Virginia is one of nineteen states whose laws provide for the creation of “Domestic Asset Protection Trusts”—irrevocable trusts the assets of which are impervious to creditor attack that allow the “settlor” of the trust (the individual who contributes assets to the trust) to also be a “beneficiary” of the trust. The formal term for a Virginia Domestic Asset Protection Trust is “Qualified Self-Settled Spendthrift Trust” (“QSSST”).
The Bottom Line: Virginia
law permits the creation of QSSSTs, irrevocable trusts the assets of
which are impervious to creditor attack that allow the “settlor” of the trust
to also be a “beneficiary” of the trust.
As a result of certain limitations and exemptions, QSSSTs
work best when the “settlor” is a resident of Virginia, the funding of the QSSST
does not render the “settlor” insolvent, the assets contributed to the QSSST
are located entirely in Virginia and the primary purpose of the QSSST is
to protect assets from creditors rather than a trustee in bankruptcy.
By way
of brief background, Virginia law recognizes two types of trusts: “revocable”
and “irrevocable.” In general terms, a
“revocable” trust may be modified by the “settlor” at any time. Assets placed in a “revocable” trust
are subject to claims by the “settlor’s” creditors.[1] An “irrevocable” trust is much harder to
modify, requiring the consent of the “settlor,” the “trustee” and the
“beneficiary” or a court order. Assets
placed in an “irrevocable” trust are also subject to claims by a “settlor’s”
creditors EXCEPT to the extent provided in § 64.2-745.1
and § 64.2-745.2 of the Virginia Code which relate to QSSSTs.[2]
Pursuant
to § 64.2-745.1 and § 64.2-745.2 of the Virginia Code, assets contributed
by a “settlor” to an “irrevocable” trust shall be unavailable to the
“settlor’s” creditors if the following criteria are met:
· Inter Vivos.
The
“irrevocable” trust must be created while the “settlor” is alive and not
pursuant to a testamentary document such as a will or revocable living
trust.
· Multiple Beneficiaries. There must be at least one beneficiary
other than the “settlor.” Typically, the
other beneficiary or beneficiaries are family members to whom the “settlor”
would like assets to go to upon the “settlor’s” death.
· “Independent Qualified Trustee”. The trustee must be an “independent
qualified trustee” whose actions are not subject to direction by the “settlor,”
either directly or indirectly through family members or business
associates. Typically, an “independent qualified
trustee” will be a Virginia-based trust company.[3]
· Governing Law. The “irrevocable” trust must state that the laws of
the Commonwealth of Virginia shall govern the validity, construction and
administration of its terms and provisions.
· “Spendthrift Provision”. The “irrevocable” trust must contain a
“spendthrift provision” that restrains both “voluntary” and “involuntary”
transfers of the interests of the beneficiaries.
· No Disapproval Right.
The
“irrevocable” trust must provide that the “settlor” does not have the right to
disapprove distributions from the “irrevocable” trust.
Assets
transferred to a properly established QSSST shall be exempt from
attack by all future creditors of the “settlor.”[4] However, the “settlor’s” existing
creditors shall have a five-year period from the date of transfer of assets to
a QSSST to reach such assets.[5]
Although
very powerful asset protection tools, QSSSTs do have some limitations of
which potential “settlors” need to be aware:
· Unenforceable “Spendthrift Provisions.” Under Virginia law, “spendthrift”
provisions such as those required to be included in a QSSST are
unenforceable in the case of child support obligations,[6]
when the “spendthrift” provision operates “to the prejudice of the United
States, the Commonwealth [of Virginia] or any county, city or town”[7]
and where there is an obligation to reimburse public agencies (such as
Medicaid) for public assistance.[8]
· Solvency Requirement. QSSSTs are expressly subject to Virginia’s
“fraudulent transfer” laws[9]
which provide for the setting aside of transfers made with “intent to delay,
hinder or defraud” creditors.[10] Accordingly, “settlors” need to ensure that
the transfer of assets to a QSSST does not render them insolvent
immediately following such transfer.
· Bankruptcy Lookback Period. The federal Bankruptcy Code
contains a provision that permits a bankruptcy trustee to set aside any
transfer made to a QSSST within the prior ten years,[11]
substantially compromising the usefulness of QSSSTs in the bankruptcy
context.
· State Law Conflicts.
“Domestic Asset
Protections Trusts” and the statutes governing their creation have been the
subject of interesting (and complex) litigation involving the rights of states
to regulate people, property and transactions in other states. Based on the decisions in these cases, it is
unclear whether Virginia law in general or, specifically, QSSSTs would
be enforceable in connection with people, property or transactions in other
states.
Given
the foregoing limitations, QSSSTs work best when the “settlor” is a
resident of Virginia, the funding of the QSSST does not render the “settlor”
insolvent, the assets contributed to the QSSST are located entirely in Virginia
and the primary purpose of the QSSST is to protect assets from creditors rather
than a trustee in bankruptcy.
* *
*
Should
you have any questions regarding the contents of this Client Note, please
contact Steven G. Thompson by e-mail at sthompson@sgthompsonlaw.com or by telephone
at (757) 253-5711 (Office) or (917) 817-2720 (Mobile).
[3]
Annual fees for the investment management
and trust administration services of such a Virginia-based trust company are
subject to negotiation but one fee structure with which we are familiar is as
follows: (i) 1.25% on the first $1.0 million; (ii) .95% on the next $4.0
million; (iii) .65% on the next $5.0 million; and (iv) a percentage “to be
determined” on amounts in excess of $10.0 million.
[4] Va. Code § 64.2-747(A)(2)
[5] Va. Code § 64.2-745.1(D)
[7] Va. Code § 64.2-744(C)
[8] Va. Code § 64.2-745
[9] Va. Code § 64.2-745.1(C)
[10] Va. Code § 55.1-400
[11] 11 U.S. Code § 548(e)
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