Is an Asset Protection Trust Right for You?

Nov 15, 2022 | Estate Planning & Administration

Asset protection is often a primary concern for many people when they evaluate their estate planning goals. A Domestic Asset Protection Trust (DAPT) may serve as an effective trust solution for individuals seeking to preserve, protect, and provide for themselves and future generations.

Some professional occupations may expose certain individuals to increased risk or liability. A DAPT can be a beneficial way for high net-worth individuals or business owners to protect their assets from a lawsuit, bankruptcy, divorce, or a similar financially damaging situation. DAPTs can only be established in states that have laws which allow them. The trust is irrevocable and typically funded with cash, real estate, business assets, LLCs, or securities.

As of 2022, 20 states permit DAPTs. Those states include Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

In 2007, Tennessee created its own DAPT, the Tennessee Investment Services Trust (TIST). The TIST is an irrevocable trust that allows the grantor to retain access and control over the assets placed in the trust, while at the same time protecting the assets from creditors.

Requirements for a trust to qualify under the Tennessee Investment Services Act:

  • Trust must be irrevocable.
  • Trust must appoint a “qualified trustee,” a person or entity, such as a corporate trustee, based in Tennessee. (The grantor is not required to be a Tennessee resident.)
  • Trust must expressly incorporate Tennessee law.
  • Trust must contain a spendthrift clause prohibiting voluntary and involuntary alienation of the beneficiary’s interest in the trust.
  • Qualified affidavit required upon creation and initial contribution.

Possible Grantor Rights Under a TIST:

  • The power to direct, consent to, or disapprove the trustee’s investment decisions.
  • The power to veto trust distributions.
  • Special testamentary power of appointment over the trust assets.
  • The right to receive income from the assets.
  • The right to receive an amount of the initial trust value each year, as determined in the trust document.
  • The ability to receive additional distributions from the principal of the trust in trustee’s discretion or pursuant to an ascertainable standard within the meaning of the IRS Code.
  • The right to remove and re-appoint trustees or other advisors.
  • The right to use any real property held by the trust.

Limitations of a TIST:

  • The trust is irrevocable.
  • The trust can only protect trust-held assets against future claims. It cannot protect against claims that already exist.
  • If the grantor removes a trustee, the grantor can only appoint a successor trustee who is not related to the grantor and not subordinate to the grantor.
  • The trust-held assets are not protected against past-due child support or past-due alimony.
  • The trust is generally not outside the grantor’s taxable estate due to the powers retained by the grantor to receive distributions of trust-held assets.

Consult an estate planning professional who can help you develop a strategy for your estate plan that fits you and your family’s specific circumstances. Cumberland Trust, as an independent corporate trustee, along with your chosen team of professional advisors, will work together to ensure your plan is tailored to your needs and your family’s wealth and legacy are preserved.