Self-Settled Asset Protection Trusts

An old curse of somewhat unsettled origin states: “May you live in interesting times.”  For many individuals, a plan for interesting times should include consideration of the use of a self-settled asset protection trust. A self-settled asset protection trust (SSAPT) allows an individual to protect assets from creditors, while allowing the creator of the trust to retain some level of interest in, or benefit from, the trust assets.

How does a SSAPT fit into your estate plan? Are you an individual with increased exposure to creditors’ claims because of your profession (physician, accountant, attorney)? Do you engage in activities that increase chances of creditors’ claims (directors and officers of corporations, or real estate owners)? Do you have high net worth that increases your exposure to third-party claims as a deep pocket in a lawsuit? If you answer “yes,” you may want to consider a SSAPT.

SSAPTs, however, do involve following key requirements, in drafting and operation, and do not eliminate all risks. A SSAPT must be irrevocable and must be established under the laws of a specific jurisdiction that allows the creator of the trust, generally referred to as the “settlor” or “grantor”, to:

(1) transfer assets to the trust,

(2) retain some level of interest in or benefit from the assets, and

(3) protect the assets from claims of the settlor’s creditors.

Frank Rogers Sr., one of the founders of our firm, is reputed to have said often the only problem with an irrevocable trust is that the “darn” thing is irrevocable. True, but not a sufficient reason to dismiss the SSAPT.

As to specific law, Virginia allows for self-settled asset protections trusts under Sections 64.2- 745.1 and 745.2 of the Code of Virginia. The statutory requirements are lengthy and specific, but provide the settlor the opportunity to protect assets in interesting times. These statutes are relatively new and the parameters have not been fully tested in courts in Virginia, but Virginia’s statutes are based upon model statutes used in one form or another in a number of other states as well.

The ideal time to establish a SSAPT is before the assets are under potential attack. Thus, the SSAPT will be most effective and least vulnerable to challenge if set up when:

(1) there are no existing or pending claims by creditors against the settlor’s assets, and

(2) the settlor will remain solvent even after the transfer of the particular assets to the SSAPT.

If these two criteria are not met, the settlor is open to arguments that the asset transfers were fraudulent attempts to avoid legitimate claims.

As a final note, as with other irrevocable trusts, a SSAPT can be structured as a so-called “grantor trust” for federal income tax purposes to avoid taxes at the trust level and provide a tax-free benefit to the trust beneficiaries.

If you have questions about the benefits and usefulness of a self-settled asset protection trust as part of your estate plan, please contact Neil Birkhoff or another member of the Woods Rogers Tax & Estate Planning Group at Woods Rogers PLC.

Article brought to you by:

Neil V. Birkhoff
Chair, Tax Practice Group
Woods Rogers PLC
(540) 983-7699