Wills and Estates

Utilizing Tennessee Trusts in Estate Planning

Ally Hicks

Individuals from across the country are incorporating Tennessee-sited trusts into their estate plans – and for good reason. The state’s taxpayer-friendly environment, combined with a robust trust code and a supportive legislature, has solidified Tennessee as a top jurisdiction to establish a trust. Particularly popular among both residents and nonresidents are self-settled domestic asset protection trusts, community property trusts, and tenancy by the entirety trusts.

Tennessee Investment Services Trusts

The Tennessee Investment Services Act of 2007, codified in Tenn. Code Ann. § 35-16-101 et seq., permits the creation of Tennessee Investment Services Trusts (“TISTs”), a type of self-settled domestic asset protection trust. A TIST allows the grantor to retain certain beneficial ownership over the trust property, while also providing a degree of protection from the grantor’s creditors.

Although the trust property remains subject to claims of past-due child and spousal support, most other claims are barred eighteen (18) months after the grantor conveys the property to the TIST, or six (6) months after the creditor discovers, or reasonably should have discovered, the conveyance. This layer of creditor protection subsists notwithstanding the grantor’s ability to receive distributions from the trust, veto proposed distributions to other beneficiaries, or change trustees.

Both residents and nonresidents of Tennessee can establish TISTs, so long as the trust 1.) is governed by Tennessee law, 2.) is irrevocable, 3.) contains a spendthrift provision, 4.) has at least one qualified trustee, and 5.) includes a qualified affidavit signed by the grantor. As defined in Tenn. Code Ann. § 35-16-102(12), a qualified trustee is either a Tennessee resident (other than the grantor) or a Tennessee-licensed corporate fiduciary.

TISTs are effective estate planning vehicles for those individuals looking to protect assets from the claims of creditors while also enjoying the benefits of their property. Typically, the grantor’s beneficial ownership over the trust property triggers estate inclusion – for this reason, TISTs are often utilized in conjunction with other estate planning tools for a comprehensive tax-saving approach.

Community Property Trusts

Tennessee is one of only five separate property states that permit married couples to convert separate property into community property by establishing a community property trust. Under the Tennessee Community Property Trust Act of 2010, codified in Tenn. Code Ann.§ 35-17-101 et seq., grantors may transfer separate property into a Tennessee Community Property Trust (“CPT”), a type of revocable trust which provides the tax benefits of community property ownership.

The major advantage of a Tennessee CPT is that upon the first spouse’s death, the entire trust property receives a step-up in basis to fair market value. As a result, the surviving spouse may sell the property without recognizing capital gain. In contrast, couples in separate property states who own property outright only receive a stepped-up basis on the decedent’s one-half interest in the property. Upon the sale of such property, the surviving spouse will recognize capital gain on the one-half interest that did not receive a stepped-up basis, resulting in up to a 37% rate of tax levied on the gain.

To establish a Tennessee CPT, 1.) both spouses must sign the trust document, 2.) the trust must declare it is a Tennessee CPT, 3.) there must be a qualified trustee serving, and 4.) specific warning language must be included. While the grantors need not live in Tennessee, the qualified trustee must be a Tennessee resident (which can be either or both spouses) or a Tennessee-licensed corporate fiduciary. In the event the grantors divorce, the trust immediately terminates, and one-half of the property is distributed to each grantor, outright.      

A Tennessee CPT is an efficient tax-saving strategy for married couples who live in separate property states and own appreciated property. Despite the tax advantages, however, one-half of the trust property remains subject to the separate creditors of each spouse. Given this, Tennessee CPTs typically hold only appreciated property, such as real estate and securities, while other estate planning techniques provide a layer of creditor protection for additional assets.

Tenancy by the Entirety Trusts

In 2014, the Tennessee State Legislature enacted a new type of trust designed to hold property owned as tenants-by-the-entirety. Codified in Tenn. Code Ann. § 35-15-510, a Tennessee Tenancy by the Entirety (“TBE”) Trust combines the typical benefits of a trust—incapacity planning, probate avoidance, and privacy—with the creditor protection of joint property ownership.

Property held as tenants-by-the-entirety is generally immune from the claims of each spouse’s separate creditors. Prior to 2014, couples who transferred such property into a joint revocable trust lost this creditor protection. With a TBE Trust, however, the property maintains its tenancy-by-the-entirety protection, so the creditors of only one spouse cannot satisfy their claims with the trust property. At the death of the first spouse, the property remains protected from the separate creditors of the decedent spouse. However, the property is subject to the separate creditors of the surviving spouse, to the extent the surviving spouse can withdrawal trust assets.

Spouses who transfer property held as tenants-by-the-entirety to a TBE Trust enjoy this creditor protection, so long as 1.) the spouses stay married, 2.) the property continues to be held in trust, 3.) the trust is revocable, 4.) both spouses are permissible current beneficiaries, and 5.) the trust refers to the applicable statute. Notably, immunity from the claims of the spouses’ separate creditors may be waived as to any specific creditor or property by the trust, conveyance document, or written consent of the spouses.  

TBE Trusts are useful estate planning tools for those couples interested in both the creditor protection of joint ownership and the privacy of a trust. While the grantors’ retained powers over the trust assets typically results in estate inclusion, the flexibility of the trust structure allows for clever tax-saving strategies after the first spouse’s death.

To learn more about how a Tennessee-sited trust could elevate your estate plan, contact the experienced Wills & Estates attorneys at Thompson Burton PLLC.

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