As the settlors and beneficiaries of trusts know well, irrevocable trusts can provide many advantages for wealth planning and generational wealth transfer, including (but certainly not limited to) fiduciary oversight and management, the avoidance of probate, and the reduction or elimination of estate taxes. Another benefit that irrevocable trusts can provide is the protection of assets from creditors, generally through the use of spendthrift provisions. These provisions are designed to prevent the creditors of a trust settlor or beneficiary from reaching a trust’s assets by barring voluntary and involuntary transfers of trust interests.
New Hampshire is no exception to such protections. New Hampshire, however, has further added to these safeguards through the provisions of the New Hampshire Trust Code (specifically RSA Sections 564-B:5-502 and 505A for those interested in some light statutory reading).
Under New Hampshire’s Trust Code, the classes of creditors are limited to two camps: 1) creditors of the settlor at the time of the creation and funding of the trust; and 2) “exception creditors.” Exception creditors include individuals who have a judgment or court order against the settlor or beneficiary for things like child support, spousal support or alimony, and, in the case of a beneficiary, a judgment creditor who has provided services for the protection of the beneficiary’s trust interest. The protections for either a settlor or a beneficiary are also unenforceable against a claim of New Hampshire or the United States, but only to the extent a New Hampshire or a federal law so provides.
For the existing creditors of settlors transferring assets to an irrevocable trust (the first camp, above) significant hurdles and limitations exist. Such a creditor must seek to enforce a claim within one year after discovering the transfer (or within one year after the creditor reasonably should have discovered the transfer) and in no event more than four years after the transfer. In other words, the passage of four years, regardless of discovery, extinguishes existing creditor claims. Moreover, to be successful, an existing creditor must prove that the settlor’s transfer of assets was a fraudulent transfer.
Even for exception creditors (second camp) to whom the foregoing time limits do not apply, there are real constraints on the amounts they can recover. Exception creditors of a settlor cannot recover more than the maximum amount of trust property available to be distributed to or for the benefit of the settlor (as opposed to all trust property) even if that is less than what is owed. Similarly, the exclusive remedy for an exception creditor of a beneficiary is a court ordered attachment of the beneficiary’s present or future trust distributions.
A distinctive feature of the New Hampshire Trust Code is that it extends the availability of asset protection to all irrevocable trusts that contain a spendthrift provision. Notably, this broad reach allows for self-settled asset protection trusts – trusts from which a settlor may receive benefits while still shielding the trust assets from creditors. While a settlor must irrevocably transfer the assets to be protected (and thus cede ultimate control over them), the settlor can still receive trust distributions as a beneficiary pursuant to discretionary distribution provisions. Additionally, the settlor can retain considerable control over the trust assets, including the ability to substitute and reacquire trust assets and to exercise general powers of administration. General powers of administration can include the power to vote stock or other securities of a corporation as well as the ability to control the investment of trust assets. Not a bad exchange for the protections gained.
If you are interested in discussing New Hampshire asset protection trusts or other aspects of New Hampshire trust law, please let us know. We would be happy to connect.
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