Tennessee is among a small group of states, including Alaska and Delaware, which permit the creation of a “self-settled asset protection trust.” The TN legislation creating such trusts, confusingly titled “The Tennessee Investment Services Act, allows individuals for the first time to protect their assets from future creditors. An individual, called the “Settlor,” can create an asset protection trust by transferring the Settlor’s assets to an irrevocable trust (one that cannot be revoked by the Settlor) that incorporates TN law to govern it. The Settlor cannot be a trustee of the trust but can name themselves as a beneficiary to receive distributions within the discretion of an independent trustee (one not related or subordinate to the Settlor as defined in the Internal Revenue Code) of the trust. The Settlor is allowed to retain certain rights, including the power to remove and appoint another independent trustee and the limited power to appoint the trust assets to specific family members at the death of the Settlor. Retaining the latter power should make the transfer of the Settlor’s assets to the trust incomplete for gift tax purposes, but the trust would remain a part of the Settlor’s estate at the death of the Settlor. Most such asset protection trusts are structured as grantor trusts for federal income tax purposes, meaning that the Settlor will be taxed on all the trust income. The TN Investment Services Act contains a number of provisions that must be followed in order to achieve protection of the trust assets from the Settlor’s future creditors. For example, the Settlor must sign an affidavit that the transfer will not render the Settlor insolvent; that the Settlor is not attempting to defraud his creditors by the transfer; and that there is no pending court or other proceeding against the Settlor other than those identified in the Affidavit. The Settlor must also affirm that he is not contemplating bankruptcy and that the transferred property was not derived from any unlawful activity. Generally, assets in such trusts are not protected from creditor claims until four years after the transfer. There are different restrictions applicable in the bankruptcy context (where a 10 year rule applies). There are also “exception creditors” who can reach the assets in such a trust in the child support, alimony and property settlement contexts; for a spouse who was married to the Settlor before the Settlor’s transfer of property to the trust. The TN asset protection trust is complex to set up, yet these type of trusts can provide considerable asset protection for high net worth individuals vulnerable to unforeseen creditors.
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