On July 1, 2012 Virginia became the 13th state to permit a settlor to establish an irrevocable trust where the settlor is a beneficiary and can still receive spendthrift protection against the claims of the settlor’s creditors. SB 11, which was signed by Governor Bob McDonnell on April 4, 2012, expanded the number of types of permissible trusts in Virginia and added new Virginia Code Sections 55-545.03:2 and 55-545.03:3 to permit self-settled domestic asset protection trusts. The legislation is effective for trusts created on and after July 1, 2012.

Generally, a settlor establishes an irrevocable trust to minimize the settlor’s taxable estate and/or protect the settlor’s assets from claims from the settlor’s creditors. However, only under very rare occasions can the settlor be the beneficiary of the irrevocable trust. These rare occasions and lack of control make irrevocable trusts less attractive to most potential settlors. Virginia’s new law makes it much more desirable to a domestic asset protection trust.

Virginia is the 13th state to enact domestic asset protection trust legislation. It joins Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah and Wyoming.

Statutory requirements for the trust include the following:

1. The trust must be irrevocable;

2. There must be 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 for the trust or otherwise materially participates within Virginia in the administration of the trust;

3. The settlor must be entitled only to discretionary distributions of income and principal; and

4. The transfer to the trust cannot be for fraudulent reasons.

Virginia’s legislation is a little more conservative than the legislation in other domestic asset protection trust states. First, Virginia provides for a five year period in which creditors at the time of the creation of the trust may bring a claim. This claiming period is a little longer period than some other asset protection trust states. Second, the settlor may not retain a power to disapprove distributions. Such a veto power is common in other domestic asset protection trust states. Third, the person or entity who approves distributions must meet the requirements for a qualified Trustee, and for Virginia, that means an independent Trustee. Spouses, descendants, siblings, parents, employees and entities in which the settlor controls 30% of the vote are specifically excluded from serving in this capacity. Other states are less restrictive on the relationship of the person that can approve distributions. Fourth, only the right of the settlor to receive distributions of income and principal from the trust is protected from the claims of creditors. This may not protect all the assets in a Virginia self-settled spendthrift trust from the claims of the settlor’s creditors.

While the Virginia legislation may not be as attractive as the legislation enacted in other states, it can be a viable option for some in the right circumstances.