Mississippi has joined a growing number of states that allow a person to establish a trust for himself with his own assets, with the assets in the trust being protected from the Settlor's future creditors. The Settlor can receive income distributions, and principal distributions can be made in the discretion of the trustee, or pursuant to standards related to the Settlorfs health, education, support or maintenance. Here's how it works:
Suppose for example that Dr. Phil practices in a high-risk field and wishes to set up a trust for himself and his family the assets of which will be protected from future malpractice or other creditors. Under the new Mississippi Qualified Disposition in Trust Act, beginning on or after July 1, 2014, Dr. Phil can do so by causing a "Qualified Disposition Trust" or "QDIT" to be created and transferring assets into it. There are some qualifications, of course. Dr. Phil must execute an affidavit before funding his trust in which he states, among other things, that the transfer will not render him insolvent; that he does not intend to defraud a creditor by the transfer; that there are no pending or threatened lawsuits or administrative proceedings against him; that he does not contemplate bankruptcy; that the transferred assets were not derived from unlawful activities; and that he is covered by adequate personal and professional liability insurance (as defined in the statute).
The next thing Dr. Phil must do is find a "qualified trustee." A qualified trustee cannot be Dr. Phil; must be a Mississippi resident or a Mississippi bank or trust company authorized to carry on trust business under the supervision of the Mississippi Department of Banking and Consumer Finance, the FDIC, the Comptroller of the Currency, or the Office of Thrift Supervision. The Mississippi trustee, in order to be a qualified trustee, must maintain or arrange for custody in Mississippi of some or all of the property, maintain records, prepare or arrange for preparation of tax returns, or otherwise materially participate in the administration of the trust. In other words, the Mississippi trustee has to be a real, functioning trustee, and not just in name only.
In order to be a QDIT, the trust agreement must expressly incorporate Mississippi law, be irrevocable, and contain "spendthrift" language, meaning it must state that Dr. Phil's interest, and those of other beneficiaries, may not be assigned or transferred, voluntarily or involuntarily, prior to distribution.
If Dr. Phil successfully complies with these statutory requirements, then the trust assets are protected from his future creditors. In general, the only way Dr. Phil's creditors can "pierce the veil" of the QDIT is to file suit to set aside the transfer as a fraudulent conveyance under existing Mississippi statues. An existing creditor must bring such suit within two years after the transfer to the QDIT is made, or six (6) months after the creditor discovers or reasonably should have discovered the qualified disposition. A creditor is deemed to have discovered the qualified disposition if there is a public record of it, such as filing a deed in the land records. There is a two-year window after the qualified distribution is made for a creditor whose claim arises after the transfer to file suit to set aside the disposition on the basis that it was fraudulent. In order to prevail, the creditor must present "clear and convincing" evidence of the Settlorfs actual intent to defraud the creditor.
Therefore, generally speaking, upon the second anniversary of the qualified disposition, the spendthrift protection is fully operational, and the assets fully protected, with some exceptions. First, claims for alimony and child support by Dr. Phil's spouse or former spouse at the time the qualified disposition is made are not limited or extinguished by the qualified disposition or the time periods described above; nor are medical malpractice claims or other claims for personal injury or property damage incurred prior to the date of the qualified distribution; nor are claims of the State of Mississippi, or its political subdivisions; nor claims of any creditor not exceeding $1.5 million, if Dr. Phil fails to maintain the liability insurance coverages required by the statute.
Even with the exceptions, a claim still cannot be asserted against the trustee or trust assets until a final, non-appealable determination is made that the debt is past due and that the creditor has made "reasonable attempts" to collect the debt from other sources.
There are many practical applications of this new law. Even though the QDIT must be irrevocable, it could still be a good alternative to the typical revocable living trust. The Settlor could fund the trust with a "nest egg," but give an agent under a power of attorney the power to transfer other assets to the trust upon the Settlor's incapacity. Likewise, the Settlor's Will could pour over his estate into the trust at his death, and the trust would contain the desired testamentary provisions. During the life of the Settlor, he could be a beneficiary of the trust, and the trust could be amended at the discretion of a trust protector or advisor. The Settlor could and should retain a limited testamentary power of appointment over the trust assets, to dispose of them by Will. Also, like a revocable trust, during the lifetime of the Settlor, the trust would be a so-called "grantor" trust, meaning that the trust is ignored for income tax purposes and all income and deductions of the trust could be reported by the Settlor under his own social security number.
A Charitable Remainder Trust (CRT) or a Grantor Retained Interest Trust (GRAT) could be designed as a QDIT as well.
The Qualified Disposition Trust offers tremendous opportunities that many Mississippians desiring to protect their hard-earned assets will want to take advantage of.
For more information about how a Qualified Disposition Trust might be a part of your estate planning, please contact one of our estate planning attorneys.
Wells Marble & Hurst, PLLC
R. David Marchetti, J.D., LL.M.