- Virginia Trust Law to Help Protect Assets from Creditors While Still Enjoying the Assets Takes Effect on July 1, 2012
- July 3, 2012 | Authors: David N. Anthony; Tania S. Sebastian; Melissa Roberts Tannery
- Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - McLean Office ; Troutman Sanders LLP - Richmond Office
Beginning July 1, 2012, Virginia will allow its residents to create qualified self-settled spendthrift trusts and achieve some protection from creditors. Va. Code Ann. §§ 55-545.03:02 and 55-545.03:03. Under current Virginia law, a trust creator (“settlor”) cannot establish an irrevocable trust for his or her own benefit and protect the trust assets against creditors’ claims, even with a spendthrift provision.
For the protections to apply to a settlor’s qualified interest in a trust, several requirements must be met, including: (1) the trust must be irrevocable; (2) the trust must be created during the settlor’s lifetime; (3) there must be a qualified trustee, meaning a person residing in Virginia or a legal entity authorized to conduct trust business in the Commonwealth and who maintains some or all of the trust property in Virginia, maintains trust records in Virginia and prepares fiduciary income tax returns for the trust in Virginia; (4) the trust must be governed by Virginia law; (5) the settlor must be entitled to receive only income and/or principal distributions in the sole discretion of an independent qualified trustee, meaning such trustee must not be or be directed by the settlor’s spouse, descendant, parent, sibling, employee or business entity controlled by the settler or a non-Virginia resident or entity; (6) the trust must include at least one other beneficiary whose beneficial interest in the trust includes income and/or principal mirroring the settlor’s qualified interest; (7) the settlor must not retain the right to disapprove distributions from the trust; and (8) the transfer of assets to the trust must not be fraudulent and/or render the settlor insolvent. See Va. Code Ann. § 55-545.03:3(A)(11)(1-7) and § 55-545.03:02 effective July 1, 2012 (C); see also Va. Code Ann. § 55-545.05(A)(2), as amended effective July 1, 2012.
Approximately a dozen other states allow asset protection trusts (“APTs”). Although Virginia’s new law certainly makes APTs more desirable, Virginia’s law is friendlier to creditors than the laws of other domestic asset protection states. For example, creditors “may bring an action ... to avoid a transfer to a qualified self-settled spendthrift trust or otherwise to enforce a claim that existed on the date of the settlor’s transfer to such trust within five years after the date of the settlor’s transfer to such trust to which such claim relates.” Va. Code Ann. § 55-545.03:2(D) (emphasis added). This five year period before trust assets are protected is longer than the period in other APT states.
In addition, unlike some other states, Virginia’s APT law prohibits the settlor from retaining veto power over the distributions to other beneficiaries. Virginia’s requirement of an independent qualified trustee to approve distributions also is more restrictive than other jurisdictions. Moreover, not all of the assets in a Virginia self-settled spendthrift trust may be protected, including any absolute right to receive income or principal.