The current legislative session at the Arkansas General Assembly has resulted in many substantial changes to our state’s laws. In particular, two new acts have reshaped the asset protection industry in Arkansas. Act 291 and Act 293 were signed into law by Governor Sanders on March 17, 2023. Act 291 was created to update the Arkansas Code regarding spendthrift trusts and to allow for domestic asset protection trusts. Act 293 updates the Arkansas Trust Code to allow for the decanting or appointment of trust property to another trust. These acts were passed in response to Arkansans sending their assets to other states to avail themselves of the more favorable asset protection rules in these jurisdictions. The goal of these statutes is to make Arkansas a more competitive forum for asset protection and estate planning.
The changes to spendthrift trusts and the allowance for domestic asset protection trusts shift the estate and business planning landscape in the state. By modeling Act 291 after the protection-friendly Nevada Act, Arkansas immediately becomes a more desirable jurisdiction for asset protection. Additionally, domestic asset protection trusts organized in other states that contain Arkansas property or have Arkansas settlors or trustees will now be subject to the new Arkansas statue.
Trust decanting under Act 293 creates more flexibility for trusts Arkansas trusts. This Act is also modeled after the Nevada Act and contains many of the same trustee-friendly provisions. Trusts that are irrevocable and give the trustees discretion to distribute income and principal from the trust are eligible to decant under Act 293.
Act 291 changes the way Arkansans can maintain and protect their assets from potential creditors. Domestic asset protection trusts are self-settled trusts that own assets contributed by the settlor. Creditors of these settlors cannot easily reach the assets that are contributed to these trusts. Trusts eligible for this type of protection must (1) be irrevocable; (2) contain Arkansas property or have an Arkansas settlor or trustee; (3) not be created to hinder, delay, or defraud known creditors; and (4) limit distributions to the settlor by the discretion of a third party trustee.
Settlors may keep the power to veto distributions by the trustee and direct trust investments. Settlors also retain the rights to the lead interests in charitable remainder trusts, qualified personal residence trusts, and grantor retained annuity trusts, as well as the right to minimum distributions from deferred compensation plans, the right to receive distributions at the discretion of another person, and the right to use the real or personal property of the trust. Even though the right to the property interest is retained by the settlor, a retained interest in a domestic asset protection trust is not subject to creditors of the settlor while in the hands of the trustee.
Creditors must bring claims against transfers to these trusts within two years of the trust’s creation or within six months of when the creditor should have reasonably discovered the trust, whichever is later. If the creditor’s interest is not created until after the transfer is made, the claim must be brought within two years of the transfer to the trust. Otherwise, the courts will not award a judgment to a creditor against the property in these trusts unless it was a fraudulent transfer under the Uniform Voidable Transactions Act or the transfer violated a legal obligation under a contract or judgement.
This new act has numerous estate and business planning applications. Domestic asset protection trusts are beneficial to professionals who are more likely to be sued. These include physicians, dentists, real estate investors, business owners, and athletes. By placing assets that creditors are more likely to go after, like cash or investments accounts, into these trusts, settlors are able to protect their assets from future creditors. Proceeds from the sale of a business are excellent assets to place in these trusts because of the increased protection from creditors and the ability of the settlor to use the proceeds at the discretion of a third-party trustee. Assets that are given to minors or younger beneficiaries also benefit from these trusts because the assets are still usable by the beneficiary without being subject to future creditors.
As discussed above, Act 293 increases the flexibility of trusts in the state of Arkansas by allowing trusts to be decanted into separate trusts. Trust decanting is like decanting a fine wine. A trustee may remove or modify trust provisions from an irrevocable trust by “pouring” the trust assets from an old trust into a new trust.
To decant from one trust to another, a trust must be irrevocable and the trustee must have the discretion to distribute the principal and income of the trust to or for the benefit of the beneficiaries. Trusts that have taken the martial or charitable deduction and certain trusts subject to withdrawal powers by beneficiaries may not be decanted.
Only one or more beneficiaries of the original trust who are (1) to whom or for a distribution of principal or income from the original trust may be made; (2) to whom or for a distribution of principal or income may be made from the original trust upon the occurrence of a future event; or (3) both are eligible beneficiaries of the new trust. The new trust may grant a general or limited power of appointment to its beneficiaries if they were also beneficiaries of the old trust.
Trustees decant trust property by exercising an appointment power in a signed document that is filed with the records of the original trust. While not required to, trustees may petition for court approval before appointing the assets to the new trust.
Just like domestic asset protection trusts, trust decanting has a large number of practical applications. Appointing assets from an older trust to a newer trust is usually done to clarify unclear terms, replace the trustees, or convert to a new tax status. Decanting may also be used to extend the term of the trust or change the governing law. Changed circumstances since the creation of the older trust may require trust property to be decanted to a special needs trust or into several new distinct trusts for each of the beneficiaries.
Both acts will change the estate and business planning landscape in Arkansas. They make Arkansas a more competitive and desirable forum to host asset protection instruments. Because neither act has an emergency clause, both Act 291 and Act 293 will not become law until 90 days after the legislature has adjourned. However, estate planners and asset managers should be prepared to use these new statutes to serve their clients.