HOW YOU CAN UTILIZE TRUSTS TO PROTECT ASSETS AND PROVIDE FOR LOVED ONES
Trusts are powerful planning tools that are frequently misunderstood. Trusts can have a reputation of being complex, restrictive, and expensive. While these attributes can be true, they do not have to be. If created properly, there is a wide range of flexibility to ensure the trust is crafted to meet your specific needs.
Trusts to Protect You
Tennessee law provides for self-settled asset protection trusts, meaning that someone can create a trust and be a beneficiary of that trust, which, if done correctly, will ensure the assets inside the trust are protected from creditors. Tenancy by the Entirety Trusts (TBE) and Tennessee Investment Services Trusts (TIST) are the two most common self-settled asset protection trusts.
A TBE trust is a revocable trust created by a married couple that provides creditor protection similar to property held jointly with a spouse under Tennessee law. Unlike traditional joint revocable trusts, if a TBE trust is properly drafted and funded, the assets in the TBE trust maintain creditor protection against individual creditors. Often central to estate planning, TBE trusts can act as a substitute for a will, offering asset protection even after the first spouse’s death, unlike property jointly held by spouses outright.
A TIST is an irrevocable trust established by you (the grantor) for your (or the grantor’s) benefit while shielding assets from most future creditors. When
initially funding a TIST, the grantor must complete an affidavit disclosing known creditors and affirming solvency. The trustee must be a Tennessee resident or trust company but cannot be the grantor or a subordinate. If properly drafted, funded, and managed, TISTs gain protection from most creditors within 18 months or six months after discovery of the transfer, whichever is later.
Trusts for the Protection of Your Loved Ones
You may wish to create a trust for your loved ones for many reasons. Trusts created under Tennessee law can last for up to 360 years. The benefit of a trust being allowed to continue for 360 years is two-fold. First, the assets within the trust will largely remain protected from the beneficiaries’ creditors (e.g., divorce) while remaining in the trust. This provides creditor protection of the assets for 360 years. Second, if properly prepared, the trust can avoid paying estate, gift, or generation-skipping transfer taxes (after the initial funding) for up to 360 years. A wealthy family or individual will be able to pass a large sum of assets to multiple generations while providing creditor protection and avoiding transfer taxes on such assets.
Trusts are not only for the wealthy or those exposed to the risk of creditors. They also allow you to appoint a trustee to decide how much and when the beneficiary should receive the funds, which can be useful when a beneficiary is a spendthrift or not financially sophisticated. Trusts give you the ability to determine who receives the assets upon a beneficiary’s death — this is common to protect the remainder beneficiary from a possible second marriage.
What Does This Mean?
An individual can create a trust for their benefit, which would be protected from creditors. Alternatively, a married couple can create a trust for their benefit, which would be protected from the creditors of one spouse. These assets could remain in the trust for 360 years, providing creditor protection to descendants while avoiding Uncle Sam getting his share at the death of each generation.
Whether you have a modest estate or millions, a trust under Tennessee law could provide you a great benefit.
For more information on how to utilize trusts, please contact Shelton Swafford Chambers or Nick Nester.