Tennessee Investment Services 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.

Hawaii has become the 13th state to allow an individual to set up a trust for his or her benefit which is protected from the individual’s creditors. Unlike Tennessee, Hawaii’s law has limits on how much you can transfer to the trust and what kind of assets you can place in the trust. In addition to these restrictions, anyone who establishes such a trust must pay a tax to the state equal to 1% of the assets transferred to the trust. Hawaii is the only state that charges a tax to establish such a trust.

Because of this tax, it is unlikely that anyone other than a resident of Hawaii would use a Hawaii trust rather than a trust in one of the other 12 states. Tennessee’s asset protection trust law compares very favorably to the other asset protection trust states. The Tennessee legislature made several improvements to our law this spring in order to keep our law at the forefront. Tennessee is still the only Southeastern state that permits self-settled asset protection trusts. See the enclosed map for the other states.
 

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.