The Tennessee Investment Services Trust

By Matthew D. Faulk - March 3, 2020

In 2007, Tennessee entered into a small class of states which permit self-settled asset protection trusts. These trusts allow individuals to create irrevocable trusts over which they retained some level of control AND shield the assets which were transferred to the trust from creditors. Before the passage of the Act, this was not permitted in Tennessee.

In order to create a Tennessee Investment Services Trust (“TIST”), the terms of the trust state that the trust is irrevocable; Tennessee law governs; a qualified Trustee serve; a portion of the trust assets be located and administered in Tennessee; the person transferring property to the TIST execute a qualified affidavit prior to any disposition to the trust; and, pursuant to Section 35-16-102(7)(C) of the statute, 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, whether voluntarily or involuntarily, before a distribution is made.

If the property being transferred to a TIST is not a fraudulent conveyance, then such property is immediately set aside from creditor claims. However, if such transfer is shown by clear and convincing evidence that the transfer of property to the TIST was made with intent to defraud that specific creditor, and if the claim arose prior to the transfer to the trust, any such claim must be initiated within the later of two years of the transfer is made or six months after the disposition was or could reasonably have been discovered by the creditor. If the claim arises at the same time or later than the disposition, the limitations period is two years. The ten year federal bankruptcy look-back still applies.

The statute shares there are two classes of creditors who are exempted from the provisions: child support obligations and those stemming from alimony or spousal support. In light of how the terms “spouse” and “former spouse” are defined in the statute, were a person to make a disposition in trust prior to marriage, then those assets are protected from spousal claims. As a result, the TIST can be an attractive alternative to executing a prenuptial agreement.

The person creating the trust retains a number of powers over the trust, such as being able to direct the investments of the trust, the right to remove the then-serving Trustee, and the right to veto any distributions proposed by the Trustee.

A Tennessee Investment Services Trust can be a highly effective estate planning tool, especially for those in a high-risk profession (i.e., physicians), or those with large cash holdings, or equity in a primary residence. The goal is to protect your assets from future and unknown creditors and still be able to direct their use.