The Connecticut General Assembly has passed significant trust legislation including the Uniform Trust Code and Directed Trust Act, and extended the rule against perpetuities to allow 800-year dynasty trusts.
Public Act 19-137, entitled, An Act Concerning the Uniform Trust Code was signed by Connecticut Governor Ned Lamont on July 12, 2019, and will be effective on January 1, 2020.
The Connecticut Qualified Dispositions in Trust Act
Noteworthy in the 98-page bill is the Connecticut Qualified Dispositions in Trust Act, which allows for the creation and establishment of self-settled domestic asset protection trusts (DAPTs). Also known as Asset Protection Trusts, DAPTs are irrevocable, self-settled trusts that sanction the individual establishing the trust (the grantor or settlor) to fund the trust with his or her own assets and still be a permissible beneficiary of the trust.
A properly structured DAPT protects trust property from any claims of future creditors of the grantor, but for fraudulent transfer claims under the Connecticut Uniform Fraudulent Transfer Act, some child support and marital support liabilities, and tort claims that originated prior to the transfer of assets to the DAPT. Connecticut’s exceptions are based on public policy concerns and are akin to those in other states.
Claims that are initiated after a transfer of assets into a Connecticut DAPT are subject to a four-year statutes of limitations period.
The Connecticut DAPT law is like the statutes in the other states that permit DAPTs. Either the owner of property or the holder of general power of appointment is permitted to transfer assets to a Connecticut DAPT. The transfer must be a “qualified disposition.” To be deemed a qualified disposition, the DAPT must satisfy the following:
- Be irrevocable.
- Have a “qualified trustee” as one of the trustees.
- Incorporate Connecticut law to govern the validity, construction and administration of the Connecticut DAPT.
- Contain a spendthrift clause.
What is a Qualified Trustee?
A qualified trustee is any person, other than the transferor, who in the case of an individual, is a Connecticut resident or who, in all other cases, is a state or federally chartered bank or trust company having a place of business in this state, is authorized to engage in a trust business in Connecticut, and
- Maintains or arranges for custody in Connecticut of some or all of the property that’s the subject of the qualified disposition.
- Maintains records in Connecticut for the trust on an exclusive or nonexclusive basis.
- Prepares or arranges for the preparation in this state of fiduciary income tax returns for the trust.
- Otherwise materially participates in Connecticut in the administration of the trust.
A qualified trustee doesn’t include:
- The transferor.
- Any other individual who is a not a Connecticut resident.
- An entity that is not authorized by the laws of this state to act as a trustee.
- whose activities aren’t subject to supervision as provided in the definition above.
A trust instrument is defined as an instrument, in writing, appointing at least one qualified trustee for the property that’s the subject of a disposition, where the instrument:
- Expressly says that Connecticut laws govern the validity, construction, and administration of the trust.
- Is irrevocable.
- States that the interest of the transferor or other beneficiary in the trust property or the income from the trust property may not be transferred, assigned, pledged, or mortgaged (either voluntarily or involuntarily) before the qualified trustee(s) actually distribute the property or income from the trust property to the beneficiary.
- The provision of the trust instrument shall be deemed to be a restriction on the transfer of the transferor’s beneficial interest in the trust that’s enforceable pursuant to non-bankruptcy law.
While the transfer of assets to a Connecticut DAPT is irrevocable, grantors can still keep some rights and powers over the DAPT. The grantor can retain the rights to the following:
- Receive income.
- Receive principal (from the trustee’s exercise of discretion or compliance with a distribution standard).
- Receive up to 5% of the value of the trust property annually.
- Refuse a distribution from the trust.
These trusts can also permit a grantor to possess a limited power to appoint the trust assets at death in his will. The grantor is also allowed to grant the power to remove a trustee or trust director and appoint a replacement trustee or trust director, provided the replacement is considered “independent” under the tax code.
The Uniform Trust Code Created in 2014
The Uniform Trust Code was drafted by the National Conference of Commissioners on Uniform State Laws in 2014. It was the first effort to create a thorough trust code model that contains most generally accepted common notions of Anglo-American trust law.
More than 35 states have enacted versions of the Uniform Trust Code.
Connecticut becomes the 19th state to adopt DAPT legislation. The other 18 states are Alaska, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.
Other states may also consider DAPT legislation, if not enact their own DAPT legislation.
Law Against Perpetuities
First-year law students will tell you that the law against perpetuities is an ancient, common law restriction on the amount of time that a trust can be in existence.
The rule is a bit complicated, and thus, it appears on most first-year law school property exams. That said, most states have modified the traditional rules to permit a longer time limit than what’s contained in the original rule.
Before the new legislation in Connecticut, a trust could last a maximum period of time so that any beneficiary’s interest vested within 90 years or 21 years after the death of an individual alive at the time the interest was created.
With the new Act, the state’s 90 year limit has been extended to 800 years.