Know the Law: Trust can protect assets from creditors

Chris Paul Headshot
Christopher R. Paul
Director and Vice-Chair, Trusts & Estates Department
Published: Union Leader
August 31, 2015

Q: My neighbor, an OB-GYN, recently mentioned that she created a special Trust to help protect some of the assets of which she has worked so hard to accumulate in the event her insurance is insufficient to pay potential future malpractice claims.  Is such a Trust available in New Hampshire?

A:  Yes. Until recently, it was universally accepted (at least in the United States) that a “self settled” Trust (e.g. a Trust funded by you with your own assets in which you are a beneficiary) would not protect your assets from your creditors.  That has now changed.

New Hampshire has adopted the Qualified Dispositions in Trust Act, R.S.A. 564-D, which allows you to create a self-settled “Asset Protection Trust” (“APT”) to shield Trust assets from your future creditors, including a future spouse.  The Trust can be drafted giving the trustee broad discretionary powers to distribute principal and income to you and your designated beneficiaries.

As the creator (“Grantor”) of the Trust, you can retain significant control over the assets you place in your Trust.  For example, you can have the power to veto distribution decisions to other beneficiaries proposed by the trustee.  You can act as the Trust investment advisor, reserve the right to remove and replace the trustee or other fiduciaries, and hold a testamentary power of appointment.

Although the statute imposes several technical requirements, they are generally easily met.  For example, a New Hampshire APT must; (1) be irrevocable; (2) provide that the laws of the State of New Hampshire govern the Trust; (3) contain a valid “spendthrift clause”; and (4) provide that a New Hampshire resident trustee serve.  Also, you cannot act as trustee.

Creditor protection is not absolute.  For example, if you transfer assets to your APT on the eve of a judgment or bankruptcy or to avoid existing creditors, creditor protection may be ineffective.   To shield assets from existing creditors, notice of the transfer must be given to them.  Four years after notice is given, those Trust assets will then be protected from claims from those creditors.  Without notice, assets placed into an APT may be attached by those to whom you owe a financial obligation at the time the assets are placed into the Trust (i.e. existing creditors, known potential creditors, a current spouse, etc.).

In the proper circumstances, a New Hampshire APT may be right for you.  If you have recently received a large inheritance or windfall, own a family business, have a high risk medical or professional practice, or have managed to acquire a nest egg, the New Hampshire Asset Protection Trust could be an important component of your financial and estate plans.