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Domestic US Trusts

Tennessee Self Settled Trust

Not all states allow self-settled trusts; essentially the law does not support their existence.  On May 10, 2007, the state of Tennessee  enacted the “Tennessee Investment Services Act.”  This legislation created a new creditor’s rights law and became the ninth state to allow the creation of self-settled asset protection trust.

This law allows what is referred to as an IST “Investment Services Trust” as an irrevocable trust into which an individual can transfer asset as the settlor and retain the following rights and benefits.

• Direct the investment of the IST assets
  
• Receive trust income
  
• Request up to 5% of trust principal annually
  
• Receive additional distributions of principal based upon the discretion of the trustee or another appointed  advisor
• Live in a home owned by the trust
  
• Veto distributions to any other permissible beneficiary
  
• Direct the distribution of the trust assets upon death to any one or more persons other than the settlor's creditors, estate or creditors of the settlor's estate
  
• Remove the trustee and other trust advisors and appoint their successors, provided they are not related or subordinate to the settlor
  
• The settlor may not serve as the trustee of the IST. 

The settlor is required to provide an affidavit at the creation of the IST stating under oath that the trust does not intend to defraud creditors and that the trust was not created to defraud creditors by avoiding pending court action.  The process requires filed paperwork and is not simple, but if properly prepared and facilitated, for the residents of Tennessee it is a viable option for asset protection.

The trustee must be an individual residing in Tennessee or a corporate trustee who is authorized to conduct business in Tennessee. At least some portion of the assets of the IST must be administered in Tennessee.

The IST does not provide asset protection for assets transferred to it until four years after the transfer. At that time, the settlor's creditors are prevented from seizing the assets of the IST to satisfy claims against the settlor.
Three additional limitations on the protection afforded by an IST:

• Federal bankruptcy law has a 10-year period to set aside transfers that could apply to an IST under certain circumstances.
• Mandatory distributions (and discretionary distributions once made) may be garnished.
• The law is unsettled as to whether a court of another state is required to recognize the creditor protection of an IST under the full faith and credit clause of the Constitution.

The trust is permitted to exist for 360 years.  This in essence has an effect as if it were a Dynasty Trust.  If combined with an allocation of the individual's generation skipping transfer tax exemption, this also will allow those assets to benefit each generation without the payment of any estate or gift taxes.