Cole Law Group Blog
No engaged couple goes into a marriage planning to get divorced—but maybe they should. As a Tennessee bride-to-be I am certainly more concerned with flower arrangements and dress fittings than I am with whether the marriage will eventually sour. Unfortunately, the romance and excitement of planning a perfect wedding often overshadow the harsh reality that divorce is a common outcome of modern marriages, and it can be beneficial for you and your significant other to have an asset division plan in place before saying “I do.”
Prenuptial agreements, or “prenups,” are probably the most well-known premarital contract thanks to their widespread use by the rich and famous. Because of their association with society’s elite, prenups notoriously suffer from a negative reputation and are commonly believed to be an indication that the marriage is not expected to last. This common (albeit misguided) characterization of prenups means that it can be difficult and awkward to broach the topic with a partner.
Tennessee residents wishing to protect their individual property can avoid the delicate discussion altogether. In 2007, the Tennessee Investment Services Trust (“TIST”) Act established a new form of domestic asset protection by allowing a person to unilaterally transfer property into an Investment Services Trust (“IST”). Tennessee is one of only seventeen (17) states to offer this type of trust, thus making it a fairly unique method for local residents to shield their property from future ex-spouses.
An Overview of TISTs
A TIST is a type of irrevocable trust wherein the transferor (“grantor”) retains a level of personal interest, control, and ownership of the trust property while simultaneously shielding it from creditor claims. “Property” that can be transferred into a TIST includes real property, personal property, and one’s interests in real and personal property.
For a trust to qualify as a TIST it must expressly state that Tennessee law controls its validity, construction, and administration. As such, a TIST is most effective when both the trust and the trust property are located in Tennessee. Other core requirements for a valid TIST are that the trust must be irrevocable, contain a spendthrift provision, and have at least one “qualified trustee.” A qualified trustee for TIST purposes is simply either a Tennessee resident or someone who is authorized by Tennessee law to act as a trustee.
The qualified trustee must have at least some trust-related duties such as custody of assets, tax return preparation, or materially administering the trust. Notably, the grantor cannot also be a trustee. They can, however, name themselves as one of the beneficiaries entitled to payouts.
TISTs and Divorce Planning
TISTs are attractive in the context of divorce planning thanks to their unilateral nature. Unlike prenups which require a signature from both future spouses, a TIST can be created without the approval or even knowledge of the other party.
To effectively shield property from a future ex-spouse the TIST must be created prior to getting married. A “Spouse” or “Former Spouse” as defined by the Act, are “persons to whom the transferor was legally married, at or before, the qualified disposition is made.” It further provides that, “The spouse or former spouse may only set aside dispositions after such person married the Transferor.” In other words, a TIST protects assets that were transferred into the trust before marriage.
Of course, the grantor cannot avoid every post-divorce financial obligation simply by creating a TIST. As evident by the language in the Act, any property or assets obtained after the marriage are fair game for an ex-spouse. Additionally, one of the more notable limitations of the Act is that the assets in the trust are not protected from claims of past-due child support or past-due alimony.
Other Uses and Benefits
Engaged couples are not the only ones who can benefit from creating a TIST. In fact, TISTs are most widely used in the context of asset protection in case of bankruptcy. Once a TIST is created and the assets are transferred, any creditors to the trust property have eighteen (18) months to bring a claim to seize it. If the creditors do not bring a claim within that time frame, they are generally barred from doing so.
As previously hinted at, TIST grantors are able to retain a lot of authority over the trust while still maintaining an interest in the transferred property. Some of this authority includes the power to direct the investments of the trust, remove and/or replace trustees, and veto any distributions. An everyday example of this level of grantor control is the grantor’s right to live in a home owned by the trust.
Those interested in creating a TIST for bankruptcy purposes should do so earlier rather than later. Importantly, TISTs cannot protect assets from past creditor claims, meaning that any debts incurred prior to creating the TIST can potentially be paid using trust property. Early transferring of the trust property also helps the grantor avoid the presumption that the TIST is being created to defraud certain creditors. Accordingly, it is most effective to form a TIST as a proactive measure rather than attempting to form one as a reaction to financial difficulty.
Conclusion
The amount of grantor control, coupled with the level of asset protection provided by a TIST, bolster Tennessee’s reputation as an incredibly trust-friendly state. After all, it is one of only seventeen (17) states affording its residents this form of domestic asset protection. The key to reaping the full benefits of this unique option is to treat TISTs as proactive tools for asset protection, regardless of the trust’s intended purpose.
If you are attempting to sign a prenuptial agreement with an apprehensive partner or are considering transferring property into a Tennessee Investment Services Trust in lieu of a prenup, you should seek advice from a Nashville attorney with expertise in protecting individual assets. The professionals at Cole Law Group are experienced in family law and trust formation and can assist you with any questions you may have regarding asset protection in the event of divorce. Please contact us at (615) 490-6020 to request a consultation.
Author: Madeleine Lamb, Law Clerk to the Firm