Family Wealth Preservation Trust

I had the privilege of growing up on a farm in Iowa.  Among the many things, I learned while living on a farm was how to build and maintain a strong fence.  Estate planning and asset protection are really nothing more than building and maintaining fences.  A successful plan keeps the cows (assets) in and the wolves (creditors) out.

In 2004, the Oklahoma Legislature created a better way to build a fence in order to protect assets against future creditors.  Known as The Family Wealth Preservation Trust Act, the law was passed as an “exemption” from creditors.  It is similar to the homestead exemption, retirement funds exemption, and other exemptions designed to protect the family.  The statute provides for both a revocable or irrevocable trust, called a Family Wealth Preservation Trust (FWPT).  This trust would be established for the benefit of your spouse, lineal heirs (children, grandchildren, etc.) or charity – but not for yourself.

However, if you make the trust revocable, you may be able to partially revoke it to provide payments to you, the grantor.   

The act also requires an Oklahoma trust company to serve as a trustee (similar in a way to the third-party custodian requirement for an IRA) and requires that a majority of the trust’s assets be invested in “Oklahoma” assets.  The law initially capped contributions at $1 million.

Effective November 1, 2014, the legislature amended the FWPT statute to define Oklahoma assets to include an Oklahoma-based limited liability company or other Oklahoma entity, regardless of the nature of its underlying assets.  The legislature also removed the $1 million cap, making contributions to an FWPT unlimited.

A limited liability company, or LLC, is a very simple business entity anyone can create which provides some asset protection.  An LLC created under Oklahoma law can be deposited into and owned by an FWPT.  This is similar to building a corral within your larger fence.  For example, if you have stocks and bonds in your individual name, you can transfer those to the LLC owned by the FWPT.  If predators come, they must go through both the outside fence (FWPT) and the corral (LLC) to reach your assets.

Since the inception of the FWPT Act, we have been asked many times whether this law has been tested in court.  It has not.  If and when that day comes, it will be important to have previously designed your fences to meet your unique needs.  One size does not fit all.  It is necessary that your fences are erected prior to the need for protection to avoid any allegations of fraudulent transfer.  It is also important to understand that some assets must continue to reside with you outside your fence.  If an FWPT is tested, a creditor will be more likely to break through the fence if you do not have sufficient assets outside the fence to support yourself.    

The recent changes to the FWPT statute give us better materials to build even stronger fences.  However, primarily due to the removal of the $1 million cap on contributions, FWPTs may become a more tempting target in the future for creditors.  If you currently have an FWPT, it would be wise for an attorney to review the trust in light of the new legislation as well as recent case law in other states.   

Whenever Trust Company of Oklahoma is named as trustee, we will take an active role in both the creation and management of the FWPT, including any underlying LLC or other entity that is a trust asset.  Above all,  we will help preserve your strong fences.

By Lesa Creveling