Self-Settled Trusts and Asset Protection Trusts: A Summary

Self-settled trusts, often referred to as asset protection trusts, are a type of trust where the grantor (the person creating the trust) is also a discretionary beneficiary. This means the grantor can potentially benefit from the assets while hoping to keep those assets out of the reach of creditors. 

The effectiveness and legality of these trusts for asset protection vary widely based on jurisdiction and specific circumstances. Here's an overview of the related legal issues: 

Jurisdiction Matters

• Domestic Asset Protection Trusts (DAPTs): Only some U.S. states allow for the creation of DAPTs. These states have specific laws that provide for certain protections against the claims of future creditors if various requirements are met.

• Offshore Asset Protection Trusts: Some individuals turn to jurisdictions outside the U.S. (offshore trusts) that offer perceived stronger asset protection. However, enforcement and recognition of these trusts can be complex, especially when trying to repatriate assets or when facing a judgment from a U.S. court.

Fraudulent Transfers

Trust transfers meant to defraud current creditors can be set aside, rendering the asset protection ineffective. If a court determines that the grantor placed assets into the trust with the intent to hinder, delay, or defraud creditors, those assets can be reached by creditors.

Likewise, timing is critical. Transferring assets into a trust immediately after incurring a large debt or when litigation is foreseeable can be particularly suspect. 

Existing vs. Future Creditors

Protection is typically stronger against future creditors than existing ones. In many jurisdictions, if a creditor's claim arose after the establishment of the trust and all legal requirements were followed, the trust assets might be protected. However, existing creditors at the time the trust was established often have stronger claims against trust assets. 

Other Considerations for Asset Protection Trusts

• Choice of Law and Full Faith and Credit: Even if you create a valid DAPT in one state, another state (where you reside or where the creditor sues) may not respect its asset protection features. The U.S. Constitution's Full Faith and Credit Clause can make this a nuanced area.

• Bankruptcy: If a debtor files for bankruptcy within ten years of transferring assets to a self-settled trust, the Bankruptcy Code might allow the bankruptcy trustee to access those assets.

• Spousal and Child Support: Many jurisdictions make exceptions to asset protections when it comes to spousal or child support obligations.

• Legal and Administrative Costs: Setting up and maintaining an asset protection trust, especially an offshore one, can be expensive and administratively burdensome.

Know the Laws with Legal Fix

While self-settled trusts offer potential avenues for asset protection, their effectiveness is contingent on a range of factors, including jurisdiction, timing, and individual circumstances. Moreover, their ethical and legal implications can be complex. It's essential to consult with legal professionals knowledgeable in wills, trusts, and estates to navigate the intricacies and ensure compliance with relevant laws.

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