USA – CONNECTICUT Trends and Developments Contributed by: William Kambas, Lawton Leung and Samantha Kopf, Withers
Building on the Uniform Trust Code, Connecticut adopted the Uniform Directed Trust Act, further expanding the state’s trust-planning toolkit. The Directed Trust Act allows for the separation of pow- ers and responsibilities traditionally vested in a sin- gle trustee among a trustee and one or more trust directors. Under this framework, a trustee may retain responsibility for administrative functions, while investment authority may be delegated to an invest- ment director and distribution authority delegated to a distributions director. This separation of functions reflects the practical reality that different individuals or institutions may be best suited to handle different aspects of trust management. Unless a trust instrument provides otherwise, those with fiduciary positions are subject to the same fidu- ciary duties and potential liabilities in the exercise or non-exercise of their powers as a trustee would have under similar circumstances. Directed trust structures therefore allow grantors to retain trusted advisers, family members or investment professionals in key decision-making roles, as appropriate, while still lev- eraging the administrative capabilities of a corporate trustee. For families with concentrated investments, operating businesses or unique governance needs, the Directed Trust Act provides meaningful flexibility without sacrificing fiduciary accountability. Self-settled asset protection trusts Connecticut has also entered the asset protection trust arena through the enactment of the Connecti- cut Qualified Dispositions in Trust Act, becoming the nineteenth state to authorise self-settled asset protec- tion trusts. Under this statute, a grantor may transfer assets to a trust for their own benefit while potentially limiting the reach of future creditors, subject to impor- tant statutory safeguards. In particular, property trans- ferred to a Connecticut asset protection trust remains subject to creditor claims in two key circumstances: first, for claims that arose before the transfer, if an action is brought within four years of the transfer; and second, for claims that arise after the transfer, if brought within four years of the transfer. Because assets transferred to a Connecticut asset protection trust remain exposed to creditor claims during this statutory window, such transfers are not
treated as completed gifts for gift tax purposes and do not achieve estate tax protection until the creditor claim period has expired. As a result, asset protec- tion trusts under Connecticut law are not a short-term planning solution. Instead, they require early imple- mentation and careful integration with broader estate and tax-planning strategies, particularly where sig- nificant gifting or estate tax minimisation is a primary objective. Connecticut courts have also made clear that asset protection trusts created under the laws of other juris- dictions will not necessarily be respected if enforce- ment is sought in Connecticut. In Netter v Netter , the Connecticut Appellate Court held that Connecticut will not enforce another jurisdiction’s self-settled spend- thrift trust laws if doing so would violate Connecti- cut public policy. The court concluded that if a self- settled trust does not satisfy the requirements of the Connecticut Qualified Dispositions in Trust Act, or if sustaining the trust would substantially prejudice the rights of interested parties, Connecticut common law applies and the trust may be deemed void as a mat- ter of public policy. Individuals who have established self-settled asset protection trusts under the laws of another state or country should therefore be aware that, if a Connecticut court is asked to enforce such a trust, it will be evaluated under Connecticut law rather than the law of the trust’s original jurisdiction. Extension of the perpetuities period Another significant development enhancing Connecti- cut’s appeal for long-term planning is the extension of the state’s perpetuities period. Under the Uniform Statutory Rule Against Perpetuities, Connecticut now permits trusts to last for up to 800 years. This extend- ed duration allows for the creation of dynasty trusts designed to preserve family wealth, provide creditor protection, and achieve transfer tax efficiency across multiple generations. Because Connecticut’s estate tax exemption generally matches the federal exemp- tion, a grantor can fund an irrevocable trust with up to USD15 million today, remove those assets from the transfer tax system, and allow them to remain outside of any beneficiary’s estate for centuries, assuming proper structuring and administration.
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