As asset protection planning has gained prominence, more states are changing their laws to provide opportunities for individuals to create asset protection trusts. Such trusts were previously unavailable outside of a few limited jurisdictions. Connecticut made a huge stride towards competing with states like Delaware, Nevada, and Alaska for trust business when it adopted the Uniform Trust Code (UTC) in 2019.
What Is an Asset Protection Trust?
An asset protection trust is a vehicle for protecting your assets during your lifetime. The trust offers protection from creditors and, depending on how the trust is structured and funded, can eliminate or reduce income and/or estate tax liabilities. The downside is that the person creating the trust (the grantor) cedes control over the assets transferred into the trust to the trustee.
How Does the UTC Benefit Connecticut Residents?
The UTC offers the option to set up an asset protection trust in Connecticut using a local trustee and local counsel which enables the grantor to keep trust assets in the state. Further, if litigation is ever necessary, recourse is readily available in local Connecticut courts. For Connecticut residents, the “home field” advantage may be paramount. Trusts set up under other state laws typically require that grantors use trustees and attorneys located in their states. In addition, an asset protection trust created in another state must have a connection to the state, such as having assets in the state, in order to be protected.
What Are the Requirements for a Connecticut Asset Protection Trust?
In order to be effective, an asset protection trust must be irrevocable, meaning that it cannot be revoked or modified by the grantor, it must be governed by Connecticut law, it must have a Connecticut trustee, and it must contain a “spendthrift” clause that prohibits beneficiaries from assigning or transferring their interests in the trust.
While the grantor generally has to relinquish control over the trust assets, under the new Connecticut UTC, the grantor still has some options to maintain a level of control. For example, with a self-settled irrevocable trust, the grantor can retain the power to remove and replace trustees.
The trust can also provide for a distribution committee independent of the trustee, whose members can override the trustee if there is a dispute as to proposed distributions of trust funds. For instance, if the grantor wanted to receive a distribution as a beneficiary but the trustee objected, the distribution committee could vote to allow the distribution. However, the distribution committee should be made up of adverse parties, usually other beneficiaries of the trust, in order to ensure that the trust’s creditor protection is not impacted.
The grantor can also maintain control by serving as the investment advisor of the trust which would permit the grantor to direct the trust’s investment strategy.
What Are the Limits of a Connecticut Asset Protection Trust?
Unfortunately, the trust cannot protect against all creditor claims. For example, trust assets may be available to pay claims related to equitable distribution and spousal and child support in divorce.
Creditors may also be able to go after assets if the transfer of assets to the trust is deemed a fraudulent conveyance. Typically, this arises when a trust is created when there are potential tort or contract claims against a grantor. If the grantor knew or should have known that a lawsuit was likely at the time the trust was created, trust assets may be available to pay the claims.
Grantors also cannot completely bankrupt themselves in order to protect against all future claims. They must hold some assets outside the trust that could reasonably satisfy the grantor’s personal obligations.
Should You Establish an Asset Protection Trust in Connecticut?
If you are a Connecticut resident, setting up the trust in Connecticut offers certain benefits as discussed previously. While some commentators have expressed concerns that Connecticut trust laws have not been widely interpreted by the courts, and therefore are untested, this should not be a reason by itself to forego the creation of a Connecticut trust.
The UTC has been heavily vetted and has been enacted in more than thirty states. Each state might have some small variations, but the provisions are virtually identical in the enacting states, and instructive, though non-binding case law from other states is easily found.
When coupled with the other provisions of Connecticut’s trust code, such as the allowance for trusts that last 800 years, a domestic asset protection trust offers a convenient, practical, and efficient means of protecting your wealth here in Connecticut.
To learn whether an asset protection trust is right for you, contact us for a consultation. We work closely with clients to determine what options are best for them to achieve their goals and meet their needs.