DECEMBER SESSION. Florida, Texas, and Tennessee. December 9, 2014 Panelists:

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1 DECEMBER SESSION Florida, Texas, and Tennessee December 9, 2014 Panelists: Jonathan Gopman Akerman Senterfitt Amy Jetel Beckett Tackett & Jetel, PLLC Michael Ripp Giordani Swanger Michael Ripp Gordon & Phillips LLP Gourdon, Wick Fournaris, Ruehling & Mammarella Equitable Trust Company Michael Sneeringer Nelson & Nelson PA Rick Scott Travis Tippett Equitable The Tippett Trust Law Company Firm ambar.org/assetprotection

2 American Bar Association Section of Real Property, Trust and Estate Law 321 North Clark Street Chicago, IL , select option 2 CDs, DVDs, ONLINE COURSES, PODCASTS, and COURSE MATERIALS ABA-CLE self-study products are offered in a variety of formats. To take advantage of our full range of options, visit the ABA Web Store at The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association, Section of Real Property, Trust and Estate Law for Continuing Legal Education unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved.

3 TENNESSEE LAW. The following is meant to provide a summary of key aspects of Tennessee asset protection trusts created under the Tennessee Investment Services Act of 2007 (the Tennessee Act ). See Tenn. Code Ann et. seq. In 2008, 2010, and 2013, the Tennessee General Assembly passed subsequent legislation that has amended and added to the Tennessee Act. The Tennessee Act permits a resident or non-resident to create a Tennessee Investment Services Trust (a TIST ). Summary of the Tennessee Act I. Rules Governing the Creation of a TIST There are six requirements governing the creation of a TIST: A. A disposition of property by a transferor to an investment services trust. Tenn. Code. Ann (11). 1. Disposition is defined under the Tennessee Act as a transfer, conveyance or assignment of property, including a change in the legal ownership of property occurring upon the substitution of one trustee for another or the addition of one or more new trustees, or the exercise of power so as to cause a transfer of property to a trustee or trustees, but shall not include the release or relinquishment of an interest in property that, until the release or relinquishment, was the subject of a qualified disposition. Tenn. Code Ann (4). 2. Transferor is defined under the Tennessee Act as a person who, directly or indirectly, makes a disposition or causes a disposition to made in such person s capacity as: a) the owner of property; b) the holder of a power of appointment that authorizes the holder to appoint in favor of the holder, the holder s creditors, the holder s estate, or the creditors of the holder s estate; or c) the trustee. Tenn. Code Ann (15). 3. Person is defined under the Tennessee Act as having the same meaning as ascribed in (19) of the Tennessee Code, which includes corporations, firms, companies, or associations, along with individuals. Tenn. Code Ann (8). 4. Qualified Disposition is defined under the Tennessee Act as a disposition by or from a transferor, with or without consideration, to an investment services trust after the transferor executes a qualified affidavit. Tenn. Code Ann (11). B. The transferor must execute a qualified affidavit. Tenn. Code Ann (11). 1. Qualified Affidavit is defined under the Tennessee Act as a sworn affidavit signed by the transferor before a disposition of assets to an investment

4 services trust that meets the specific requirements outlined in the Act in Tenn. Code. Ann (10) 2. The Qualified Affidavit must state that: a) The transferor has full right, title, and authority to transfer the assets to the trust; b) The transfer of the assets to the trust will not render the transferor insolvent; c) The transferor does not intend to defraud a creditor by transferring the assets to the trust; d) The transferor does not have any pending or threatened court actions against the transferor, except those court actions identified by the transferor on an attachment to the affidavit; e) The transferor is not involved in any administrative proceedings except for those administrative proceedings identified on an attachment to the affidavit; f) The transferor does not contemplate filing for relief under the provisions of the federal bankruptcy code; and g) The assets being transferred to the trust were not derived from unlawful activities. Tenn. Code. Ann A disposition by way of a change of trustee of a TIST after a Qualified Disposition was previously made does not require the execution of a new Qualified Affidavit to maintain the creditor protection provided by the previous Qualified Disposition. Tenn. Code Ann (10). C. The TIST must appoint at least one qualified trustee. Tenn Code. Ann (7). a) Identity Component: (1) Qualified trustee is defined under the Tennessee Act as a natural person who is a resident of Tennessee, or, in all other cases, is authorized by the law of this state to act as a trustee and whose activities are subject to supervision by the Tennessee Department of Financial Institutions, the federal deposit insurance corporation, the comptroller of the currency, or the office of thrift supervision or any successor to them. Tenn. Code. Ann (12). (2) The transferor is not eligible to be a qualified trustee under the Tennessee Act. Tenn. Code. Ann (12)(B).

5 b) Activity Component: (1) The qualified trustee must perform at least one of four activities: (a) Maintain or arrange for custody in Tennessee of some or all of the property that is the subject of the qualified disposition; (b) Maintain trust records on an exclusive or nonexclusive basis; (c) Prepare or arrange for preparation of required income tax returns for the trust; or (d) Materially participate in the administration of the trust. Tenn. Code. Ann (12)(B) D. The TIST must expressly incorporate the law of Tennessee to govern the validity, construction, and administration of the trust. Tenn. Code. Ann (7)(A). 1. However, an existing trust originally governed by the laws of another state may have title to its assets transferred to a qualified trustee and become a valid TIST if it meets all of the other statutory requirements other than incorporating Tennessee law. Tenn. Code Ann (7)(A), (c). 2. Prior to the change of trustee, either the original transferor or the predecessor trustee should sign a qualified affidavit based on the facts as of the date of the original disposition. E. The TIST must include a spendthrift clause. Tenn. Code Ann (7)(C). 1. The spendthrift provision must provide that the interest of the transferor or other beneficiary in the trust property or the income from the trust property may not be transferred, assigned, pledged, or mortgaged, whether voluntarily or involuntarily, before the qualified trustee or qualified trustees actually distribute the property or income from the property to the beneficiary. Tenn. Code Ann (7)(C). 2. The spendthrift provision is deemed to be a restriction on the transfer of the transferor s beneficial interest in the trust that is enforceable under applicable nonbankruptcy law within the meaning of 541(c)(2) of the Bankruptcy Code. Tenn. Code Ann a) This provision is meant to ensure that a TIST qualifies for protection under 541(c)(2) of the Bankruptcy Code, which provides that a state law restriction on the transfer of property in trust is enforceable in bankruptcy.

6 G. The TIST must be irrevocable. Tenn. Code Ann (7)(B). II. Optional Rights and Powers That May Be Retained by the Grantor The Tennessee Act provides a number of powers a grantor may retain without causing a TIST to be deemed revocable. A. The grantor may retain certain interests in the trust income and principal including: 1. The right to receive income from the trust. Tenn. Code Ann (3). 2. The right to receive principal payments through the actions of a qualified trustee or another advisor in the sole discretion of the qualified trustee/advisor or according to an ascertainable standard pursuant to the trust document. Tenn. Code Ann (6). 3. The right to retain an interest in a CRAT or CRUT. Tenn. Code. Ann (4). 4. The right to receive an annuity or unitrust amount up to 5% of the initial value of the trust or its value determined from time to time pursuant to the trust. Tenn. Code Ann (5). 5. The right to use real property held in a QPRT as a personal residence. Tenn. Code Ann (8). 6. The right to receive trust income or principal to pay income taxes due on income of the trustee through either the actions of the qualified trustee or advisor in the sole discretion of the qualified trustee/advisor or based on mandatory provisions set forth in the trust document. Tenn. Code Ann (9). 7. The ability, whether pursuant to direction in the trust or through the discretion of the qualified trustee, to pay the grantor s debts outstanding at the time of the grantor s death, including the expenses of administering the grantor s estate, or any estate or inheritance taxes posed on the grantor s estate. Tenn. Code Ann (10). 8. The right of the qualified trustee to pay certain tax obligations of the grantor or the grantor s estate directly to relevant taxing authorities. Tenn. Code. Ann (11).

7 B. The grantor may retain the power to veto a distribution from the trust. Tenn. Code. Ann & (1). C. The grantor may retain a lifetime or testamentary limited power to appoint trust assets. Tenn. Code Ann (2). D. The grantor may retain the right to remove a current trustee or advisor and replace with a successor trustee or advisor who is not related or subordinate to the Grantor, as defined in I.R.C. 672(c). Tenn. Code Ann (7). E. The grantor may serve as the trust investment advisor and direct the trust investments. Tenn. Code Ann F. The grantor may appoint advisors who have the authority to remove and appoint qualified trustees or trust advisors; advisors who have authority to direct, consent to, or disapprove distributions from the trust; and investment advisors who have authority to direct trust investments. Tenn. Code Ann Advisors include trust protectors and are not required to be Tennessee residents. Tenn. Code Ann G. The trust may appoint an unlimited number of non-qualified trustees, provided there is one qualified trustee. III. Prohibited Grantor Powers The Tennessee Act prohibits the grantor from retaining several trust functions: A. The grantor may not serve as trustee of a TIST. Tenn. Code Ann (12)(C). B. The grantor may not have any rights or authority with respect to the trust corpus or income, except as permitted by and (see Section II above). This provision would seemingly invoke: 1. A prohibition against the grantor serving as advisor or trust protector, other than as an investment advisor. 2. A prohibition against the grantor retaining the power to direct distributions from the trust. 3. A prohibition against the grantor demanding a return of assets transferred to the trust.

8 C. Any agreement or understanding purporting to grant or permit the retention of any greater rights or authority than granted under the trust document shall be void. Tenn. Code Ann IV. Restrictions on Actions: Which Creditors May Reach the Trust Assets in a TIST? The Tennessee Act provides a limited window for creditors to bring an action against property transferred to a TIST under the Tennessee Uniform Fraudulent Transfers Act (as compiled in Tenn. Code Ann , et. seq.) The statute of limitations for such a claim is determined by whether the claim arose before or after the qualified disposition to the TIST. In order to bring an action, any creditor that fits within the appropriate statute of limitations period must prove by clear and convincing evidence that the transfer was made with the intent to defraud the specific creditor (and not just creditors in general). Tenn. Code Ann (b)(2)(B). The Tennessee Act provides a tacking rule so that the date of a qualified disposition to a TIST made from another asset protection trust that meets the requirements of Tenn. Code Ann (7)(B) and (C) does not reset for purposes of the determining the applicable timeframe to bring a creditor claim. Such dispositions instead look back to the date of the initial disposition to the original asset protection trust. Tenn. Code Ann (c). In the event of multiple qualified dispositions to a TIST, each disposition is tested on its own to determine whether it is protected from creditors. Tenn. Code Ann (f). In addition, as a matter of public policy, the Tennessee Act allows a limited class of exception creditors to avoid a qualified disposition to a TIST without proving fraud or being time barred. A. Pre-Qualified Disposition Creditors 1. A creditor with a claim arising prior to the creation of the TIST may bring a claim, provided it is commenced within the later of two years after the date of the qualified disposition or six months after the creditor discovers or reasonably should have discovered the qualified disposition. Tenn. Code Ann (b)(1)(A). 2. Discovery is deemed to have been made of any qualified disposition to a TIST at the time any public record is made on any transfer of property relative to the qualified disposition, including recording a deed or filing a UCC-1. Tenn. Code Ann (b)(2)(A). B. Post-Qualified Disposition Creditors 1. A creditor with a claim arising after the creation of a TIST may bring a claim, provided the action is commenced within two years after the qualified disposition is made. Tenn. Code Ann (b)(1)(B). C. Exception Creditors 1. The Tennessee Act provides an exception for agreements, judgments, or

9 orders of a court for payment of: a) Past due child support; b) Past due alimony in solido of a spouse or former spouse; c) Past due alimony or support of a spouse or former spouse; or d) A written agreement, judgment, or order of a court for division of marital property of a spouse or former spouse, but only to the extent of such debt, legally mandated interest, and the reasonable cost of collection. Tenn. Code Ann (i)(1). 2. The Tennessee Act defines spouse or former spouse as only persons to whom the transferor was legally married at, or before, the time the qualified disposition is made. Therefore, qualified dispositions to a TIST made before the grantor s marriage are not subject to the exception creditor rules. Tenn. Code Ann (13). 3. Any claim made by the above exception creditors may be asserted against a trustee only: a) Upon a final non-appealable determination of a Tennessee court or a fully domesticated, final non-appealable order of a court of another state that such debt is past due; and b) After the court has determined that the claimant has made reasonable attempts to collect the debt from any other sources of the transferor or that such attempts would be futile. Tenn. Code Ann (i)(2). 4. Non-exception creditors a) The Tennessee Act explicitly excludes claims for forced heirship, legitime, or elective share. Tenn. Code Ann (j). b) The Act also noticeably omits exceptions for tort creditors or claims by the state government, United States government, or financial institutions. V. Avoidance of Qualified Dispositions If a creditor is able to reach trust assets under Tenn. Code. Ann et. seq., the Tennessee Act provides additional restrictions on the ability of the creditor to recover. A. Limitation on Avoidance 1. A qualified disposition to a TIST shall be avoided only to the extent

10 necessary to satisfy the transferor s debt to the creditor at whose instance the disposition had been avoided, together with costs, including attorneys fees, that the court may allow. Tenn. Code Ann (a). B. Trustee Protections 1. Provided a court is satisfied that a qualified trustee has not acted in bad faith, the qualified trustee has a first lien against trust property in an amount equal to the entire cost, including attorneys fees, properly incurred by the qualified trustee in the defense of the action or proceedings to avoid the qualified disposition. This includes predecessor qualified trustees that have not acted in bad faith. Tenn. Code Ann (b)(1)(A) and (B). 2. There is a statutory presumption that the qualified trustee did not act in bad faith by merely accepting the property. Tenn. Code Ann (b)(1)(C). C. Beneficiary Protections 1. If the court is satisfied that a beneficiary of a TIST did not act in bad faith, the avoidance of the qualified disposition is subjected to the right of the beneficiary to retain any distribution made upon the proper exercise of a trust power or discretion vested in the qualified trustee of the TIST prior to the commencement of an action to avoid the qualified disposition. Tenn. Code Ann. 106(b)(2). 2. There is a statutory presumption that the beneficiary, including a beneficiary who is also the grantor, did not act in bad faith merely by creating the trust or by accepting a distribution made in accordance with the terms of the trust. Tenn. Code Ann (b)(2). VI. Protections for Trustees and Other Professionals A. The Tennessee Act provides a complete bar against claims or causes of action brought by creditors or any other person against a trustee or trust advisor of a TIST. Tenn. Code Ann (d). B. This bar extends to claims against persons who provide counseling, drafting, preparation, execution, or funding of a TIST. This includes work on limited partnerships or limited liability companies if interests in these entities are subsequently transferred to the TIST. Tenn. Code Ann (d). C. In addition, the Tennessee Act provides that no action of any kind, including, but not limited to, an action to enforce a judgment entered by a court or other body having adjudicative authority, shall be brought at law or in equity against a trustee or an advisor of an investment services trust (including persons involved in counseling, drafting, preparation, execution or funding of a TIST) if, the action is otherwise barred by the relevant statute of limitations period applicable for claims

11 against trust assets. Tenn. Code Ann (e). VII. Automatic Removal of Trustee A. A trustee of a TIST will automatically cease to serve if a court declines to apply Tennessee law in determining the effect of a spendthrift provision of the trust. In such event, the successor trustee will succeed as trustee in accordance with trust s terms. Tenn. Code. Ann (g). B. If the trust does not provide for a successor trustee, a Tennessee court will appoint a successor trustee upon the terms and conditions it determines to be consistent with the purposes of the trust and Tennessee law. Tenn. Code. Ann (g). C. Upon the trustee ceasing to serve, the trustee will have no authority other than to convey the trust property to the successor trustee. Tenn. Code. Ann (g). VIII. Other Relevant Aspects of Tennessee Law A. Trust Decanting - Tennessee enacted a decanting statute in 2004, which was amended most recently in The statute does not require notice to or consent of qualified beneficiaries. Tenn. Code Ann (b)(27). B. Rule Against Perpetuities - Tennessee extended its applicable rule against perpetuities for trusts to 360 years, provided that the trust grants a power of appointment at death to at least one member of each generation of beneficiaries who are beneficiaries of the trust more than ninety (90) years after the creation of the interest. Tenn. Code Ann (f). C. State Income Tax - Tennessee imposes no state capital gains tax. Tennessee levies a 6% tax on a resident beneficiary s share of dividends and interest, however this tax, known as the Hall Tax, does not apply to a trust with nonresident beneficiaries. Tenn. Code Ann , et. seq. D. Time Period for Discharge of Trustee Liability - A trustee administering a trust in Tennessee will be discharged from liability one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately discloses facts indicating the existence of a potential claim for breach of trust. The report must provide sufficient information so that the beneficiary or the beneficiary's representative knows of the potential claim or has sufficient information to be presumed to know of it, or to be put on notice to inquire into its existence. In addition, a Tennessee trustee will benefit from a number of other non-utc standard statutes of limitations and tolling standards. Tenn. Code Ann E. Non-Judicial Settlement Agreements - Tennessee law permits the trustee and qualified beneficiaries (defined at Tenn. Code Ann (24)) to enter into binding agreements with respect to any matter involving the trust without judicial intervention, to the extent the agreement does not violate a material purpose of the trust agreement. Tenn. Code Ann

12 F. Virtual Representation - Tennessee has adopted virtual representation statutes that allow specified persons to bind the interests of others without the appointment of an agent or guardian, including the ability for parents to bind minor or unborn descendants in regard to trust matters, provided the beneficiaries have substantially similar interests. Tenn. Code Ann et. seq. G. Directed and Multi-Participant Trusts - Tennessee offers a statutory structure for multi-participant trusts and in 2013 added additional language limiting the liability of trustees, trust advisors, or trust protectors in their capacity as excluded fiduciaries. Tenn. Code Ann (12), H. Tenancy by the Entirety Joint Revocable Trusts - In 2014, Tennessee amended its trust code to allow Tenancy by the Entirety Joint Revocable Trusts, which allow for married couples to transfer assets to a joint revocable trust and retain the same creditor protections afforded to other tenancy by entirety property. Tenn. Code Ann

13 There s No Place Like Home - Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP Trusts: Why Do Them and Where To Go When You Do Domestic Asset Protection Trust Planning: Jurisdiction Selection Series Tennessee Tuesday, December 9, :00 PM Eastern Sponsored by The ABA Section of Real Property, Trust & Estate Law

14 The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association, Section of Real Property, Trust and Estate Law for Continuing Legal Education unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved.

15 Tennessee Investment Services Trusts The following is meant to provide a summary of key aspects of Tennessee asset protection trusts created under the Tennessee Investment Services Act of 2007 (the Tennessee Act ). See Tenn. Code Ann et. seq. In 2008, 2010, and 2013, the Tennessee General Assembly passed subsequent legislation that has amended and added to the Tennessee Act. The Tennessee Act permits a resident or non-resident to create a Tennessee Investment Services Trust (a TIST ).

16 Rules Governing Formation of a TIST There are six primary requirements governing the creation of a TIST: 1. A disposition of property by a transferor to an investment services trust. Tenn. Code. Ann (11). 2. The transferor must execute a qualified affidavit. Tenn. Code Ann (11). Tenn. Code. Ann (10) ( Qualified Affidavit ).

17 Rules Governing Formation of a TIST Six governing requirements (cont.) 3. The TIST must appoint at least one qualified trustee. Tenn Code. Ann (7) (12) ( Qualified Trustee ). 4. The TIST must expressly incorporate the law of Tennessee to govern the validity, construction, and administration of the trust. Tenn. Code. Ann (7)(A).

18 Rules Governing Formation of a TIST Six governing requirements (cont.) 5. The TIST must include a valid spendthrift clause. Tenn. Code Ann (7)(C) 6. The TIST must be irrevocable. Tenn. Code Ann (7)(B).

19 Optional Grantor Retained Rights and Powers Rights related to certain interests in trust income and principal: The right to receive income from the trust. Tenn. Code Ann (3). The right to receive principal payments through the sole discretion of a qualified trustee or another advisor or according to an ascertainable standard pursuant to the trust document. Tenn. Code Ann (6).

20 Optional Grantor Retained Rights and Powers Rights related to certain interests in trust income and principal (cont.): The right to retain an interest in a CRAT or CRUT. Tenn. Code. Ann (4). The right to receive an annuity or unitrust amount up to 5% of the initial value of the trust or its value determined from time to time pursuant to the trust. Tenn. Code Ann (5).

21 Optional Grantor Retained Rights and Powers Rights related to certain interests in trust income and principal (cont.): The right to use real property held in a QPRT as a personal residence. Tenn. Code Ann (8). The right to receive trust income or principal to pay income taxes due on income of the trust through either the actions of the qualified trustee or advisor in the sole discretion of the qualified trustee/advisor or based on mandatory provisions set forth in the trust document. Tenn. Code Ann (9).

22 Optional Grantor Retained Rights and Powers Rights related to certain interests in trust income and principal (cont.): The ability, whether pursuant to direction in the trust or through the discretion of the qualified trustee, to pay the grantor s debts outstanding at the time of the grantor s death. Tenn. Code Ann (10). The right of the qualified trustee to pay certain tax obligations of the grantor or the grantor s estate directly to relevant taxing authorities. Tenn. Code. Ann (11).

23 Optional Grantor Retained Rights and Powers Other optional retained powers include: The grantor may retain the power to veto a distribution from the trust. Tenn. Code. Ann & (1). The grantor may retain a lifetime or testamentary limited power to appoint trust assets. Tenn. Code Ann (2).

24 Optional Grantor Retained Rights and Powers Other optional retained powers include: The grantor may serve as the trust investment advisor and direct the trust investments. Tenn. Code Ann The grantor may retain the right to remove a current trustee or advisor and replace with a successor trustee or advisor who is not related or subordinate to the Grantor, as defined in I.R.C. 672(c). Tenn. Code Ann (7).

25 Optional Grantor Retained Rights and Powers Other optional retained powers include: The grantor may appoint advisors who have the authority to remove and appoint qualified trustees or trust advisors; advisors who have authority to direct, consent to, or disapprove distributions from the trust; and investment advisors who have authority to direct trust investments. Tenn. Code Ann The trust may appoint an unlimited number of nonqualified trustees, provided there is one qualified trustee.

26 Prohibited Grantor Powers The Tennessee Act prohibits the grantor from retaining several trust functions: The grantor may not serve as trustee of a TIST. Tenn. Code Ann (12)(C). The grantor may not serve as an advisor or trust protector, other than as an investment advisor. The grantor may not demand a return of assets transferred to the trust The grantor may not retain the power to direct distributions from the trust.

27 Which Creditors May Reach the Assets in a TIST? The Tennessee Act provides a limited window for creditors to bring an action against property transferred to a TIST under the Tennessee Uniform Fraudulent Transfers Act (as compiled in Tenn. Code Ann , et. seq.) The statute of limitations for such a claim is determined by whether the claim arose before or after the qualified disposition to the TIST. The Tennessee Act also provides for a short list of exception creditors.

28 Which Creditors May Reach the Assets in a TIST? Discovery is deemed to have been made of any qualified disposition to a TIST at the time any public record is made on any transfer of property relative to the qualified disposition. Tenn. Code Ann (b)(2)(A). In order to bring an action, any creditor that fits within the appropriate statute of limitations period must prove by clear and convincing evidence that the transfer was made with the intent to defraud the specific creditor (and not just creditors in general). Tenn. Code Ann (b)(2)(B).

29 Which Creditors May Reach the Assets in a TIST? Pre-Qualified Disposition Creditors A creditor with a claim arising prior to the creation of the TIST may bring a claim, provided it is commenced within the later of two years after the date of the qualified disposition or six months after the creditor discovers or reasonably should have discovered the qualified disposition. Tenn. Code Ann (b)(1)(A).

30 Which Creditors May Reach the Assets in a TIST? Post-Qualified Disposition Creditors A creditor with a claim arising after the creation of a TIST may bring a claim, provided the action is commenced within two years after the qualified disposition is made. Tenn. Code Ann (b)(1)(B).

31 Which Creditors May Reach the Assets in a TIST? Exception Creditors The Tennessee Act provides an exception for agreements, judgments, or orders of a court for payment of: Past due child support; Past due alimony in solido of a spouse or former spouse; Past due alimony or support of a spouse or former spouse; or A written agreement, judgment, or order of a court for division of marital property of a spouse or former spouse, but only to the extent of such debt, legally mandated interest, and the reasonable cost of collection. Tenn. Code Ann (i)(1).

32 Which Creditors May Reach the Assets in a TIST? Exception Creditors (cont.) The Tennessee Act defines spouse or former spouse as only persons to whom the transferor was legally married at, or before, the time the qualified disposition is made. Therefore, qualified dispositions to a TIST made prior to the grantor s marriage are not subject to the exception creditor rules. Tenn. Code Ann (13).

33 Which Creditors May Reach the Assets in a TIST? Non-exception Creditors The Tennessee Act explicitly excludes claims for forced heirship, legitime, or elective share. Tenn. Code Ann (j). The Tennessee Act also noticeably omits exceptions for tort creditors or claims by state governments, United States government, or financial institutions.

34 Avoidance of Qualified Dispositions Trustee Protections Provided a court is satisfied that a qualified trustee has not acted in bad faith, the qualified trustee has a first lien against trust property in an amount equal to the entire cost, including attorneys fees, properly incurred by the qualified trustee in the defense of proceedings to avoid the qualified disposition. This includes predecessor qualified trustees that have not acted in bad faith. Tenn. Code Ann (b)(1)(A) and (B). There is a statutory presumption that the qualified trustee did not act in bad faith by merely accepting the property. Tenn. Code Ann (b)(1)(C).

35 Avoidance of Qualified Dispositions Beneficiary Protections Provided the beneficiary did not act in bad faith, the avoidance of the qualified disposition is subjected to the right of the beneficiary to retain any distribution made upon the proper exercise of a trust power or discretion vested in the qualified trustee of the TIST prior to the commencement of an action to avoid the qualified disposition. Tenn. Code Ann. 106(b)(2). There is a statutory presumption of good faith. Tenn. Code Ann (b)(2).

36 Protections for Trustees and Other Professionals The Tennessee Act provides a complete bar against causes of action brought by creditors or any other person against a trustee or trust advisor of a TIST. Tenn. Code Ann (d). This bar extends to claims against persons who provide counseling, drafting, preparation, execution, or funding of a TIST. This includes work on limited partnerships or limited liability companies if interests in these entities are subsequently transferred to the TIST. Tenn. Code Ann (d).

37 Automatic Removal of Trustee A trustee of a TIST will automatically cease to serve if a court declines to apply Tennessee law in determining the effect of a spendthrift provision of the trust. In such event, the successor trustee will succeed as trustee in accordance with trust s terms. Tenn. Code. Ann (g). If the trust does not provide for a successor trustee, a Tennessee court will appoint a successor trustee upon the terms and conditions it determines to be consistent with the purposes of the trust and Tennessee law. Tenn. Code. Ann (g). Upon the trustee ceasing to serve, the trustee will have no authority other than to convey the trust property to the successor trustee. Tenn. Code. Ann (g).

38 Other Relevant Aspects of Tennessee Law Trust Decanting 360 Year Rule Against Perpetuities No State Income Tax Discharge of Trustee Liability One Year After Proper Notice Non-Judicial Settlement Agreements Virtual Representation Directed and Multi-Participant Trust Statute Tenancy By The Entirety Joint Revocable Trusts

39 TRUST LAW AND PLANNING UNDER THE FLORIDA TRUST CODE By Jonathan E. Gopman and Michael A. Sneeringer Introduction On July 1, 2007, Florida adopted the Florida Trust Code ( FTC ), which is a modified version of the Uniform Trust Code ( UTC ). The Ad Hoc Committee recognized that other states have eliminated the Self-Settled Trust Doctrine and expressed no opinion on such legislation. Although the term self-settled trust is not used in the FTC, of the Florida Statutes ( F.S. ) establishes rules related to revocable and irrevocable trusts created by a settlor where the settlor retains a beneficial interest in the trust. The inclusion of a spendthrift provision is irrelevant. i Under Florida law, the assets of a revocable trust are subject to the claims of the settlor s creditors during the settlor s lifetime, however, only to the extent such assets would not be exempt from creditors claims if held directly by the settlor. ii Therefore, a settlor s homestead held by his or her revocable trust should remain exempt under Florida law (but not necessarily Federal bankruptcy law). iii With respect to the assets of an irrevocable trust, a creditor or assignee of a settlor may reach the maximum amount that can be distributed to or for the benefit of the settlor. iv If there is more than one settlor, the amount that may be reached may not exceed the portion of the irrevocable trust attributable to the settlor s contribution. Subsection (1)(b) conforms to the holding in Witlin, that is, that a beneficiary who is also the settlor may not use the trust to shield his assets from creditors. v If the trustee has the discretion to distribute the entire income and principal to the settlor, the effect is as if the settlor had not created the trust for purposes of placing the settlor s assets beyond the reach of his or her creditors. vi Primer on Florida Statutes Section (1)(c) Drafting irrevocable trusts as wholly-owned grantor trusts for federal income tax purposes is a common technique used by estate planners to enhance the benefits of such trusts by effectively permitting tax-free gifts when the grantor pays income taxes attributable to trust assets. Still, it may be desirable to grant the trustee a discretionary power to pay such taxes or reimburse the settlor. Although not found in the UTC, the FTC ensures that such discretionary power will not subject an irrevocable trust to the claims of creditors under the general rule established in F.S (1)(b). vii This provision provides in relevant part: the assets of an irrevocable trust may not be subject to the claims of an existing or subsequent creditor or assignee of the settlor, in whole or in part, solely because of the existence of a discretionary power granted to the trustee by the terms of the trust, or any other provision of law, to pay directly to the taxing authorities or to reimburse the settlor for any tax on trust income or principal which is payable by the settlor under the law imposing such tax. As a result of this provision the state legislature may have unwittingly added Florida to the list of asset protection states. Normally such a decision is made with substantially more consideration. Issues related to this provision include: 1

40 (a) There is no time limit on reimbursement. Thus, in theory a trustee can accrue a reimbursement account for several decades and reimburse the settlor for a tax liability incurred many years in the past. While policy arguments can be made to permit reimbursement for a tax liability incurred within the statute of limitations for a tax return, permitting reimbursement for tax liability incurred beyond that point is ridiculous unless the state has made a conscientious decision to become an asset protection trust jurisdiction. This certainly has not occurred in this instance. (b) As a result of the issue identified in the foregoing paragraph (a), Florida has unwittingly added a new exemption to its laws. Practitioners are certainly obligated to discuss the use of this potentially substantial exemption with their clients. (c) The provision could have been drafted to prevent abuse by mandating the formula for determining the maximum amount that the trustee could distribute to the settlor. Some methods of constructing such a formula might have been to mandate that the trustee can pay up to: (i) the highest marginal rate of tax. Thus, the income generated by the assets in the trust is assumed to be taxed at the highest rate applicable to the settlor. (ii) its proportional share of the tax liability. Thus, all income generated by the assets in the trust is assumed to be taxed at the settlor s average tax rate. (iii) the lowest possible tax rate applicable. Thus, the settlor s remaining income from sources other than the assets in the trust is assumed to be taxed at the higher rates applicable to the settlor. (d) Although potentially difficult under certain circumstances, the provision could have prevented abuse by directing that any tax payments be made directly to the appropriate taxing authority rather than reimbursing the settlor for such amounts. Of course, one could argue that such a provision would be too restrictive. (e) Is the payment by the settlor of the settlor s tax liability subject to the fraudulent transfer statute? The funds could one day be returned to the settlor pursuant to a discretionary distribution. At first blush it would seem that such payment should not be a fraudulent transfer, however, inequitable results will be caused to a creditor because of this provision if the fraudulent transfer statute is not applicable. How will the bankruptcy law (discussed infra) treat this provision? (f) Can distributions be made from the reimbursement account for the benefit of the grantor rather than having to be distributed directly to him? The statute provides no guidance in this respect. (g) Is the trustee permitted to offset the tax benefits that accrue to the settlor as a result of grantor trust status, such as deductions and tax credits, against the reimbursement account? Query: Trust ( T ) contains a discretionary tax reimbursement provision. T holds interests in limited liability companies that own substantial real estate investments. T was established and funded by A and T is a wholly owned grantor trust as to A. In calendar year x T s real estate generates $2,000,000 of taxable income and it also generates $1,000,000 of 2

41 depreciation. In the same year A has $2,000,000 of taxable income. Assume a thirty-five percent (35%) income tax rate applies. A includes the $2,000,000 of taxable income from T on his personal income tax return with his $2,000,000 of personal taxable income. He also includes the $1,000,000 of deduction provided by the depreciation on the assets held in T. Assume the trustee does not reimburse T for any income tax liability in year x. How much should be allocated to the reimbursement account? The answer is unknown. The statute does not appear to mandate the $1,000,000 of depreciation be used to offset the trust income specifically. It would seem logical to assume that it should, however, the answer remains unclear. (h) The provision applies even though the grantor trust may be designed to receive gifts that are incomplete for federal gift tax purposes. This can lead to serious abuse of the statute. (i) Caution: A tax reimbursement provision is not appropriate for use in every type of grantor trust. For instance, such a provision should never be used in a general power of appointment marital trust, viii a qualified terminable interest property trust ( QTIP ), ix an Internal Revenue Code x 2642(c) trust ( Code ) or a Code 2503(c) trust. Additionally, if it is necessary for a trust to qualify as a skip person for GST tax purposes, a tax reimbursement provision should not be included in the trust agreement. xi During the period a Crummey Power or other power of withdrawal may be exercised, the powerholder is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power. xii Since the purpose of this commentary is to examine the types of self-settled trusts that are now permitted to be used in Florida to shield trust assets from the creditors of a settlor, a discussion of the treatment of Crummey Powers and other types of withdrawal rights granted to third parties in a trust is beyond the scope of this article. The authors would respectfully point out that the peculiar characteristics of this provision may fundamentally change the way Crummey Powers and other lapsed withdrawal rights are taxed for federal income tax purposes. Successor QTIP Inter-Vivos Trusts (or SQITs ). The benefits of marriage are numerous and in the case of trust law in Florida were increased when F.S (3) became effective. F.S (3) provides: Subject to the provisions of s , for purposes of this section, the assets in: (a) A trust described in s. 2523(e) of the Internal Revenue Code of 1986, as amended, or a trust for which the election described in s. 2523(f) of the Internal Revenue Code of 1986, as amended, has been made; and (b) Another trust, to the extent that the assets in the other trust are attributable to a trust described in paragraph (a), shall, after the death of the settlor s spouse, be deemed to have been contributed by the settlor s spouse and not by the settlor. 3

42 This provision creates an exception to the self-settled trust doctrine. It protects the assets in a self-settled trust from the claims of a creditor of the settlor. The exception relates to any trust for the benefit of the settlor that is established after the death of the settlor s spouse when the settler created and funded an inter vivos general power of appointment or QTIP marital trust for the initial benefit of the settlor s spouse. A settlor can fund an inter vivos QTIP trust for the settlor s spouse by gifting assets to such trust. A QTIP election must be made with respect to any gift to this QTIP trust. As a result of the QTIP election the trust will be includible in the estate of the settlor s spouse for estate tax purposes. xiii The gift by the settlor to the trust will (must - it would seem) qualify for the unlimited marital deduction. The inter vivos QTIP trust may contain provisions that provide for the settlor following the donee-spouse s death. The trust assets should not be subject to the claims of the settlor s creditors although the trust is selfsettled. According to F.S (3), the settlor would not be treated as the settlor of the trust. Planning Points to Consider Regardless of the foregoing issues, practitioners must recognize that this is not your father s type of trust. It should be designed from an asset protection point of view. A quality asset protection trust contains numerous provisions that are not typically included in more traditional trust forms. Other considerations include: (a) The Reciprocal Trust Doctrine. Can the reciprocal trust doctrine be applied to uncross trusts created contemporaneously by spouses for the benefit of each other? xiv If the reciprocal trust doctrine is applicable, what period is sufficient between one spouse establishing a funding a trust and the other spouse doing the same to avoid the application of the doctrine? Would the federal government be concerned about the application of the reciprocal trust doctrine in this instance? If Florida courts will apply the reciprocal trust doctrine in a manner similar to the way it is applied under Federal tax law, it would seem possible to structure an arrangement with sufficient care to avoid a problem at the state level. It should be noted, however, that there is no existing guidance on this issue in Florida. (b) Recommending the SQIT. It may be malpractice to not recommend that spouses each establish QTIP trusts for the other. Any estate planning conference with clients should certainly now include a discussion of the benefits of creating an inter vivos QTIP trust in Florida under F.S (3) by at least one spouse. (c) Making the QTIP Election. The protection afforded to the successor trust or trusts is dependent upon a Federal tax election in the case of a QTIP trust and the trust containing the proper provisions to ensure it qualifies as a marital trust under either of Code 2523(e) and 2523(f). xv In PLR , the Service apparently mistakenly granted the taxpayer an extension to make a QTIP election for a gift to an inter vivos QTIP trust. Could a private letter ruling issued by the Service affect the substantive law of Florida in regards to a trust created pursuant to F.S (3)? xvi It should be noted that PLR was revoked by PLR

43 and then reinstated in PLR , which granted the taxpayer relief pursuant to Code 7805(b). Nevertheless, it should serve as a lesson to attorneys who plan in this area and to litigators attacking and defending such trusts that rulings issued by the Service and decisions in tax cases in court can affect the outcome of litigation under Florida law. What is the purpose of the specific reference to F.S ? Does this preclude the application of F.S ? How will this provision be applied to property added to the QTIP trust during the doneespouse s lifetime that cannot qualify for the marital deduction? How will this provision be applied to property held in a trust for which only a partial QTIP election has been made? (d) Florida Practice. Serious public policy concerns may exist regarding the application of this statute and similar to F.S (1)(c), it is questionable whether the Florida legislature carefully considered some of the ramifications of the statute it enacted. For example, consider the situation where A creates and funds a trust for the benefit of his spouse B. A retains a secondary life interest following B s death that can either be wholly discretionary or include a mandatory income interest for potential QTIP treatment based on a formula or a Clayton type QTIP election. (The decision to make the Clayton QTIP election may (should) be vested in an independent fiduciary.) Two months after the gift A and B are involved in a car crash. B dies and three unrelated individuals are severely injured in the accident. A is at fault. A s gifts to the inter vivos QTIP trust were not fraudulent under the applicable Florida fraudulent transfer rule. At the time of the accident B has not filed his gift tax return. The gift tax return may not be due for almost a year or more in some cases if the gifts were made in early January. Whether A s creditors from the car accident can collect on a judgment from the assets in the trust will depend on whether A makes a QTIP election. Is this a fair result? What happens if there is a disposition of the donee-spouse s income interest in the original trust prior to the donee-spouse s death? For gift tax purposes it might be difficult to imagine a donee-spouse renouncing his or her income interest, however, it might happen for other non-tax reasons. If the assets in the original QTIP trust pass to a successor trust or trusts for the benefit of the settlor-spouse, it appears that the assets in the trust will not be protected from the settlor-spouse s creditors during the donee-spouse's lifetime. This contingency should be addressed when drafting the trust agreement. Practitioners should carefully review Chapter 739 of the Florida Statutes (that is, the Florida Uniform Disclaimer of Property Interests Act) to see how it may benefit a client seeking to implement this type of trust arrangement. It is now significantly easier and presumably less expensive for Florida residents to create asset protection trust structures. Thus, F.S (3) could be a game changer if used properly. F.S (3) also presents some unique estate planning opportunities. Practitioners should carefully review Bonner Est. v. U.S., 84 F.3d 196 (5 th Cir. 1996) and Mellinger Est. v. 5

44 Com r., 112 T.C. 26 (1999), acq., AOD (better known as the Fredericks of Hollywood estate) and similar cases in an effort to uncover these potential planning opportunities. (e) Additional Planning Concerns. This strategy cannot work if the donee-spouse is not a US citizen as the transfer would not qualify for the marital deduction. xvii Perhaps additional planning opportunities exist if the QTIP trust is designed to permit the donee-spouse to assign his or her income interest in the trust. xviii If the donee-spouse and settlor-spouse divorce, they may be unaware of the potential continuing obligations of the settlor of an inter vivos QTIP trust to pay income taxes on trust capital gains post-divorce, despite the settlor having no right to trust distributions or access to trust assets to pay such capital gains taxes. xix Fraudulent Transfer Law If the initial transfer of the assets to the trust by the settlor was a fraudulent conveyance under Chapter 726, Florida Statutes, F.S (3) would not apply and the protections discussed, above, would be superseded by fraudulent transfer law. The extended bankruptcy fraudulent transfer period of ten (10) years applicable to transfers to self-settled trusts should apply to this trust arrangement. xx Since little or no case law exists to provide guidance on the application of 548(e)(1) to this type of trust arrangement, all practitioners can do is speculate on this issue. (Perhaps this uncertainty simply dictates that this type of trust arrangement be established as a foreign trust structure that complies with all of the requirements of Florida law.) Furthermore, while in most instances the use of a QTIP trust as the lead interest trust under F.S (3) would be more attractive so that the underlying assets held in the trust are protected from the donee-spouse's creditors, in regards to 548(e)(1), it may be more prudent to use a general power of appointment trust as the lead interest trust. Although not completely clear, it may be that the use of such a trust would cleanse the successor trust from the application of the ten (10) year rule under 548(e)(1). Creditor Issues It is important to note that the mandatory income interest in the trust remains vulnerable to attack by a creditor. While the interest itself may be protected by use of a spendthrift provision, income distributed directly to the beneficiary is certainly at risk for attachment. If the property transferred to the trust has a situs outside of Florida that is located in a jurisdiction that has the Self-Settled Trust Doctrine, the law of that jurisdiction would most likely apply to such property held in the trust. In such a situation the asset protection features of this trust might not be available to the settlor following the donee-spouse s death. SQIT (or its Equivalent) in Other Jurisdictions 6

45 As previously stated, the protection afforded to the successor trust or trusts is dependent upon a Federal tax election in the case of a QTIP trust and the trust containing the proper provisions to ensure it qualifies as a marital trust under either of Code 2523(e) and 2523(f). This does not appear to be the case in other states that have or may soon have similar laws. Besides Florida, the planning described above may also be used in jurisdictions such as Arizona, Delaware, Kentucky, Maryland, Michigan, North Carolina, Oregon, South Carolina, Texas, Virginia and Wyoming. xxi For example, specifically in Arizona, Ariz. Rev. Stat (E) states: E. For the purposes of this section, amounts and property contributed to the following trusts are not deemed to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts shall not be treated as a settlor: 1. An irrevocable inter vivos marital trust that is treated as qualified terminable interest property under section 2523(f) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor's spouse. 2. An irrevocable inter vivos marital trust that is treated as a general power of appointment trust under section 2523(e) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor's spouse. 3. An irrevocable inter vivos trust for the settlor's spouse if the settlor is a beneficiary of the trust after the death of the settlor's spouse. 4. An irrevocable trust for the benefit of a person, the settlor of which is the person's spouse, regardless of whether or when the person was the settlor of an irrevocable trust for the benefit of that spouse. [Emphasis added.] 5. An irrevocable trust for the benefit of a person to the extent that the property of the trust was subject to a general power of appointment in another person. In North Carolina, N.C. Gen Stat. 36C states: Subject to Article 3A of Chapter 39 of the General Statutes, for purposes of this section, if the settlor is a beneficiary of the following trusts after the death of the settlor's spouse, the property of the trusts shall, after the death of the settlor's spouse, be deemed to have been contributed by the settlor's spouse and not by the settlor: (1) An irrevocable intervivos marital trust that is treated as a general power of appointment trust described in section 2523(e) of the Internal Revenue Code. 7

46 (2) An irrevocable intervivos marital trust that is treated as qualified terminable interest property under section 2523(f) of the Internal Revenue Code. (3) An irrevocable intervivos trust of which the settlor's spouse is the sole beneficiary during the lifetime of the settlor's spouse but which does not qualify for the federal gift tax marital deduction. [Emphasis added.] (4) Another trust, to the extent that the property of the other trust is attributable to property passing from a trust described in subdivision (1), (2), or (3) of this subsection. For purposes of this subsection, the settlor is a beneficiary whether so named under the initial trust instrument or through the exercise of a limited or general power of appointment, and the "settlor's spouse" refers to the person to whom the settlor was married at the time the irrevocable intervivos trust was created, notwithstanding a subsequent dissolution of the marriage. xxii Unlike Delaware, Florida, Maryland, Michigan, Oregon, South Carolina, Virginia and Wyoming, four states, Arizona, Kentucky, North Carolina and Texas, statutorily provides that the initial settlor of any irrevocable inter vivos trust created for the settlor s spouse will not be deemed to have been contributed by the settlor if the settlor is the beneficiary of the trust after the death of the settlor s spouse, even if there is no QTIP election. While at first glance Arizona, Kentucky, North Carolina and Texas appear to create great asset protection and the possibility of enhanced estate tax benefits that are afforded to credit shelter trusts as compared to an inter vivos QTIP Trusts (i.e., all appreciation of assets in the credit shelter trust would avoid future estate taxes and regardless of whether the applicable exclusion amount is reduced the assets in a credit shelter trust should not be subject to estate tax inclusion), there are two potential pitfalls to the statute: (1) the trust needs to have its situs in Arizona, Kentucky, North Carolina or Texas and be subject to income tax there; and (2) there is no provision similar to IRS Treas. Reg (f)- 1(f), Example 11 that assures that the initial settlor will not be subject to tax under Code 2036 or As a result, the IRS could take the position that despite state law, the initial settlor has an interest under Code 2036 and 2038, resulting in estate tax inclusion. xxiii It would also seem possible under these states statutes to design the lead trust without a mandatory income distribution provision so all distributions to the spouse could be solely within the trustee s discretion. Perhaps the lead trust could also be designed such that gifts to the trust would not constitute completed gifts for Federal gift tax purposes. In order for Florida to become a leader in this realm of planning, it would be prudent to update F.S (3) to incorporate provisions similar to Arizona, Kentucky, North Carolina and Texas. Same Sex Planning Opportunities 8

47 Based on the plain language of the statute, it should be possible to use this planning technique in the case of a same-sex couple who were married in a jurisdiction recognizing same sex marriage. xxiv Caution is warranted, however, until more authority is available in this area. In this regard, F.S provides: Marriages between persons of the same sex.- (1) Marriages between persons of the same sex entered into in any jurisdiction, whether within or outside the State of Florida, the United States, or any other jurisdiction, either domestic or foreign, or any other place or location, or relationships between persons of the same sex which are treated as marriages in any jurisdiction, whether within or outside the State of Florida, the United States, or any other jurisdiction, either domestic or foreign, or any other place or location, are not recognized for any purpose in this state. [Emphasis added.] (2) The state, its agencies, and its political subdivisions may not give effect to any public act, record, or judicial proceeding of any state, territory, possession, or tribe of the United States or of any other jurisdiction, either domestic or foreign, or any other place or location respecting either a marriage or relationship not recognized under subsection (1) or a claim arising from such a marriage or relationship. (3) For purposes of interpreting any state statute or rule, the term marriage means only a legal union between one man and one woman as husband and wife, and the term spouse applies only to a member of such a union. [Emphasis added.] Several cases are pending in Florida courts challenging the validity of the foregoing provision under the Constitution of the United States. While not directly involving this provision it is clear that the ultimate outcome of these cases may determine whether a same-sex couple can obtain the creditor protection benefits of (3). Until this rule is clarified in favor of a same-sex couple, it may be prudent for a same-sex couple to establish a SQIT in a more asset protection friendly jurisdiction that provides broader asset protection benefits to such self-settled trusts, and affirmatively making the QTIP election on the federal gift tax return after the trust is established. For example, because North Carolina is in the Fourth Federal Circuit, as of October 6, 2014, same sex marriages also enjoy inter vivos QTIP trust benefits. xxv When the issue is resolved favorably the situs and administration of the SQIT can be moved to Florida. Governing Law and Situs of a Florida Trust Under Section 107 of the UTC, the meaning and effect of the terms of a trust are determined by: (1) the law of the jurisdiction designated in the terms unless the designation of that jurisdiction s law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue; or (2) in the absence of a controlling designation in the terms of the trust, the law of the jurisdiction having the most significant relationship to the matter at issue. F.S is similar but has important differences: The meaning and effect of the terms of a trust are determined by: (1) The law of the jurisdiction designated in the terms of the trust, provided there is a sufficient nexus to the designated jurisdiction at the time of the creation of the trust or during the trust administration, including, but not limited to, the location of real 9

48 property held by the trust or the residence or location of an office of the settlor, trustee, or any beneficiary; or (2) In the absence of a controlling designation in the terms of the trust, the law of the jurisdiction where the settlor resides at the time the trust is first created. Notwithstanding subsection (1) or subsection (2), a designation in the terms of a trust is not controlling as to any matter for which the designation would be contrary to a strong public policy of this state. [Emphasis added]. Both Section 103(9) of the UTC and F.S (11) define jurisdiction, with respect to a geographic area, includes a state or country. F.S (18) provides that the term State means any state of the United States and includes the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession subject to the legislative authority of the United States. Additionally, F.S provides: (1) Terms of a trust designating the principal place of administration of the trust are valid only if there is a sufficient connection with the designated jurisdiction. Without precluding other means for establishing a sufficient connection, terms of a trust designating the principal place of administration are valid and controlling if: (a) A trustee s principal place of business is located in or a trustee is a resident of the designated jurisdiction; or (b) All or part of the administration occurs in the designated jurisdiction. (2) Unless otherwise validly designated in the trust instrument, the principal place of administration of a trust is the trustee s usual place of business where the records pertaining to the trust are kept or, if the trustee has no place of business, the trustee s residence. In the case of cotrustees, the principal place of administration is: (a) The usual place of business of the corporate trustee, if there is only one corporate cotrustee; (b) The usual place of business or residence of the individual trustee who is a professional fiduciary, if there is only one such person and no corporate cotrustee; or otherwise (c) The usual place of business or residence of any of the cotrustees as agreed on by the cotrustees. (3) Notwithstanding any other provision of this section, the principal place of administration of a trust, for which a bank, association, or trust company organized under the laws of this state or bank or savings association organized under the laws of the United States with its main office in this state has been appointed trustee, shall not be moved or otherwise affected solely because the trustee engaged in an interstate merger transaction with an out-of-state bank pursuant to s in which the out-of-state bank is the resulting bank. (4) A trustee is under a continuing duty to administer the trust at a place appropriate to its purposes and its administration. (5) Without precluding the right of the court to order, approve, or disapprove a transfer, the trustee, in furtherance of the duty prescribed by subsection (4), may transfer the trust s principal place of administration to another state or to a jurisdiction outside of the United States. (6) The trustee shall notify the qualified beneficiaries of a proposed transfer of a trust s principal place of administration not less than 60 days before initiating the transfer. The notice of proposed transfer must include: (a) The name of the jurisdiction to which the principal place of administration is to be transferred. (b) 10

49 The address and telephone number at the new location at which the trustee can be contacted. (c) An explanation of the reasons for the proposed transfer. (d) The date on which the proposed transfer is anticipated to occur. (e) The date, not less than 60 days after the notice is provided, by which the qualified beneficiary must notify the trustee of an objection to the proposed transfer. (7) The authority of a trustee to act under this section without court approval to transfer a trust s principal place of administration is suspended if a qualified beneficiary files a lawsuit objecting to the proposed transfer on or before the date specified in the notice. The suspension is effective until the lawsuit is dismissed or withdrawn. (8) In connection with a transfer of the trust s principal place of administration, the trustee may transfer any of the trust property to a successor trustee designated in the terms of the trust or appointed pursuant to s i F.S (1). ii F.S (1)(a). iii In re Cocke, 371 B.R. 554 (Bankr. M.D. Fla. 2007). iv F.S (1)(b). v See In re Witlin, 640 F.2d 661 (5th Cir. Fla. 1981). vi See Unif. T. Code 505, comments. vii F.S (1)(c). viii See I.R.C. 2523(e). ix See I.R.C. 2056(b)(7) & 2523(f). x All references to sections of the Code are to sections of the Internal Revenue Code of 1986, as amended. xi See I.R.C xii F.S (2)(a). xiii See I.R.C xiv For an excellent discussion of this issue see Rothschild & Akhavan, "Creditor Protection The Reciprocal Issue for Reciprocal Trusts (It's Not Just About Estate Taxes)," 38 Est. G. & Tr. Jrnl. 187 (Mar.-Apr. 2013). See also Security Trust v. Sharp, 77 A.2d 543 (Del. Ch. 1950); Ariz. Rev. Stat. Ann (E)(4); and Restatement (Third) of Trusts, 58, cmt. f, Reporter Note's cmt. f. xv See I.R.C. 2523(f)(4) & 6075(b). These sections of the Code provide the rules and time limitations for making the QTIP election for an inter vivos QTIP trust. xvi For an excellent analysis of PLR see Steiner, PLR : IRS Grants Extension of Time to Make QTIP Election for Inter Vivos Transfer, LISI Estate Planning Newsletter #1699 (Sept. 16, 2010) at xvii See I.R.C. 2523(f). xviii See e.g., PLR ; and Bramwell and Kanaga, Austin Bramwell and Vanessa Kanaga on PLR , LISI Estate Planning Newsletter #2040 (Dec. 20, 2012) at xix See Nelson and Franklin, Inter Vivos QTIP Trusts Could Have Unanticipated Income Tax Results to Donor Post-Divorce, LISI Estate Planning Newsletter #2244 (Sept. 15, 2014) at xx See 548(e)(1) of the Bankruptcy Code. xxi See Ariz. Rev. Stat (E); Del. Code Ann. Tit (C)(2); Ky. Rev. Stat. Ann (8)(a); Md. Est. & Tr. Code Ann (a)(1)-(2); Mich. Comp. Laws (4); N.C. Gen. Stat. 36C-5-505(c); Or. Rev. Stat (4); S.C. Code Ann (b)(2); Tex. Prop. Code (g); Va. Code Ann (B)(2); Wyo. Stat. Ann (e) (note that it may also be possible to utilize an inter vivos QTIP trust plan in one of the self-settled asset protection trust jurisdictions). xxii See also Ky. Rev. Stat. Ann (8)(a)(3) and Tex. Prop. Code (g)(3)(A). xxiii See discussion at Nelson, Asset Protection & Estate Planning Why Not Have Both? in the Forty-Sixth Annual Heckerling Institute on Estate Planning at 17-1 (Matthew Bender 2012). xxiv See also, Rev. Rul ; United States v. Windsor, 570 U.S. (2013). For an excellent discussion of the issues relating to the Windsor case and Revenue Ruling see Karibjanian, "Revenue Ruling and IR : The Service Responds to Windsor," LISI Estate Planning Newsletter #2137 (Sept. 3, 2013) at Karibjanian, "Federal Law for Same-Sex Married Couples after Windsor: 11

50 Equality for All or Only for Some?," LISI Estate Planning Newsletter #2118 (July 23, 2013) at Karibjanian, "Windsor and Perry: A Supreme Split Decision," LISI Estate Planning Newsletter #2110, (June 26, 2013) at xxv See Bostic v. Schaefer, 760 F.3d 352 (4th Cir. 2014), cert. denied, No , 2014 WL (Oct. 6, 2014). 12

51 There s No Place Like Home - Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP Trusts: Why Do Them and Where To Go When You Do Domestic Asset Protection Trust Planning: Jurisdiction Selection Series Florida Tuesday, December 9, :00 PM Eastern Sponsored by The ABA Section of Real Property, Trust & Estate Law

52 Florida Statutes (3) Inter Vivos QTIP Trusts FLA. STAT (1)(a) The property of a revocable trust is subject to the claims of the settlor s creditors during the settlor s lifetime to the extent the property would not otherwise be exempt by law if owned directly by the settlor.

53 Florida Statutes (3) Inter Vivos QTIP Trusts Under the Florida Trust Code, holding significant assets in a revocable trust does not enhance asset protection because assets in a revocable trust are not protected from claims of the settlor s creditors.

54 Florida Statutes (3) Inter Vivos QTIP Trusts FLA. STAT (1)(b) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor s benefit.

55 Florida Statutes (3) Inter Vivos QTIP Trusts An alternative that is effective both for estate tax and asset protection planning is an Inter Vivos QTIP Trust.

56 Florida Statutes (3) Inter Vivos QTIP Trusts Creditors' claims against settlor (3) Subject to the provisions of s , for purposes of this section, the assets in (a) a trust described in section 2523(e) of the Internal Revenue Code of 1986, or a trust for which the election described in section 2523(f) of the Internal Revenue Code of 1986 has been made; and

57 Florida Statutes (3) Inter Vivos QTIP Trusts Creditors' claims against settlor (b) another trust, to the extent that the assets in the other trust are attributable to a trust described in (a), shall, after the death of the settlor s spouse, be deemed to have been contributed by the settlor s spouse and not by the settlor.

58 Florida Statutes (3) Inter Vivos QTIP Trusts Consistent with Treas. Reg (f)-1(f), Example 11, which provides that assets held in an inter vivos QTIP trust for the benefit of the donor after the death of his or her spouse will not be includible in the donor s taxable estate under 2036 and 2038 of the Internal Revenue Code.

59 Florida Statutes (3) Inter Vivos QTIP Trusts F.S provides: Marriages between persons of the same sex.- (1) Marriages between persons of the same sex entered into in any jurisdiction, whether within or outside the State of Florida, the United States, or any other jurisdiction, either domestic or foreign, or any other place or location, or relationships between persons of the same sex which are treated as marriages in any jurisdiction, whether within or outside the State of Florida, the United States, or any other jurisdiction, either domestic or foreign, or any other place or location, are not recognized for any purpose in this state. [Emphasis added.]

60 Florida Statutes (3) Inter Vivos QTIP Trusts F.S provides: (3) For purposes of interpreting any state statute or rule, the term marriage means only a legal union between one man and one woman as husband and wife, and the term spouse applies only to a member of such a union. [Emphasis added.]

61 Florida Statutes (3) Inter Vivos QTIP Trusts Until this rule is clarified in favor of a same-sex couple it may be prudent for a same-sex couple to establish a SQIT in a more asset protection friendly jurisdiction Since North Carolina is in the Fourth Federal Circuit, as of October 6, 2014, same sex marriages also enjoy inter vivos QTIP trust benefits. See Bostic v. Schaefer, 760 F.3d 352 (4th Cir. 2014), cert. denied, No , 2014 WL (Oct. 6, 2014). When the issue is resolved favorably in Florida, the situs and administration can be moved to Florida.

62 Asset Protection Trusts... in Texas? By Michael H. Ripp, Jr. & Amy P. Jetel Under Texas law, assets held in a spendthrift trust will be protected from the creditors of the trust s beneficiaries. 1 An asset protection trust (sometimes also called a self-settled spendthrift trust ) is essentially a spendthrift trust that protects a settlor s retained beneficial interest in the trust. Until recently, it was impossible to create an asset protection trust in Texas because there had been one major exception to spendthrift trust protection: a spendthrift clause in a trust instrument will not protect a settlor s beneficial interest in the trust from the claims of his creditors. 2 But that is no longer the case. Kind of. In 2013, the Texas legislature revised section of the Texas Trust Code (the spendthrift trust statute) to add significant exceptions to the prohibition against spendthrift protection for self-settled trusts. 3 As discussed in greater detail below, the revised statute provides expansive opportunities for spouses to use inter vivos trusts to shield their assets from creditors, and it also opens the door to using powers of appointment as a mechanism for establishing an asset protection trust in Texas. 4 A new subsection (g) to the Texas spendthrift trust statute opens with: For purposes of this section, property contributed to the following trusts is not considered to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts may not be treated as a settlor At the outset, this new language begins to unwind the historical prohibition against spendthrift protection for self-settled trusts in Texas by no longer treating a settlor-beneficiary of certain types of trusts as the settlor. So what types of trusts get this special treatment? Primarily, trusts created for, or by, the settlor s spouse, and secondarily, trust over which someone other than the settlor held a general power of appointment or exercised any power of appointment. Let s review each provision of this new subsection in turn. Section (g)(1): Spousal Trusts That Qualified for the Federal Gift Tax Marital Deduction The first new provision of the Texas spendthrift trust statute provides that the settlor will not be deemed a settlor of an irrevocable inter vivos marital trust, as long as the settlor s gift to the trust 1 Tex. Prop. Code Ann (b). (Note that Title 9 of the Texas Property Code is referred to as the Texas Trust Code. ) 2 Tex. Prop. Code Ann (d); Daniels v. Pecan Valley Ranch, Inc. 831 S.W.2d 372 (App. 4 Dist. 1992, writ denied) (holding that a [s]ettlor cannot create [a] spendthrift trust for his own benefit and have [the] trust insulated from [the] rights of creditors. ); see also First Bank and Trust v. Goss, 533 S.W.2d (Civ. App. 1976). 3 See Exhibit A for a copy of Section reflecting the 2013 amendments. 4 All asset protection planning is subject to fraudulent transfer restrictions that is, a person cannot make a transfer with the intent to hinder, delay, or defraud existing or reasonably foreseeable creditors. A discussion of fraudulent transfer considerations is outside the scope of this paper. 1

63 qualified for the federal gift tax marital deduction either by making the QTIP election 5 or by giving the spouse a testamentary or inter vivos general power of appointment ( GPOA ) over the trust property. 6 (In each case, the donee spouse is entitled to receive the income of the trust for life.) If either of these requirements is met under the Internal Revenue Code, then the settlor can become a beneficiary of the trust upon the death of his spouse at which time he will no longer be considered the settlor and the trust assets will be fully protected from the claims of his creditors under the Texas spendthrift trust statute. Assets held in QTIP or GPOA trusts will be included in the donee spouse s gross estate, and the donee spouse becomes the new transferor of those assets for federal tax purposes. Therefore, this change to the Texas statute merely causes Texas debtor/creditor law to follow federal transfer tax law s view of who the new settlor should be (g)(2). Spousal Trusts that Did not Qualify for the Gift Tax Marital Deduction While it is easy to see the logic behind the special treatment of QTIP and GPOA trusts, the legislature s reasoning behind the second new provision of the Texas spendthrift trust statute is less easy to discern. Simply stated, this subsection provides that a settlor will not be treated as the settlor for purposes of the spendthrift trust statute of any irrevocable trust created for his spouse of which he becomes a beneficiary at the spouse s death no QTIP election or GPOA required. The question here is: why did the Texas legislature go to the trouble of specifically requiring a QTIP election or the inclusion of a spousal GPOA in the previous subsection, when this provision catches all spousal trusts? We don t know, but we re happy to accept the legislature s gift of planning opportunities, two of which we can identify immediately. First, high-net-worth clients can use this section to engage in asset-protected, estate-freeze transactions, where assets that are expected to appreciate significantly in value over time can be gifted at a low value now, with the appreciation escaping estate taxation in both the settlor-spouse s estate and in the donee spouse s estate, and with neither spouse s creditors being able to reach the trust s assets. 7 Second, clients whose net worth falls below the estate tax exemption, and who are thus otherwise not typical candidates for advanced estate planning, can also engage in estate-freeze planning and receive creditor protection to boot. 8 Thanks, Texas legislature (g)(3)(A). Non-Reciprocal Spousal Trusts The third new provision of the Texas spendthrift trust statute provides that the beneficiary of an irrevocable trust established by the beneficiary s spouse will not be deemed the settlor of that trust 5 I.e., the Qualified Terminable Interest Property election under IRC 2523(f). 6 Under IRC 2523(e). 7 To the extent that the donor spouse retains a beneficial interest in the trust following the donee spouse s death, special attention must be paid to avoiding inclusion of the trust assets in the donor spouse s gross estate for federal estate tax purposes. 8 Note that low-basis assets gifted to trusts in an estate-freeze transaction will retain their low basis and will not receive a step-up in basis at the donee spouse s death. With the recent increase in federal income tax rates and the imposition of the net investment income tax, the costs and benefits of paying estate tax and receiving a basis step-up versus paying no estate tax and incurring capital gains should be quantified. When no estate tax would otherwise be due in the case of clients with lower net worth, the tax benefits of such a transaction are greatly reduced, and the use of a QTIP or GPOA trust might actually be preferable. 2

64 under the spendthrift trust statute, regardless of whether or when the [spouse-beneficiary] was the settlor of an irrevocable trust for the benefit of that [spouse-settlor]. In short, this provision allows for the assets in reciprocal or non-reciprocal (i.e., nearly reciprocal) spousal trusts to be protected from both spouses creditors. As such, Texas spouses could partition all of their community property to be the separate property of each spouse, and then each spouse could transfer his or her separate property to a trust for the other spouse both trusts would enjoy spendthrift protection. 9 Typically, there is no good estate planning reason to create truly reciprocal trusts. The IRS will ignore such trusts for transfer tax purposes because it views them as taxpayer antics aimed at shielding the gifted assets from transfer taxes while allowing the donor to benefit from assets received as the beneficiary of an identical trust that someone else created for him. This is also referred to as a cross transaction, leaving both transferors in nearly the identical position that they would have occupied if they had created trusts for themselves. If reciprocal trusts are found to have been created to avoid inclusion in the transferors gross estates, the trusts will be uncrossed so that each transferor is treated as both the beneficiary and the settlor of the trust that was established for his benefit, thus pulling all of the transferred assets back into the transferor s gross estate. 10 As a result, in most circumstances, the spouses will create trusts for each other that are nonreciprocal, paying careful attention in the drafting process to relevant authority of federal tax law outlining the boundaries of the reciprocal trust doctrine. In fact, this new provision of the Texas spendthrift trust statute was likely intended for just that purpose. Texas practitioners can now have confidence that Texas law will not allow a creditor to employ the reciprocal trust doctrine as a means of gaining access to the trust assets. 11 If creditors could potentially exercise such rights against assets of such trusts, then that mere possibility could have the unfortunate impact of causing inclusion of the then-appreciated trust assets in the donor s gross estate for federal estate tax purposes. 12 However, this addition to the Texas spendthrift trust statute has negated such arguments. Of course, if the spouses are not transfer tax motivated, or if their assets are not significant enough to pose an estate tax problem, then establishing intentionally defective reciprocal spousal trusts could provide an easy way to achieve asset protection for spouses in Texas (g)(3)(B). Non-Spousal General Power of Appointment Trust The final type of trust of which the settlor-beneficiary will not be considered the settlor is one whose property was subject to a general power of appointment in another person, with no requirement that the trust be for the benefit of the settlor s spouse or that the settlor s beneficial interest be delayed it is only required that the holder of the GPOA was not the settlor. 9 Of course, all marital property planning should be carefully considered with respect to the spouses rights between themselves, as partitioning community property to separate property divests each spouse of rights to the community that they would otherwise have absent a partition. 10 See Lehman v. Comm r, 109 F.2d 99 (2 nd. Cir. 1940); U.S. v. Estate of Grace, 395 U.S. 316 (1969); Estate of Bischoff v. Comm r, 69 T.C. 32 (1977). 11 Under the common law, there may be an argument that reciprocal trusts can also be uncrossed for purposes of creditors claims, not only for federal tax purposes (see Restatement (Third) of Trusts, 58, cmt. f, Reporter Note s cmt. f.). 12 IRC 2036,

65 Curiously, the legislature used the word was subject to a GPOA, instead of is subject to a GPOA, when drafting the new provision. A plain-meaning application of this language gives rise to the following possible examples of trusts of which the settlor ( John in these examples) can be a beneficiary but not be treated as the settlor under the spendthrift statute: John creates an irrevocable trust for the benefit of himself and his descendants, and under the terms of the trust document, he grants Susan a right to withdraw gifts to the trust for a period of 30 days. If she does not exercise the withdrawal right, it lapses. Susan does not exercise the power and allows it to lapse. John creates an irrevocable trust for the benefit of Paul, and grants Susan a GPOA over the trust property. The day after the trust was created, Susan exercises her power in favor of a trust for the benefit of John. Presumably, favorable spendthrift protection was given to such trusts because a GPOA is not granted lightly due to the fact that assets subject to a GPOA will be included in the holder s gross estate at death, 13 the lapse or release of a GPOA during the holder s lifetime will be considered a taxable gift, 14 and the granting of the GPOA requires a high level of trust between the settlor and the holder. Thus, the value of assets that could be protected by this provision is potentially limited. Also, the same logic for allowing protection of marital deduction trusts seems to apply here, as the federal tax laws treat the holder of a GPOA as the new transferor of the assets that are subject to the power. An argument might also be made that subsections (e) and (f) of Section of the Texas Trust Code already served to cause the holder of an inter vivos GPOA to be treated as the settlor of the trust while presently exercisable or following the lapse, release, or waiver of that power, in the same manner as federal transfer tax law. Therefore, this new provision might have constituted an effort to clarify what was implied by other provisions of the Texas spendthrift trust statute namely, that the existence of a GPOA severs the original settlor s status as settlor for purposes of the spendthrift trust statute. In summary, although a number of complicated tax issues must be wrestled with whenever dealing with GPOAs, this new provision provides the possibility of allowing an individual to create a protective trust for himself currently (i.e., he doesn t have to wait for his spouse to die), provided that he has a trustworthy and creditor-free friend who also doesn t mind potentially using estate tax exemption to facilitate the settlor s asset protection efforts. Grandma, mind sharing your unused exemption with me? (d)(2). Trusts Created by Exercise of General or Limited Power of Appointment Let s now turn our focus away from the new subsection (g) and look back up to subsection (d) of the Texas spendthrift trust statute, which recites the general prohibition against self-settled spendthrift trusts, and is stated as follows: 13 IRC IRC 2514(b). 4

66 If the settlor is also a beneficiary of the trust, a [spendthrift provision] does not prevent the settlor s creditors from satisfying claims from the settlor s interest in the trust estate. 15 In 2013, when the Texas legislature added subsection (g) to allow a settlor to be a beneficiary of certain spousal trusts and non-spousal GPOA trusts, it also added a new provision to subsection (d) above. The new language of subsection (d) provides that a settlor will not be considered a beneficiary of a trust for purposes of the general prohibition against self-settled spendthrift trusts solely because the settlor s interest in the trust was created by another person s exercise of a power of appointment (general or limited). Unlike the non-spousal GPOA trust provisions discussed above, this provision seems to prohibit the settlor s beneficial interest from being specifically retained by the settlor in the trust instrument. If these requirements are met, the settlor s beneficial interest in such a trust will be protected from the claims of his creditors. For example: John creates a trust for the benefit of Susan and grants Susan a limited testamentary power of appointment exercisable in favor of any one or more of the descendants of John s parents. Susan predeceases John and exercises her limited power of appointment in her will in favor of a trust for John and his descendants. Alternatively, John creates a trust for the benefit of John s spouse and descendants and grants Susan a limited power of appointment exercisable during her lifetime or upon death and in favor of any one or more of the descendants of John s parents. Shortly after the trust s settlement, Susan exercises her limited power of appointment in favor a trust for John and his descendants. 16 In either example, although John was the original source of the assets in the trust for his benefit, he will not be considered a settlor-beneficiary of the trust for purposes of the spendthrift trust statute because his beneficial interest arose via Susan s exercise of her power of appointment. Now if we look back to the new subsection (g), you will note that the protections for the settlor s interest in spousal trusts and non-spousal GPOA trusts depend upon the settlor s being a beneficiary of such trusts. The Texas legislature must have thought that the new language of subsection (d), which does not treat the settlor as a beneficiary of trusts created by exercise of a power of appointment, might have negated the protections of subsection (g), so it added a new subsection (h), which makes it clear that for purposes of subsection (g), a person will be a beneficiary if he is named under the trust instrument or through the exercise of a limited or general power of appointment. Therefore, a settlor won t be a beneficiary under subsection (d) in certain circumstances, but he will be a beneficiary under subsection (g). 15 Emphasis added. 16 Or, perhaps to avoid the argument that John and Susan had a prearranged plan that she would favorably exercise her power for John s benefit, Susan holds the power during lifetime with the intention of exercising it only if John needs access to the assets but, in any event, exercises it upon her death in favor of a trust for John and his descendants. 5

67 Conclusion The 2013 changes to the Texas spendthrift trust statute may have profoundly reversed what has traditionally been a complete prohibition on self-settled spendthrift trusts in Texas. The new provisions have been in effect for approximately fifteen months, and no clarity has been provided by the legislature or the courts as to whether the opportunities for potentially aggressive assetprotection motivated trust planning were intentional, or whether they are the byproduct of changes that were drafted broadly but were merely aimed at conforming Texas trust law with federal tax law s view of who should be treated as the transferor of a trust. If it is the latter, then we might see corrective changes made to the statute during the 2015 legislative session or other future sessions. 17 If it is the former, then Texas may be the newest domestic venue for (quasi) asset protection trusts. 17 The Texas legislature meets only every other year in odd-numbered years. 6

68 Texas Property Code Title 9. Trusts Subtitle B. Texas Trust Code: Creation, Operation, and Termination of Trusts Chapter 112. Creation, Validity, Modification, and Termination of Trusts Subchapter B. Validity Spendthrift Trusts (a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee. (b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a "spendthrift trust" is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle. (c) A trust containing terms authorized under Subsection (a) or (b) of this section may be referred to as a spendthrift trust. (d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of the settlor's beneficial interest does not prevent the settlor's creditors from satisfying claims from the settlor's interest in the trust estate. A settlor is not considered a beneficiary of a trust solely because: (1) a trustee who is not the settlor is authorized under the trust instrument to pay or reimburse the settlor for, or pay directly to the taxing authorities, any tax on trust income or principal that is payable by the settlor under the law imposing the tax; or (2) the settlor's interest in the trust was created by the exercise of a power of appointment by a third party. (e) A beneficiary of the trust may not be considered a settlor merely because of a lapse, waiver, or release of: (1) a power described by Subsection (f); or (2) the beneficiary's right to withdraw a part of the trust property to the extent that the value of the property affected by the lapse, waiver, or release in any calendar year does not exceed the greater of the amount specified in: (A) Section 2041(b)(2) or 2514(e), Internal Revenue Code of 1986; or (B) Section 2503(b), Internal Revenue Code of (f) A beneficiary of the trust may not be considered to be a settlor, to have made a voluntary or involuntary transfer of the beneficiary's interest in the trust, or to have the power to make a voluntary or involuntary transfer of the beneficiary's interest in the trust, merely because the beneficiary, in any capacity, holds or exercises: (1) a presently exercisable power to: (A) consume, invade, appropriate, or distribute property to or for the benefit of the beneficiary, if the power is: (i) exercisable only on consent of another person holding an interest adverse to the beneficiary's interest; or EXHIBIT A PAGE 1 OF 2

69 (ii) limited by an ascertainable standard, including health, education, support, or maintenance of the beneficiary; or (B) appoint any property of the trust to or for the benefit of a person other than the beneficiary, a creditor of the beneficiary, the beneficiary's estate, or a creditor of the beneficiary's estate; (2) a testamentary power of appointment; or (3) a presently exercisable right described by Subsection (e)(2). (g) For the purposes of this section, property contributed to the following trusts is not considered to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts may not be treated as a settlor: (1) an irrevocable inter vivos marital trust if: (A) the settlor is a beneficiary of the trust after the death of the settlor's spouse; and (B) the trust is treated as: (i) qualified terminable interest property under Section 2523(f), Internal Revenue Code of 1986; or (ii) a general power of appointment trust under Section 2523(e), Internal Revenue Code of 1986; (2) an irrevocable inter vivos trust for the settlor's spouse if the settlor is a beneficiary of the trust after the death of the settlor's spouse; or (3) an irrevocable trust for the benefit of a person: (A) if the settlor is the person's spouse, regardless of whether or when the person was the settlor of an irrevocable trust for the benefit of that spouse; or (B) to the extent that the property of the trust was subject to a general power of appointment in another person. (h) For the purposes of Subsection (g), a person is a beneficiary whether named a beneficiary: (1) under the initial trust instrument; or (2) through the exercise of a limited or general power of appointment by: (A) that person's spouse; or (B) another person. Added by Acts 1983, 68th Leg., p. 3332, ch. 567, art. 2, Sec. 2, eff. Jan. 1, Amended by Acts 1997, 75th Leg., ch. 109, Sec. 1, eff. Sept. 1, Amended by: Acts 2005, 79th Leg., Ch. 148 (H.B. 1190), Sec. 5, eff. January 1, Acts 2007, 80th Leg., R.S., Ch. 451 (H.B. 564), Sec. 4, eff. September 1, Acts 2013, 83rd Leg., R.S., Ch. 699 (H.B. 2913), Sec. 2, eff. September 1, EXHIBIT A PAGE 2 OF 2

70 There s No Place Like Home - Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP Trusts: Why Do Them and Where To Go When You Do Domestic Asset Protection Trust Planning: Jurisdiction Selection Series Texas Tuesday, December 9, :00 PM Eastern Sponsored by The ABA Section of Real Property, Trust & Estate Law