Asset Protection

"Qualified self-settled spendthrift trust" means a trust if:

1. The trust is irrevocable;

2. The trust is created during the settlor's lifetime;

3. There is, at all times when distributions could be made to the settlor pursuant to the settlor's qualified interest, at least one beneficiary other than the settlor (i) to whom income may be distributed, if the settlor's qualified interest relates to trust income, (ii) to whom principal may be distributed, if the settlor's qualified interest relates to trust principal, or (iii) to whom both income and principal may be distributed, if the settlor's qualified interest relates to both trust income and principal;

4. The trust has at all times at least one qualified trustee, who may be, but need not be, an independent qualified trustee;

5. The trust instrument expressly incorporates the laws of the Commonwealth to govern the validity, construction, and administration of the trust;

6. The trust instrument includes a spendthrift provision, as defined in § 64.2-743, that restrains both voluntary and involuntary transfer of the settlor's qualified interest; and

7. The settlor does not have the right to disapprove distributions from the trust.

Under Virginia Law, effective 1 October 2012, people may transfer their property interests into Virginia self settled spendthrift trusts for asset protection purposes so that the qualified trust property can be protected from the Settlor's creditors.

A Settlor (Trust Creator or Grantor) can transfer property to a trust that qualifies for Spendthrift Property Protection for the Settlor.

What Does Spendthrift Property Protection Do?

Spendthrift Property protection prevents a creditor from reaching said Spendthrift Property before it’s received by the beneficiary. It prevents attachment to present and future distributions of said Property.

Exceptions to Spendthrift Property Protection:

1. Child Support or Maintenance
2.Creditors who protected the Settlor's interest in the Trust (Drafting Attorney, Litigation Attorney & Others Defending Settlor)
3.State & Federal Government Authorities

NOTE:

Virginia residents & Non-Virginia residents may benefit from Virginia Self Settled Trusts

Certain Rules that apply to Spendthrift trusts;

Self Settled Spendthrift Trust must be an Irrevocable Living Trust that has the following:

• Virginia Law governing trust validity, construction & administration
• At least one other beneficiary (not the Settlor) for the Spendthrift Property
• Language expressly invoking "Spendthrift Property Protection" for the Settlor-Beneficiary that restrains voluntary and involuntary transfers by the Settlor-Beneficiary of the Spendthrift Property
• Language that precludes Settlor from disproving distributions of any Trust Property
• Has at all times a "Qualified Trustee" (any natural person residing within the Commonwealth or a legal entity authorized to engage in trust business within the Commonwealth; and who maintains or arranges for custody within the Commonwealth of some or all of the property that has been transferred to the trust by the Settlor, maintains records within the Commonwealth for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation within the Commonwealth of fiduciary income tax returns for the trust, or otherwise materially participates within the Commonwealth in the administration of the trust)
• A trustee is not a qualified trustee if such trustee's authority to make distributions of income or principal or both is subject to the direction of someone who, were that person a trustee of the trust, would not meet the requirements to be a qualified trustee.

If you have any questions about Virginia Self Settled Spendthrift Trusts, feel welcome to contact Luke Lenzi at the Lenzi Law Firm, PLLC.

Section 64.2-745.1 (Effective October 1, 2012) Self-settled spendthrift trusts
A. A settlor may transfer assets to a qualified self-settled spendthrift trust and retain in that trust a qualified interest, and, except as otherwise provided in this article, § 64.2-747 shall not apply to such qualified interest.

B. Section 64.2-747 shall continue to apply with respect to any interest held by a settlor in a qualified self-settled spendthrift trust, other than a qualified interest.

C. A settlor's transfer to a qualified self-settled spendthrift trust shall not, to the extent of the settlor's qualified interest, be deemed to have been made with intent to delay, hinder, or defraud creditors, for purposes of § 55-80, merely because it is made to a trust with respect to which the settlor retains a qualified interest and merely because it is made without consideration. A settlor's transfer to a qualified self-settled spendthrift trust may, however, be set aside under § 55-80 or 55-81 on other bases, such as if the transfer renders the settlor insolvent.

D. A settlor's creditor may bring an action under § 55-82 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.

E. A creditor shall have only such rights with respect to a settlor's transfer to a qualified self-settled spendthrift trust as are provided in this section. No creditor and no other person shall have any claim or cause of action against any trustee, trust adviser, trust director, or any person involved in the counseling, drafting, preparation, or execution of, or transfers to a qualified self-settled spendthrift trust.

F. If a settlor makes more than one transfer to the same qualified self-settled spendthrift trust, the following rules shall apply:

1. The settlor's making of a subsequent transfer shall be disregarded in determining whether a creditor's claim with respect to a prior transfer is valid under this section;

2. With respect to each subsequent transfer by the settlor, the five-year limitations period provided in subsection D, with respect to actions brought under Chapter 5 of Title 55 with respect to the subsequent transfer, commences on the date of such subsequent transfer; and

3. Any distribution to a beneficiary is deemed to have been made from the latest such transfer.

G. The movement to the Commonwealth of the administration of an existing trust, which, after such movement to the Commonwealth, meets for the first time all of the requirements of a qualified self-settled spendthrift trust, shall be treated, for purposes of this section, as a transfer to this trust by the settlor on the date of such movement of all of the assets previously transferred to the trust by the settlor.

Section 64.2-744 (Effective October 1, 2012) Exceptions to spendthrift provision

A. In this section, "child" includes any person for whom an order or judgment for child support has been entered in this or another state.

B. Even if a trust contains a spendthrift provision, a beneficiary's child who has a judgment or court order against the beneficiary for support or maintenance, or a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust, may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary.

C. Subject to the limitations of § 64.2-745, no spendthrift provision shall operate to the prejudice of the United States, the Commonwealth, or any county, city, or town.

D. A claimant against which a spendthrift provision cannot be enforced may obtain from a court an order attaching present or future distributions to or for the benefit of a beneficiary. The court may limit the award of such relief as is appropriate under the circumstances.
 

Section 64.2-742 (Effective October 1, 2012) Rights of beneficiary's creditor or assignee

To the extent a beneficiary's interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances.

Section 64.2-747 (Effective October 1, 2012) Creditor's claim against settlor

A. Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:

1. During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.

2. With respect to an irrevocable trust, except to the extent otherwise provided in §§ 64.2-745.1 and 64.2-745.2, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution. A trustee's discretionary authority to pay directly or to reimburse the settlor for any tax on trust income or principal that is payable by the settlor shall not be considered to be an amount that can be distributed to or for the settlor's benefit, and a creditor or assignee of the settlor shall not be entitled to reach any amount solely by reason of this discretionary authority.

3. After the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children including the family allowance, the right to exempt property, and the homestead allowance to the extent the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and allowances. This section shall not apply to life insurance proceeds under § 38.2-3122. No proceeding to subject a trustee, trust assets, or distributees of such assets to such claims, costs, and expenses shall be commenced unless the personal representative of the settlor has received a written demand by a surviving spouse, a creditor, or one acting for a minor or dependent child of the settlor, and no proceeding shall be commenced later than two years following the death of the settlor. This section shall not affect the right of a trustee to make distributions required or permitted by the terms of the trust prior to being served with process in a proceeding brought by the personal representative.

B. For purposes of this section:

1. During the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power; and

2. Upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds the greater of the amount specified in § 2041(b)(2) or 2514(e) of the Internal Revenue Code of 1986, or § 2503(b) of the Internal Revenue Code of 1986.

Section 64.2-743 (Effective October 1, 2012) Spendthrift provision

A. A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest.

B. A term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust," or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest.

C. A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this article, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
 

There are many reasons why soon-to-be married couples should consider entering into a Pre-Marital Agreement. Most people who enter into a Pre-Marital Agreement do so with the primary concern of Asset Protection.  

It’s important to recognize that a Pre-Marital Agreement is an estate planning device. Because each person is unique, their Pre-Marital Agreement should contain unique asset protection provisions narrowly tailored to their finances, expectations, desires, concerns and family dynamics. However there are common or typical asset protection reasons for entering into a Pre-Marital Agreement.

Asset protection driven Pre-Marital Agreements are generally drafted for the following Asset Protection Reasons:

• insulate and protect significant assets acquired before the marriage,
• insulate and protect the growth of separate assets during the marriage
• protect separate assets from being transmuted into marital property during the marriage,   
• protect a business,
• protect the inheritance of children born from a prior relationship or marriage (blended family),
• establish what assets are to be separate property and what assets are to be marital property,
• protect retirement benefits from the claims of a divorcing spouse,
• eliminate or fix surviving spouse’s survivorship or inheritance rights (e.g., elective share); and
• minimize or eliminate potential tax liabilities (e.g. estate tax & income tax);

 Entering into a Pre-Marital Agreement makes sense for asset protection purposes. It also makes sense for additional reasons not related to asset protection. Ultimately, it’s a big decision to enter into a Pre-Marital Agreement prior to marriage.

The process of negotiation and presentation to the other spouse needs to be thoughtfully and artfully conducted. Otherwise, you may risk unnecessarily hurting feelings and causing serious issues before the marriage. It’s important to select a competent attorney who is willing to thoughtfully allocate the necessary time and take the necessary action to address your asset protection issues.

If you have any questions about Pre-Marital Agreements and asset protection, feel welcome to contact the law firm.

Sincerely,

Luke Lenzi, Esq.