DAPTs in Tennessee

By DJ Berry

Effective July 1, 2007, Tennessee joined ten other states by passing into law what is commonly referred to as a domestic asset protection trust (DAPT) via the Tennessee Investment Services Act. For Tennessee purposes, the trust is titled an “Investment Services Trust”, but this particular trust is also known as a self-settled trust, because the person who is creating the trust with their own assets is doing it for their own benefit; i.e., they will receive the income and other benefits of the trust.

Typically, a DAPT is created with asset protection as the primary purpose-hence, the name “asset protection trust.” For the most part, the trust is constructed to afford a layer of protection between the assets and the creditors of the trust’s creator. The trust is known as a domestic trust because the asset protection provided by trusts such as these were previously supplied by foreign offshore trusts. However, with the creation of the first DAPT statute in Alaska in 1997, offshore trusts began to lose some of their allure. Regardless, offshore trusts are still popular, especially in states that don’t provide DAPT statutes.

In general, the Tennessee version of the DAPT does protect assets from a creditor. Like most laws, there are exceptions to the general rule and fairly rigid standards that must be followed. In order to protect assets from creditors in Tennessee, the following requirements must be met:

1. Tennessee law must be used to create the trust (i.e., it must be a Tennessee trust);
2. The trust has to be irrevocable; and
3. The interest of the beneficiary cannot be transferred (often referred to as a spendthrift clause).

The trust must also have a qualified trustee. A qualified trustee is one who meets certain conditions. For instance, the trustee cannot be the actual creator of the trust. They must also be a resident of Tennessee (or an entity allowed by Tennessee law to act as a trustee). Moreover, the trustee must maintain in Tennessee some or all of the property that is the subject of the trust itself.

The layer of protection for assets in a DAPT may seem invincible, but in reality, there are some limitations on the shelter offered by the DAPT. Creditors can reach the assets if the transfer was a fraudulent transfer under the Tennessee Fraudulent Transfers Act. Even if the transfer was not fraudulent, creditors can reach the trust assets if the creditor files suit within four years of the creation and funding of the trust. Basically, this means that four years have to pass for the assets to be fully protected from even legal transfers.

The DAPT created by Tennessee has potential, but it is probably best suited for residents of Tennessee, especially those with most of their assets in Tennessee. The trust should be funded early, to avoid any possible problems with regard to the four-year minimum limitation for any transfer. Also, someone who is considering bankruptcy would find the DAPT to be an ineffective means of protecting assets.

The term of the trust can currently be extended for 360 years, as long as certain other guidelines are met. No other trust can come close to the DAPT in terms of longevity. If the preceding parameters fit your estate plan, a DAPT should be considered in any future planning.