In April 2012, Governor Bob McDonnell signed Senate Bill 11 which expanded the types of trust that are permitted to Virginia residents. This meant that Virginia became one of only thirteenth states in the union that permit what has come to be known as the “self-settled domestic asset protection trusts (or DAPT).
‘Self-settled’ because it is the Trustmaker’s assets that are transferred to the trust; ‘domestic’ because it is established under state law; it used to be that you had to go outside of the U.S. to create such a trust; and, ‘asset protections’ because the primary purpose of these trust is to do just that, provide protection for any asset which the Trustmaker transfers to this DAPT. The most significant feature of this trust, and the new law supports this, is the fact that these new Virginia statutes will allow a Trustmaker to establish an irrevocable trust of which the Trustmaker is a beneficiary and will also provide spendthrift protection against claims from the Trustmaker’s creditors.
Generally, a Trustmaker establishes an irrevocable trust to minimize the Trustmaker’s taxable estate or protect the Trustmaker’s assets from claims from the Trustmaker’s creditors. However, only under very rare occasions can the Trustmaker be the beneficiary of the irrevocable trust. These rare occasions and lack of control make irrevocable trusts less attractive to most potential Trustmakers. Virginia’s new law makes it much more desirable to a DAPT.
Virginia’s new trust code language is similar to the domestic asset protection trust legislation in the other twelve states by permitting the creation of “qualified self-settled spendthrift” trusts. The requirements to create a Virginia DAPT, include:
- The trust must be irrevocable;
- The Trustmaker is only entitled to discretionary distributions of income and principal;
- The transfer cannot be for fraudulent reasons; and
- Requirements that connect the trust to the Commonwealth of Virginia, like a Virginia trustee who maintains custody within Virginia of some or all of the trust property, maintains records in Virginia, prepares Virginia fiduciary income tax returns, or otherwise materially participates within Virginia in the administration of the trust.
While much of the Virginia legislation is similar to the other states, Virginia’s DAPT legislation does have several unique aspects to it.
- Virginia provides for a five-year period from the creation of the trust to allow creditors to make claims against the trust. This “claiming” period is longer in Virginia than the other states.
- Unlike the other states, a Trustmaker in Virginia may not retain a veto power over distributions.
- The person or entity who approves distributions must be a qualified trustee and, for Virginia, that means an independent trustee. That will exclude spouses, descendants, siblings, parents, employees, and entities wherein the Trustmaker controls thirty percent (30%) of the vote from being the trustee. Other states are less restrictive on the relationship of the person that can approve distributions.
- Only the income and principal from the trust is protected from creditor’s claims. Other assets in the Virginia self-settled spendthrift trust might not be protected from the claims of creditors.
Regardless, a self-settled spendthrift trust or DAPT in Virginia might be an appropriate mechanism for those in the right circumstances.