Virginia Puts Into Action Domestic Asset Protection Trust Legislation

Beginning on July 1, 2012 Virginia will become the thirteenth state to permit a settlor to establish an irrevocable trust where the settlor is a beneficiary and they can still receive spendthrift protection against the claims of the settlor’s creditors.

On April 4, 2012, Governor McDonnell signed SB 11 expanding the number of types of trusts that are permissible in Virginia. This included adding new Virginia Code sections 55-545.03:2 and 55-545.03:3 permitting self-settled asset protection trusts. This legislation will be effective July 1, 2012 for trusts created on and after that date.

Virginia is the thirteenth state to enact domestic asset protection trust legislation and joins Missouri, Alaska, Delaware, Rhode Island, Nevada, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Hawaii and Oklahoma. There are several statutory requirements for the trust including:

• The trust must be irrevocable;
• There must be a Virginia trustee who maintains custody within Virginia of some or all of the trust property, maintains records within Virginia, prepares within Virginia fiduciary income tax returns for the trust, or otherwise materially participates within Virginia in the administration of the trust;
• The settlor must be entitled only to discretionary distributions of income and principal; and
• The transfer to the trust may not be a fraudulent transfer.

The Virginia legislation is a little more conservative than the legislation in other domestic asset protection trust states. First, there is a five-year period in which creditors at the time of the creation of the trust may bring a claim, a little longer period than some other states. Second, the settlor may not retain a power to disapprove distributions while such a veto power is common in other domestic asset protection trust states. Third, the person or entity who approves distributions must meet the requirements for a qualified trustee, which under the Virginia law means an independent trustee. Spouses, descendants, siblings, parents, employees, and entities in which the settlor controls thirty percent of the vote are specifically excluded. Fourth, only the right of the settlor to receive distributions of income and principal from the trust is protected from the claims of creditors. This may not protect all the assets in a Virginia self-settled spendthrift trust from the claims of the settlor’s creditors.

While the Virginia legislation may not be as attractive as the legislation enacted in other states, it can be a viable option for some in the right circumstances.