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Virginia has become the Thirteenth state to enact “asset protection trust” legislation. In its original form, § 55-545.05 states that a creditor of the settlor of an irrevocable trust, despite spendthrift provisions, can reach the maximum amount that may be distributed to the settlor or for their benefit. (§ 55-545.05. Creditor's claim against settlor). This is no longer the case.
Signed on April 4, 2012, and effective July 1, 2012, Virginia’s Senate Bill 11 serves to craft an exception within § 55-545.05 of the code that will protect a “qualified self-settled spendthrift trust” from creditor claims, and not subject such a trust to the scrutiny of § 55-545.05.
Briefly, the enacted legislation adds §§ 55-545.03:2 and 55-545.03:3 to the code. § 55-545.03:2(A) states that, “A settlor may transfer assets to a qualified self-settled spendthrift trust and retain in that trust a qualified interest, and, except as otherwise provided in this article, § 55-545.05 shall not apply to such qualified interest.” (Senate Bill 11). This exception to § 55-545.05 is narrow. The settlor’s protected interest is termed a “qualified interest”, and is defined as an interest in distributions or income or principal that is in the sole discretion of an independent qualified trustee. (Senate Bill 11). A “qualified self-settled spendthrift trust” is defined under new § 55-545.03:3 for purposes of qualifying for this exception, if:
“1. The trust is irrevocable;
2. The trust is created during the settlor's lifetime;
3. There is, at all times when distributions could be made to the settlor pursuant to the settlor's qualified interest, at least one beneficiary other than the settlor (i) to whom income may be distributed, if the settlor's qualified interest relates to trust income, (ii) to whom principal may be distributed, if the settlor's qualified interest relates to trust principal, or (iii) to whom both income and principal may be distributed, if the settlor's qualified interest relates to both trust income and principal;
4. The trust has at all times at least one qualified trustee, who may be, but need not be, an independent qualified trustee; (See Senate Bill 11 for definition of qualified trustee))
5. The trust instrument expressly incorporates the laws of the Commonwealth to govern the validity, construction, and administration of the trust;
6. The trust instrument includes a spendthrift provision, as defined in § 55-545.02, that restrains both voluntary and involuntary transfer of the settlor's qualified interest; and
7. The settlor does not have the right to disapprove distributions from the trust.” (Senate Bill 11).
Attorneys in Maryland, DC, and Virginia, have begun the process of deciphering the new legislation. While different and perhaps narrower than their twelve predecessors, Virginia’s new legislation provides for great planning opportunities for Virginia property holders and Virginia residents. Barely a week old, there remains extensive analysis that must be done to understand the full meaning of the legislation. However, if you fall within the class of Virginia resident or Virginia property holder, you may want to reexamine your estate plan because this new “qualified self-settled spendthrift trust” may present a new planning option for you.
- Gary Altman, Esq. and Adam Abramowitz, Esq.