Many clients have asked about using trusts to place personal assets (such as homes, other real property, investment funds) beyond the reach of potential creditors’ claims. While some states have laws permitting placing such assets in trusts while allowing the trust creator to remain a beneficiary, Mississippi has not allowed this. However, effective July 1, 2014 state law was changed to allow a Mississippi resident to create a “qualified disposition trust” (QDT) that can be used to protect assets from the claims of the trust creator’s creditors. This law is known as the Mississippi Qualified Disposition in Trust Act.
A “qualified disposition trust” must (i) state that the law of this state will govern the validity, construction and administration of the trust, (ii) be irrevocable, and (iii) contain a “spendthrift clause” stating that the transferor will have no power or authority to pledge or assign the property or benefits from the trust to any other person.
Under the Act, a “transferor” is a person who owns real or personal property, has a legal power over the disposition of such property, or owns such property as a trustee (such as in a revocable living trust). The transferor may transfer or assign ownership of property to one or more “qualified trustees” by means of a qualified disposition trust. A “qualified trustee” is someone other than the transferor who is either an individual resident of this state or is a corporate trustee lawfully authorized to do business in Mississippi by an appropriate financial agency.
Before the assets may be transferred to the trustee, the transferor creating the trust must execute a “qualified affidavit.” This is a sworn affidavit signed by the transferor or, in the event of a disposition by a trustee, the affidavit shall be signed by the transferor who made the original transfer into the trust. The affidavit must state:
(a) The transferor has full right, title, and authority to transfer the assets to the trust;
(b) The transfer of the assets to the trust will not render the transferor insolvent;
(c) The transferor does not intend to defraud a creditor by transferring the assets to the trust;
(d) The transferor does not have any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit;
(e) The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit;
(f) The transferor does not contemplate filing for relief under the provisions of the federal bankruptcy code; and
(g) The assets being transferred to the trust were not derived from unlawful activities.
Once the QDT is created and funded with assets, no action may be taken by a creditor against the trust assets (including an action to enforce a judgment entered by a court or administrative body) unless the action is brought pursuant to the provisions of the Uniform Fraudulent Transfer Act or unless the creation of the trust was also made with actual intent to defraud such creditor. Any creditor who files a claim must do so within the later of two (2) years after the qualified disposition is made or six (6) months after the person discovers or reasonably should have discovered the qualified disposition. If the person becomes a creditor after the qualified transfer to a QDT is made, s/he must commence an action within two (2) years after the qualified disposition is made. A creditor is deemed to have discovered the existence of a transfer to a qualified disposition trust at the time any public record is made of any transfer of property, such as the recording of a deed to the QDT. A creditor must prove by clear and convincing evidence that the settlor’s transfer of such property was made with the intent to defraud that specific creditor. Neither a creditor nor any other person shall have a claim or cause of action against the trustee, an advisor of a QDT, or against any person involved in the counseling, drafting, preparation, execution, or funding of a trust that is the subject of a qualified disposition or of a limited partnership or a limited liability company that are subsequently transferred to the trust. If more than one (1) qualified disposition is made to the same qualified disposition trust, then the later qualified disposition will not extend a creditor’s claim against a prior qualified disposition.
The limitations on actions by creditors will not apply, and such creditors’ claims will not be extinguished, if the transferor’s debt arose by an agreement, judgment, or order of a court for the payment (i) of child support, alimony or property division or distribution in favor of the transferor’s spouse or former spouse, or (ii) to any person who suffers death, personal injury, or property damage on or before the date of a qualified disposition by a transferor, which death, personal injury, or property damage is at any time determined to have been caused in whole or in part by the negligent act or omission of such transferor.
If a qualified disposition is overturned, the properly-acting qualified trustee shall have a first lien against the trust property equal to the entire cost, expenses and attorneys’ fees incurred by the trustee in the defense of the action to avoid the qualified disposition.
A QDT must be irrevocable, meaning that transferor cannot revoke or take back the property disposed of to the trust. However, the Act states that the trust will not be disqualified if it contains any of the following provisions:
(a) A transferor’s power to veto a distribution from the trust;
(b) A power of appointment, allowing the transferor to designate who will receive the trust property later; provided that the transferor may only exercise this power in his/her last will and testament and may not appoint property to the transferor, the transferor’s creditors, the transferor’s estate or the creditors of the transferor’s estate,;
(c) The transferor’s potential or actual right to receive income, including rights to the income retained in the trust;
(d) The transferor’s potential or actual right to receive income or principal from a charitable remainder trust;
(e) The transferor’s receipt each year of an amount specified in the trust instrument, up to five percent (5%) of the initial value of the trust or its value determined from time to time pursuant to the trust;
(f) The transferor’s potential or actual right to receive or use principal if received pursuant to (i) the qualified trustee’s discretion, (ii) a distribution standard for principal that does not give the transferor a power to use property for the benefit of the transferor, unless the power of the transferor is limited by an ascertainable standard relating to the health, education, support, or maintenance within the meaning of the Internal Revenue Code; or (iii) the direction of a trust advisor;
(g) The transferor’s right to remove and replace a trustee or trust advisor who is not a related or subordinate party within the meaning of Section 672(c) of the Internal Revenue Code;
(h) The transferor’s potential or actual use of real property held under a qualified personal residence trust;
(i) The transferor’s potential or actual receipt of income or principal to pay income taxes due on income of the trust if the trust expressly permits a distribution to the transferor as reimbursement for such taxes.
(j) The ability to pay, after the death of the transferor, all or any part of the debts of the transferor outstanding at the time of the transferor’s death, the expenses of administering the transferor’s estate, or any estate or inheritance tax imposed on or with respect to the transferor’s estate; and
(k) A qualified trustee’s authority to make distributions to the transferor to pay taxes.
Mississippi has followed the lead of a number of other states in creating this new method by which residents can protect assets from potential claims and lawsuits. If this planning technique sounds good to you, call us today at 601-987-3000 to discuss how we can help protect your family and your treasure.