asset protection trust

Today, one of my clients called me because his Trustee is moving to Colorado.  Five years ago, he established a Tennessee Investment Services Trust, a/k/a asset protection trust.  The creditor protection provided by these trusts is dependent upon the Trustee being a Tennessee resident or trust company.

Tennessee Community Property Trusts have the same requirement.  You need a Tennessee trustee if you want to obtain the benefits provided by these trusts.

When your Trustee of one of these two types of trusts moves away from Tennessee, you must change the Trustee to a Tennessee resident or trust company.  You should first review the trust agreement to see if a successor trustee has already been designated.  Assuming that a successor has been designated, the currently serving Trustee can resign and the successor can take over.  It is customary for the successor to ask the beneficiaries to release the successor from the duty of investigating the actions of the prior Trustee.

If no successor is designated in the trust agreement, then you will need to follow the procedures set forth in the trust agreement to appoint a successor.  With asset protection trusts, you must appoint a Disinterested Trustee, i.e. a corporate Trustee or a Tennessee resident who is not a beneficiary or related to you.  In the case of a Tennessee Community Property Trust, the Trustee does not have to be Disinterested.

Most other types of trusts do not require a Tennessee trustee.  However, be wary of a potential tax problem.  Some states, such as California, impose state income taxes just because the Trustee resides in that state.  You can avoid these taxes by appointing a different Trustee.

I recommend that you call your trust attorney when your Trustee moves away from Tennessee.

In the Liner divorce case, the court awarded 1/2 of the equity in the husband’s premarital residence to the wife. As a general rule, assets owned by one spouse prior to the marriage are treated as separate property and are not divided in the divorce. There are some exceptions, including the division of appreciation of the property if the non-owner contributes to the appreciation. This case did not involve appreciation. Rather, the wife was awarded 1/2 of the house primarily because she made non-financial contributions to the ongoing maintenance and management of the residence.

This case demonstrates the importance of entering into a prenuptial agreement or an asset protection trust prior to marriage. Assets that you transfer into an asset protection trust prior to the marriage will belong to the trust and will not be subject to division in the event of a divorce.

 

Tennessee imposes Franchise and Excise Tax on limited partnerships and limited liability companies unless they qualify for an exemption. Due to a law change enacted earlier this year, numerous entities converted from the family owned non-corporate entity (“FONCE”) exemption to the obligated member entity (“OME”) exemption.

The OME exemption requires the entity’s owners to assume personal responsibility for liabilities of the entity. Most entities that switched to the OME exemption own commercial real estate.

In order to qualify for the OME exemption for 2009, appropriate documentation had to be filed with the Tennessee Secretary of State by October 1, 2009. On November 10, 2009, the Department of Revenue imposed an additional requirement to qualify for the OME exemption for 2009.

Each entity that switched to the OME exemption must file a new Application for Exemption with the Department of Revenue on or before November 30, 2009. If the entity does not file an Application for Exemption by November 30, 2009, it will not be exempt for 2009.

The Department of Revenue has discretion to allow a late filing of the application. However, if they permit the late filing, they must charge a $1,000 penalty.

If the entity failed to convert to an OME prior to October 1, 2009, it has the option of converting to an OME prior to December 31, 2009 if the entity wants to be exempt from franchise and excise taxes for 2010 and future years.

If you are an owner of an OME and are concerned about your potential exposure to liabilities of the entity, you should consider transferring a portion of your assets to an asset protection trust.
 

Federal and state lawmakers continue to pass laws that provide tax and non-tax benefits to trusts. I have often wondered why legislators love trusts so much.

Richard Johnson and I did a presentation to the Nashville Estate Planning Council titled “60 Trusts in 60 minutes.” We came up with 65 different types of trusts. Let me know if we forgot any.
 

I have received several inquiries about steps that can be taken to protect assets when your spouse or parent continues to drive when they should not be driving.

The obvious answer is to try to persuade the person to give up the car keys. It helps if you can offer a plan for providing transportation assistance. When the person refuses to stop driving, there are some steps that can be taken to protect assets.

I advised one woman to change the ownership of the car from joint ownership to her husband. If her husband has a wreck, this should decrease the chance that her assets will be endangered. Incidentally, you should also change the title for your child’s car when your child turns age 18.

Another couple decided to transfer their assets to two separate asset protection trusts, one for the husband and one for the wife. In addition to providing asset protection, these trusts will operate as a probate avoidance mechanism, similar to a revocable trust.

For years, my durable general power of attorney form has authorized the agent to transfer the principal’s assets to a revocable trust established by the agent for the principal’s benefit. I have now expanded this power to provide the agent with the ability to transfer assets to an asset protection trust established by the agent for the principal’s benefit.

Incapacitated persons seldom attempt to drive. However, I know of situations in which persons with dementia have assaulted other persons. If assets have been transferred to an asset protection trust prior to the assault, the assets should be protected from any monetary judgment resulting from the assault.