Setting up an asset protection trust can help you protect your assets from creditors, lawsuits, and other financial risks. It is a popular tool. But it only works in these circumstances:
- The person creating the trust is a resident of a state that permits them, and
- The person creating the trust is not subject to jurisdiction in a state that does not permit them.
Learn more about the basics of setting up an asset protection trust and discover whether or not it would be beneficial for you.
What Is an Asset Protection Trust?
An asset protection trust is a self-settled spendthrift trust. The idea is that you establish and fund an irrevocable trust naming yourself as a beneficiary. The trustee is an independent party who can make distributions from the trust to you, but not to your creditors.
This means that the grantor can give money or assets to an independent trustee of an “asset protection trust,” also known as an APT, so future creditors can’t get those assets. It also promises that the trustee can give the assets back to you at any time.
This all sounds great. What’s the problem?
The problem is that generations of U.S. laws have made it clear that creditors can reach into a trust that you create if you are also the beneficiary. This includes many U.S. court cases that have successfully attacked the assets of offshore asset protection trusts. The one court case to date that seemed to show that an offshore asset protection trusts works is U.S. v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013). However, Jay Adkisson explains in a Forbes article why this ultimately showed the stupidity of using an offshore asset protection trust. Yes, the debtor’s money was protected. But the court issued a permanent injunction against her or her family every getting access to the money.
(By the way, the Second Pillar of Asset Protection is that creditors cannot limit your use and enjoyment of your money. So, offshore asset protection trusts fail this standard.)
Domestic Asset Protection Trusts (DAPTs) Also Don’t Work.
Domestic Asset Protection Trusts (DA)Ts) also have a horrible record when it comes to protecting people from creditors. In 2017, the Nevada Supreme Court expressly upheld the validity of Nevada’s “self settled spendthrift trust” statute. The case was Klabacka V. Nelson. That case is like the exception that proves the rule. (The rule being that DAPTs don’t work.)
As Jay Adkisson explains in another Forbes article:
DAPTs work when the settlor is resident in a DAPT state, the action is outside of bankruptcy, and the settlor can avoid personal jurisdiction in a non-DAPT state. DAPTs may also work in a bankruptcy proceeding where the settlor is resident in a DAPT state at the time they filed for bankruptcy, and the transferred occurred more than 10 years prior to the commencement of the bankruptcy case, so as to avoid the 10-year limitations period of Bankruptcy Code § 548(e). This is the only time that DAPTs work.
List of States That Permit DAPTs:
As of late 2021, the following states allow the formation of a domestic asset protection trust:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
As you can see, DAPTs are only permitted in a minority of states. The majority of states (including Arizona) view them as being against public policy. Historically, courts do not like the idea of someone transferring assets in trust for the benefit of himself/herself, and claiming that those assets are off limits to creditors.
Your DAPT Won’t Protect You In Bankruptcy Or In a Non-DAPT State
Here’s a visual to show when a DAPT will work and when it won’t.