Asset Protection 101: Trusts

Domestic self-settled asset protection trusts are attractive for the lower costs, time, and effort associated with creation and maintenance. The Internal Revenue Service’s tax reporting requirements alone make foreign self-settled asset protection trusts unappealing to many clients, which spurs them to easier forms of asset protection, including the domestic options.

Every state treats self-settled asset protection trusts differently, so structuring the trust correctly depends heavily on the laws in your area. Nevertheless, there are some general principles of trust formation and maintenance that hold true no matter where in the United States you’re located.

The first and most important challenge for a client is ensuring that the self-settled asset protection trust will be considered valid by your state’s courts. A worst-case scenario would be operating as though a trust was correctly formed and properly insulated, only to have a court invalidate the entire process after the fact. 

To strengthen the chance that a state will uphold the validity of a domestic self-settled asset protection trust, the settlor needs to tie the trust to the designated state through a series of both legal and procedural maneuvers. The settlor will need to deposit at least some of the assets in the state and appoint a trustee who resides there as initial steps. If the trust owns real property, that property should also be in-state. Ideally, the trust will retain local counsel in that state and the trust’s beneficiaries will be residents of that state as well. The trustee can prepare income tax returns with complete discretion over distributions.