th 8, 33 Cal Rptr 2d 283.

"We note that other versions of pension plan exemption exist in other areas of the law. The Internal Revenue Code, for
example ... Another version of the exemption problem appears in the Employment Retirement Income Security Act of
1974 (ERISA). ... These provisions of the Bankruptcy Code, the Internal Revenue Code, and ERISA have similar
purposes. All seek to protect retirement plans; but the standard appropriate for one is not necessarily appropriate for
all. ... ERISA and the Internal Revenue Code are concerned with protecting employees' rights in pension plans. But
the Bankruptcy Code exemption is concerned only with safeguarding those assets of the debtor from the grasp of
creditors that he or she has set aside for retirement. ... The key requirement for bankruptcy purposes is that the plan
be used for retirement purposes." Bloom v. Robinson (1988, 9th Cir.) 839 F.2d 1376, 1378, 1379.

Obviously, not every plan claimed to be a retirement plan is protected by the courts. An example is In re: ALAN BERNARD;
LINDA BERNARD, Debtors 94 Daily Journal D.A.R. 16364, November 1994.

In 1991 Alan and Linda Bernard filed for relief under Chapter 7 of the Bankruptcy Code. Among other assets, the Bernard's
claimed to be exempt was a $250,000 annuity policy. As part of the pre-petition planning the Bernards had refinanced their
home, then homesteaded their home, then bought the annuity policy with the refinancing proceeds. They did all this just ten
days before filing for bankruptcy. ("The trustee", the court said, "was understandably suspicious.") The Bernards claimed the
annuity was exempt under pursuant to CCP 704.100(a). Mr. Bernard was 60 years old in 1994, was employed as a sound
technician at Paramount studios making in excess of $200,000 per year, and would, upon retirement, have a right to social
security and a union pension.

The Bernards contended that the annuity was a retirement annuity within the intent and meaning of CCP 704.115 and
therefore was exempt. CCP 704.115 says that individual retirement annuities are "exempt only to the extent necessary to
provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and
dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the
judgment debtor when the judgment debtor retires."

The court held that Mr. Bernard's employment, his social security, and other pensions were sufficient for his support upon
retirement and therefore this annuity did not meet the requirements of an exempt retirement annuity.

5 Special Needs Trust

"Special" or "supplemental" needs trusts (SNTs) are designed to supplement the basic support of governmental programs,
such as: Social Security income; Medicaid; group home placement; and day training programs. The trust can provide
additional income to disabled people who have minimal income and resources. Such trusts can be established with the
disabled own funds or by someone else's for his or her benefit.

Although SNTs can be established by will, inter vivos SNTs are preferred for several reasons. A disabled person's parents
can establish a single lifetime SNT to act as a depository for gifts by all the child's relatives. Some parents make regular
contributions to an SNT as a convenient way to set aside funds for a disabled child. In addition, an inter vivos SNTs (a trust
created and funded during the Settlor's lifetime) can create a role in estate tax planning by removing the transferred funds
from the grantor's taxable estate, whereas the testamentary SNT (a trust created upon death of the Settlor) are funded with
amounts remaining after payment of death taxes.

Life insurance is often employed to fund SNTs. An irrevocable SNT can shelter life insurance from estate tax provided that
the insured (or an entity controlled by the insured) is not a trustee or beneficiary of the trust and does not own or have
incidents of ownership over the insurance during the three years preceding the insured's death. To avoid inclusion of life
insurance benefits payable to an SNT in an insured's estate , the trust instrument must fully satisfy IRC sections 2035(b)(2)
and 2042, which contain many traps for the unwary and can foster hefty legal fees.

Special needs trust planning raised many issues of gift, estate, and income taxation. Although the rules governing the
taxation of trusts are quite complex, they afford the opportunity to both minimize potential taxes and avoid disqualifying a
disabled beneficiary for financial need-based government programs.

8 CHILDREN'S TRUST. (IRC 2503(c) and QUALIFIED PERSONAL RESIDENCE TRUST. (QPRT).

The Children's Trust is a fairly common estate planning tool, ofttimes including the family residence as part of the Trust. The
residence is placed in the Trust with the children being the beneficiaries. Essentially, the parents retain a life estate in the
residence and in any proceeds forthcoming therefrom. However, in a Children's Trust other assets may be made part of the
Trust in addition to the family residence.

The QPRT (Qualified Personal residence Trust) is exclusively for the family residence. A Trust is created with the children as
beneficiaries. Into the Trust is placed the family home or a vacation home. The goal is that upon the death of both spouses
the home is in the hands of the children, avoiding probate and estate taxes.

The Trust is created for a set umber of years. At the end of that time, the home belongs to the beneficiaries (child or
children). After the Trust is created a lease is entered into between the parents and the Trust which provides that they can
live in the home for as long as they live. Lease terms can be reasonably flexible.

9 Individual Retirement Accounts (IRAs), KEOGHS, PENSIONS

In California, generally speaking, IRAs, KEOGHS, and Pension Plans are exempt in an amount necessary to provide living
expenses for the debtor, taking into account all other income of the debtor. Code of Civil Procedure Section 704.11

In Nevada, debtors may exempt monies, not to exceed $100,000, held in an IRA. Nev. Rev. Stat. Section 21.090.1(q).
Bankruptcy of Seltzer (December 24, 1996, 9th Cir.) 96 Daily Journal D.A.R. 15368.

10 Conclusion to Private Retirement Plan

There are those that predict the Private Retirement Plan will become the cornerstone of future asset protection plans in
California.

Is it fair, for example, that an employee of a large corporation can be a renter placing excess cash into their company's 401K
which the local architect puts his/her excess cash into paying off the mortgage on their home. At retirement, the 401K
totaling $500,000 is most likely exempt from creditors while creditors can levy on the architects home, give him/her the
$75,000 homestead exemption, and take the rest.

The courts and the elected lawmakers are struggling with these and other retirement problems. We predict that, in California,
the Private Retirement Plan, perhaps funded with private and commercial annuities and life insurance, will become the
vehicle which protects the retiree's nest-egg from the devastation of unwarranted litigation and its overbearing expenses.