November 18, 2019
Effective January 1, 2020, Connecticut will join seventeen other states in allowing for self-settled domestic asset protection trusts (DAPTs). This change comes as part of an overhaul of Connecticut trust law brought about by Connecticut’s adoption of the Uniform Trust Act (the “Act”) on June 24, 2019. Other significant changes include the recognition of directed trusts, which allow appointment of a non-trustee to control one or more aspects of a trust’s administration, and a modification of the rule against perpetuities, which governs how long trusts may last. These changes create new planning opportunities for Connecticut residents (and others).
Domestic Asset Protection Trusts
By enacting the “Connecticut Qualified Dispositions in Trust Act” as part of the Act, Connecticut joins Alaska, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming in authorizing the use of DAPTs. A DAPT is an irrevocable self-settled trust in which the settlor or creator of the trust is also a discretionary trust beneficiary and the assets of which generally cannot be reached by the settlor’s future creditors. DAPTs can be particularly useful for high-net worth individuals and those individuals who work in high-risk or highly litigious professions, such as business owners or physicians.
Under the Connecticut Qualified Dispositions in Trust Act, the trust settlor may retain, among other rights, the right to receive trust income, to receive discretionary distributions of principal and to veto trust distributions. Despite the settlor’s retention of these rights, the DAPT will qualify for the protections afforded by the new statute if it is a “qualified disposition.” To meet the requirements of a “qualified disposition,” the trust instrument must: (i) be irrevocable; (ii) have a “qualified trustee,” meaning either a Connecticut resident or a state or federally chartered bank or trust company with a place of business in Connecticut, authorized to serve as a trustee; (iii) state that Connecticut law governs the validity, construction and administration of the trust; and (iv) contain a spendthrift clause (giving a third party full authority over spending decisions for the benefit of the beneficiary).
A Connecticut DAPT will not provide protection if the trust funding was the result of a fraudulent transfer. Likewise, the act does not protect against claims resulting from breach of court ordered child support or alimony obligations occurring prior to the date of the trust funding, or from liability for death, injury or property damage arising before the transfer to the DAPT.
The act is particularly beneficial to Connecticut residents who can now establish DAPTs in their home state. There has long been a concern based on case law in some states that if an individual is not a resident of the state under which he or she establishes a DAPT, the DAPT might not be respected by the state of residence.
In addition to its value in protecting assets from future creditors, a DAPT is a useful way of making completed gift transfers to utilize the temporarily higher federal gift tax exemption of $11,400,000 while retaining the ability to reacquire the transferred assets or the income therefrom should the settlor need to do so in the future. It is important to note, however, that for transfers by Connecticut residents in 2019 a state-level gift tax would apply if lifetime transfers exceed the current state gift tax exemption of $3,600,000. The Connecticut exemption is scheduled to match the larger federal exemption in 2023.
Dynasty Trust Planning
Before the passage of the Act, trusts in Connecticut were limited in duration to approximately 90 years from their establishment, forcing Connecticut residents wishing to create dynastic trusts for multiple generations of descendants to establish such trusts in other jurisdictions, such as Delaware, which have abolished the rule against perpetuities. Under the Act, Connecticut residents may now create dynastic trusts lasting up to 800 years, making it easier and more cost-effective for residents of Connecticut to establish dynasty trusts using Connecticut based asset managers and trustees.
As part of the Act, Connecticut has adopted the “Connecticut Uniform Directed Trust Act” permitting a non-trustee (referred to as a “trust director”) to have power over one or more aspects of a trust’s administration. A trust director is treated as a fiduciary and is subject to the same fiduciary duties as a trustee.
Powers that may be granted to a trust director include power over the investment of trust property or power over the distribution of trust property. A directed trust may be useful where, for example, the settlor wants a family member to control investment decisions, but wants someone else (such as a corporate trustee) to control distribution decisions. A directed trust is also useful where a corporate trustee is unable to manage certain trust assets (such as real estate).
We invite readers to contact us to discuss whether the Connecticut Uniform Trust Act could impact your optimal estate plan and whether a Domestic Asset Protection, Dynasty or Directed Trust could be right for you and your family.