How can you be a beneficiary of your trust and protect your assets in the trust simultaneously?
Generally, if you place your assets in a trust and name yourself as a beneficiary, you cannot also benefit from asset protection. If you have a say in how the assets in your trust can be used, then it follows you can direct your trustee to pay your creditors with these assets.
Depending on state laws, a domestic asset protection trust (DAPT) is an irrevocable trust that allows a person who establishes a trust to retain some rights to the assets while still protecting the assets from creditors.
What is the difference between a revocable and an irrevocable trust?
A revocable trust is structured to allow the settlor (the person who establishes and funds the trust) to retain control over the trust assets and terms. This means that they can make changes to the trust document, add or remove assets, and even dissolve the trust.
While a revocable trust offers numerous benefits, it does not provide asset protection from creditors or legal claims. Asset protection is not typically afforded to a settlor who places their assets in a trust of which they are a beneficiary. These trusts are commonly referred to as self-settled trusts.
With an irrevocable trust, the settlor transfers assets into the trust. These assets are generally considered separate from the settlor’s personal assets since the settlor cannot alter or amend the trust documents.
Since the settlor’s assets are permanently transferred to the trust, they are protected from creditors. Neither the settlor nor creditors can reach the assets.
What is a domestic asset protection trust?
Domestic asset protection trusts are irrevocable trusts that allow the settlor to be a discretionary beneficiary of the trust while still offering some protection from the settlor’s creditors.
A domestic asset protection trust makes it possible to separate the legal ownership of the trust assets from the beneficial interest of the trust and, therefore, protect your assets.
How long does it take to protect assets in a domestic asset protection trust?
Asset protection starts after the statute of limitations passes in the state where the trust is established.
The statute of limitations varies by state, but it is typically two to four years. The statute of limitations allows creditors time to make claims against the trust.
Most states have exceptions that allow certain creditors to gain access to the trust assets even after the statute of limitations has passed. Examples of these exception creditors include alimony and child support claims.
Nevada is one of the least creditor-friendly states of those which allow domestic asset protection trusts.
Nevada does not have exception creditors.
Settlors cannot knowingly place assets into a domestic asset protection trust to protect them when they know or suspect there is a claim against them.
When should you establish a domestic asset protection trust?
The answer to this question has many caveats, and that is why it is important to work with an attorney who specializes in estate planning and asset protection.
Asset protection is an essential component of estate and financial planning. To effectively use a domestic asset protection trust, you must establish the trust and move your assets before you know or suspect that you may be sued. Otherwise, it is a fraudulent transfer, and the assets will not be protected.
It is also important to not move assets to a domestic asset protection trust when you may need access to them.
How do you establish a domestic asset protection trust?
If you live in a state, such as Nevada, that allows for domestic asset protection trusts, here is how the trust is established:
- The settlor establishes the trust and transfers assets such as real estate, investments, cash, and property into the trust.
- The settlor designates beneficiaries for the trust. These beneficiaries will eventually receive the trust’s assets.
- The settlor can retain some control over the assets by appointing a trustee to make distribution decisions and by being named as a discretionary beneficiary.
- Wait out the statute of limitations period.
State laws for domestic asset protection trusts vary. Some states have more established and legally tested laws than others.
What if you don’t live in a state that allows for domestic asset protection trusts?
California and New York are examples of states that do not allow domestic asset protection trusts. Residents of these states must establish hybrid domestic asset protection trusts.
When using a hybrid domestic asset protection trust, the settlor cannot be a beneficiary when the trust is established, and they cannot access the trust’s assets. The legal title to the assets is transferred to the trustee.
If the hybrid domestic asset protection trust is established in Nevada, the settlor can be an investment trustee, but not a distribution trustee. They can dictate how the funds will be invested, but not how they will be distributed. This is how the assets are protected from creditors. Settlors can also retain the power to change trustees.
Domestic asset protection trusts can offer significant benefits, including providing asset protection and naming the settlor’s spouse and children as beneficiaries. However, a domestic asset protection trust does not protect assets when there is the likelihood of an impending lawsuit.
Settlors using a domestic asset protection trust must also be solvent to pay current and expected expenses.
A domestic asset protection trust is an irrevocable trust. State laws vary widely regarding the use of these trusts for asset protection. It is essential to consult with a knowledgeable estate planning attorney who can ensure your hybrid domestic asset protection trust is structured to protect your assets while still providing some flexibility in case your financial circumstances change in the future.