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 The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker.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, Utah, and Nevada are states with favorable domestic asset protection trust laws. Of these three states, I prefer Utah’s domestic trust law which as updated in 2013 to compete favorably with other DAPT states. For example, in Utah the general statute of limitation for fraudulent transfers to the DAPT is four years, and there is a procedure by which a debtor can shorten the limitations time to only 120 days. In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states’ DAPTs. Utah’s DAPT law law also has relatively flexible trustee provisions under which a trustmaker can appoint himself as trustee as long as there is a Utah co-trustee. The Utah trustee does not have to be a bank or trust company, but it can be any individual who resides in the state. The trustmaker as trustee can retain control of investments and 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 is protected from a Florida judgment. The legal issue in DAPT planning is referred to as “conflict of law” law” issue: if a Florida resident forms a self-settled trust in a DAPT state where these trusts are expressly protected from all creditors, will Florida courts apply the protective laws of the DAPT state which has encouraged self-settled trust protections or the Florida law opposing self-settled trust protection?
Resolving the conflict between Florida’s public policy against self-settled trusts and contrary policy in DAPT states is legally complicated and involves a multi-step fact analysis. In general, based upon principles in the Restatement of Trusts, if a Florida debtor establishes a DAPT trust the more that trust assets, trust records, and trust parties are situated in the DAPT state the more likely that DAPT state laws will apply. However, the more that the DAPT trust assets and parties are in Florida the more likely Florida courts will apply local law.
There are possibilities to structure estate planning trusts in Florida to achieve asset protection. Although assets in the debtor’s own living trust, a form of self-settled trust, are not protected from the debtor’s creditors, a Florida resident may protect assets in a trust created by another person. There is authority 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.