On April 4, 2012, Governor Robert McDonnell signed into law asset protection trust legislation making Virginia the thirteenth state to enact comprehensive legislation permitting asset protection trusts since Alaska and Delaware first enacted such legislation in 1997 (nearly averaging one State per year). This legislation will be effective as of July 1, 2012. An exception has been grafted into § 55-545.05 of the Virginia Code that permits the creation of self-settled spendthrift trusts, which protect the assets of a qualified irrevocable trust against the claims of the creditors of a settlor who is also a beneficiary. Alaska, Delaware, South Dakota, Nevada, Wyoming, Oklahoma, Tennessee, Rhode Island, Utah, Missouri, New Hampshire and Hawaii have all enacted comprehensive legislation permitting asset protection trusts.
Like its predecessors, Virginia will not protect the assets of just any self-settled spendthrift trust created in the Commonwealth. To be a qualified self-settled spendthrift trust, it must satisfy the following criteria:
(a) irrevocable (further confirmed by subsection A.1. of § 55-545.05);
(b) created during the settlor’s lifetime;
(c) has at least one beneficiary other than the settlor, (i) to whom income may be paid, if settlor is eligible to receive income, (ii) to whom principal may be paid, if settlor is eligible to receive principal, or (iii) to whom income and principal may be paid, if settlor is eligible to receive both;
(d) has at least one “qualified trustee;”
(e) expressly incorporates the law of the Commonwealth of Virginia to govern the validity, construction and administration of the trust;
(f) contains a spendthrift provision that restrains both voluntary and involuntary transfer of the settlor’s “qualified interest;” and
(g) the settlor does not retain the right to disapprove distributions (i.e., a veto power).
The checklist above includes other terms with particular meanings that determine the scope of protection and administration of a qualified self-settled spendthrift trust.