Virginia's New Asset Protection Trust

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.

Most Trusts Do Not Protect Your Assets; Asset Protection Trusts; Revocable and Irrevocable; US and Offshore

Bank Tells Her A Trust Will Protect Her. Sally called our office for an appointment to set up a trust to protect her proceeds from a new credit line to be placed on her home. She wants to protect the proceeds of the loan from her creditors and her Bank told her to set up a trust to do that. It is common for many people to think that a revocable living trust protects them from their creditors. It usually doesn’t. We told her the appointment was not a good use of her time and money. Instead, we helped Sally set up an LLC.

Self-Settled Trust. There is a legal doctrine in trust law or state statute in most states that says a self-settled trust does not protect you from past, present or future creditors. The policy behind this law is that you should not have the ability to set up a trust and remove those assets in the trust from your creditors. Otherwise, everyone would set up a trust and if they had a judgment against them, the owner of the judgment or the credit card company could not get a court order to take over the debtor's bank account. No one would have to pay their debts.

Modification of Self-Settled Trust Law. Certain states, such as Delaware, Alaska, Virginia and South Dakota have passed new statutes that alter the self-settled trust doctrine. In very general terms, these new laws allow you to set up an Asset Protection Trust (APT) and place assets in it and these assets may be not subject to what you will owe new creditors in the future. They are usually strong restrictions on what funds you can take out. Also, federal bankruptcy law overrides state law and may open up the state law APT to attack for ten years. If you are resident of a state that still has a self-settled trust law, but have an APT in Delaware, Alaska, Virginia, South Dakota or other state than allows you to set up an APT, then your local court may choose to apply the law of your state and not the law of the state of the APT and bust up your APT.

Offshore. Offshore, the story is completely different. You can set up trusts offshore where the law of the offshore country is that the assets in a self-settled trust are protected, usually after a period of three years from the date of the establishment of the trust. The assets in the offshore trust do not have to be in the country where you set up the trust. This is a complex area where you should be guided by experienced and competent counsel. This is not an opportunity for a US citizen to avoid paying taxes on investments you have outside of the country. If a US creditor attacks your offshore trust, the US court will examine what powers you have retained and whether the court can force you to bring the money back to the US and make it subject to the US court’s orders. As a general rule, if the trust and assets are offshore and the court cannot force the offshore trustee to bring the money back to the US, the ability of the US court to do anything about the money offshore will be very limited.

Trusts for Others. This self-settled trust doctrine should not be confused with trusts you set up for others. Fred dies and leaves his assets in trust for his daughter Jane for her lifetime. Jane has her CPA as a Cotrustee. Jane did not set up this trust; Fred did, so for Jane, Jane’s trust is not a self-settled trust. In routine legal cases, the Jane type of trust provides high hurdles to jump over for any past, present or future creditor of Jane. Some spouses or life partners may decide to set up such Jane trusts for each other. These can provide substantial asset protection for spouses and partners as long as the trusts are not carbon copies.

Asset Protection. There is no bullet proof asset protection vehicle and do not believe anyone who claims to have one to sell you. But, careful planning and operation of the proper type of vehicles can provide substantial protection of your hard earned assets.

Next: Virginia’s new asset protection trust law.