Virginia Enters the Asset Protection Arena

On April 4, 2012, Governor McDonnell signed into law Senate Bill 11, which added sections 55-545.03:2 and 55-545.03:3 to the Code of Virginia, thereby allowing self-settled spendthrift trusts to be established in Virginia.  Effective July 1, 2012, Virginia joins the ranks of other domestic asset protection trust states, including Nevada, South Dakota, Alaska, Delaware, Hawaii, Missouri, New Hampshire, Oklahoma, Rhode Island, Tennessee, Utah, Wyoming, and Colorado (although it is uncertain whether the latter’s statute provides protection).

Senate Bill 11 specifies that only “qualified self-settled spendthrift trusts” will be able to take advantage of the statute’s asset protection provisions.  The statutory requirements to establish a Virginia qualified self-settled spendthrift trust include:

  • the trust needs to be irrevocable;
  • the trust needs to be created during the settlor’s lifetime;
  • the trust needs to include at least one other beneficiary in addition to the settlor;
  • the trust, at all times, needs to have at least one “qualified trustee,” meaning any natural person residing within Virginia or legal entity authorized to engage in trust business within the Commonwealth, who maintains some or all of the trust property in the Commonwealth, maintains records within the Commonwealth, prepares fiduciary income tax returns for the trust within the Commonwealth, or “otherwise materially participates within the Commonwealth in the administration of the trust”;
  • the trust needs to be governed by the laws of Virginia;
  • the trust agreement needs to include a spendthrift provision, as defined in section 55-545.02 of the Code of Virginia, restricting voluntary, as well as involuntary, transfers of the settlor’s qualified interest; and
  • the settlor cannot retain the right to veto distributions from the trust.

Regarding the protection afforded by the Commonwealth’s self-settled laws, two Virginia commentators have written: “From a pure asset protection standpoint, Virginia is not as attractive as other jurisdictions, such as Alaska or Nevada.”  First, the Commonwealth’s statute provides that a “settlor’s creditor may bring an action under § 55-82 to avoid a transfer to a qualified self-settled spendthrift trust or otherwise to enforce a claim that existed on the date of the settlor’s transfer to such trust within five years after the date of the settlor’s transfer to such trust to which such claim relates.”  This five-year statute of limitations, or seasoning period, before the trust assets are protected, is longer than other self-settled states.  For instance, in comparison, Nevada’s statute of limitations for preexisting creditor claims is the later of two years from the date of transfer of the assets to the trust or six months after the creditor discovers or reasonably should have discovered the transfer.

Second, unlike Nevada, Virginia’s self-settled laws prohibit the settlor from retaining the power to veto trust distributions.  Third, under the Commonwealth’s statute, the actions of the independent qualified trustee, who is responsible for approving distributions, are not “subject to direction” by a broad list of persons and entities, including the settlor’s spouse, parents, issue, siblings, employees, or business entities in which the settlor maintains at least thirty percent of the voting power.  Furthermore, the foregoing individuals and entities cannot serve as independent qualified trustees.  Fourth, Senate Bill 11’s asset protection provisions just apply to a qualified interest, that is, the settlor’s right to receive discretionary distributions of income and principal from the trust.  As a result, all of the assets in the Virginia asset protection trust might not be shielded against the claims of a settlor’s creditors.  Finally, unlike Nevada, Virginia imposes an income tax against Virginia self-settled spendthrift trusts created by non-resident settlors.