You can now create a trust for yourself – the assets
of which will be protected from claims of future creditors.
BACKGROUND
From before the founding of this country the rule has always been that while a person could establish a “spendthrift” trust for others the assets of which would be protected from the beneficiaries’ creditors, the creator of the trust, referred to here as the “Settlor,” could not use a spendthrift trust to protect the Settlor’s own assets from his or her creditors. Now, with passage of the Qualified Dispositions in Trust Act, effective July1, 2014, Mississippi has joined a small number of states that allow the Settlor to establish a trust for his or her own benefit, with the assets in the trust being protected from the Settlor’s future creditors.
HOW TO SET UP AN ASSET PROTECTION TRUST
This might best be illustrated by example:
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 law, beginning on or after July 1, 2014, Dr. Phil can do so by causing a “Qualified Disposition Trust” (“QDIT” for short) to be created and transferring assets to it. There are some qualifications, of course. Dr. Phil must execute an affidavit before funding his QDIT 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, being $1 million for each.
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 bank or trust company authorized to carry on trust business in Mississippi. 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 addition to having a qualified trustee, 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 any other beneficiaries may not be assigned or transferred, voluntarily or involuntarily, prior to distribution.
HOW ARE THE ASSETS PROTECTED?
If Dr. Phil successfully complies with these statutory requirements, then the trust assets are protected from his future creditors. This means that the assets of the trust cannot be seized or attached to satisfy a judgment against Dr. Phil, with some exceptions. In general, the only way Dr. Phil’s creditors can “pierce the veil” of the QDIT is to file suit to set aside the qualified disposition as a fraudulent conveyance. In general, there is a two-year window after the qualified distribution is made for a creditor to set aside the disposition on the basis that it was fraudulent. 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 of the qualified disposition 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 against Dr. Phil 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 required liability insurance coverages. Even in these exceptional cases, a claim still cannot be asserted against the QDIT trustee or the 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 assets of Dr. Phil.
OTHER APPLICATIONS
The QDIT has many practical applications. Even though the QDIT must be irrevocable, it could still be a good alternative to the typical revocable living trust, having most of same advantages. During the life of the Settlor, the Settlor could be the primary beneficiary of the trust, and the trust could be amended at the discretion of a trust protector or advisor. The Settlor could be the “investment manager” and thereby retain control of the investments in the trust. Also, 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 are reported by the Settlor under his own social security number.
Like a typical living trust, the QDIT can also be a will substitute. The QDIT could have appropriate testamentary provisions drafted into it, and the Settlor could have a simple “pour over” will to add to the QDIT any assets not already in the QDIT at the Settlor’s death.
The QDIT should also be considered in pre-marital planning, in addition to a well-drawn prenuptial agreement.
The QDIT may also offer estate and gift tax planning opportunities, but that is not its primary purpose.
SUMMARY
Setting up a QDIT is really very simple.
* Make sure you have adequate personal and professional liabilty insuance.
* You have the trust drawn up, naming a qualified trustee
* Sign the affidavit and the trust
* Transfer the desired assets into the trust
Given that you can now have access to your assets and creditor protection at the same time, and because the QDIT is so simple to set up, it is an opportunity many professionals, business owners and other Mississippians will undoubtedly want to take advantage of.
For more information about Qualified Disposition Trust, please contact one of our estate planning attorneys.
– David Marchetti