Self-settled trusts have skyrocketed in popularity lately, but is the risk of potential drawbacks worth it? Explore the pros and cons to find out if this type of asset protection is right for you.
One of the main advantages of self-settled trusts is that the grantor and beneficiary are the same person, unlike in traditional trusts. This allows the grantor/beneficiary to benefit from the trust’s assets while ensuring that they cannot be transferred to creditors.
Many individuals mistakenly believe that moving their assets to foreign asset protection trusts will protect them from creditors. Although US courts lack jurisdiction over assets held in these trusts, there are still ways for courts to punish individuals for wrongdoing. For example, if the IRS determines that an individual owes taxes and that they have sufficient funds in a foreign trust to cover their tax liability, the individual may be penalized for not repatriating the money.
Domestic asset protection trusts, which are a type of self-settled trust, are not recognized in all states. This makes individuals vulnerable to legal and financial risks. Regulations surrounding domestic trusts vary from state to state, so if a state does not legally recognize this type of trust, any assets held in it will not be protected from debt collectors. Even in states that recognize domestic trusts, creditors can submit an involuntary bankruptcy petition to the courts, placing assets at risk.
Although self-settled trusts may appear attractive, the risks of exposure to creditors are too high without federal and state support. It is recommended that individuals consult an experienced asset protection attorney to learn more about non-self settled trusts.