If you have worked hard all your life to accumulate and grow your asset portfolio you undoubtedly want to protect the assets you have accumulated. Whether you are concerned about creditors, personal liability for business losses, or just your own spendthrift tendencies, it is always wise to include asset protection strategies in your estate plan to prevent the loss of assets. One popular asset protection tool is a self-settled trust. A Murfreesboro estate planning lawyer at Bennett | Michael | Hornsby explains how a self-settled trust works and whether Tennessee law allows self-settled trusts.
At its most basic, trust is a relationship whereby property is held by one party for the benefit of another. The terms and provisions of a trust are reduced to writing in a document referred to as a “trust agreement.” Trusts are broadly divided into living trusts and testamentary trusts with the former activating during the lifetime of the Settlor (the creator of the trust) and the latter typically being activated at the time of the Settlor’s death by a provision in the Settlor’s Will. Trusts can also be revocable or irrevocable. The Settlor of a revocable trust can modify or terminate the trust at any time and for any reason whereas the Settlor of an irrevocable trust cannot.
What Is a Self-Settled Trust?
A trust agreement can be used as your primary estate planning tool to distribute your estate assets after you are gone; however, trusts can also be used to accomplish a wide range of different and/or additional estate planning goals. Certain types of trusts, for example, are used to protect assets. A self-settled trust is used for just this purpose.
Also known as a domestic asset protection trust, self-titled trust, or spendthrift self-settled trust, a self-settled trust is a specialized type of irrevocable trust that is specifically designed to protect your assets from potential threats. The unique aspect of a self-settled trust is that the creator is not only the Settlor of the trust but is also the beneficiary of the trust. Assets that are transferred into the trust become the legal property of the trust. While the beneficiary (you in this case) may enjoy the benefits of the trust assets, the beneficiary has no direct legal claim to those assets because they are owned by the trust and controlled by the Trustee (pursuant to the terms of the trust). In practical terms, this means that a creditor of yours cannot reach the assets to satisfy debts because the trust, not you, owns the assets. Note that even when properly drafted and executed a self-settled trust does not protect against all claims. For example, the assets in a self-settled trust may still be accessible to satisfy child support arrearages or federal tax debts.
Tennessee Law and Self-Settled Trusts
State law governs many issues related to Wills, trusts, and estates, including whether you can establish a self-settled trust within the state. Currently, (as of 2023) less than half of all states allow you to establish such a trust within the state. Fortunately for Tennessee residents, Tennessee has allowed the creation of self-settled trusts since 2007. Referred to as “Tennessee Investment Services Trusts,” self-settled trust are governed by Tennessee Code Annotated §35-16-101 et seq, commonly known as the “Tennessee Investment Services Act (TISA).” TISA sets forth five basic requirements for the formation of a self-settled trust in Tennessee, including:
- The trust must be governed by the laws of Tennessee.
- The trust must be irrevocable.
- The trust must contain a spendthrift provision.
- The trust must have at least one qualified Trustee. A “qualified” Trustee is either a Tennessee resident or a Tennessee licensed corporate Trustee.
- The transferor of the assets must sign a qualified affidavit. A qualified affidavit must state that:
- The Grantor has full rights and authority to the assets being transferred.
- The transfer will not cause the Grantor to become insolvent.
- There is no intent on the part of the Grantor to defraud a creditor.
- The Grantor is not involved in any administrative proceedings that have not been disclosed as an attachment to the affidavit.
- The Grantor is not currently contemplating bankruptcy.
- The assets being transferred were lawfully acquired.
Contact a Murfreesboro Estate Planning Lawyer
If you have additional questions or concerns about establishing a self-settled trust in Tennessee, consult with an experienced Murfreesboro estate planning lawyer at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.
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