Self-Settled Asset Protection Trusts

A "self-settled asset protection trust" can be used to protect real estate, personal property, bank accounts, businesses, and other assets from future creditors. Transferring assets into the trust makes them no longer owned by you and therefore—in some cases—unreachable by those who aim to collect money from you.

This type of trust has many limitations. It doesn't work for past creditors, for all assets, in every state, or in all circumstances. But if you have concerns about possible future liabilities and you have assets you want to protect, ask your lawyer whether a self-settled asset protection trust might work for you.

What Is a Self-Settled Asset Protection Trust?

A self-settled asset protection trust is a complex trust used to shield assets from future creditors. This type of trust is also known as a "domestic asset protection trust."

How a Self-Settled Asset Protection Trust Works

With a self-settled asset protection trust, a grantor—the person creating the trust—signs a trust document and permanently transfers assets into the trust. At that point the trust is irrevocable—the transfer to the trust is permanent and the terms of the trust cannot be changed by the grantor. This irrevocability—and the fact that the assets now belong to the trust rather than the grantor—is key to shielding the assets from creditors.

Unlike other states, Oklahoma doesn't require a self-settled asset protection trust to be irrevocable to provide protection from creditors. (Okla. Stat. tit. 31 § 13 (2024).)

If the trust is created properly, neither creditors nor the grantor can reach or use trust property. However, the grantor might be able to receive discretionary payments of income and/or principal from the trust if such payments are approved by the trustee.

Self-Settled Asset Protection Trusts Are Not Allowed in All States

Traditionally, self-settled asset protection trusts were not allowed in most states, because of concern that people would create trusts to wrongfully avoid creditors. But in the last few years, many states have passed laws allowing some self-settled asset protection trusts to shield assets from future creditors.

The states that allow some form of self-settled asset protection trusts are:

How to Make a Self-Settled Asset Protection Trust

If you want to make a self-settled asset protection trust, you'll need help from an attorney. This type of trust is very technical and the laws are state-specific. The attorney you work with should have experience writing self-settled asset protection trusts and should be licensed in a state where they are allowed. If the trust is not written properly, it might not protect your assets.

Here are five things you and your attorney will need to think about when creating a self-settled asset protection trust.

1. Creditors. From which creditors do you want to protect your assets? Your reasons for creating the trust can't be to avoid current creditors. The trust can shield your assets only from potential future creditors, and some states have a waiting period. For example, if you create a trust and 6 months later a court issues a judgment against you, the assets might not be protected.
2. State laws. Under which state's laws will you make your trust? You don't necessarily have to reside in the state that allows a self-settled asset protection trust. You may choose which state you want to govern the trust.
3. Trustee. Who will be the trustee of the trust? You will probably need to choose an individual or corporate trustee who resides in the state where the trust is created. As the grantor of the trust, it is unlikely that you can be a trustee.
4. Assets. What property do you want to put in the trust? You might have to move assets to the state where you are creating the trust. If the assets are cash, stocks, or bonds, that might be easy to do. However, you can't move real estate to a different state, so you might not be able to provide as much protection for real estate, particularly if the property is located in a state that does not allow this type of trust.
5. Access to funds. What payments do you expect to get from the trust? The trust document may limit your access to funds so that you can only receive distributions from the trust if the trustee approves it. You might also want other members of your family—like your spouse, children, or grandchildren—to be eligible for discretionary distributions from the trust.

Why Protect Your Assets

Using a self-settled asset protection trust allows you to protect your accumulated wealth from future creditors so that you can pass your property on to your loved ones after you die. If you do not expect any risk of creditors in your future, you might not need this type of trust. However certain circumstances put your wealth at risk. Here are three situations that might make you think about creating a self-settled asset protection trust.

• Accidents or injury. If you worry that a future personal injury lawsuit might put your assets at risk, a self-settled trust might be able to protect your assets from future claimants.
• High-risk professions. If you work in a profession that puts your personal wealth at risk—like many lawyers, doctors, architects, real estate developers, builders, accountants, or executives—a self-settled asset trust might be able to protect your assets from being reached by work-related litigation.
• Business ownership. If you own a business, you might be at a higher risk for lawsuits and you might wish to shield some of your assets from future potential creditors.

Some Creditors Will Be Able to Reach the Assets

A self-settled asset protection trust won't protect your assets from every type of creditor. There are several factors at issue here, including the terms of the trust, what rights you have to access trust assets, and state law. For example:

• Family support obligations: Child support, alimony, or spousal support might have to be paid from the trust.
• Taxes: Taxes might have to be paid from the trust.
• Court's discretion: In some cases, a court will require trust assets be made available to pay for "necessary services or supplies" like some medical services.
• Judgments: The trust might not protect against some court judgments against the grantor. This will depend on several factors including the trust language, state law, and the type of judgment awarded against the grantor.

Other Ways to Protect Your Assets

Self-settled asset protection trusts aren't the only way to protect assets against future creditors. Limited liability corporate structures, professional or umbrella insurance, and prenuptial agreements can also be effective in specific circumstances. When you're talking to your lawyer, you might ask about these types of asset protection tools as well.