FAMILY WEALTH PRESERVATION TRUST ACT

Several years ago, PLICO, or the Physicians Liability Insurance Company of Oklahoma, reported that it insured most of the practicing doctors in Oklahoma.  There were newspaper articles written about its financial strength, and I have visited with physicians who were very concerned about the future of this company, and about their ability to purchase medical malpractice insurance, if PLICO goes out of business.  Perhaps for this reason, and Oklahoma’s inability to place a cap on punitive damage lawsuits (or pass meaningful tort reform), the Oklahoma legislature passed an emergency law in 2004 which permitted Oklahomans, and out of state persons, to  shelter one million dollars from creditors claims. The legislation is known as the Family Wealth Preservation Trust Act.  

I serve on the State Bar Association Committee which deals with some legislative issues, and we were alerted that this legislation was going be adopted.  As it was explained to us, the legislature wanted to create an incentive for out of state investors to invest in Oklahoma assets, such as stocks, bonds, debentures issued by an Oklahoma company, Oklahoma State or Local Municipal Bonds, accounts in Oklahoma based banks and Oklahoma real estate.  We were told that once assets were placed in a preservation trust, creditors could not seize the assets, as a means of satisfying judgments.  

After June 9, 2004, when the law went into effect, there were several seminars held, and through these seminars, I learned that the FWPTA was actually an extension of the homestead statutes.  In other words, investors in California, Florida, Maine, or wherever, would be protected from creditors only if they were residents of Oklahoma (Oklahoma homestead statutes, which are outlined in Title 31 of the Oklahoma Statutes, only protect Oklahoma citizens).  Because of this, it appeared the legislation was doing very little towards luring out of state investors to invest in Oklahoma assets.  It seemed the only ones to benefit from this law were Oklahoma citizens.  

This leads me back to my initial point, and that is, doctors are permitted to use this legislation to shelter assets from creditors claims.  In a sense, FWPTA is an indirect means of tort reform. In 2014, the legislature amended the statute, so that unlimited assets could be placed into a Family Wealth Preservation Trust (FWPT) – thus removing the $1MM cap on assets placed into these trusts. What this means is, Oklahomans can now shelter all of their assets into the sacred, homestead status, by creating a FWPT.

The unique aspect of the Oklahoma law is that FWP trusts can be revocable or irrevocable.  Regardless of whether the trust can be changed or not, it appears such a trust would be a grantor trust under the Internal Revenue Code, and income would be taxed to the grantor.

One of the trustees of a FWPT must be a bank or trust company, either chartered in Oklahoma, or Federally chartered with a physical location in Oklahoma.  An out of state federally chartered trust company could serve as trustee, but there is a requirement that the trustee have a physical location in Oklahoma.  

The beneficiaries under such a trust are limited to the Grantor’s spouse, the natural children of the grantor, adopted children of the grantor if they were under age 18 when the trust was created, grandchildren of the grantor, issue of deceased natural children or grandchildren of the grantor, or nonprofit charitable organizations organized under Section 501(c)(3) of the Internal Revenue Code. These beneficiaries are known as “qualified beneficiaries” (and these “qualified beneficiaries” are not to be confused with qualified beneficiaries, as that term is defined under the Uniform Trust Code). The creator of the trust cannot create a trust for his or her benefit; the creator of the trust can give beneficial status to “qualified beneficiaries.”

The corpus of the trust must consist only of Oklahoma assets, which are stocks, bonds, or debentures issued by an Oklahoma based company, Oklahoma State or Local Municipal Bonds or other obligations, accounts in Oklahoma based banks, and Oklahoma real estate.  There are many questions about this list of assets:  presumably, an Oklahoma company could be formed (which would qualify as an Oklahoma based company), and then own assets which are physically located outside Oklahoma.  That same company could invest in securities (stocks or bonds) from other states, but because the assets are owned by an Oklahoma based company, the nature of the assets would not matter:  the company qualifies under the FWPTA. If there are non-qualifying assets (out of state property), which are determined to be non-qualifying assets, the trustees of the FWP trust are given a reasonable period of time to convert the assets into qualifying assets.

As previously stated, preservation trusts may be funded with unlimited assets, which then become “exempt from attachment or execution and every other species of forced sale, and no judgment, decree or execution can be a lien on the trust for the payment of the debts of the grantor”.   If the assets grow in value, the incremental growth is also protected from judgments.

Transfers of assets into a preservation trust are subject to the fraudulent transfer rules, which means that these trusts will not protect a person who becomes insolvent or has more claims (including contingent claims) than assets remaining after transferring property to the trust. Thus, the fraudulent transfer act thwarts efforts to protect persons who have pending lawsuits against them, or people who have guaranteed a loan. As one commentator stated, if the guarantor of a large debt (which might be current at the time) seeks safe haven with a FWP trust, he is “dead on arrival”, because in such a case, assets cannot be placed out of a creditor’s reach, using with a FWP Trust. 

Another commentator put it this way: being able to place assets in homestead property is a cure from creditors’ claims; all other actions taken to place assets out of the creditors’ reach is a treatment. We should all seek cures (homestead assets), not treatments (belated attempts to move assets out of the reach of a creditor).

Presumably all of these trusts will be revocable trusts; however, the statute indicates that only the grantor has the right to revoke the trust.

There are many questions that are being raised about these trusts, and no Oklahoma Court has opined on the validity of the law. In a sense, it is a vehicle which gives some backdoor tort relief to physicians (and others who want to shelter assets from judgment creditors). Here is a re-print of the legislation:

Oklahoma statutes, Title 31:

Section 10:
This act shall be known and may be cited as the “Family Wealth Preservation Trust Act”.

Section 11:
As used in the Family Wealth Preservation Trust Act:

  1. “Grantor” means an individual, whether or not a resident of this state, establishing or creating a preservation trust;
  2. “Oklahoma assets” includes:
    a. a stock, bond, debenture, membership interest, partnership interest, or other equity or debt interest issued by an Oklahoma-based company, without reference to assets owned by the Oklahoma-based company,
    b. a bond or other obligation issued by this state or an Oklahoma governmental agency
    c. a bond or other obligation issued by a county of this state, by a municipal government located in this state, by a school district located in this state or by any public trust for the benefit of either this state or one or more political subdivisions of this state
    d. an account in an Oklahoma-based bank. As used in this subparagraph, “account” means a demand, time, savings or passbook type of account or a certificate of deposit type of account,
    e. real or tangible personal property, or any interest therein, having a situs in this state, which shall include, but not be limited to:
    (1) mineral interests, or
    (2) promissory notes secured primarily by real or tangible personal property or both,
    f. any security backed exclusively by promissory notes, if at least a majority in value of such promissory notes are secured by real or tangible personal property having a situs in this state or both, and
    g. mutual funds, as defined pursuant to The Investment Company Act of 1940, 15 U.S.C., Section 80a-1 et seq. and The Securities Act of 1933, 15 U.S.C., Section 77a et seq., and common trust funds, as defined pursuant to Section 1010 of Title 6 of the Oklahoma Statutes, to the extent the assets within such funds meet one or more of the requirements listed in subparagraphs a through f of this paragraph;
  3. a. “Oklahoma-based bank” means a bank, savings association or credit union which both:
    (1) takes deposits insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, and
    (2) has a place of business in Oklahoma, which shall be a physical location, and
    b. “Oklahoma-based trust company” means a trust company chartered under the laws of this state or nationally chartered and having a place of business in Oklahoma, which shall be a physical location;
  4. “Oklahoma-based company” means a corporation, limited liability company, limited partnership, limited liability partnership or other legal entity formed or qualified to do business in this state and having its principal place of business in this state, which principal place of business shall be a physical location;
  5. “Preservation trust” means a trust:
    a. established by a grantor under Oklahoma law,
    b. having at all times as a trustee or cotrustee an Oklahoma-based bank that maintains a trust department or an Oklahoma-based trust company,
    c. having as beneficiaries only qualified beneficiaries or a qualified beneficiary,
    d. having a majority in value of its assets comprised of Oklahoma assets, except that if any asset which qualifies, or is intended to qualify, as an Oklahoma asset ceases or fails to qualify as an Oklahoma asset, the trustee shall have a reasonable period of time following discovery thereof to convert such nonqualifying asset into an Oklahoma asset, and
    e. reciting in its terms that the income generated from the corpus of the trust is subject to the income tax laws of this state; and
  6. “Qualified beneficiary” or “qualified beneficiaries” means:
    a. the lineal ancestors and lineal descendants of the grantor or the grantor’s spouse, including adopted lineal descendants if they were under the age of eighteen (18) at the time of the adoption,
    b. the spouse of the grantor,
    c. a nonprofit organization qualified under the provisions of the Internal Revenue Code of 1986, 26 U.S.C., Section 501(c)(3), or
    d. a trust settled for the sole benefit of one or more qualified beneficiaries.

Section 12:
Notwithstanding Section 3 of this title and Section 299.15 of Title 60 of the Oklahoma Statutes, the corpus and income of a preservation trust shall be exempt from attachment or execution and every other species of forced sale and no judgment, decree, or execution can be a lien on the trust for the payment of debts of a grantor, except a child support judgment. Any incremental growth derived from income or an increase in value of the corpus of a preservation trust shall also be considered protected by this section. Transfer of an asset to a preservation trust does not affect any mortgage, security interest or lien to which that asset is subject.

Section 13:
A preservation trust may be established as a revocable and amendable trust or as an irrevocable trust. If the grantor of a preservation trust revokes or partially revokes the preservation trust, the exemption provisions of Section 12 of this title shall not be applicable to any property received by the grantor as a result of such revocation or partial revocation. The fair market value of any property received by the grantor as a result of a partial revocation shall increase the amount of property which the grantor may contribute to the preservation trust pursuant to Section 12 of this title.

Section 14:
The exemptions provided for pursuant to other provisions of the laws of this state shall be independent of and in addition to the exemption provided for pursuant to Section 12 of this title.

Section 15:
The exemptions provided for pursuant to other provisions of the laws of this state shall be independent of and in addition to the exemption provided for pursuant to Section 12 of this title.

Section 16:
The exemptions provided for pursuant to other provisions of the laws of this state shall be independent of and in addition to the exemption provided for pursuant to Section 12 of this title.

Section 17:
Any transfer of monies or property by a grantor to a preservation trust shall be subject to the provisions of the Uniform Fraudulent Transfer Act.

Section 18:
A grantor may not establish more than one preservation trust. However, in the event a preservation trust established by a grantor is wholly revoked or terminated, the grantor may establish a new preservation trust, and this act shall be applicable to such new preservation trust.

© James H. Beauchamp, 2015