On May 10, 2007, Governor Bredesen signed into law the “Tennessee Investment Services Act of 2007” (the “Act”), which will take effect July 1, 2007. The Act contains landmark provisions permitting the creation of self-funded asset protection trusts. The provisions of the Act, if properly followed, will allow a person to place his or her own assets into a trust, retain the right to receive distributions from the trust and insulate the assets in the trust from claims of creditors of the person funding the trust.
The Act’s Changes in Tennessee Law
Under Tennessee law prior to the passage of the Act, a person could not place his or her own assets into a Tennessee trust and retain rights to distributions (called a “self-settled trust”) while insulating the assets of the trust from claims of creditors of the person funding the trust (called the “settlor”). Under prior law in Tennessee, if a settlor created a self-settled trust and later became subject to a creditor’s claim (for example, a claim resulting from an automobile or other accident in which the settlor is found to be negligent or a malpractice claim against a physician settlor), then the assets of the trust would remain subject to the claims of the creditor. Now, however, the Act allows a settlor to create a self-settled trust called an “Investment Services Trust” (“IST”) that, subject to certain qualifications, will insulate the assets placed in the trust from claims of creditors.
Requirements to Create an Investment Services Trust
To take advantage of the provisions of the Act, a settlor must first execute a trust instrument that meets the requirements set forth in the Act. Specifically, the trust instrument, to qualify as an IST, must (i) appoint a qualified trustee, (ii) expressly incorporate Tennessee law to govern the trust, (iii) be irrevocable, and (iv) contain a provision commonly known as a “spendthrift” provision, which is common to many trusts. The trustee appointed in the IST must be either an individual resident of Tennessee or a corporate trustee authorized by Tennessee law to act as a trustee. The trustee is required to maintain at least some of the assets in Tennessee. Finally, prior to transferring the assets to the trust, the settlor must execute a “qualified affidavit,” swearing that the settlor, among other things, does not intend to defraud a creditor by transferring assets to the trust, does not have a pending or threatened court action against the settlor (other than those identified in the affidavit), and does not intend to file for relief under the bankruptcy code.
Powers and Rights Retainable by Settlor
Under a properly created IST, the settlor cannot serve as the trustee of the IST. The settlor’s spouse (assuming he or she is a Tennessee resident) is eligible to serve as a trustee, however. The settlor may serve as the investment advisor in order to retain control of the investments of the IST. Furthermore, a settlor may retain one or more of the following rights or powers:
The right to receive the income produced by the trust assets;
The right to receive annual distributions of up to five percent of trust principal;
The right to receive principal distributions at the discretion of the trustee or an appointed advisor;
The power to veto a distribution from the trust to another beneficiary;
The power to direct the distribution of the trust assets upon the settlor's death; and
The right to remove a trustee or an advisor and appoint a new trustee or advisor, provided that the new trustee or advisor is not related or subordinate to the settlor.
Prior to the Act, Tennessee citizens desiring to protect their assets were left to create an offshore asset protection trust or to create an asset protection trust under the laws of another state. The Act now provides an opportunity for persons to insulate assets from unknown claims by transferring assets to a friendly individual trustee, such as a spouse, retain the right to trust distributions and manage the trust assets.
Drafting and implementing an IST should be undertaken only by professionals with knowledge of tax laws and the law of creditors rights. Please keep in mind that only the highlights of the Act have been described in this newsletter.
If you have any questions concerning this information, please contact a member of the Boult Cummings Estates and Trusts Team: Jay Cloud at (615) 252-2318, Joe Gibbs at (615) 252-2317, Todd Ervin at (615) 252-2394, or Brian Shelton at (615) 252-2313.