Asset Protection Trusts
Virginia law now permits a Grantor to create an asset protection trust called a qualified self-settled spendthrift trust which permits the grantor to protect assets from creditors if certain requirements are met. The trust must be irrevocable. The trust must be created during the grantor’s lifetime. If the grantor may receive distributions of income and/or principal, the distributions must be in the sole discretion of an independent qualified trustee. The independent qualified trustee may not be the grantor or the grantor’s spouse, parent, child or grandchild, sibling, or employee. The trust must have at least one beneficiary other than the grantor to whom the trustee may make the same kinds of distributions. The trust must expressly incorporate the laws of Virginia. It must include a spendthrift provision. The grantor may not have the right to disapprove distributions from the trust. If these and other requirements are met, a creditor may only bring an action against the trust to avoid a transfer or enforce a claim that existed on the date of the grantor’s transfer to the trust within five years after the date of the grantor’s transfer to the trust.
Asset protection trusts are not for everyone. They are not useful if the grantor has existing or known potential claims against him or her. They are not helpful if the grantor has insufficient assets outside the trust on which to live. However, our law firm has used the asset protection trust for clients in businesses where the risk of as yet unknown but potential future claims is high, and where the clients wish to transfer wealth but retain the possibility, even though discretionary, to benefit from the assets in the future.