Connecticut Adopts Self-Settled Asset Protection Trust Legislation

June 25, 2019

On June 24, 2019, Connecticut enacted HB 7104, adopting the Uniform Trust Act. One important provision of the act was the “Connecticut Qualified Dispositions in Trust Act,” permitting the establishment of self-settled domestic asset protection trusts (DAPTs), which provide spendthrift creditor protection to the settlors.

As of the effective date of Jan. 1, 2020, Connecticut will become the 19th state to have DAPT-enabling legislation. The other 18 states are Alaska, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. (See also McGuireWoods’ May 19 legal alert, “Indiana Enacts Self-Settled Asset Protection Trust Legislation.”)

The Connecticut DAPT law is similar to the statutes of the other states that permit DAPTs. Either the owner of property or the holder of general power of appointment can transfer assets to a Connecticut DAPT. The transfer of assets to the Connecticut DAPT must be a “qualified disposition.” To be a qualified disposition, the Connecticut DAPT must be irrevocable; have a “qualified trustee” as one of the trustees; incorporate Connecticut law to govern the validity, construction and administration of the Connecticut DAPT; and have a spendthrift clause.

The Connecticut DAPT must have a “qualified trustee,” which is either an individual residing in Connecticut or an entity authorized by Connecticut law to act as a trustee. Qualified trustees must:

1. maintain or arrange for the custody of the property in the trust,

2. maintain records of the trust on an exclusive or nonexclusive basis,

3. prepare or arrange for the preparation of all tax returns, and

4. materially participate in the administration of the trust.

The act addresses the consequences if a non-Connecticut court seeks to assert jurisdiction over a Connecticut DAPT or apply the law of a state other than Connecticut. The act provides that if a court declines to apply Connecticut law in determining the effect of a spendthrift provision in a Connecticut DAPT, the trustee must immediately resign and thereafter can transfer the trust property only to another trustee.

The only claims of creditors that can be enforced against the assets in a Connecticut DAPT are:

1. fraudulent transfer claims under the Connecticut Uniform Fraudulent Transfer Act,

2. child support obligations,

3. marital support obligations, and

4. tort claims arising prior to the transfer of assets to the Connecticut DAPT.

Claims are subject to a four-year statute-of-limitations period.

Transferors can have certain rights and powers with respect to the Connecticut DAPT. The following provisions can be included in a Connecticut DAPT for a transferor:

1. The transferor can have the power to veto a distribution from the trust.

2. The transferor can have a testamentary limited power of appointment.

3. The transferor can have the right to remove a trustee or trust director and appoint a new trustee or trust director who is not a related or subordinate party under Section 672(c) of the Internal Revenue Code.

With Connecticut becoming the 19th DAPT state and Indiana having also adopted DAPT legislation in 2019, which is effective July 1, 2019, other states are likely to at least consider DAPT legislation, if not join the states in  DAPT legislation.