By Olen M. "Mac" Bailey, Jr.
What is a "Hard-Shell Nest Egg" ? In the world of academia, it is an "ineradicable financial reserve held in trust for a future expense." In legal terms, it is a self-settled asset protection trust. In practical terms, it is a way to protect your own money and still have use of it.
Self-Settled Asset Protection Trusts
A "self-settled asset protection trust" is a trust created by an individual (the settlor), funded with the settlor's own assets, and then held for the benefit of the settlor, without being subject to the settlor's creditors or debts. These trusts are sometimes referred to as "domestic asset protection trusts" or DAPTs.
For more than one and a half centuries since the 1850 case of Hawkins v. Pearce, the law was well-settled in Tennessee that a DAPT was void against public policy in this state. Prior to this year, only a handful of states (Alaska, Delaware, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota, and Utah) permitted DAPTs. Now, add Tennessee to that short list.
On May 10, 2007, Governor Phil Bredesen signed the Tennessee Investment Services Act of 2007, into law. The new law permits any person to create a self-settled, asset protection trust, which is referred to as an "Investment Services Trust." This new law sanctioning the creation of a Tennessee asset protection trust (TAPT) is effective July 1, 2007.
General Rule
The general rule is that TAPT assets are protected from creditors. In other words, a person can transfer his or her own money to a trust for that same person's personal benefit, and that person's creditors cannot access the funds in the TAPT.
Exceptions to General Rule
However, the asset protection is not absolute. The TAPT is not protected from:
(1) a creditor's claim arosing before the creation and funding of the TAPT, and the creditor claims and proves that the TAPT was a fraudulent conveyance for the sole purpose of defrauding the creditor and not paying the creditor's claim;
(2) a creditor's claim arosing AFTER the creation and funding of the TAPT, and the creditor files suit before the expiration of four (4) years after the creation and funding of the TAPT;
(3) a creditor's claim in federal bankruptcy made within ten (10) years of the creation and funding of the TAPT;
(4) a creditor's claim for garnishment against any funds actually distributed to the TAPT beneficiary;
(5) a creditor's claim filed in a state other than Tennessee, if that state chooses not to apply Tennessee law and the Full Faith and Credit Clause of the U.S. Constitution is not applicable to the TAPT law; and
(6) a creditor's claim against a trust which does not comply with the statutory framework and requirements for a valid TAPT.
Requirements for a Valid TAPT
In order for a trust to be a valid TAPT, the trust must comply with the following statutory framework and requirements:
(a) The trust must be a Tennessee trust;
(b) The trust must be irrevocable;
(c) The trust must contain a spendthrift clause stating that the assets of the trust are not subject to the creditors of the settlor/beneficiary;
(d) The settlor must sign an Affidavit under oath stating that: (1) the settlor has full right, title and authority to transfer the assets to the TAPT; (2) the transfer to the TAPT will not render the settlor insolvent; (3) the settlor does not intend to defraud a creditor by transferring the assets to the TAPT; (4) no pending or threatened court actions exist against the settlor, except for those identified in the affidavit; (5) the settlor is not involved in any administrative proceedings, except for those identified in the affidavit; (6) the settlor does not contemplate filing federal bankruptcy; and (7) the settlor did not obtain the assets being transferred to the TAPT through unlawful activities; and
(e) The trustee must either be a Tennessee resident or a trust company authorized to do business in Tennessee, must maintain custody of the assets of the TAPT in Tennessee, and must not be the settlor.
Rights of the Settlor/Beneficiary
The settlor/beneficiary of a TAPT can retain the following powers and rights over the trust:
(1) Power to veto a distribution from the TAPT;
(2) Power of appointment, i.e. the power to direct the distribution of any remaining funds in the TAPT upon the settlor's death (other than a power to appoint to the settlor, the settlor's creditors, the settlor's estate or the creditors of the settlor's estate);
(3) Right to receive income from the TAPT;
(4) Right to demand up to 5% of the principal of the TAPT each year;
(5) Right to receive additional principal if based on the trustee's discretion or in compliance with certain distribution standards;
(6) Right to remove a trustee or appoint a new trustee; and
(7) Right to reside in and use real property owned by the TAPT;
Who Needs a TAPT?
In general, asset protection planning is needed by any person who has assets which may be subject to a risk or peril. The type of risk or peril is normally the possibility or probability of attachment, execution, garnishment, or levy by a secured or judgment creditor. The degree or likelihood of such risk or peril is based on the person or client and the number of "peril" factors associated with the client. Peril factors associated with a client may include: (a) a client whose liabilities are almost as great as, equal to or exceed his or her assets; (b) a client engaged in a start-up business venture; (c) a client engaged in a high risk business venture, such "high risk" to include businesses traditionally subject to large tort claims or workers compensation claims or businesses with a high incidence of bankruptcy; (d) a client with periodic or sporadic income sources; (e) a client who is a professional such as a physician, lawyer, accountant, architect, engineer or other professional licensed by the State of Tennessee; (f) a client who is a business owner who wants to protect his or her personal assets from creditors of the business; (g) a client who is elderly or disabled and who has foreseeable medical or skilled care liabilities; (h) a client who has a taxable estate for federal estate and state inheritance tax purposes; (i) a client whose beneficiaries of his or her estate at the client's death have "spendthrift" issues such as disability, alcoholism, drug addiction, bankruptcy, divorce, or creditors claims; (j) a client who is entering a second marriage and desires to protect premarital assets for children by a previous marriage in the event of death or for himself or herself in the event of divorce; or (k) a client who is worried about losing his or her assets to an unforseen and unpredictable creditor or event such as an automobile accident or malpractice.
Creating a TAPT
The TAPT is not a "do-it-yourself" project. First a professional, preferably a licensed attorney, should draft the TAPT document. Second, the drafter should have experience and knowledge in the areas of creditor rights, trust administration, estate planning, income taxation of trusts, and gift, estate and inheritance taxes. Lastly, the drafter should be familiar with the statutory requirements for the creation of a valid self-settled, asset protection trust in Tennessee.
Conclusion
In conclusion, an asset protection plan should be considered by any person with assets which may be subject to a risk or peril. A sound asset protection plan includes multiple strategies - the old saying "don't put all of your (nest) eggs in one basket" certainly applies. The TAPT is "one tool in the toolbox" of such a plan. Prior to the TAPT, a person could only achieve similar asset protection through offshore trusts or out-of-state DAPTs. Now a Tennessee resident (or a resident of any other state) can create a self-settled asset protection trust in Tennessee without traveling to, and depositing his or her assets in, the Carribean Sea or the Alaskan Tundra.
Legal Notice: The term "Hard-Shell Nest Egg" and its stated definition are protected proprietary phrases trademarked by Mr. Bailey and The Bailey Law Firm, A Professional Corporation, and are not to be used without the express, prior written consent of the owner of the marks. |
