The 'Asset Protection Trust'
Where
the liability risk warrants additional protection, consideration should
be given to utilizing an asset protection, or "self-settled," trust.
The law of most of the United States provides that where a person establishes a trust, and is also a beneficiary of that trust, the trust fund is available to that person's creditors to the full extent of his or her beneficial interest. This principle of domestic trust law holds true even if the trust was established at a time when no creditors existed and even if the future potential for such creditors was wholly unforeseeable at that time.
A distinction is often made between the circumstance where one establishes a spendthrift trust for the benefit of another, and where one attempts to establish a spendthrift trust for his or her own benefit (even if only as a member of a class). Upon public policy grounds, such a "self-settled" spendthrift trust is, in most jurisdictions, deemed invalid as against the settlor's own creditors. This is true even where the settlor's only beneficial trust interest is the possibility of receiving distributions within the discretion of a third-party trustee. Moreover, in such majority rule jurisdictions, it is also deemed to be immaterial whether the settlor's creditors are present or future, reasonably anticipated or impossible to foresee, as intent to defraud creditors is not required for the application of this rule.
Notably, however, the settlor of a trust may designate the law of any jurisdiction as governing the trust's administration, not just that of his own domicile, and hence may designate a jurisdiction that recognizes self-settled spendthrift trusts as valid even though the jurisdiction of the settlor's domicile does not. Thus a settlor domiciled in one state may create an inter vivos trust by conveying property to a trust company of another state as trustee and delivering the property to it to be administered in that state. In that case the law of that state will, presumably, be applicable as to the rights of creditors to reach the beneficiary's interest. This permits a person who is domiciled in a state in which restraints on alienation are not permitted, to create an inter vivos trust in another state where they are permitted and thereby take advantage of the law of the latter state.
Therefore, although only a minority of jurisdictions, both onshore and offshore, permits the establishment of effective self-settled spendthrift trusts, such trusts are available to all persons regardless of domicile. Care must be taken, however, in order to achieve all of the desired benefits of an effective self-settled spendthrift trust.
The primary consideration in establishing an effective self-settled spendthrift trust is the law under which the trust is established. In this regard the practitioner has the choice of a fair (and constantly expanding) number of offshore jurisdictions as well as, to date, 11 states.
Additional myriad considerations of somewhat lesser (but by no means inconsequential) significance must also be considered in choosing the law that will be designated as governing the trust. Some of those considerations include (i) the effect of the local tax regime upon the trust; (ii) the availability of professional trust services (ideally through a trustee with which an effective working relationship has previously been established); (iii) the political and economic stability of the jurisdiction; (iv) whether there exists language, cultural or other barriers which make administration of the trust in that jurisdiction inconvenient; (v) the situs of the property; and (vi) other practical and psychological hurdles for a creditor attempting to enforce a claim against a trust sited in that jurisdiction.
The law surrounding spendthrift trust protections is, however, an iceberg, and this article exposes merely the tip. Therefore, the diligent estate planner will dig further to discover the myriad creative ways that exist to protect his clients' interests through the use of spendthrift trusts.
Gideon
Rothschild is a partner at Moses & Singer LLP in New York City and
co-chair of the Trust & Estate and Wealth Preservation Group. He
is a fellow of ACTEC and academician of the International Academy of
Trust & Estate Lawyers.