Wealth Preservation Strategies and “Asset Protection” Trusts

Virginia is currently one of about fifteen states that recognize Wealth Preservation Trusts, also called “asset protection trusts (APTs),” “domestic asset protection trusts (DAPTs),” or “self-settled spendthrift trusts.”

Wealth Preservation TrustWhat is a Wealth Preservation Trust?

A Wealth Preservation Trust is an irrevocable trust that you create yourself in which you or a trusted family member either retains, or may in the future be granted, a right to receive income or property that becomes part of the trust. Its purpose is both to protect you from errors and omissions you might make yourself, and to shield the family assets in the trust from predators. In those regards, it works like a trust that someone else created for you and your family and funded with assets that he owned. The difference is that you create the Wealth Preservation Trust yourself, making gifts of property or accounts of yours that might be needed to support your family at some time in the future.

Who might want or need the protections of a Wealth Preservation Trust?

Most commonly, people who have a higher-than-average chance of being sued, such as physicians, dentists, architects and contractors, professional engineers, entrepreneurs who are starting new businesses, and risk-takers generally. Generally, such people have high net worths, but in many cases, a Wealth Preservation Trust can be a useful tool for setting aside a “nest egg” for young professionals and young entrepreneurs.

But regular folks who aren’t risk-takers can also benefit from conservative wealth preservation (sometimes erroneously called “asset-protection”) estate planning strategies. With a divorce rate of over 50%, as well as an increasing number of lawsuits, creditor protection is an important objective, and for some, the most important objective, of estate planning.

Almost anyone can potentially fall victim to a lawsuit. Lawsuits can, and often do, arise out of accidents that truly weren’t your fault. Divorce or foreclosure might not have hit you, but the chances are they’ve hit someone you know. As financial writer Ben Stein has pointed out, we, ourselves, are the only ones we can reliably count on to assure our families’ security (and to fund our own retirements).

Now, one need not and should not have all (or even substantially all) of his assets in a Wealth Preservation Trust. But isn’t it wise to diversify your risk – to place a core group of assets – a family “nest egg” – outside the reach of predators?

What protection does a Wealth Preservation Trust offer you and your beneficiaries?

Under Virginia law, a properly drafted Wealth Preservation Trust (referred to in the Virginia Code as a “qualified self-settled spendthrift trust,” sometimes abbreviated “QSSST”) offers immediate protection against people who seek to lay claim to your assets in the future (after you establish and transfer assets to the trust); and against present creditors and claimants after a five-year waiting period. (Other states that recognize domestic asset protection trusts have shorter waiting periods than five years for existing creditors, but only Virginia currently offers immediate protection against future claims.)

What are the limitations of Wealth Preservation Trusts?

Unfortunately, all is not roses and rainbows. A Wealth Preservation Trust or similar irrevocable trust cannot be used to delay, hinder, or defraud your creditors in contravention of Virginia’s “fraudulent conveyance” laws. In fact, if a creditor can prove that a “fraudulent conveyance” to a Wealth Preservation Trust was made by you, the trust may be set aside, and attorney’s fees may be awarded to a creditor who proves fraudulent intent. The lesson here is that a Wealth Preservation Trust should be set up during “good times” – before any legal claims are filed or are even likely, before a professional error or omission occurs, and before extraordinary amounts of debt are incurred. (Right now might be a good time. Consider, if you will, that you may make regular contributions to a Wealth Preservation Trust just as you do under your retirement savings plans.)

Do you need an estate planning attorney to set up a Wealth Preservation Trust?

Definitely. The requirements of Virginia law, and the laws of the other states under which Wealth Preservation Trusts may be established, are many and detailed. Within the frameworks established by Virginia and foreign-state laws, there are various structures, strategies, and options that need to be considered and discussed before pen (or toner) is set to paper. (Remember, Wealth Preservation Trusts by their nature are irrevocable.) And keep in mind that there are other wealth preservation tools besides self-settled spendthrift trusts. These other tools, including most prominently third-party discretionary trusts, are often superior in many common situations. In addition, the interplay of wealth preservation and protection tools with federal and state estate tax and gift tax laws, life insurance, retirement plans, and pre-existing family trusts all need to be considered.

If you are considering wealth preservation estate planning, it is important that you consult an experienced estate planning attorney. This is not an area where you should take your advice from websites (even this one) or from non-attorney “asset protection consultants.” If you are a Virginian with questions about wealth preservation planning, I invite you call me at 703-276-0114, so that we can arrange an appointment to discuss your situation face to face. (If you’d like to contact me initially by email or by using a form on this website, please just say you’d like to discuss wealth preservation. Please do not include details about your particular situation.)

Finally,

A note for the technically minded, or for foreign-state attorneys who happen on this page: the current Virginia Code sections on self-settled DAPTs are sections 64.2-745.1 and 64.2-745.2. As you will see if you read them, these trusts are not do-it-yourself projects. In addtion, Virginia’s penalty statute for attorneys, CPAs, and even laymen who assist a fraudulent conveyance is Code section 55-82.1. Tread carefully on this ground.