By: Eric R. Kaplan, Esq.
Earlier this year, Alabama enacted its “Qualified Dispositions in Trust Act” (the “Act”) and became the twentieth state to implement self-settled spendthrift trust legislation (also known as domestic assets protection trust legislation) under which a settlor can name himself or herself, along with one or more additional beneficiaries, as a discretionary beneficiary of the trust as well as be eligible to receive distributions from such trust.
Alabama defines the phrase “qualified disposition” as “a disposition of property to one or more trustees, at least one of whom is a ‘qualified trustee’. . . .” A qualified disposition does not include a disposition to the extent that, at the time of such disposition, the transferor is in arrears on a child support obligation by more than thirty days.
A trust may provide for one or more of the following rights, powers or interests of a “transferor”[1] without such power(s) being viewed as a power to revoke the trust; (1) the power to direct the trust’s investment decisions; (2) the power to veto a distribution from the trust; (3) a special power of appointment exercisable by Will or other written instrument effective only upon the transferor’s death; (4) the right to the potential or actual receipt of income, including rights to income retained in the trust instrument; (5) the potential or actual receipt or use of principal if the potential or actual receipt or use of principal would be the result of a trustee acting under (i) a discretionary trust provision; (ii) a support provision; or (iii) the direction of an advisor acting under a discretionary trust provision or support provision; (5) the power to remove and replace a trustee or advisor; (6) the right to the potential or actual receipt of income or principal to pay income taxes due on trust income if the potential or actual receipt of income or principal is under a provision in the trust instrument that expressly provides for the payment of such taxes; and (7) after the transferor’s death, the qualified trustee may pay the transferor’s debts and administration expenses and any estate or inheritance tax imposed on or with respect to the transferor’s estate.
A “qualified trustee” is defined as a person, other than a transferor, whom:
is an individual that is an Alabama resident, or an organization authorized to act as trustee by Alabama law;
maintains or arranges for custody in Alabama of some or all of the property that is the subject of the qualified disposition and administers all or part of the trust within the State of Alabama; and
whose usual place of business, where some of the trust’s records are retained, is located within the State of Alabama.
In an action brought by a creditor for an attachment against property that is the subject of a qualified disposition or for avoidance of a qualified disposition: (a) such action may only be brought under the applicable sections of the Alabama Uniform Voidable Transactions Act;[2] (b) for a creditor claim arising after a qualified disposition is made, the action may involve only a qualified disposition that was made with actual intent to hinder, delay or defraud the creditor; and (c) the allegations must be proven by the creditor via a preponderance of the evidence[3] .
Moreover, a creditor may not bring an action concerning a qualified disposition if such claim arose prior to the qualified disposition being made or the latter of: (i) two years after such qualified disposition was made; or (ii) one year after the qualified disposition could have been reasonably discovered by the claimant. If a claim arose concurrent with or after a qualified disposition was made, then a claim period expires two years after the qualified disposition was completed.
If a trust beneficiary who has an interest in a qualified disposition or in property that is subject to a qualified disposition is a party to an action for the dissolution or annulment of a marriage, then the following rules apply:
If the beneficiary is not the transferor of the qualified disposition, then the beneficiary’s interest in such qualified disposition is not considered marital property and may not be awarded to the beneficiary’s spouse in a judgment;
If the beneficiary is the transferor of the qualified disposition, then the beneficiary’s interest in such qualified disposition is not considered marital property, is not considered part of the beneficiary’s real or personal estate, and may not be awarded to the beneficiary’s spouse in a judgment if either (i) the beneficiary transferred the qualified disposition more than 30 days before the marriage; or (ii) the parties to the marriage somehow agree that the disposition is not to be considered marital property.
Qualified transfers to the trust will need to be accompanied by a signed “qualified affidavit” by the transferor, in which he or she avers that at the time of the transfer of property into the trust:
The transferor has full right, title and authority to transfer property to the trust;
The transfer of property to the trust will not render the transferor insolvent;
The transferor does not intend to defraud a creditor by transferring property to the trust;
The transferor does not know of or have reason to know of any pending or threatened court actions against the transferor, except for court actions identified by the transferor on an attachment to the affidavit;
The transferor is not involved in any administrative proceedings, except for those identified on an attachment to the affidavit;
The transferor is not currently in arrears on a child support obligation by more than thirty days;
The transferor does not contemplate filing for bankruptcy; and
The property being transferred to the trust was not derived from unlawful activities.
The Act welcomes Alabama into the select group of domestic jurisdictions (now 40% of the nation) that allow for asset-preservation minded individuals to consider settling a self-settled spendthrift trust and receive creditor protection should an issue arise in the future.
[1] “Transferor” is defined under the Act as “a person or, for more than one owner of undivided interests, each of several persons who, as a beneficial owner of certain property or as the holder of a general power of appointment over certain property, directly or indirectly makes a disposition of the property or causes a distribution to be made.”
[2] Ala. Code §8-9B-1 et seq.
[3] As opposed to the more stringent “clear and convincing evidence standard” used in some other domestic and foreign jurisdictions.
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