Virginia Enacts Domestic Asset Protection Trust Legislation

April 9, 2012

Virginia will become the thirteenth state to permit a settlor to establish an irrevocable trust of which the settlor is a beneficiary and receive spendthrift protection against the claims of the settlor’s creditors beginning on July 1, 2012.

On April 4, 2012, Governor McDonnell signed SB 11 which added new Virginia Code sections 55-545.03:2 and 55-545.03:3 to permit self-settled asset protection trusts in Virginia. This legislation will be effective July 1, 2012 for trusts created on and after that date. Virginia is the thirteenth state to enact domestic asset protection trust legislation and joins Missouri, Alaska, Delaware, Rhode Island, Nevada, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Hawaii and Oklahoma. The Virginia legislation is similar to the domestic asset protection trust legislation in other states by permitting the creation of a “qualified self-settled spendthrift trust.” Among the statutory requirements are:

  • the trust must be irrevocable;
  • there must be a Virginia trustee who maintains custody within Virginia of some or all of the trust property, maintains records within Virginia, prepares within Virginia fiduciary income tax returns for the trust, or otherwise materially participates within Virginia in the administration of the trust;
  • the settlor must be entitled only to discretionary distributions of income and principal; and
  • the transfer to the trust may not be a fraudulent transfer.

The Virginia legislation is generally more conservative than the legislation in other domestic asset protection trust states. First, there is a five-year period in which creditors at the time of the creation of the trust may bring a claim. This is longer than the period in other domestic asset protection trust states. Second, the settlor may not retain a power to disapprove distributions while such a veto power is common in other domestic asset protection trust states. Third, the person or entity who approves distributions must meet the requirements for a qualified trustee, which under the Virginia law means an independent trustee. Spouses, descendants, siblings, parents, employees, and entities in which the settlor controls thirty percent of the vote are specifically excluded. Other domestic asset protection trust states are less restrictive as to who can act as a co-trustee or distribution director to make distribution decisions. Fourth, only the right of the settlor to receive distributions of income and principal from the trust is protected from the claims of creditors. This may not protect all the assets in a Virginia self-settled spendthrift trust from the claims of the settlor’s creditors.

Notwithstanding these features, certain settlors with assets in Virginia may find the Virginia legislation appropriate for their circumstances and needs.

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