[Guest Post by Christopher Guest] Though most people will not see the significance of April 4, 2012, it was a big date for estate planners in Virginia. On that date, Virginia Governor Bob McDonnell signed SB 11 expanding the number of types of trusts that are permissible in Virginia. Starting on July 1, 2012. Virginia will become the thirteenth state to permit the self-settling of domestic asset protection trusts (or DAPT)ⁱ. More significantly, the VA code sections will allow a settlor to establish an irrevocable trust of which the settlor is a beneficiary and will also provide spendthrift protection against claims from the settlor’s creditors.

Generally, a settlor establishes an irrevocable trust to minimize the settlor’s taxable estate and/or protect the settlor’s assets from claims from the settlor’s creditors. However, only under very rare occasions can the settlor be the beneficiary of the irrevocable trust. These rare occasions and lack of control make irrevocable trusts less attractive to most potential settlors. Virginia’s new law makes it much more desirable to a DAPT.

Virginia’s new trust code language is similar to the domestic asset protection trust legislation in the other twelve states by permitting the creation of “qualified self-settled spendthrift” trusts. The requirements to create a Virginia DAPT, include:

• The trust must be irrevocable;
• The settlor is only entitled to discretionary distributions of income and principal;
• The transfer cannot be for fraudulent reasons; and
• Requirements that connect the trust to the Commonwealth of Virginia, like a Virginia trustee who maintains custody within Virginia of some or all of the trust property, maintains records in Virginia, prepares Virginia fiduciary income tax returns, or otherwise materially participates within Virginia in the administration of the trust.

While much of the Virginia legislation is similar to the other states, Virginia’s DAPT legislation does have several unique aspects to it.

1. Virginia provides for a five-year period from the creation of the trust to allow creditors to make claims against the trust. This “claiming” period is longer in Virginia than the other states.
2. Unlike the other states, a settlor in Virginia may not retain a veto power over distributions.
3. The person or entity who approves distributions must be a qualified trustee and, for Virginia, that means an independent trustee. That will exclude spouses, descendants, siblings, parents, employees, and entities wherein the settlor controls thirty percent (30%) of the vote from being the trustee. Other states are less restrictive on the relationship of the person that can approve distributions.
4. Only the income and principal from the trust is protected from creditor’s claims. Other assets in the Virginia self-settled spendthrift trust might not be protected from the claims of creditors.

Regardless, a self-settled spendthrift trust or DAPT in Virginia might be an appropriate mechanism for those in the right circumstances.