Self-settled Asset Protection Trusts in Georgia
| Jurisdiction | Georgia,United States |
| Citation | Vol. 23 No. 5 Pg. 0016 |
| Pages | 0016 |
| Publication year | 2018 |
The Legal
Self-Settled Asset Protection Trusts in Georgia
Self-settled asset protection trusts (SSAPTs) allow an individual to place assets in trust so the assets are both available to the individual and protected from the individual's creditors. This article addresses a number of issues involving SSAPTs in Georgia, including the anticipated effect SSAPT legislation would have on the amount of trust assets administered in Georgia.
BY T. KYLE KING AND BLAKE N. MELTON
Self-settled asset protection trusts (SSAPTs) allow an individual to place assets in trust so the assets are both available to the individual and protected from the individual's creditors. For example, a settlor who is worth $10 million might transfer $3 million to an SSAPT of which the settlor, along with his or her descendants, is a discretionary beneficiary. If the settlor encountered financial trouble, the settlor's creditors could not proceed against the trust assets; however, the trust could continue to make distributions to the settlor (or more likely pay bills and other expenses on behalf of the settlor). Stated colloquially, the settlor would have taken $3 million "off the table."
The first express SSAPT statute was enacted in Alaska in 1997.[1] As of December 2016, 18 states have enacted such legislation, including other southern states like Mississippi, Tennessee and Virginia.[2] SSAPT legislation has been introduced annually in the Georgia General Assembly for several consecutive sessions.[3]
These events suggest that Georgia attorneys should develop an informed opinion on the merits of SSAPTs in Georgia. This article will summarize the competing arguments in an objective manner, neither supporting nor opposing the establishment of SSAPTs in Georgia, with the goal of facilitating informed debate. The only position taken will be that, of all possible outcomes, the worst would be for Georgia to adopt or reject SSAPTs on the basis of misinformation and misconceptions.
SSAPT Anti-Abuse Provisions
All SSAPT legislation contains anti-abuse provisions, simply because, without such provisions, SSAPTs would offend most individuals' sense of fairness. Two primary anti-abuse provisions (which also apply to spendthrift trusts, discussed infra) are the Uniform Voidable Transactions Act (UVTA) and legislation protecting what are known as "exception creditors."
UVTA applies to transfers to SSAPTs— as to all asset transfers—regardless of whether exception creditors are involved. While a full discussion of UVTA exceeds the scope of this article, UVTA voids transfers that are made with actual intent to hinder, delay, or defraud past or future creditors; that are made without receiving equivalent value and render the debtor insolvent; or that leave the debtor with unreasonably limited assets in relation to the transaction.[4] At its most basic level, UVTA would prevent an individual from making a valid transfer to an SSAPT as the creditors were gathering at the proverbial courthouse steps.
Spendthrift trusts and SSAPTs are also subject to the claims of exception creditors, who may make effective claims against trust property, regardless of the propriety of the transfer to the trust. In Georgia, exception creditors for spendthrift trusts include those asserting claims against the beneficiary for alimony or child support, taxes or other governmental claims, judgments for torts, restitution from criminal convictions and for necessities[5]—in other words, creditors who, on the basis of public policy, should not be thwarted by the existence of the trust. Georgia is an outlier in including tort and criminal restitution creditors as exception creditors, but is otherwise consistent with the majority of states.
If SSAPTs are introduced into Georgia law, careful consideration should be given to any disparities among exception creditors for spendthrift trusts and SSAPTs. Some previous SSAPT proposals in Georgia included fewer exception creditors than currently exist for spendthrift trusts, which would create an environment where a trust established by a parent for a child would enjoy less creditor protection than a trust established by that parent for the parent's own benefit. In order to avoid incongruous outcomes, the composition of the class of statutory exception creditors able to reach the assets of spendthrift trusts should be considered when defining the class of exception creditors capable of reaching SSAPT assets.[6]
Additional anti-abuse provisions, which generally are inapplicable to spendthrift trusts, include special statutes of limitation, requiring notice to creditors upon the creation or funding of an SSAPT and requiring an affidavit of solvency from the settlor prior to creating or funding an SSAPT. There is a great deal of variation among the states as to whether and to what extent such anti-abuse provisions are incorporated into their SSAPT statutes.
Assessments of these anti-abuse provisions vary widely. Proponents assert their adequacy, albeit often in a fairly abstract and theoretical fashion. For example, they note the robust and far-reaching nature of UVTA. Opponents most often counter more practically: even if the anti-abuse provisions are ultimately effective, there is a substantial difference between collecting a debt upon delivery of goods or completion of work and collecting that debt after protracted litigation, with all its attendant delays, expenses and uncertainties.
In other words, opponents believe that even if the creditor ultimately prevails in court, the creditor actually lost as soon as the SSAPT required litigation that otherwise would have been unnecessary. Opponents concede that plenty of nefarious, creditor-avoiding conduct occurs currently without any encouragement from SSAPTs. However, they worry the existence of SSAPTs would cause such conduct to increase significantly.
Additionally, but less frequently, opponents will question the adequacy of UVTA on a technical level. Consider, for instance, an individual who transfers more than 90 percent of his or her assets to an SSAPT. Opponents worry that—while we all may know a fraudulent transfer when we see one—proving the transfer was fraudulent will generally still necessitate litigation, because the applicable legal standards are fact-intensive: the transfer was made with actual intent to hinder, delay or defraud; the remaining 10 percent of assets are unreasonably small in relation to the transaction; or the debtor reasonably should have believed he or she would incur debts beyond the debtor's ability to pay.[7]
Existing Law in Georgia
Under existing Georgia law, where the settlor is not a beneficiary of a trust, the inclusion of a few key phrases in the trust instrument will protect the assets held in trust from creditors. Such trusts are generally referred to as "spendthrift trusts," and virtually all modern trusts in Georgia are spendthrift trusts. For example, a spendthrift trust allows a parent to place assets in trust for the benefit of his or her child, thereby shielding those assets from the creditors of the beneficiary child. This "non-tax" benefit of trusts is widely touted by advisors and embraced by settlors, and is one of the motivating forces behind the recent nationwide trend toward trusts that last for a beneficiary's lifetime.
Additionally, many Georgia residents currently have SSAPTs administered in, and under the laws of, other states, such as Delaware or Tennessee.[8] Regarding these SSAPTs, there are two fundamental issues: whether such arrangements are effective in the other jurisdiction, and, if so, whether Georgia courts will respect the legal precepts of the other jurisdiction.
Whether SSAPTs generally are especially effective remains an open question, because to date SSAPTs do not enjoy a very good record in reported cases. Proponents deal with these failures by noting the reported cases generally involve egregious actions by the debtor, suggesting it is reasonable to expect these sorts of cases will appear before appellate courts, and cautioning...
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