By: Eric R. Kaplan, Esq.
On March 16, 2023, Arkansas enacted a new subchapter 7 to Arkansas Code Title 28, Chapter 72 (the “Act”), which allows Arkansas to be known as the twenty-first state to implement self-settled spendthrift trust legislation (also known as domestic asset 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 (hereinafter referred to as a “DAPT”).
Section 28-72-701(4) of the Arkansas code defines “Domestic asset protection trust” as a “self-settled, first-party spendthrift trust.” The Act governs the construction, operation, and enforcement of all DAPTs in the State of Arkansas, regardless as to whether the trust was created in or outside Arkansas, if: (i) all or part of the lands, rents, issues or profits affected are located in Arkansas; (ii) all or part of the assets affected are located in Arkansas; (iii) the settlor’s domicile is in Arkansas; or (iv) at least one trustee has powers that include maintaining records, and preparing income tax returns, and all or part of the trust’s administration is performed in Arkansas.[1]
If the DAPT settlor is also a beneficiary, then at least one trustee must be: (i) an individual domiciled in Arkansas; (ii) a trust company that is organized under either federal law, Arkansas law, or the laws of another state, and maintains an office located in Arkansas for the transaction of business; or (iii) a bank organized under federal law, Arkansas law, or the laws of another state and maintains an office located in Arkansas.[2]
An Arkansas DAPT may be for the benefit of the settlor and others if: the DAPT is irrevocable, does not require that any part of the income or principal be distributed to the settlor, and is not intended to hinder, delay, or defraud known creditors.[3] An Arkansas DAPT will meet all the requirements of the immediately preceding sentence in the scenario whereby the settlor may prevent a distribution from a trust or holds a special lifetime or testamentary power of appointment that cannot be exercised in favor of the settlor, the settlor’s estate, a creditor of the settlor, or a creditor of the settlor’s estate.[4]
With the exception of the power of a settlor to make distributions to himself without the consent of another person, the Act is not to be construed to prohibit the DAPT’s settlor from holding other powers under the trust, regardless as to whether the settlor is a co-trustee, including without limitation the power to remove and replace a trustee, direct trust investments; and execute other management powers.[5] A settlor has only the powers and rights that are conferred in the trust itself.[6]
Beneficiaries of an Arkansas DAPT must be named or clearly referred to in the trust document.[7] No spouse, former spouse, child or dependent shall be a beneficiary unless such individual is named or clearly referred to in the trust.[8]
A mandatory or discretionary payment by the trustee to a beneficiary shall be made only to or for the benefit of the beneficiary and may not be made by acceleration or anticipation, or to an assignee of a beneficiary or upon a court order.[9]
An Arkansas DAPT may not continue for more than ninety years after its creation.[10]
An individual may not bring an action with respect to a transfer of property to a DAPT if the person: (a) is a creditor when the transfer is made, unless the action is commenced within the later of (i) two years after the transfer is made; or (ii) six months after the individual discovers or reasonably should have discovered the transfer; or (b) becomes a creditor after the transfer is made, unless the action is commenced within two years after the transfer.[11]
A creditor will not be awarded a judgment with respect to a transfer of property to a DAPT unless the creditor demonstrates by clear and convincing evidence that the transfer of property: (a) was a fraudulent transfer under the Uniform Voidable Transactions Act; or (b) violates a legal obligation owed to the creditor under a contract or valid court order that is legally enforceable by that creditor.[12]
If property transferred to a DAPT is conveyed to the settlor or a beneficiary for the purpose of obtaining a loan secured by a mortgage and is later reconveyed to the DAPT, for purposes of bringing a creditor claim against the DAPT, the transfer is disregarded and the reconveyance relates back to the date the property was originally transferred to the DAPT.[13]
If more than one transfer is made to a DAPT, then: (a) the subsequent transfer to the DAPT shall be disregarded for the purposes of determining whether a person may bring an action with respect to a prior transfer to the DAPT; and (b) any distribution to a beneficiary from the DAPT shall be deemed to have been made from the most recent transfer made to the DAPT.[14]
A trust administered under the laws of another state or jurisdiction may become an Arkansas DAPT if: (a) the trustee complies with the requirements set forth the trust instrument and the requirements of the laws of the state or jurisdiction from which the trust is being transferred; and (b) the trustee has the authority to transfer the trust’s domicile declares the intent to transfer such domicile.[15] If the domicile of an existing trust is transferred to Arkansas from another state or jurisdiction, and the laws of the transferring jurisdiction are similar to Arkansas law, then the transfer of the trust is deemed to have occurred: (a) on the date on which the settlor transferred assets into the trust; or (b) on the earliest date on which the applicable laws of the trust were substantially similar to the provisions of Arkansas law.[16]
Arkansas now joins the select group of domestic jurisdictions allowing asset-preservation minded individuals to consider settling a self-settled spendthrift trust and receive creditor protection.
____________________________________________________________________________________________________________
[1] Ark. Code Ann. § 28-72-702(a). [2] Id . at § 28-72-702(b). [3] Id . at § 28-72-703(a) [4] Id . at § 28-72-703(b). [5] Id . at § 28-72-703(c). [6] Id . at § 28-72-704(a). [7] Id . at § 28-72-705(a). [8] Id . at § 28-72-705(b). [9] Id . at § 28-72-707(b). [10] Id . at § 28-72-709(a) and Id . at 18-3-101(a)(2). [11] Id . at § 28-72-712(a). [12] Id . at § 28-72-712(c). [13] Id . at § 28-72-712(d)(1). [14] Id . at § 28-72-712(g) [15] Id . at § 28-72-713(a). [16] Id . at § 28-72-713(b).
