Estate Planning and Probate Section

Once a part of the TBA Tax section, the Estate Planning and Probate section was created after it was determined that there was a need for a separate and distinct section. It now provides an annual CLE Forum and provides information through newsletters.

U.S. Trust
414 Union St.
Nashville, TN 37219
Immediate Past Chair
UT Institute of Agriculture,...
114 Morgan Hall 2621 Morgan Cir.
Knoxville, TN 37996

Volunteers Needed for Memphis Wills for Heroes Clinic

The TBA Young Lawyers Division will hold a free Wills for Heroes legal clinic tomorrow in Memphis at the Benjamin L. Hooks Library, 3030 Poplar Ave., from 9 a.m. to 5 p.m. The clinic will provide free wills, powers of attorney and advance directives for Tennessee's firefighters, law enforcement officers and other emergency responders. Attorneys who would like to volunteer or get more information should contact Memphis lawyer Chasity Grice.

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The Advantages of Tennessee Trusts: Investment Services Act Trusts

Tennessee is often at the cutting edge of trust law, as evidenced by its recent passage of laws allowing for the creation of Tenancy in the Entirety trusts, which will be a topic of one of my future posts along with posts on other types of Tennessee trusts.

Tennessee Investment Services Act trusts are excellent vehicles for protection of assets, particularly real and personal property located in Tennessee as well as for bank and investment accounts custodied in Tennessee. Investment Services Act trusts are Tennessee’s version of what are colloquially known as domestic asset protection trusts. These trusts can serve more purposes than simply protecting assets from creditors, although they are of course excellent for that purpose.

The basic concept of all trusts is that there is a person who gives property (typically called a grantor or settlor) to a person (known as a trustee) to hold on behalf of the trust’s beneficiaries. Historically, all of the states forbid self-settled spendthrift trusts. “Self-settled” means the grantor (i.e. the person putting the assets into the trust) is also a beneficiary. “Spendthrift” is a provision whereby the trustee decides how the trust funds are spent for the beneficiary, and therefore creditors cannot reach the funds in the trust. Generally, this means the beneficiaries do not have direct control over the trust. It should be noted however that a creditor of that beneficiary could reach any property distributed to that beneficiary.

In 1997, Alaska became the first state to allow self-settled spendthrift trusts. Tennessee and several other states soon followed. The main benefits of the Tennessee Investment Services Act trust (as amended effective July 1, 2013) are that pre-transfer creditors have either two years from the date of the transfer of the property to the trust (or six months from the date of the creditor’s having discovered the transfer) to challenge the transfer or they are barred from bringing a claim. An interesting aspect of Tennessee law is that “discovery” is deemed if the transfer is a public record. Many attorneys have begun recording affidavits of transfers in the applicable counties in order to make the transfers a public record, and thus ensure the shortest statute of limitation possible. Even if an action is filed within the statute of limitations period, it must be shown with clear and convincing evidence that the transfer was for the purpose of defrauding that creditor.

There are other advantages to Tennessee Investment Services Act trusts. They allow for flexible tax planning. Unlike in certain other states, tort claimants are not exemption creditors (i.e. tort claimants would be treated the same as any other creditors for the purposes of the Tennessee act). Tennessee law allows for decanting and virtual representation (I will be covering these topics in future posts, but they allow for methods of fixing certain problems in the trust without court intervention). The Tennessee law creating these trusts, therefore, provides a great deal of protection for assets as well as flexibility for planning. The basic requirements for creating one of these trusts are is that the trust:

  • must be governed by Tennessee law,
  • must be irrevocable,
  • must have a spendthrift clause,
  • must have a qualified trustee, and
  • there must be an executed affidavit.

The qualified trustee must:

  1. be a Tennessee resident or a corporate trustee licensed under Tennessee law, and
  2. have at least some certain duties such as custody of assets, preparing tax returns, or be materially administering the trust.

The grantor/settlor CANNOT be the trustee. The affidavit is required to state that the grantor/settlor had full right and title to transfer the property, that the transfer does not render the grantor/settlor insolvent, that there is no fraud and the assets were obtained lawfully, that there is not litigation or administrative proceedings pending against the grantor/settlor, and that the grantor/settlor isn’t bankrupt.

There are some areas to be cautious about, however. The limited case law has shown that domestic asset protection trusts may have limited or no protection for assets located outside of the state of domicile for the trust. Nonresidents of Tennessee can certainly set up Tennessee Investment Services Act trusts, particularly if the qualified trustee and the property are located/custodied in Tennessee, but great care must be used if property outside of Tennessee is to be added to the trust. The Tennessee Investment Services Trust Act also does not protect against past due child support, past due alimony, and division of alimony. A much longer ten year statute of limitations may also apply in certain cases of bankruptcy.

As a final note, it is generally better to use the domestic asset protection trust law of the state of domicile (provided that said state has such a law) since a recent case out of Utah (regarding a Nevada asset protection trust) has shown that even among states with asset protection trust laws, other states’ laws may have some difficulties in being enforced. Fortunately, Tennessee’s Investment Services Act does have provisions allowing trusts from other states to be transferred to Tennessee.

A decision to enter into any sort of trust is not one to take lightly, as there are real property laws, tax laws, asset protection laws, etc. that must be carefully taken into account, and many of those details exceed the limited scope of this blog post. As always, we strongly recommend seeking the advice of a professional before setting up trusts.

Michael Goode, a Nashville attorney with Stites & Harbison PLLC is a member of the TBA Estate Planning & Probate Section's Executive Council

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