When Tennessee passed the Tennessee Investment Services Act in 2007, it became one of the best States to establish an asset protection trust. Tennessee's version of an asset protection trust is often referred to as a "Tennessee Investment Services Act Trust," or "TIST." A TIST is a "self-settled" "spendthrift" grantor trust. It is "Self-settled" because the grantor, who is the person who establishes and transfers assets into the trust, is both the person making the trust and the beneficiary of the trust. It is a "Spendthrift" trust because the trustee determines how the trust funds will be spent for the benefit of the beneficiary while also shielding the trust from the reach of creditors and lawsuits. In addition, because a TIST is a grantor trust, you do not have to obtain a separate tax identification number or file a separate tax return because all of the income of the trust is reported on the grantor's 1040. Thus, you continue to prepare your own tax return each year and any trust income is treated as the grantor's income.
Although a TIST is irrevocable, the assets placed in the trust are not treated as gifts, and the assets are included in the grantor's estate for estate tax purposes. More importantly, the trust assets will receive a step-up in basis on the grantor's death. This means that the heirs receiving the trust assets will inherit those assets with a cost basis equal to the fair market value of the assets valued on the date of the grantor's death. The step-up in basis is important if the heirs intend to sell the newly inherited property without incurring capital gains tax on those assets which have appreciated in value over time.The basic requirements for creating a TIST are that the TIST must be governed by Tennessee law, it must have a qualified trustee, it must be irrevocable, it must contain a spendthrift clause, some of the trust property must be located in Tennessee, and there must be an executed affidavit. It's important to note that in order to be a qualified trustee, the trustee cannot be the grantor. The trustee must be an individual who is a resident of the State of Tennessee, or a trust company or other corporate trustee qualified to serve as a trustee in Tennessee. Although the grantor cannot serve as trustee, the grantor can retain the following rights:
1. The right to remove the trustee at any time for any reason.
2. The right to replace the trustee, but the successor trustee cannot be a related or subordinate person.
3. The right to manage the investments in the trust.
4. The right to veto any distributions from the trust.
If all of the requirements are met, the assets placed in the TIST are protected immediately from claims that arise after the trust is created and funded. For claims that may exist when the trust is funded, a creditor has two years from the date the trust is funded to bring a claim. However, if you provide a potential creditor with notice of the transfer of assets to the trust, then the creditor only has six months to bring a claim. Consequently, recording the transfer at the Register's Office is deemed to be notice to all creditors.
So who should use a TIST? A TIST can benefit anyone who is a professional such as a physician, physical therapist, contractor, business owner, or other individual in a profession where there is a higher risk of liability or litigation. Also, a TIST can be used by unmarried adults as an alternative to a prenuptial agreement, or by young adults with inheritances or large custodial accounts.
Finally, a TIST can be used as an alternative to a Limited Liability Company ("LLC") while avoiding excise and franchise taxes. You can essentially set up a general partnership where all of the partners are separate TISTs. By using a general partnership with each partner being a TIST, the partnership avoids having to pay Tennessee excise and franchise taxes with the equivalent liability protection of an LLC.
To learn more about a TIST and how we can help you, contact our offices of Grant, Konvalinka & Harrison, P.C., located at Republic Centre, Ninth Floor 633 Chestnut Street and can be reached at 423-756- 8400.