In April 2012, Governor Bob McDonnell signed Senate
Bill 11 which expanded the types of trust that are permitted to Virginia residents. This meant that Virginia became one of only thirteenth
states in the union that permit what has come to be known as the “self-settled
domestic asset protection trusts (or DAPT).
‘Self-settled’ because it is the
Trustmaker’s assets that are transferred to the trust; ‘domestic’ because it is
established under state law; it used to be that you had to go outside of the
U.S. to create such a trust; and, ‘asset protections’ because the primary
purpose of these trust is to do just that, provide protection for any asset
which the Trustmaker transfers to this DAPT.
The most significant feature of this trust, and the new law supports
this, is the fact that these new Virginia
statutes will allow a Trustmaker to establish an irrevocable trust of which the
Trustmaker is a beneficiary and will also provide spendthrift protection
against claims from the Trustmaker’s creditors.
Generally, a Trustmaker establishes an irrevocable trust
to minimize the Trustmaker’s taxable estate or protect the Trustmaker’s assets
from claims from the Trustmaker’s creditors. However, only under very rare
occasions can the Trustmaker be the beneficiary of the irrevocable trust. These
rare occasions and lack of control make irrevocable trusts less attractive to
most potential Trustmakers. Virginia’s
new law makes it much more desirable to a DAPT.
Virginia’s new trust code language
is similar to the domestic asset protection trust legislation in the other
twelve states by permitting the creation of “qualified self-settled
spendthrift” trusts. The requirements to create a Virginia DAPT, include:
- The trust must be irrevocable;
- The Trustmaker is only entitled to discretionary distributions of income
- The transfer cannot be for fraudulent reasons; and
- Requirements that connect the trust to the Commonwealth of Virginia, like a
Virginia trustee who maintains custody within Virginia of some or all of the trust
property, maintains records in Virginia, prepares Virginia fiduciary income tax
returns, or otherwise materially participates within Virginia in the
administration of the trust.
While much of the Virginia
legislation is similar to the other states, Virginia’s DAPT legislation does have
several unique aspects to it.
- Virginia provides for a five-year
period from the creation of the trust to allow creditors to make claims against
the trust. This “claiming” period is longer in Virginia than the other states.
- Unlike the other states, a Trustmaker in Virginia may not retain a veto power over
- The person or entity who approves distributions must be a qualified trustee
and, for Virginia,
that means an independent trustee. That will exclude spouses, descendants,
siblings, parents, employees, and entities wherein the Trustmaker controls
thirty percent (30%) of the vote from being the trustee. Other states are less
restrictive on the relationship of the person that can approve distributions.
- Only the income and principal from the trust is protected from creditor’s
claims. Other assets in the Virginia
self-settled spendthrift trust might not be protected from the claims of
Regardless, a self-settled spendthrift trust or DAPT in Virginia might be an
appropriate mechanism for those in the right circumstances.