A self-settled trust, as it is referred to in the estate planning community, is generally an irrevocable trust that allows the creator (commonly referred to as the “settlor” or “grantor”) to be one of the beneficiaries, while providing many of the same benefits applicable to trusts where only family members are beneficiaries. Such benefits include building wealth outside of the taxable estate of the settlor, multi-generational planning, protecting family wealth from any potential future creditors and consolidating wealth management.  

In cases where one wants to take advantage of the large estate tax exemption coupled with low asset values, yet continue to have access to the transferred assets or income therefrom, a self-settled trust can be quite valuable. There are IRS rulings supporting the non-inclusion of such assets in the gross estate of the settlor.  

Such trusts have been around since the early 1990s, and a number of states have favorable trust laws that include self-settled trust statutes. New Hampshire (which provides additional benefits including dedicated trust courts), South Dakota, Nevada and Delaware tend to be the most favorable. These states have more favorable trust laws in general, including greater privacy, less disclosure requirements to beneficiaries, more favorable “decanting” rules (which essentially allow assets to be distributed to other trusts with certain different provisions) and better protection from potential creditor claims, including those from unscrupulous “in-laws and outlaws.”

With regard the protection of family assets from creditors, special care must be taken, as there have been few cases testing their strength. It is uncertain, for instance, how much protection one will enjoy if he creates a self-settled trust in a state other than where he resides. It is therefore preferable that the settlor have some connection to or near the state of choice, such as a vacation home in New Hampshire (or New England in general), business interests in Boston (including a satellite office), wealth advisors, legal counsel or family members. [Note that such trusts cannot be expected to provide much protection where a government agency such as the IRS or SEC becomes an adverse party or sometimes in the case of a bankruptcy of the settlor.]

One technique to mitigate creditor risks is for the settlor not be an immediate beneficiary, but instead someone who can be added at a later date, either by a independent party’s discretion or by an “act of independent significance” such as a divorce or untimely death of a spouse or other beneficiary (or the Miami Dolphins winning the Super Bowl).  

For those wanting to get their cake out of their taxable estate and eat it too, a self-settled trust should be considered regardless where they live. There are further benefits outside of the purview of this article. For example, a self-settled trust can serve as a remainder beneficiary of a GRAT when the settlor, particularly a single individual, is no longer receiving the GRAT annuity payments.   

Seth R. Kaplan, JD, LL.M, AEP, is a shareholder in Gunster’s Private Wealth Services group in its Miami and Boca Raton offices and is a member of the Florida Bar, New York State Bar and North Carolina State Bar.