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An overview of self-settled asset protection trusts in Georgia

August 21, 2018

As self-settled asset protection trusts (SSAPTs) become more common throughout the US, they are inciting a debate among wealth management lawyers and others in the industry. With the increasing popularity of these trusts, state legislatures, including Georgia, may be forced to take a position on their legality. To encourage education on this topic, we have summarized a recent piece that appeared in the Georgia Bar Journal. What follows are the facts and arguments that Georgians and state legislators should be aware of.

 

What are SSAPTs?


Alaska was the first state to allow SSAPTs in 1997, with 17 more states codifying them by December 2016. Essentially, SSAPTs protect assets from creditors but still allow the creator of the trust access to the assets. The trust then differs from standard spendthrift trusts in which assets are only protected from creditors when the settlor is not the beneficiary. Under an SSAPT, a settlor can hide a portion of their assets from creditors in a trust while still receiving distributions from the trust. Obviously, that creates the potential for abuse, so specific legal provisions have become commonplace as safeguards—many of which are drawn from the other common types of asset-protection trust.

Spendthrift trusts are among the most common trusts in Georgia. In general, language in the trust protects the trust from creditors as long as the settlor is not the beneficiary. For example, parents can create spendthrift trusts for their children, protecting the assets from the parents' creditors. Certain types of creditors are free from this protection and can still make claims against the trust. These are called exemption creditors and are given this status to protect against individuals who are attempting to hide assets unfairly. Exemption creditors vary by state but often include creditors claiming alimony, torts, or taxes.

State legislators are likely to adopt these same provisions when passing SSAPT legislation. Additionally, the Uniform Voidable Transactions Act (UVTA) invalidates asset transfers made with clear intent to defraud creditors. Other possible safeguards include required notices to creditors or affidavits of solvency. Opponents of SSAPTs argue that even with these provisions, there is an undue burden placed on the creditor as soon as the creditor's claim is disputed.

Arguments surrounding SSAPTs

With the omnipresence of spendthrift trusts, advocates of SSAPTs have a template to follow. Just as spendthrift trusts were established and accepted, proponents of SSAPTs argue that the new type of trust will become accepted with time. They also question why adults can create protected trusts for their children, but not themselves. Those opposed point out that parents are not responsible for the debts of their children, and there is not a positive social reason why individuals should be protected from creditors.

Proponents of SSAPTs also argue that individuals should be allowed the freedom to contract. As long as creditors receive adequate disclosure, proponents argue that lenders should be trusted to protect themselves in the private contract. Opponents note that not every lender is a large bank who can adequately measure the risk involved, and smaller creditors make up more of the market.

Perhaps the most pragmatic point is that SSAPTs already exist in Georgia—they have just been set up in other states. One way or another, the Georgia legislature will need to take a position. Either they will codify SSAPTs in Georgia, or else they will need to pass legislation that invalidates SSAPTs structured in other states. Note that this is possible given how creditor-friendly Georgia is. The state of Georgia can rule that another state's laws conflict with the strong public policy of Georgia and rule SSAPTs unenforceable in Georgia.

SSAPTs in Georgia

The next question about SSAPTs concerns their economic impact and potential benefits. If SSAPTs are allowed and formed in Georgia, we know that there can be jobs created from the administration of the new trust regime and taxes will be collected from the trusts. However, in order to demonstrate economic benefits for the state, proponents of SSAPTs still need to first show that individuals will form SSAPTs in Georgia over other states.

The central concern in this argument is Georgia's income tax. With a 6% state income tax, Georgia faces a significant disadvantage when compared to other states that allow SSAPTs but have no state income tax. As long as that tax exists, Georgia will struggle to attract out-of-state trust business, and the economic impact will accordingly be lower. Similarly, if a Georgia resident can escape income taxes, there is little reason to form the SSAPT in Georgia. While this should not be true as a general rule (SSAPTs in Georgia will usually be taxed to the settlor), it does point to a worst-case scenario where SSAPT legislation in Georgia fully legitimizes the practice, and Georgians all rush to create SSAPTs in states without an income tax.

Conclusion

There is no objectively correct answer when discussing SSAPTs. Those in favor and those opposed both make relevant points and differ on what they prioritize. The introduction of SSAPTs would undoubtedly increase flexibility and choice for residents of Georgia, and that must be weighed against the tradeoff with unethical activity and additional hardship for creditors. Some settlors of SSAPTs will have entirely positive, societally beneficial reasons for protecting their assets. Others will hide their assets in lieu of a prenuptial agreement or adequate malpractice insurance. However, the existence of abuse is not, in and of itself, a reason to avoid improving trust law in Georgia. SSAPTs merit a reasoned and in-depth discussion on their positives and negatives, and the sooner the state legislature evaluates these trusts, the sooner Georgians have clarity on the issue.
 

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