What's a Self-Settled Trust?
A Self-Settled Trust is a trust you establish for your own benefit. Historically, trusts were formed by one individual for the benefit of a third party. Generally a family member or a charity. More recently, leading trust jurisdictions have begun allowing individuals to form trusts for themselves. These are called self-settled trusts and they enjoy the same asset protection and trust benefits as third party settled trusts.
This change in trust law came about as many US based jurisdictions began to compete more directly with traditional offshore havens such as Nevis and the Cook Islands. A self-settled trust in Wyoming is one example of a Wyoming Asset Protection Trust that we form for clients.
Self-Settled Trust Examples
The core of a self-settled trust is the ability to create a trust for yourself. That is you are both the settlor and the beneficiary of the trust. In Wyoming, this provides strong asset protection benefits, unlike California and Texas for example. The trust holds title in the eyes of the law. This means the trust's assets cannot be taken if you are sued individually.
There are many situations where this strategy can be useful. For example, professionals (doctors, attorneys, etc.), real estate investors and other wealthy individuals stand to benefit. The below examples all decrease the risk of a lawsuit from the beginning because, with the title removed from your name, you are less of a target. The rule is those with assets are often targeted and those without are usually left alone.
- Professionals: Doctors and attorneys use malpractice insurance to protect personal assets from liabilities arising from their professional practice. Insurance may not always decide to pay, nor is there a guarantee the coverage limit will cover all liabilities. An easier route is to place personal assets into a self-settled asset protection trust. This removes the title from your name and places it beyond the reach of creditors. This can protect your home, car and life savings without paying the ever increasing cost of malpractice insurance.
- Real Estate Investors: Real estate is inherently risky. Mortgage payments over time increase your equity and make the asset an increasingly tempting target. Investors frequently over-insure their real estate and take out personal liability insurance in case of a personal credit event as well. Wyoming's Trust and LLC laws make these additional protections unnecessary. Forming a holding company and subsidiaries protects properties from one another, and the self-settled trust protects the properties from any personal risks such as car accidents, divorces, the IRS and bankruptcy.
- Other Examples: Personal assets cannot be protected with a limited liability company. This makes them an easy target for aggressive attorneys. Whether a lawsuit has merit or not, there is a good chance the opposing counsel will attack personal assets if only to raise your stress level. Removing assets from your personal name and into a self-settled asset protection trust keeps creditors from using this tactic. You can sleep well at night knowing your personal and business assets are protected.
Qualified Spendthrift Trusts
Spendthrift trusts are designed to deprive creditors of the ability to seize a trust and its assets to satisfy judgments or other claims against beneficiaries. In technical terms, a creditor cannot go after your beneficial interest. At best they can pursue direct distributions. In such cases indirect distributions can be made on behalf of the beneficiary.
For example, the trust can directly pay your landlord, credit card companies and other bills - rather than having the money go through your bank account first. This is a weak remedy which discourages creditors from pursuing lawsuits. In the event a judgement is successful, then there is nothing to attach to. This further strengthens your hand for a favorable negotiation.
This asset protection benefit is obtained by granting full control to an independent trustee. Fortunately, Wyoming trust law considers a single family private trust company (PTC) to be independent. You own the PTC and manage its affairs, with trusted advisers staffing key committees. This prevents you from losing control while maintaining the necessary separation required to enjoy being a spendthrift trust.
Revocable vs Irrevocable Trusts
A revocable trust is formed for privacy and to avoid probate. They cannot be used for asset protection as a judge can revoke them at any time and order assets be liquidated to satisfy creditor claims. An Irrevocable Trust cannot be revoked or amended without the consent of the beneficiary (you). This provides asset protection because the trust holds legal title to the property and is considered its own person in the eyes of the law. Its right to the property will be protected and the creditor will not be able to attach their judgement to its assets. You, however, may continue to enjoy the assets as you see fit. This setup initially seems odd, but is supported by hundreds of years of trust law. Follow this link to Learn more about the difference between irrevocable and revocable trusts.
Wyoming is one of the few jurisdictions which allows trusts to exist for 1,000 years. Less favorable states, which tend to also not allow self-settled trusts, limit the trust's life to one or two generations. This drives many residents of California and Texas to seek our more favorable trust laws. If you form a trust in California or Texas you will not enjoy asset protection during your lifetime. You will also pay unnecessary Gift Taxes, Estate Taxes and Generation Skipping Taxes. These can be avoided with a Self-Settled Wyoming Trust.
Wyoming Trust Attorney
Due to the unique nature of Self-Settled trusts, we recommend only using a Trust Attorney who specializes in such matters. Our attorney assisted with writing Wyoming's Trust Laws and was formerly a Certified Public Accountant. Our law firm only handles asset protection and estate planning matters.
Frequently Asked Questions
A self-settled trust is an asset protection instrument where the creator of the trust is also a beneficiary. These are referred to as Domestic Asset Protection Trusts in contrast with offshore entities from the Caribbean or Cook Islands for example.
Thirteen states allow individuals to form self-settled trusts, whereas all states allow you to form third party trusts for asset protection. The difference being whether the Grantor and Beneficiary can be the same.
A self-settled trust must be irrevocable. Given the trust is not revocable a judge or creditor cannot force you to distribute assets. The assets remain protected inside the self-settled or Domestic Asset Protection Trust.
A self-settled trust can be a Grantor or Non-Grantor trust, the latter solely refers to the method of taxation whereas the former as to whether the Grantor is also a Beneficiary.