On July 1, 2012 Virginia will become the thirteenth state to permit a settlor to establish an irrevocable trust of which the settlor is a beneficiary and receive spendthrift protection against the claims of the settlor’s creditors
On April 4, 2012, Virginia’s governor signed into law a bill allowing self-settled asset protection trusts, effective July 1, 2012. The law applies to trusts established on or after July1 and allows a grantor to create a self-settled spendthrift trust for the joint benefit of the grantor and at least one other beneficiary. Until the law was signed, a spendthrift clause did not protect a beneficiary’s assets from creditors if the beneficiary was also the creator of the trust. Virginia law had allowed trusts that are protected from the claims of creditors against trust beneficiaries, and the new law l extends that policy to trusts of which the grantor is also a discretionary beneficiary.
The trust must meet certain requirements. It must be an irrevocable trust. There must be a Virginia situs for the trust, with a Virginia trustee who retains at least some trust assets in Virginia, and actively administers the trust in Virginia. The grantor of the trust can only be entitled to discretionary distributions of principal and income. As can be anticipated, the assets cannot be transferred to the trust in an effort to avoid creditors, as that would be a fraudulent transfer.
Virginia’s law is more conservative than the asset protection trust laws adopted by the other twelve states (Missouri, Alaska, Delaware, Rhode Island, Nevada, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Hawaii and Oklahoma). Those with a claim when the trust is established have five years to bring their claim, a longer period than in any other state. A Virginia grantor may not retain a power to disapprove distributions, although veto power is common in other domestic asset protection trust laws. The trustee who approves distributions of trust assets is required to be an independent trustee, which rules out family members, employees or business entities where the grantor controls at least thirty percent of the vote. Not all of a grantor’s assets may be protected from creditors since only the right to receive distributions of income and principal from the trust is protected.
