Posted by Martin Heller Potempa & Sheppard, PLLC on October 20, 2021
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In 2007, Tennessee created its own domestic asset protection trust, the Tennessee Investment Services Trust (“TIST”). Tennessee is one of 17 states that offer some type of domestic asset protection trust. Nevada is often seen as one of the most protective jurisdictions for creating a domestic asset protection trust. Tennessee is also considered one of the best states in which to create one.
The TIST is an irrevocable trust that allows the client to have a significant amount of access and control over the property placed in the trust, while at the same time protecting the property from the client’s creditors. In this context, “property” includes both real and personal property, such as investments, interest in a business, etc.
Basics of a TIST
For a trust to take advantage of the Tennessee Investment Services Trust protections, the trust must:
Have at least one of the trustees be a “Tennessee” trustee, who is either a Tennessee resident or a corporate trustee authorized to serve in Tennessee, but cannot be the client creating the trust; and
Have at least some of the trust property held in Tennessee, such as an investment account in a bank or investment company located in Tennessee.
Even though the TIST is an irrevocable trust, below are some of the powers the client can retain without losing the protection of the trust:
The right to receive distributions from the trust including: trust income; trust principal, at the trustee’s discretion; and each year, five percent of either (i) the trust’s initial value, or (ii) the trust’s value as determined annually by the trust provisions.
The power to veto proposed distributions to other trust beneficiaries.
The right to remove a trustee and appoint a successor trustee.
The right to control all investment decisions.
The power to direct how trust property is distributed among the beneficiaries at the client’s death.
Generally, the TIST’s protection from the client’s creditors does not begin until the property has been in the trust for two years. Additionally, to assert a claim against property transferred to the trust, the creditor has to first overcome a high evidentiary burden of a clear and convincing standard to show that the property is not yet protected. A creditor can only bring a claim against trust property if they can prove by the heightened standard that the client transferred the property to the trust with the intent to defraud that specific creditor. A creditor claiming that the transfer was done to protect from the client’s creditors in general, may not be enough to reach inside the TIST.
What Limitations Does a TIST Have?
A TIST does have some limitations:
The trust is irrevocable, meaning that the trust language cannot be changed.
The trust can only protect property against future claims. It cannot protect against claims that already exist.
If the client removes a trustee, the client can only appoint a successor trustee who is not related to the client and not subordinate to the client.
The trust property is not protected against past-due child support or past-due alimony.
The trust is generally not outside the client’s taxable estate due to the various powers retained by the client to receive distributions of trust property. Therefore, the client also generally engages in estate planning at the same time as the TIST planning.
How to Create an Effective TIST
Court cases have recently come out that suggest the trust is strongest when both (1) the trust, and (2) the property held by the trust are in the same state. Additionally, because bankruptcy is a federal court process, there are some extra steps to evaluate the trust’s level of protection in those situations.
Possibly the most important takeaway from this is that time can be on your side. The sooner a TIST is created and assets transferred into it, the better the protection will be against something bad happening in the future. TISTs work well when they are created proactively and do not work as well when they are created reactively.
Learn More From Experienced Trust Attorneys
At Martin Heller Potempa & Sheppard, PLLC, our Nashville trust attorneys understand how and when to use a Tennessee Investment Services Trust properly. Our team can help you understand what you need to know about Tennessee’s domestic asset protection trust, if one is right for you, and how to create one properly.
Contact a trust attorney today to get assistance with trusts and any other estate planning needs you have.
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