Kentucky Authorizes
Series Statutory Trusts
As previously noted, Kentucky
has become the first state to enact the Uniform Statutory Trust Act, it in turn
enabling series statutory trusts. This
bill will become effective on July 12, 2012.
With this statute, Kentucky becomes the 5th state (along with
Delaware, Virginia, Wyoming and Connecticut; they may be organized as well in
D.C.) to authorize a series trust. At
this juncture, Kentucky does not authorize either series LLCs or series limited
partnerships.
A series statutory trust has
the capacity to partition its assets, liabilities and beneficial owners into
one or more separate series, and with respect to each individual series,
designate particular trustees responsible for its direction and
management. Assuming a variety of
statutory requirements are satisfied, the liabilities of each individual series
are enforceable only against the assets of or associated with that series, and
each series will have the capacity to enter into contracts and to sue and to be
sued in its own name. By way of example,
separate pieces of real property could be titled in the name of each individual
series of a statutory trust, but there will only be one statutory trust in
existence. Note, however, that the
series mechanism will not be a means of avoiding the Kentucky limited liability
entity tax. Rather, each series will,
for purposes of that tax, be treated as a distinct entity.
In order validly create a
series, a variety of requirements must be satisfied; absent their satisfaction,
the inter-series liability shield will not exist. In summary, those requirements are:
·
The certificate of
trust as filed with the Kentucky Secretary of State must affirmatively state
that the statutory trust may organize series;
·
The governing
instrument of the statutory trust must provide for the organization of series;
and
·
The records of the
statutory trust must reflect the association of beneficial owners, trustees,
assets and liabilities with each series.
It is upon this last factor
that most challenges to the inter-series liability shields will be based, and
any series statutory trust should expect to expend significant resources in
maintaining the necessary records. Those
of the believe that utilization of a series will be a cost saving vis-à-vis the
organization of distinct, for example, single member LLC holding companies are
likely due an unpleasant surprise.
The series structure, outside
of its traditional application in the organization of investment companies and
in asset securitization, is relatively new.
To date, as noted above, series statutory trusts exist in only four
other jurisdictions. Delaware and D.C.
have series limited partnerships, and all of Delaware, D.C., Illinois, Iowa,
Kansas, Nevada, Oklahoma, Tennessee, Texas and Utah have series LLCs.
Consequent to their relative
novelty, there remain significant unresolved questions with respect to
series. As alluded to above, the degree
of specificity that must be maintained in order to secure the inter-series
liability shields has not been judicially determined. Significant questions exist as well with
respect to federal income tax classification (the IRS has proposed, but they
are not yet final, regulations as to federal tax classification), state tax classification,
nexus, whether an individual series can file for bankruptcy protection, the
mechanism by which a security interest may be taken in the assets of an
individual series and questions as to whether the inter-series liability shield
will be respected in states that did not provide for the series in that
particular form of organization.
The fact that the Kentucky
General Assembly has enabled the creation of series does not mean that the issues
with respect to their utilization have been resolved. Caution is highly warranted.
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