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How the Tennessee Investment Services Trust Act works

Tennessee residents who divorce often wonder how they can protect their assets. Although both premarital and postmarital agreements are good options, others are also available. One of those, the Tennessee Community Property Trust, was discussed on this blog a few weeks ago. Another instrument that can help spouses protect assets during divorce is an Investment Services Trust. ISTs are governed by the Tennessee Investment Services Trust Act.

Enacted in 2007, the act allows a person to transfer independent property into an IST before marriage. One major advantage is that an IST can be set up independently and does not require the consent of the other soon-to-be spouse. An individual can set up an IST alone or in addition to a marital agreement.

If the trust complies with certain rules, it also can protect assets from creditors. It must, however, comply with states laws related to the validity, setup and administration of trusts;

it cannot be revocable; and it must include provisions that limit the trustee's right to transfer, assign, pledge or mortgage assets until he or she distributes the assets of the trust to a beneficiary. The most important requirement is that the trustee must be a Tennessee resident or someone Tennessee laws allows to act as a trustee. In addition, the trustee cannot transfer the trust's assets.

Creditors can make claims against an IRT in only a few circumstances: if a creditor claims an amount before the IST was set up or if the creditors' claim was made before or at the time the trust was formed and legal action is taken within four years of that formation.

Regardless of these factors, an IST can protect assets during property division, and individuals can consider using one if they foresee significant changes in their marital status in the years ahead.

Source: Tennessee Bar Association, "Divorce Planning in Tennessee: Pre-nuptial, Post-nuptial Agreements and Trusts," Marlene Moses and Jessica Uitto, Dec. 21, 2010

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