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EVERY WORD COUNTS (IRS Busts Discretionary Support Trust for Child)


01 March, 2016

EVERY WORD COUNTS (IRS Busts Discretionary Support Trust for Child)

(Duckett v. Enomoto, D. Ariz. 2016)

“BE SURE WHEN YOU STEP, STEP WITH GREAT CARE AND GREAT TACT.  AND REMEMBER THAT LIFE’S A GREAT BALANCING ACT.”
~Dr. Seuss


Dr. Dennis Enomoto was a gifted and dedicated physician, but a terrible business person.  After failing to meet his tax obligations in 2007 through 2011, the IRS made assessments totaling $701,079.11, which he failed to pay.

Mother Knows Best

Dr. Enomoto's mother ("Ms. Enomoto") must have known he was a poor steward because she executed a will in 2004 leaving all her assets equally to her three children, but only Dr. Enomoto's share was to be held in trust. Ms. Enomoto passed away in February of 2013 and a probate was opened.

After a final accounting of the estate, the IRS filed a Notice of Levy demanding the surrender of all Dr. Enomoto's "property" or "rights to property," slated for the testamentary trust established by his mother's will.

It seems clear that Ms. Enomoto sought to protect Dr. Enomoto from himself.  As such, she named a corporate trustee and distributions for the support of Dr. Enomoto were to be in the sole " discretion " of the trustee. 

When Does String Become Rope?

The right amount of "discretion" is absolutely key to asset protection. The wrong amount is fatal.  The difference between right and wrong is a thin grey line akin to the point at which string becomes rope. That point is a moving target and subject to differing opinions. Everything rides on this balance. As such, words have great weight and must be chosen carefully with cases like Duckett v. Enomoto (D. Ariz. 2016) in mind.

The court in  Duckett  had to determine whether the IRS could attach Dr. Enomoto's interest in the trust. The threshold question was whether Dr. Enomoto -- as a beneficiary -- could legally require the Trustee to give him anything.  If so, then it follows that the IRS (or any other creditor) could stand in his shoes and attach Dr. Enomoto's interest in the trust. The decision hinged on the following language from the trust:

"The Trustee shall pay to DENNIS MASAKI ENOMOTO so much or all of the net income and principal of the trust as in the sole discretion of the Trustee may be required for support in the beneficiary's accustomed manner of living." 

"In the Trustee's sole discretion and to the extent the Trustee deems advisable, the Trustee may consider or disregard the funds available to the beneficiary from other sources."

Was the Trustee under any obligation to make a distribution to Dr. Enomoto?  Or did the Trustee have complete discretion to withhold or distribute trust funds?  That is the question. 

Busted Flat in Baton Rouge

At the end of the day, the court found that the language "shall pay" connotes a mandatory obligation and, thus, the trustee was under a duty to distribute at least some amount for support. If  push came to shove -- Dr. Enomoto (the beneficiary) could legally compel a distribution. As such, Dr. Enomoto  had enough "control" over the trust funds to trigger the federal tax lien attachment.  Cue the fist bump explosion.

The actual dollar amount that could be reached by the levy remains to be determined based on the court's future determination of Dr. Enomoto's "needs and living demands," which will be assigned a reasonably accurate dollar value. 

Service With A Smile

Ms. Enomoto just got served with her son's tax bill -- because the Trustee was not given enough discretion to withhold distributions. Because the language at issue in Duckett is so commonplace, it would be prudent to review existing trust provisions and to modify language under appropriate circumstances to avoid the result of Duckett - particularly where asset protection is an objective.

Theus Law Offices provides a complete range of estate and business planning services with integrated asset protection techniques, including domestic asset protection trusts (a/k/a domestic asset preservation trusts). If you are facing an estate planning, business planning or asset protection issue and need help from a Louisiana asset protection lawyer in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe or elsewhere, let our estate planning, business planning and asset protection attorneys help you and your business.

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