Protecting Your Assets: Part II Virginia APTs; Existing Creditors.

Part II. This is part two of our summary on the new Virginia Asset Protection Trust (APT).  See Virginia’s New Asset Protection Trust.  In Part I, we discussed the basic requirements for a Virginia Asset Protection Trust under Sections 55-545.03:2 and 55-545.03:3.

There are several details which make this Virginia APT very useful:

*No Automatic Set Aside As a Fraudulent Transfer. In the past, a creditor had a powerful tool to attack an APT by arguing to the Court that the mere existence of the APT was sufficient proof that the purpose of the APT was to delay, hinder or defraud creditors. If the creditor proved that, the Court had the power to dissolve the trust as a fraudulent transfer.  Section 55-545.03:2 states that the mere creation of this APT is not enough to show such fraudulent intent.  Instead, now the creditor must be able to show more than just the transfer and the creation of the trust.  For example, the creditor would have to prove that you had no assets to pay your bills after you made the transfer to the APT.

*5 Percent Permitted. You can receive up to five percent of the value of the trust on an annual basis and that 5% does not set aside the protection features.

*Personal Residence Trust. You can protect your residence if you use a qualified personal residence trust that meets the tests of the tax code.  This trust can only be for your primary and secondary personal residences and required associated funds.

*Annuities. Certain grantor annuity interests can be protected.

*Pay Inheritance Taxes. The money in the trust can be used to pay inheritance taxes.

*Charitable Remainder Trust. You can protect assets in a charitable remainder trust.

*Pay Income Taxes.  The trust income and assets can be used to pay income taxes on income you receive from the trust.

*People Will Not Be Afraid to Help You. Planners and attorneys will be more willing to help you do this type of planning. The new law specifically states that a creditor has no claim or action against a trustee, planner or attorney for helping you set up this APT.

*Strengthens Existing Foreign APTs. The new law will strengthen in Virginia the enforcement of existing asset protections trusts formed in other states or countries. Virginia no longer has a strong public policy against these APTs which would encourage a Virginia Judge to set aside an APT from another state or country.

*Protection from Existing Creditors. You can protect assets from existing creditors. An existing creditor has five years from the date you transfer the assets to reach the assets in the trust. If the existing creditor does not sue in the five years after the transfer, even the existing creditor cannot reach the protected assets. 

Do It Now. There is a motivation in the new law to transfer as much as advisable as soon as possible to an APT.  For existing creditors, the five years begins to run the day you make the transfer to an APT. An existing creditor can only reach trust assets that have been transferred within the last five years when the creditor makes their claim.  But, any distributions out of the trust are deemed to come first from the most recent contribution.

Sally’s Trust.  In 2012, Sally sets up a qualified Virginia APT for her and her granddaughter Sandra. In 2012, Sally transfers $1,000,000 to the trust. In 2015, Sally transfers another $500,000 to the trust. In 2018, a creditor obtains a judgment against Sally for $2,000,000 for a debt that Sally owed in 2012 when she set up the APT. Even with the $2,000,000 judgment, Sally is not bankrupt. Since the creditor’s judgment was entered more than five years after Sally’s transfer of the $1,000,000 in 2012, the creditor cannot obtain the $1,000,000 Sally transferred in 2012.  The creditor requests that the Court distribute to the creditor the $500,000 transferred in 2015, less than five years from the judgment in 2018.  However, the trustee of the APT has distributed $500,000 from the APT to Sally and Sandra prior to the judgment of the creditor.   Because the $500,000 distribution is deemed to have been made from the latest transfer in 2015, there are no funds in the APT that the creditor can obtain.

Fraud & Bankruptcy. These new APTs can still be set aside if the existing creditor can show intent to defraud the creditor under Virginia law or federal bankruptcy law. Section 548(e) of the federal Bankruptcy Code allows the bankruptcy court to set aside a state APT for ten years from its establishment where there is compelling proof of an intent to defraud, hinder or delay a creditor in the set up and operation of the APT.  Therefore, in the set up and operation of these APTs, it is very important to show there was no intent to hinder, delay or defraud creditors and also to avoid bankruptcy court.  By using these APTs for other purposes, such as for estate tax planning, a personal residence trust or for charitable planning, there will be proof that there was a purpose other than to protect the assets from creditors.  There was case in the Alaska Bankruptcy Court, Battley v.Mortensen, where the bankruptcy court set aside a valid Alaska APT on the basis that there was proof of intent to delay, hinder or defraud creditors.

Bottom Line:  If you live in Virginia, you have a new powerful tool that will go a long way to providing you additional asset protection if you correctly set up and operate this trust.