Under the new “Connecticut Qualified Dispositions in Trust Act” that went into effect on January 1, 2020, an individual may now set up a trust (referred to as an Asset Protection Trust or APT) for his or her own benefit which protects against claims of most future creditors. Previously, Connecticut residents who wished to set up an APT needed to go to an ATP-friendly state, such as Delaware, and utilize a local trustee. This approach was both inconvenient and often costly. Using a Connecticut APT also avoids the uncertainty, due to recent cases, regarding how much protection out-of-state trusts provide.
A Connecticut APT must meet certain requirements including primarily: (1) the trust must be irrevocable; (2) one of the trustees with material responsibilities must be a Connecticut resident or a bank or trust company authorized to act in Connecticut; (3) Connecticut law must govern the trust; and (4) the trust must contain a spendthrift clause (which means that a beneficiary may not voluntarily or involuntarily transfer his interest in the trust).
The settlor (creator) may receive income and principal distributions made by the trustee in its discretion, and may also have the right to receive up to 5% of the value of the trust property each year. In addition, the settlor may retain certain powers, including the power to veto a distribution to another beneficiary from the trust, and a limited power of appointment exercisable by Will to determine how trust assets pass at his or her death. By including these last two powers, no taxable gift is made at the time of the transfer. This type of trust should not be used to make taxable gifts since these trust assets may be includible in the settlor’s estate due to the settlor being a potential beneficiary.
The assets held in the APT will generally be protected against future creditor claims, except fraudulent transfer claims (e.g., if the transfer of assets to an APT renders the settlor insolvent, the transfer may be considered fraudulent). Your attorney will require that you complete a solvency affidavit before drafting the APT to make sure that you are a good candidate.
Claims of future creditors are barred four years after the assets were transferred to the trust. Claims of existing creditors are subject to the same four-year period or within one year after the transfer to the APT was discovered by the creditor (or reasonably could have been discovered), whichever occurs later. If the settlor/debtor files for bankruptcy, then federal bankruptcy laws prevail and the statute of limitations is ten years from the date of the petition for bankruptcy. An APT does not protect against child support obligations and marital support/division of assets obligations pursuant to an agreement that existed prior to the transfer of assets, and tort claims arising prior to the transfer of assets. In addition, an APT cannot be used to circumvent state or federal Medicaid laws. For more information, please contact Lisa F. Metz (lmetz@brodywilk.com) or another BW attorney.