Gabriel Katzner - July 11, 2023 - Estate Planning
Lawyer and client shaking hands in agreement

A self-settled trust is a type of trust in which the settler, or the person who created the trust, is also the beneficiary. This type of trust varies from the typical trust in which the grantor’s assets are conveyed into a trust for the benefit and protection of others.

Settlers use a self-settled trust to shield their assets from future creditors. This type of trust is also called a domestic asset protection trust.

By transferring their assets into the trust, the settlor no longer owns these accounts and properties, and therefore, with some pretty strict restrictions, they are no longer accessible to future creditors.

Anyone can be sued, and the time to consider asset protection is before you need it. If you established a self-settled trust or transferred assets into one that was already established after you knew about a prospective creditor, it would be considered a fraudulent conveyance.


Who manages a self-settled trust?


The settler of a domestic self-settled trust can transfer their assets to the trust and still be the beneficiary, but an independent trustee manages the trust. Since a self-settled trust is discretionary, all distributions are wholly within the trustee’s discretion.

The settlor retains the right to remove and replace the trustee with another independent trustee. The trustee cannot be a relative or a subordinate party, and the trustee must be based in the state under which the trust was formed.


Can a self-settled trust be modified?


No, the trust becomes irrevocable when a grantor (another name for the settler) transfers their assets into a self-settled trust and signs the trust documents. The grantor can no longer change the trust terms.

If the grantor could change the terms of the trust, they would be able to access their assets to pay creditors. Because they cannot change the terms and access their assets, they are shielded from creditors.

Neither the grantor nor future creditors can touch the assets in the self-settled trust. However, the trustee can pay out distributions to the grantor. The trustee must approve these distributions. The key to making this type of trust work is for the grantor to have no say in how the money and property are used once the trust documents are signed.

Are self-settled asset protection trusts permitted in all states?


No, self-settled asset protection trusts are not allowed in all states. The concern is that grantors could use these trusts wrongfully to avoid creditors. States that allow self-settled trust for asset protection have different periods during which the creditor can still act after the assets have been transferred. You can establish self-settled trusts in another state, but the trustee and the assets must reside there.

States that allow some form of self-settled trust to protect assets include:

  • Alaska
  • Delaware
  • Hawaii
  • Michigan
  • Mississippi
  • Missouri
  • Nevada
  • New Hampshire
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Virginia
  • West Virginia, and
  • Wyoming.

Are any creditors exempt from being unable to access these assets?


Yes, certain categories of creditors are exempt from the asset-protection benefits of these trusts.

They include:

  1. Child support claims
  2. Claims from divorcing spouses
  3. Torts
  4. Federal tax claims
  5. State tax claims
  6. Court judgments

How do you establish a self-settled asset protection trust?


Self-settled trusts are complicated and may be customized to meet your needs. This is a general outline of the necessary steps to establish this type of trust.

  1. Meet with your estate attorney to determine whether a self-settled asset protection trust is the right estate planning tool to meet your needs.
  2. Determine in which state the trust will be established and the laws governing these trusts. Remember, the assets must be in that state. This could work for accounts, but not real estate in another state.
  3. Determine what assets will be transferred into the trust.
  4. Write the trust documents and identify an eligible trustee. The trustee must reside in the state in which the trust is established and be independent of the grantor.
  5. The trust must contain a spendthrift provision. This prevents the grantor and the creditors from accessing the trust assets.

What are the benefits of a self-settled asset protection trust?


Self-settled asset protection trusts have several benefits, including:

  1. Grantors can irrevocably transfer their assets into the trust and name themselves the sole beneficiary.
  2. The trust has a spendthrift provision, which means the assets are not accessible to the grantor or their future creditors.
  3. The settler appoints the trustee and has the ability to remove and replace them with another eligible trustee.
  4. If the grantor does not assign the assets to a specific beneficiary upon the grantor’s death, then they remain part of the owner’s estate and do not require a federal gift tax return.

Your traditional asset-protection strategies may not be strong enough. If you are interested in discussing self-settled asset protection trusts to protect your assets from future creditors, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.


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