Self-Settled Trusts Should Protect Assets, But Do They?

A self-settled trust is one where the person creating the trust (the “settlor”) is also the beneficiary.  It’s easy to understand why courts frown on this type of trust for asset protection purposes.  In theory, a self-settled trust could simply be used to provide an individual with the beneficial use of assets while depriving creditors any access to those same assets.  On some level, it seems unfair to the creditors, but it’s not really at all unfair.

Full Disclosure, Due Diligence, and Asset Protection

Good asset protection attorneys do not seek to hide assets.  On the contrary, one benefit of an asset protection plan is that once it is seen by plaintiff’s attorneys, they often lose interest in filing a lawsuit.  With respect to dealing with lenders and other voluntary creditors, they should be given the opportunity to make informed choices about the people to whom they lend money.  Conducting due diligence is part of their job, and they have attorneys who help them understand the complexities of legal structures like trusts and other forms of offshore asset protection.  Voluntary creditors are generally very sophisticated parties that know what they are getting themselves into.

Fraudulent Conveyance Laws Level the Playing Field

If full disclosure isn’t enough, fraudulent conveyance laws will require that any transfer of assets to a trust–either a domestic trust or an offshore asset protection trust–be “set aside” as fraudulent, if the transfer is made with actual fraudulent intent or within a certain period of time of a “claim” being made against the settlor.  This set of laws protects voluntary and involuntary creditors.

Twelve State Legislative Bodies Agree

At least twelve states have adopted laws that protect assets in self-settled trusts from the claims of the settlor’s creditors.  In 1997, Alaska led the pack by adopting the first such law.  Since then, eleven other states have followed suit and enacted some sort of asset protection law to benefit self-settled trusts: Colorado, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, Tennessee, Utah, and Wyoming.  It can be said with some degree of certainty that at least some lawmakers think that domestic laws, and not just offshore asset protection laws, should effectively protect wealth held in the form of self-settled trusts.

Asset Protection Attorneys Don’t Trust Them

The problem with the twelve states listed above is that asset protection attorneys don’t trust their laws.  The statutes themselves are good, and they are a pronouncement of the beliefs held by asset protection lawyers.  The problem is with a proactive judiciary that could potentially disregard the laws.  If that happens and your assets are in a domestic trust, your asset protection plan just went out the window!  It is telling that there is very little, if any, case law interpreting the laws from the twelve jurisdictions mentioned above.  For that reason, offshore asset protection is only true form of asset protection.