Special Power of Appointment Trust (SPAT) in Utah

A special power of appointment trust, or SPAT, is an irrevocable trust that you fund but are not a beneficiary of. A person other than you, usually called a trust protector, holds a special power of appointment to add or redirect beneficiaries within a defined class. The design aims to keep the trust outside the ten-year bankruptcy look-back for self-settled trusts in 11 U.S.C. § 548(e). It is an advanced and unsettled strategy, it does not guarantee protection, and a transfer into it can still be reversed under Utah's voidable transaction law.

Why the self-settled distinction matters

A self-settled trust is one that the person who funds it can also benefit from. Section 548(e) lets a bankruptcy trustee unwind a transfer to a self-settled trust made within ten years before a bankruptcy filing if it was made with actual intent to hinder, delay or defraud a creditor. A Utah domestic asset protection trust (DAPT) is self-settled by design, so that ten-year exposure comes with it. See our page on Utah asset protection trusts for how a DAPT works.

A SPAT is built so that you are not a beneficiary, which is why § 548(e) should not apply by its terms. The ordinary two-year look-back in § 548(a) still applies to any trust, and a bankruptcy trustee can also use state voidable transaction law. No court has settled how a SPAT will be treated, and the result in a given case will turn on the facts and the judge.

How a SPAT is structured

You transfer assets to an irrevocable trust. An independent trustee manages them and makes discretionary distributions to the beneficiaries you name, often a spouse, children or other family. A trust protector holds a special power of appointment, meaning a power that cannot be exercised in favor of the protector, the protector's estate or either one's creditors. Keeping the power special rather than general keeps it from being treated as a general power of appointment under IRC § 2041.

In the structure we use, you are not a beneficiary and the protector cannot appoint trust property to you. That choice matters. Under Utah Code § 75B-2-505(2)(a), a creditor of the person who funded an irrevocable trust may reach the most that could be distributed to or for that person's benefit, unless the trust qualifies as an asset protection trust. If a SPAT lets the protector appoint property back to you, a creditor will argue that everything the protector could send back is reachable and that you are a beneficiary after all. Keeping the grantor out of the class gives up that route back in exchange for a cleaner argument.

The protector should be someone you do not control: not a person who lives with you, depends on you or answers to you. A protector with a power of direction is a trust director under Utah's Uniform Directed Trust Act (Utah Code Title 75B, Chapter 3) and owes fiduciary duties.

SPAT vs. Utah DAPT

Are you a beneficiary? In a DAPT you remain a discretionary beneficiary by design. In a SPAT you are not a beneficiary.

Governing rules. A DAPT is governed by Utah's asset protection trust statute, Utah Code § 75B-1-301 et seq. A SPAT has no statute of its own, so ordinary trust law and Utah's voidable transaction law apply.

What a creditor must prove. Against a DAPT, a creditor must prove by clear and convincing evidence that the transfer failed the statute's intent or solvency requirements (§ 75B-1-303). Against a SPAT, a creditor must prove each element of a voidable transaction claim by a preponderance of the evidence (§ 25-6-202(3)), which is a lower burden.

State-law time limit. A DAPT creditor generally must sue within two years after the transfer, subject to limited exceptions (§ 75B-1-307). A SPAT creditor generally has four years after the transfer, and for actual-intent claims may sue up to one year after the transfer was or reasonably could have been discovered if that is later (§ 25-6-305).

The ten-year bankruptcy look-back. Section 548(e) can apply to a DAPT because the grantor is a beneficiary. By its terms it does not apply to a SPAT. The two-year look-back in § 548(a) applies to both.

Trustee requirements. A DAPT must meet statutory conditions, including a Utah trustee. A SPAT has no requirements specific to it, although the trustee and protector should still be independent of you.

Court testing. A DAPT has a statutory framework behind it. A SPAT has little.

The two structures protect against different risks. A DAPT has the stronger state-law position and the larger bankruptcy exposure. A SPAT has the cleaner bankruptcy argument and the weaker state-law position, because creditors face a lower burden and a longer period. Some clients use both, so that a weakness in one is covered by the other.

Who should not use a SPAT

A SPAT is for people who are financially healthy and planning ahead. Before we discuss one, we ask two questions. First, can you name a trustee and a protector who do not live with you, do not depend on you and are not subordinate to you in any way? Second, after the transfer, will the assets you keep outside the trust be worth more than all of your debts and obligations?

The second question is not a formality. Under Utah Code § 25-6-203(1), a transfer is voidable by an existing creditor if you did not receive reasonably equivalent value and you were insolvent or became insolvent because of it, and no bad intent is needed. Under § 25-6-202(1)(a), a transfer made with actual intent to hinder, delay or defraud any creditor is voidable, and a court can look at factors such as whether you had been sued or threatened with suit, transferred substantially all of your assets, or kept control of the property. A SPAT is not appropriate if a claim is pending or foreseeable, if the transfer would leave you unable to pay your debts as they come due, or if you are uncomfortable with legal uncertainty.

Tax treatment of a SPAT

Funding the trust is a gift. You report it on a federal gift tax return, and it uses part of your lifetime gift and estate tax exemption, which is adjusted each year (IRS estate and gift tax page). Generation-skipping transfer tax can also apply when the beneficiaries include grandchildren. Because the gift is complete and you keep no power over the trust, the assets and their future growth are generally outside your taxable estate. That result depends on running the trust as a real gift: if there is an understanding that the property will come back to you, the IRS or a creditor may argue you kept an interest.

Because the assets leave your estate, your heirs receive your income tax basis (carryover basis under IRC § 1015) rather than a step-up to fair market value at your death under IRC § 1014. Income tax treatment depends on how the trust is drafted. It may be a grantor trust, where you pay the tax on its income, or a separate taxpayer that files its own return at compressed rates. Utah Code § 75B-2-505(2)(c) allows a non-settlor trustee or advisor to reimburse you for income tax on trust income without making the trust reachable by your creditors. Confirm the plan with your tax advisor before you sign.

When a SPAT may make sense

A SPAT may fit if you are solvent and want to complement an existing DAPT, if you hold assets outside Utah where a DAPT's treatment is less certain, or if you want a structure that does not carry the ten-year exposure of a self-settled trust. It is not a stand-alone solution. Most clients should have a revocable living trust, will, power of attorney and health care directive in place first. For the wider picture, see advanced estate planning in Utah and asset protection and legacy planning.

What it costs

The flat attorney fee for a SPAT is $3,000. It does not include the core estate plan. See our pricing page for the other flat-fee services.

Frequently asked questions

What is a SPAT? A SPAT is an irrevocable trust you fund but do not benefit from. A trust protector holds a special power of appointment over a defined class of beneficiaries. It is designed to avoid the ten-year look-back for self-settled trusts under 11 U.S.C. § 548(e).

How is a SPAT different from a Utah DAPT? A DAPT lets you remain a beneficiary and has its own Utah statute, a clear and convincing evidence standard for creditors and a two-year state-law limit. A SPAT does not have a specific statute, so Utah's voidable transaction law applies with a lower burden and a four-year limit, but it avoids the self-settled bankruptcy look-back by its terms.

Is a SPAT guaranteed to protect my assets? No. The structure rests on arguments that courts have not widely tested. A transfer can be reversed if it was made to hinder, delay or defraud a creditor, or if it left you insolvent.

Can I use a SPAT with a DAPT? Yes. Some clients fund both so that the two structures address different risks. Whether that makes sense depends on your assets, your debts and your timing.

What does the trust protector do? The protector holds the special power to add, remove or redirect beneficiaries within the class. The protector should be independent of you, and the role carries fiduciary duties under Utah's Uniform Directed Trust Act.

Talk it through first

If you are considering advanced asset protection planning, we are happy to walk through whether a SPAT, a DAPT or neither fits your situation. Book a free consultation with Legacy Peak Estate Planning Law. We serve clients throughout Utah from our Draper and Kaysville offices.

This page is general information, not legal or tax advice, and it does not create an attorney-client relationship.