By: Jacqueline Z. Fox, Esq., LL.M.
After failing to repeal Connecticut’s state gift tax that was originally intended to pass as part of the state’s two-year budget,[1] on July 12, 2019, Connecticut Governor Ned Lamont signed into law Public Act 19-137, “An Act Concerning the Uniform Trust Code” (the “Act”), which goes into effect on January 1, 2020. This newly passed trust legislation was part of a sweeping change in Connecticut’s trust laws, which included enactment of the Uniform Trust Code and Directed Trust Act[2] , and extended the rule against perpetuities to allow 800-year dynasty trusts (i.e., long-term trusts created to pass wealth from generation to generation without incurring transfer taxes for as long as assets remain in the trust). The most groundbreaking enactment under the Act, however, was the adoption of the “Connecticut Qualified Dispositions in Trust Act” (the “QDTA”), which authorizes the creation of a self-settled domestic asset protection trust (i.e., an irrevocable trust in which the creator of the trust (the “settlor”) is also a beneficiary of such trust, but the trust assets may still be protected from certain creditors of the settlor) for purposes of holding a nest egg of assets that can be preserved for future use by the person creating the trust, as well as by such person’s family and heirs. For purposes of this article, such trusts will be referred to as a “Legacy Trust”, and each state that has statutorily authorized the creation of such trusts as a “Legacy Trust state”.
Under Connecticut’s QDTA, a Legacy Trust is established when assets are transferred to an irrevocable trust by way of a “qualified disposition”. To constitute a “qualified disposition”, the Legacy Trust must (1) have at least one “qualified trustee” (i.e., an individual residing in Connecticut or an entity authorized under Connecticut law, that (i) is not the transferor of property into the trust, (ii) maintains and or directs safekeeping of the trust property, (iii) maintains trust records, (iv) ensures preparation of all required state and federal tax returns, and (v) materially participates in the trust’s administration); (2) select Connecticut as its choice of law with regard to the Legacy Trust’s construction, governance, and administration; and (3) contain a “spendthrift clause” (i.e., a provision that prevents creditors from attaching to a beneficiary’s interest before such interest is actually distributed to the beneficiary).
While a Connecticut Legacy Trust has the potential to generally be protected against creditor claims, this protection does not extend to: (1) creditor claims that arise within four years from the date in which an asset is transferred into the Legacy Trust; (2) creditors that existed at the time of the Legacy Trust’s creation (for such purpose creditors would have a statute of limitation period of the greater of four years from the transfer, or one year after discovering the transfer); (3) child and or marital support agreements or orders; and (4) tort claims that arose before the transfer. As such, compared to other Legacy Trust states,[3] Connecticut’s statue as not as competitive and is therefore likely to be used by a client who resides in the state. Even so, it should be noted that Legacy Trusts as a whole, irrespective of the governing state that enacted such law, may be susceptible to attack by a creditor that initiates an action in a state that has no Legacy Trust laws in place. More specifically, as case law continues to develop in this area, it is clear that a creditor may make a successful challenge if the court sides with the creditor by concluding that the jurisdiction that does not have Legacy Trust law prevails over the laws of the Legacy Trust state. Nevertheless, these creditor challenges may not be concerning to a Connecticut resident so as to otherwise override the additional effective planning that may come out of utilizing a Connecticut Legacy Trust. That is, effective use of a Legacy Trust boils down to effective planning while weighing the particular clients concerns and taking into consideration the risks and benefits of utilizing such a planning method in place of others that may be more advantageous to the client.
That being said, a notable benefit of using a Connecticut Legacy Trust are the significant rights and powers the settlor can statutorily retain such as receiving trust income and or principal, having a limited power of appointment over the trust assets at death, as well as removing and appointing trustees (provided that the successor trustee so appointed is an independent trustee).
Please contact our office if you live in a Legacy Trust state and are interested in creating a Legacy Trust or if you are otherwise looking to take advantage of these Legacy Trust statutes while taking into consideration the risks and benefits of doing so.
[1] Even though Connecticut Governor Ned Lamont submitted a first budget proposal that included the repeal of the state’s gift tax, the repeal was not included in the two-year state budget that the Governor signed into law on June 26, 2019. Consequently, Connecticut remains the only state in the nation to impose a state gift tax.
[2] Connecticut joins states such as South Dakota, Nevada, and Delaware (among others) to allow directed trusts. That is, effective January 1, 2020, Connecticut statute allows a trust to authorize a “trust director” to direct and or consent to a trustee in the investment or management of trust assets as well as in such trustee’s decisions to make distributions to trust beneficiaries. Assigning certain responsibilities as needed among the appropriate persons or institutions can be desirable to a client when their respective trust holds certain non-traditional assets such as real estate or business interests, which by nature may require certain investment and or management expertise.
[3] For example, of the 19 Legacy Trust states, only Nevada, Utah and West Virginia have Legacy Trust statutes that do not have exception creditors. Further, another competitive edge among Legacy Trust states is including short statute of limitations. In this regard with respect to existing creditors, Ohio is notably down to 18-months; whereas, Alaska, Delaware, and Connecticut are up to 4-years.
