By: G.P. Wakefield Buxton, JD, LL.M., MBA, Partner at TrustBuilders Law Group, Buxton and Buxton, PC

On July 1st of 2012, Governor McDonnell signed legislation to permit self-settled trusts in Virginia.  Self-settled spendthrift trusts, often referred to as Domestic Asset Protection Trusts (DAPTs), are trusts in which the individual is both the grantor and the beneficiary of the trust.   Virginia joins the likes of Alaska, Delaware, Utah, Nevada, Rhode Island, South Dakota, Tennessee, Wyoming, Oklahoma and Ohio as one of only 14 states now permitting these unique and highly desirable instruments.  

Self-settled spendthrift trusts are typically used to shield assets from 3rd party creditors.  They are particularly attractive to higher net-worth individuals and families because they offer a unique combination of asset protection and retained grantor control.  In other words, if done properly, one can effectively remove property from their estate while still maintaining a certain degree of benefit and control over that property.

It should be noted, that Virginia’s asset protection legislation is more conservative than most others states.  In order to qualify as a self-settled trust in the Commonwealth, the trust must be irrevocable and there must be a “qualified” Virginia trustee who not only maintains custody of trust property, but also materially participates in the administration of the trust.   The trustee also needs to be “independent” excluding such parties as the grantor’s spouse, parents, siblings, children and employees, and the trust must provide that the grantor is to receive principal or income distributions only at the sole discretion of the trustee.   

The new legislation appears to be slightly less favorable from a creditor rights standpoint as well.  There is currently a five year look-back period in which a creditor existing at the time of the creation of the trust may bring a claim.  This is quite a bit longer than in most jurisdictions. In addition, Virginia’s new law requires that there be at least one additional non-grantor beneficiary of the trust and also prohibits the grantor from retaining a right to veto distribution to that or other beneficiaries. 

Despite these and other limitations, Virginia’s self-settled spendthrift trust statute provides yet another valuable tool for preserving wealth in an increasingly litigious society.    It is a less expensive and far safer alternative to traditional foreign asset protection trusts and a natural compliment to the modern multi-generational dynasty trust.