A so-called “self-settled” trust is a trust where the person who creates the trust and transfers the assets to the trust is also a trust beneficiary. A living trust is a common example of a self-settled trust used for estate planning. Under Florida law established by a long and consistent line of court decisions, a self-settled trust does not protect the trustmaker’s beneficial interest in the income or principal of the trust from the trustmaker’s creditors.
Offshore trusts provide asset protection benefits mainly because statutes in select foreign countries state that a trustmaker’s beneficial interest in a self-settled trust formed in their country is protected from the trustmaker’s own creditors. These offshore trust statutes include other debtor-friendly provisions to encourage new trust business. Some states in the United States have recently enacted statutes which expressly grant these same type of asset protection benefits to self-settled trusts at one time found only offshore. Trusts created under these state statutes are referred to as domestic asset protection trusts (“DAPT”). These DAPTs were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in large part to attract businesses and assets to their states.
Most state DAPT statutes have several common features. The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker. The statutes also require at least one trustee to be either a state resident or a corporation doing business in the state. Some trust assets must be located or deposited in the state. The DAPT statutes, like their foreign counterparts, typically provide for a position of “trust protector” who is a person with power to veto the trustee’s decisions to make distributions if such distributions may be vulnerable to the trustmaker’s creditors.
Alaska, Delaware, and Nevada are states with favorable domestic asset protection trust laws. Of these three states, many attorneys consider Nevada to be the best DAPT jurisdiction. For example, Nevada law provides creditors the ability to challenge asset transfers to a trust as a fraudulent conveyance two years after the transfer is made or six months after the transfer is discovered. In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states’ DAPTs. Nevada law also has relatively flexible trustee provisions under which a settlor can appoint himself as trustee over trust investments as long as an independent trustee has discretion to make trust distributions.
A DAPT works well in theory, and many qualified commentators have published persuasive legal arguments supporting the DAPT’s asset protection. However, to date, no Florida court has evaluated a debtor’s interest in a DAPT formed under the laws of another state. The general rule established under several court decisions in courts outside Florida is that the trust laws of the state where the debtor resided or where a judgment is being collected will determine whether assets in a DAPT will be protected from creditors regardless of where the DAPT was formed. This rule suggests Florida debtors cannot utilize domestic asset protection trusts settled in one of the states with DAPT statutes. The debtor would have a better defense if he owned property in the state where he set up his DAPT.
However, there is authority from at least one Florida federal court that a debtor’s interest in a trust which the debtor forms or funds with his own non-exempt money will be protected from creditors if anyone other than the debtor is given control over trust assets. Therefore, a properly drafted Florida trust may provide the trustmaker effective asset protection even though Florida has not enacted specific asset protection trust statutes.