CREDITOR PROTECTION UNDER NEW TENNESSEE ACT

A new Tennessee law allows individuals to establish trusts to protect assets from creditors.  Effective July 1, 2007, the 'Tennessee Investment Services Act of 2007' (the 'Act') provides a new estate planning and asset protection opportunity in Tennessee.  Prior to the passage of the Act, Tennessee trust law was similar to most states with respect to 'self-settled trusts' (trusts that benefit the transferor).  Prior to the Act, an individual could not create a self-settled trust in which the assets would be protected from the transferors creditors. 

As the result of the Act, an individual may fund a self-settled trust that meets the statutory requirements and shelter those assets from the individuals creditors.  This protection is limited during the first four years following any funding, and the trust agreement and funding must follow the statutory procedures:

• The transferor must transfer the assets to a qualified 'investment services trust'. 
• Prior to funding the trust, the transferor must execute a 'qualified affidavit'.

The transferor of a qualified investment services trust may not serve as trustee, but may serve as an investment advisor.  The trustee of a qualified investment services trust must be a qualified trustee, meaning a Tennessee resident individual or financial or trust institution that is permitted to serve as a trustee in Tennessee.  In addition, the trust must (a) be irrevocable, (b) contain a 'spendthrift' provision (prohibits voluntary or involuntary assignment or pledge) and (c) be subject to and governed by Tennessee law. 

The Act sets forth certain interests which a transferor may retain with respect to a qualified investment services trust.  Some of the interests which the Act permits include the right to:

• Receive mandatory or discretionary income (interest, dividends, rents, etc.) 
• Receive annual distributions not exceeding five percent of the original or redetermined value 
• Receive principal distributions for health, maintenance and support 
• Determine ultimate beneficiaries through a limited power to determine the recipients of the remaining trust balance at the transferors death 
• Lifetime distributions from charitable remainder trusts 
• Use of a residence in certain qualified residence trusts 

Prior to funding an investment services trust, an individual must execute an affidavit, stating among other things, that the transfer will not render the transferor insolvent and is not intended to defraud any existing creditors.

Similar to individual retirement accounts and 401(k) plans, we believe investment services trusts may provide an opportunity for certain individuals to set aside a 'nest egg' which will be protected from future creditors.  Candidates for this technique include higher net worth individuals and those involved in high risk professions.  As with any planning opportunity, consideration must be given to estate, income and gift tax issues. 

Please contact us if you have any questions regarding this information.