Estate Planning Lawyer
As its name implies, an asset protection trust is one you establish for the purpose of protecting the assets you place in it from creditors. Asset protection trusts are irrevocable, meaning that you can’t change their provisions or revoke them once you establish them.
Which States Allow Them
Unfortunately, not all states allow you to set up a domestic asset protection trust (DAPT), also sometimes called a self-settled trust. Only the following 17 states allow them:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
Apparently, the remaining 33 states still have concerns that asset protection trusts could be used by people desiring to wrongfully avoid their creditors.
Going Out of State
If you don’t happen to live in one of the states that allow asset protection trusts, you may be able, under certain circumstances, to set up a DAPT in a state that does. The key is establishing as many ties to that state as possible. For instance, you likely will want to do one or more of the following:
- Buy a vacation home in that state.
- Contact an experienced estate planning lawyer in that state.
- Choose a trustee – individual or entity – located in that state.
- Sign all trust documents in that state.
- If you’re transferring artwork or other valuable personal property into the trust, store that property in that state, not the one where you live.
Another option if you want to set up an asset protection trust but live in a state that disallows them is to establish an offshore asset protection trust. Some foreign jurisdictions, including Nevis and the Cook Islands, have laws that heavily favor investors and protect debtors. In addition, these jurisdictions do not recognize foreign court orders, including those issued in the U.S. Consequently, if you have an offshore asset protection trust in one of these jurisdictions and a creditor receives a judgment against you in the U.S., the assets in your trust are still safe from invasion by the judgment holder.
Establishing an offshore asset protection trust, however, is even trickier and more complicated than establishing one in the U.S., be it in your home state or one that allows such trusts. For one thing, your offshore trust must comply with all the laws of that jurisdiction. In addition, the trust must be very carefully structured so as to withstand scrutiny and possible challenges by U.S. taxing authorities.