Private Client Services Update – Self-Settled Spendthrift Trusts

    By Lawrence G. Cumming, Estate, Trust & Wealth Transfer

    As of July 1, 2012, Virginia will permit the creation of self-settled spendthrift trusts. Under the new law1, a settlor may establish a qualified irrevocable discretionary trust which will not be subject to the settlor’s creditor’s claims.

    In order for the trust to qualify for these protections, the following criteria must be met:

    • The trust must be an irrevocable living trust.
    • The trust must specifically incorporate Virginia law and include a spendthrift provision.
    • There must be a qualified, independent Trustee.
    • There must be at least one beneficiary other than the settlor who is eligible to receive the same type of distribution which the settlor is entitled to receive (such as income or principal).
    • The settlor must not be permitted to veto distributions from the trust.

    The settlor’s interest in the trust that is protected from creditors is called a qualified interest. A qualified interest is a right to receive trust distributions of income, principal or both, in the sole and absolute discretion of the independent trustee. If a settlor has both a qualified interest and a non-qualified interest in the same trust, the qualified interest will be protected from creditors, but the non-qualified interest will not be.

    The trustee of the trust must be both qualified and independent. To be deemed qualified, the trustee must be a Virginia resident or an entity authorized to do business in Virginia, and must materially participate in the trust administration in Virginia. Examples of such material participation include maintaining some of the trust assets within the state of Virginia or preparing or coordinating preparation of a trust income tax return. To be deemed independent, the trustee must not be subject to direction by the settlor, the settlor’s spouse, parent, issue, sibling, employee, entity in which the settlor has a thirty percent voting interest (or an employee of such entity), or a non-Virginia individual or entity.

    A creditor of the settlor does not have the right to set aside a transfer to the trust because it was intended to delay, hinder or defraud creditors. However, creditors still have some ability to challenge transfers to the trust on other grounds, such as that the transfer to the trust rendered the settlor insolvent. Virginia Code Section 5-82 permits a creditor to bring a claim against a transfer to the trust to enforce a pre-existing claim within five years of the date of the transfer. There is a separate five-year statute of limitations on each transfer to a trust.

    Self-settled spendthrift trusts provide an exciting new planning opportunity. Such trusts will be particularly valuable tools for high net worth individuals, and especially professionals who work in a field with a high frequency of lawsuits, such as physicians. As part of a thoughtful estate plan, self-settled spendthrift trusts will be an important technique for clients to protect and preserve assets.

    1 The legislature established two new Code Sections, Virginia Code Sections 55-545.03:2 and 55-545.03:3, and amended Section 55-545.05.

    Lawrence G. Cumming is the managing partner of the Hampton office of Kaufman & Canoles. Larry’s practice focuses on commercial transactions, estate planning and administration and real estate transactions. He helps clients establish, purchase and sell businesses, negotiate loans and leases, develop employment contracts and create succession plans for their businesses. In addition, Larry represents individual clients in personal matters such as preparing estate plans, purchasing a home, contracting to build a home and handling legal issues regarding the care of elderly parents. He is a graduate of the College of William & Mary School of Law and his civic involvement includes service to Greater Peninsula NOW, Peninsula Estate Planning Council, Christopher Newport University School of Business, Coliseum Central Business Improvement District, and the Peninsula Town Center Advisory Board. He serves on the Board of Directors of TowneBank and Harrison & Lear.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.