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.
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.”
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.
If the trust is created properly, neither creditors nor the grantor can reach or use trust property. However, the grantor may be able to receive discretionary payments of income and/or principal from the trust if such payments are approved by the trustee.
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 currently allow some form of self-settled asset protection trusts include:
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. So 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 may 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.
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 may 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.
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:
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.