Opportunities & Considerations in Establishing a Tennessee Investment Services Trust
There are many opportunities, benefits and detriments offered by establishing a Tennessee Investment Services Trust (TIST), or what is commonly called a Tennessee asset protection trust.
First adopted in 2007, the statute is still relatively new and untested. It changes centuries of Tennessee common law which generally prohibits an individual from protecting assets from creditor claims by creating a trust for his or her own benefit.
To create an eligible Tennessee Investment Services Trust you must:
- Appoint a third-party trustee to take legal title to the assets.
- Contribute unencumbered assets to be administered in Tennessee. (Generally you must retain sufficient assets and income to provide minimal support for yourself and your dependents.)
- Name successor beneficiaries.
- Set out the general terms for the investment, management and distribution of the assets.
- Execute an affidavit stating among other things: a) the transfer of assets to the trust will not render you insolvent, b) you do not intend to defraud any creditor, c) there are no pending or threatened legal actions against you and d) you do not contemplate filing bankruptcy.
The trustee acts as the legal owner of the property; investing, managing reinvesting the assets and making discretionary distributions to you and potentially to the other beneficiaries. You may establish the trust to continue for multiple generations beyond your own lifetime and in that sense the trust may serve as a major portion of your overall estate plan.
Because the trust is irrevocable, you give up for your lifetime some control over the trust property. Among the rights you may retain are:
- Authority to direct, consent or disapprove the investment decisions to be made by the trustee.
- The authority to veto distributions from the trust.
- A power to appoint (either during life or by will at death) the trust assets.
- The right to remove a trustee and to appoint a successor trustee (but you may not appoint a trustee who is “related or subordinate” to yourself).
Your trustee may make discretionary distributions to you, but you may not compel distributions.
The primary benefit for you from the trust establishment and operation is the stated protection under the law which exempts the trust assets from the claims of your creditors made more than two years after the trust is established. Claims for child support, alimony and divorce-court-ordered property settlement obligations are now specifically excepted from the creditor protection. (This resulted from a more recent amendment to the statute.) In addition, if the trust agreement mandates income distributions, a creditor may be able to garnish those distributions.
An additional benefit of the TIST is that property of the trust need not be administered and distributed under probate at your death.
Drawbacks from the use of the trust include:
- Because a third party must serve as trustee there will usually be costs involved. A professional trustee (for example an institution or an accountant or attorney) will need to be compensated. Annual trustee fees typically range from .75 of 1% to 1.25% of trust assets. Most institutions in Tennessee and elsewhere have an annual minimum of $10,000 or more.
- The third-party trustee may be reluctant to acquire or manage assets which carry a substantial risk of liability to themselves (e.g. operating a high-risk business).
- Generally the trust should not hold encumbered assets because the liability will undermine the creditor protection and the trust may not have sufficient guaranteed cash flow to service the debt.
- Ownership of the assets by a trustee may sacrifice speed and flexibility in making investment changes.
- On its face the trust must be irrevocable.
In addition to the creditor protection and probate avoidance described above, the TIST may provide the following additional benefits:
- If inherited assets are transferred to the trust, the permanent segregation of those assets in a separate and protected entity may prevent inadvertent co-mingling with marital property and avoid transmutation or conversion of those assets into marital property subject to division on divorce.
- If some or all of the assets are permanently committed to your beneficiaries, the future growth in those assets may avoid estate and generation-skipping tax.
- The trustee’s advice and consent to investment and related business decisions may augment your personal investment and business planning to help you avoid personal and financial pitfalls.
- The trustee’s advice and consent with respect to estimated income tax obligations may facilitate your personal income tax compliance.
- The personal financial security offered by the knowledge that assets and income from the TIST are available to you may enable you to invest non-trust assets in more speculative, higher potential-return business opportunities than you would otherwise find comfortable if all your assets were exposed to the vicissitudes of those businesses. Your general anxiety level may be reduced.
The most important decision when forming an asset protection trust is the selection of the trustee. Ideally you will appoint someone in whom you have great confidence and who will be available to serve for a long term. You will also want to have at least one back-up trustee. Because the trust is irrevocable you do not want to be in a position where the trustee dies, resigns or is removed and you do not have a replacement ready to step in and act promptly.