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Virginia’s APT. Joining Delaware, Alaska, South Dakota and
several other states, Virginia has enacted a new law that allows a Virginia
resident to set up an Asset Protection Trust. Passed without any opposition,
the new code Sections 55-545.03:2 and 55-545.03:3 will be effective July 1,
2012. This is a major change in the law
of trusts in general and for Virginia specifically.
Fred Loses. Fred set up an irrevocable trust in 1995 which he thought would protect his assets, prior to the new law. Fred has an auto accident in 2012 and is sued for $2,000,000 and his insurance only covers up to the maximum limit of $250,000 on his insurance policy. Fred loses all of the assets he transferred to the irrevocable trust to his auto accident creditor.
Sarah Wins. Sarah sets up an Asset Protection Trust on July 1, 2012 and transfers $1,000,000 to it. The APT meets all of the qualifications under the new law. On September 1, 2012, she has an auto accident and ends up with a judgment for $2,000,000 against her. Even with the judgment, Sarah is not bankrupt. Since Sarah’s liability from the auto accident occurred after she transferred the $1,000,000 to her APT, all of her assets in the APT are not subject to the claims of the auto accident creditor.
Qualified Self-Settled Spendthrift Trusts. The reason for this dramatic difference in results is that the new Sections 55-545.03:2 and 55-545.03:3 set aside the common law of many centuries that says that if you set up a trust and put assets in it, the assets in that trust will not be protected against the lawsuits of your creditors, now or in the future. This rule applies to a “self-settled” trust (one you set up for yourself). See the codification of this self-settled trust rule under Virginia’s version of the Uniform Trust Code, Section 55.545.05. The new law says if you meet the requirements of Sections 55-545.03:2 and 55-545.03:3, the self-settled trust rules will not apply to you and your trust and the assets in the trust will be protected from future creditors.
Old Wine Bottle, Different Taste. The APT document will be familiar in the way it looks to those who already have a trust, revocable or irrevocable. You will be able to transfer assets to the APT trust you create, get income or take out assets from this trust and have the assets protected immediately from future creditors. For any existing creditor, the existing creditor must file suit within five years of the transfer of the asset to be able to reach the assets in the trust transferred five years ago. What is different is that a trust that had this structure in the past did not protect you, but now it does.
APT Requirements: The requirements for the trust to qualify as an Asset Protection Trust under Sections 55-545.03:2 and 55-545.03:3 are:
1. Irrevocable. The trust must be irrevocable. This means you cannot change it after you sign it. But, you will be able to decide who receives the assets after your passing as long as it is not paid to your estate or creditors of your estate. You usually do not want such a power to leave it to creditors or your estate if you are planning for grandchildren. There is substantial guidance on what is deemed revocable and not revocable.
2. Do It While Alive. You have to create the trust while you are alive.
3. At Least Another Beneficiary. There has to be at least one other beneficiary.
4. Discretionary Benefits Only. You can only receive principal or income in the sole discretion of an independent qualified trustee based upon “ascertainable standards”. This means the trustee can make distributions for your health, education, maintenance and support (meaning your normal living expenses).
5. One Qualified Virginia Trustee. There has to be at least one person or company that is a qualified trustee-that is, someone who will handle trust administration in Virginia who lives or is licensed as a trust company in Virginia.
6. Some Virginia Property. To be a qualified trustee, the qualified trustee has to have custody within Virginia of some or all of the property.
7. Virginia law. Virginia trust law must apply.
8. Spendthrift Trust. There has to be a provision that the trustee and you cannot pledge the assets for a loan or an annuity.
9. No Veto. You cannot veto any distributions.
Sally’s Plan. Sally wants to set up trusts for her children and grandchildren and wants to transfer substantial dollars to these trusts. She is reluctant to do so because Sally is afraid she will have very expensive health care costs in the future and wants to make sure she will have enough to live on in the future. She sets up a Virginia APT with her Virginia accountant as the trustee and with her granddaughter Alice as a beneficiary and with Sally as a contingent beneficiary. Sally transfers $1,000,000 to the Alice trust. Sally is solvent at the time of the transfer. If Sally needs the money for her health or living expenses in the future, Sally can receive distributions. The assets are protected against most creditors of Alice and Sally and can be used for the education, health and other needs of Alice.
Contact us to see if such a trust will benefit you. Note that exiting creditors and the bankruptcy laws must be considered. Please note that state APT’s can be set aside for a ten year period if there can be proven an intent to hinder, delay or defraud creditors and you file for bankruptcy protection.
Next: See Part II as to how flexible this new Virginia APT can be for you.
Great job Roger! The new law will change the way attorneys and other members of the professional collaborative planning team and their clients approach asset protection planning in the DC, MD, VA area. Maryland may be "The Land of Pleasant Living" but VA is now a Land for Asset Protection Planning! Lena Barnett, Esq.
ReplyDeleteDoes this have any effect on a spouse's elective share?
ReplyDeleteThank you for reading the blog and asking a question. This is a very sophisticated question that you have asked.
ReplyDeleteElective share refers the rights of a spouse of a deceased person to take against the augmented estate of the spouse who died. Example:
Harry Cuts Sally Out of His Will. Harry and Sally were married, but they had separated and Harry had filed for a divorce. After the separation, Harry executed a new will and trust removing Sally as a beneficiary. They did not have a premarital agreement and they do not have a property settlement agreement. Harry died before the divorce was final and therefore on the date of death they were still legally married. During the marriage, Harry had also transferred to a qualified self-settled spendthrift trust $1,000,000 that met all of the requirements of the new law. Sally files for her right to one third of the “augmented” estate of Harry; Harry is survived by children. Sally requests that her one third be paid in part or all out of the self-settled trust. Harry’s estate argues to the Judge that Sally has no rights in the self-settled trust. How does the Judge rule?
Augmented Estate. Under Virginia law, there are many details as to what is the “augmented estate”. A simplified version is that it is the assets of the deceased person owned or transferred during the marriage and not received from third parties as an inheritance. As for transferred assets, it may include interests in irrevocable life insurance trusts holding large insurance contracts. The augmented estate statute is so complex experienced practitioners always have to review the statute as they think through any question.
How the Judge is Likely to Rule. I and others do not think the answer is certain. Under the new statute, there is no reference to this situation. The argument of Harry’s attorney would be that since this is new law, it amends prior acts of the legislature. Sally’s attorney will argue that Subparagraph (A)(3) of Section 64.1-16.1 defining what is part or not part of the augmented estate includes in the augmented estate transfers during the marriage, except for full consideration, where the deceased person retained an income or principal interest. An interest in a self-settled trust under the new law would be this type of transfer that would be part of the augmented estate. For this and the general reason that the law seeks to protect disinherited surviving spouses, I think it is likely that the Judge will rule that the surviving spouse will receive one-third of the augmented estate, and if necessary, will allow for invading the self-settled trust,
What to Do? I would not advise the use of a Virginia self-settled spendthrift trust to avoid claims of a spouse. There are several reasons why you want the spouse to be a beneficiary of a self-settled spendthrift trust, such as in a qualified personal residential trust. Also, by protecting the surviving spouse, you provide a favorable reason to enforce the terms of the APT. If there is a concern, it would advisable to have the other spouse sign off on any transfers of one spouse to a self-settled trust. Most divorce attorneys I know counsel against making any transfers or new estate plans while the divorce action is pending. I do know of instances of where a spouse has transferred assets to an offshore trust as a means of avoiding spousal claims. The best course is to have an enforceable premarital agreement which itself is a subject for a separate discussion.
Emory Hackman, Chairman of the McLean Estate Planning Council, participated in formation of this answer.
I guess this is really a nice way of averting possible risks in the future in the form of lawsuits. Good tips here. Thanks. asset protection
ReplyDeleteThank you for providing the information. I would like to tell that I have also recently came across a firm called offshore trust protection who is providing the service of asset protection.
ReplyDeleteOffshore Asset Protection Trust