On May 10, 2007, Governor Phil Bredesen signed into law the "Tennessee Investment Services Act," which will become effective on July 1, 2007. The legislation creates a new era of trust and creditor's rights law in Tennessee and replaces law that has been in place since the founding of Tennessee. Tennessee becomes only the ninth state to enact legislation permitting the creation of self-created (self-settled) asset protection trusts, joining Alaska, Delaware, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota and Utah.

Under prior law, if an individual created a trust under which he is a beneficiary, the assets of the trust were subject to the claims of his creditors. As a result, an individual who built up a nest egg of wealth could not retain control of those assets and ensure their availability for future needs while simultaneously insulating them from a catastrophic event such as a claim for damages resulting from an automobile accident or a malpractice claim. The new law allows this protection by the creation of a self-settled, asset protection trust referred to as an "Investment Services Trust" (IST). An IST is an irrevocable trust into which an individual transfers assets (the "settlor") while retaining one or more of the following rights:

  • Direct the investment of the IST assets
  • Receive trust income
  • Request up to 5% of trust principal annually Receive additional distributions of principal based upon the discretion of the trustee or another appointed advisor
  • Live in a home owned by the trust
  • Veto distributions to any other permissible beneficiary
  • Direct the distribution of the trust assets upon death to any one or more persons other than the settlor's creditors, estate or creditors of the settlor's estate
  • Remove the trustee and other trust advisors and appoint their successors, provided they are not related or subordinate to the settlor
  • The settlor may not serve as the trustee of the IST.

The trustee must be either an individual residing in Tennessee or a corporate trustee who is authorized to conduct business in Tennessee. At least some portion of the assets of the IST must be administered in Tennessee. At the creation of an IST, the settlor is required to provide an affidavit under oath which must include, among other things, a statement that by creating the trust he does not intend to defraud a creditor and that he does not have any pending or threatened court action against him other than those identified in the affidavit. The IST does not provide asset protection for assets transferred to it until four years after the transfer. At that time, the settlor's creditors are prevented from seizing the assets of the IST to satisfy claims against the settlor. It is important to note that there are three additional limitations on the protection afforded by an IST:

  • Federal bankruptcy law has a 10-year period to set aside transfers which could apply to an IST under certain circumstances.
  • Mandatory distributions (and discretionary distributions once made) may be garnished.
  • The law is unsettled whether a court of another state is required to recognize the creditor protection of an IST under the full faith and credit clause of the Constitution.

The new legislation also extends the period for which any trust can exist from essentially 90 years to 360 years, joining the ranks of states such as Delaware, South Dakota, Nevada, Alaska and Florida that similarly either have eliminated this limitation totally or extended it significantly. This will permit an individual to place property in trust to ensure assets are available to benefit not only his children and grandchildren but also the next ten generations of his descendants. If combined with an allocation of the individual's generation skipping transfer tax exemption, this also will allow those assets to benefit each generation without the payment of any estate or gift taxes!

The Tennessee Investment Services Act provides an asset protection opportunity for individuals who are concerned about losing their assets to unforeseen creditors without the complexity of offshore trusts and the unknown limitations of asset protection trusts under the laws of other states that permit them. Creating an IST is not a simple, routine process. Creating an IST requires adherence to a number of statutory and equitable constraints as well as a thorough understanding of gift, estate and inheritance tax law and creditor protection law. An IST presents a unique solution for asset protection planning while still retaining the ability to manage the assets and economically benefit from them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.