Virginia recently passed several bills that will revise state trust law on July 1, 2012. In this post and the following post, I will attempt to briefly describe these changes in the law, define key terms and discuss the effects of each. Some of these rules are already in place in other states, but the specifics vary. While these rules were passed in Virginia, the following is intended also as an overview helpful to readers in any state.
Senate Bill 11 – Self-Settled Spendthrift Trusts (aka Asset Protection Trusts)
On April 4 of this year, Governor Bob McDonnell signed Senate Bill 11 into law. As of July 1, 2012, asset protection trusts, also known as “self-settled spendthrift trusts” can be used in the Commonwealth. Virginia is now the 13th state to approve of this kind of trust.
What is a “Self-Settled Spendthrift Trust”?
Let’s break this up into pieces:
- Trust – Generally, a trust is an agreement that enables one to hold property for the benefit of another. This arrangement includes three parties:
- Settlor – The party who creates the trust and then gives property to it.
- Trustee – The party who cares for the trust property according to the trust’s (i.e. the settlor’s) terms.
- Beneficiary – The party who ultimately receives the benefits from the trust.
- Spendthrift Trust – A trust written with spendthrift provisions prohibits the beneficiary from transferring the rights to future payments of the principal or income of trust property.
- Where state law permits it, the beneficiary’s creditors cannot use the beneficiary’s trust interest to reduce the beneficiary’s debts. In other words, the trust property is protected against creditor claims.
- Self-settled – A self-settled trust is one in which the settlor is also the trustee and beneficiary of the trust.
- Therefore, this law allows a person to create a trust where its property is protected against creditor claims and where the settlor is also the beneficiary. These trusts are perhaps more commonly known as “Asset Protection Trusts” or “Domestic Asset Protection Trusts” (DAPTs).
What’s the big deal?
The big deal is that in theory, this creates a way for anyone to protect their assets against any future creditors, no matter how they behave.
Here’s a wild example:
- Fred Shepherd is a popular, yet terrible building contractor. His wife, Wilma, is tired of staying up nights worrying about Fred’s work crumbling into rubble, so she convinces Fred to put all $100 million of their personal assets into a DAPT.
- Later, 17 of Fred’s buildings fall apart, dozens are injured, and $50 million in damages results. Fred’s company goes bankrupt quickly after two lawsuits. In theory, the remaining injured cannot go after any of Fred and Wilma’s personal assets because state law protects DAPT assets.
- NOTE: This is obviously an oversimplified scenario. There are certainly exceptions and additional complexities at play.
Is it fair that Fred and Wilma’s $100 million is protected if Fred caused $50 million in damages? Is this yet another way to protect the rich because the lower and middle class simply don’t have the resources to take advantage? Or should everyone now go out and get one? Will they even work? These are all important questions without immediate answers.
- History of Senate Bill 11, enacted April 2012, from Virginia Bill Tracking site (leg1.state.va.us)
- Virginia Self-Settled Asset Protection Trusts (dedononestateplanning.typepad.com)
- Asset Protection and Trusts (lawprofessors.typepad.com)
- Virginia: The New Kid on the Block (altmanassociates.com)