Friday, August 12, 2011

What is a Self-Settled Spendthrift Trust?

Georgia doesn’t recognize self-settled spendthrift trusts (1), and it is uncertain as to how domestic and foreign asset protection trusts will be treated in Georgia.  A spendthrift clause is one in which the trust documents prohibit the trustee from distributing to a creditor of a beneficiary.  A self settled trust is a trust whereby a settler transfers property to a trustee with the settler as one of the beneficiaries (or the sole beneficiary).  The issue then becomes the treatment of a self-settled spendthrift trust.  Only a handful of states (but increasing) currently recognize self-settled spendthrift trusts, and it is unclear as to how self-settled spendthrift trusts will be treated in states like Georgia where they are prohibited. (2) In addition, some argue that the domestic asset protection trusts are not as useful as first thought because 1) the full faith and credit clause requires each states to enforce the judgments of other states (and there also may be some arguments as well regarding “minimum contacts” if the trustee has actively solicited business in the state where a lawsuit originated to subject that trustee to the court’s jurisdiction), 2) federal law pre-empts state law under the Supremacy Clause and it is unclear exactly how this will play out in bankruptcy, 3) a creditor could claim that the asset protection trust law impairs their rights under the Contracts Clause of the Constitution.

(1) Speed v. Speed, 263 Ga. 166, 430 S.E.2d 348 (1993).
(2) O.C.G.A. §53-12-28 (“a spendthrift provision prohibiting involuntary transfers is not valid if the beneficiary is the settlor.”).