What are the benefits of a domestic self-settled trust?
Owners of a domestic self-settled trust can irrevocably transfer their assets to the trust, naming themselves as the only beneficiary who can receive distributions, albeit guided by an independent trustee. As settlor, one retains certain legal rights, including the ability to remove and replace the trustee with another independent trustee, as long as that person is not a relative or subordinate party as defined by the I.R.S. Code.
Another benefit of the self-settled trust is its ability to be customized. For example, it is possible to make this trust impervious to the federal gift tax. By limiting the power of the trustee to assign the assets to a specific family member upon your death, the transfer would not require a federal gift tax return. As a result, the trust remains a part of the owner’s estate while the assets are free from the claims of creditors.
One thing to keep in mind is that the domestic self-settled trust is only effective for future creditors, meaning it is impossible to use this trust to avoid existing creditors. Additionally, this type of trust must exist for ten years in order for it to be protective in the event of a bankruptcy.
Why do most states prohibit Domestic Self-Settled Trusts?
Most states will not allow for a “self-settled” asset protection trust, or a trust that only benefits the settlor while protecting their assets from seizure by creditors. Up until recently, the foreign asset protection trust would have been the more popular choice, but changes in state laws have made the domestic self-settled trust a rising trend.
Each of the seventeen states has a different set of laws governing the self-settled domestic trust, but there may be an advantage to choosing one state over the other. As long as you meet the requirements of a state’s statute, it is possible to select the state that makes the most sense for a specific circumstance. The trust must be managed by an independent trustee that resides in the state where it is established, and the trust’s assets must also be located within that state.
What kinds of assets are protected by a domestic self-settled trust?
With a “domestic self-settled trust” it is possible to protect personal property, real estate, bank accounts and business assets. Because transferring assets into a trust means they are no longer owned by you they are therefore, in most cases, unreachable by those who wish to collect money from you.
Since these trusts have some limitations, it is important to consult with our experienced attorneys at Dilendorf Law Firm and take advantage of their deep asset protection expertise.
Considerations in creating a domestic self-settled trust
- Which property should be included in the trust? If your assets are cash, stocks, or bonds, it may be easy to move them to the state where the trust is established, but if they are real estate that may not be possible, particularly if the real estate is located in a state that does not offer this type of trust.
- Access to funds. Consider the type of payments you would expect to receive from this trust. Some of these distributions may need to be approved by the trustee, or you could want other members of your family to receive discretionary distributions.
- Types of creditors: Be sure you are not trying to avoid current creditors, as this type of trust will not protect you from their legal actions. A domestic self-settled trust will only be applicable to future creditors and may be subject to a waiting period.
- State laws will be an important consideration, as you do not necessarily need to reside in the state where the trust is administered. Our attorneys will help you choose the appropriate state based on your unique needs.
- Choosing a trustee for the trust requires choosing a person who resides in the state where the trust is administered. A grantor cannot also be named the trustee, but an attorney can recommend a reliable independent trustee.
When our team at Dilendorf Law Firm recommends this type of trust, it is important to note that the laws surrounding it are complex and state specific. In order to comply with the laws in the state of issuance and ensure full protection of your assets, our experienced asset protection lawyers will write the terms of the trust in the appropriate legal language.
Remember, a self-settled trust will not be right for every asset in every state, and certain obligations might be excluded from its protection. If it turns out this type of trust is not right for you, our attorneys will recommend alternative strategies.
Domestic Self-Settled Trusts
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At Dilendorf Law Firm, we specialize in all aspects of asset protection and help our clients understand the various options available. One of these is a Domestic Self-Settled Trust.