An asset protection trust is a self-settled trust designed to protect assets from judgment creditors. In Florida, an asset protection trust does not work if it is a self-settled trust. A judgment creditor can levy upon a debtor’s interest in an asset protection trust that the debtor created for their own benefit.
A self-settled trust is a trust where the trustmaker is also the trust beneficiary. A revocable living trust (used for estate planning) is a typical example of a self-settled trust.
What Is a Domestic Asset Protection Trust?
Some states in the U.S. have enacted statutes that expressly provide asset protection benefits to self-settled trusts. Trusts created under these state statutes are referred to as domestic asset protection trusts. These domestic asset protection trusts were designed to attract businesses and assets to their states by offering creditor protection.
A domestic asset protection trust means that the trust (1) protects assets from the beneficiary’s creditors, (2) is irrevocable, (3) does not allow the trustmaker to change the terms of the trust, (4) requires at least one trustee to be either a resident or corporation of the trust state, and (5) likely provides for a trust protector, who has the power to veto the trustee’s decisions.
Which States Offer Domestic Asset Protection Trusts?
Alaska, Delaware, Utah, and Nevada are states with favorable domestic asset protection trust laws. Florida law does not allow self-settled domestic asset protection trusts. Instead, Florida has consistently followed a public policy against self-settled trust providing asset protection for the trustmaker.
Many legal experts make reasonable arguments supporting the DAPT’s asset protection. The legal issue in DAPT planning is a “conflict of law” issue.
Suppose a Florida resident forms a self-settled trust in a domestic asset protection trust state such as Delaware, Alaska, or Utah. In that case, the legal issue is whether Florida courts will apply (a) the protective laws of the DAPT state, which has encouraged self-settled trust protections, or (b) 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.
In general, a Florida resident’s domestic asset protection trust is more likely effective asset protection if the trust assets, records, and parties are situated in the DAPT state. However, the more the DAPT trust assets and parties are in Florida, the more likely Florida courts will apply Florida law, and trust assets will not be protected from creditors. To date, no Florida court has held that a debtor’s interest in a DAPT formed under the laws of another state is protected from a Florida judgment.
It is possible to structure an estate planning trust in Florida to achieve asset protection. Although assets in the debtor’s living trust, a form of a 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 legal authority that a debtor’s interest in a trust that the debtor forms or funds with their 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 with effective asset protection even though Florida has not enacted specific asset protection trust statutes.
Do Florida Living Trusts Provide Asset Protection?
One of the primary purposes of a revocable trust is to avoid guardianship while the trustmaker is alive and to avoid probate after the trustmaker dies. Some people believe that their living trust also provides asset protection.
A living trust is a self-settled trust because the trustmaker is the beneficiary of the trust during the trustmaker’s lifetime. Therefore, a Florida living trust provides no asset protection for the trustmaker.
Important Court Cases
In re Brown, 303 F. 3d 1261 (11th Cir. 2002): Self-Settled Spendthrift Trusts Do Not Provide Asset Protection
Florida law prohibits a judgment creditor from reaching a beneficiary’s interest in a trust with properly drafted spendthrift provisions. However, when the debtor establishes a trust for their own benefit so that the debtor is both the settlor or trustmaker and beneficiary, the trust is characterized as a self-settled trust. Spendthrift provisions do not protect the trustmaker’s own beneficial interest from creditors in a self-settled trust. The court says Florida public policy strongly disfavors self-settled trusts.
Miller v. Kessler, 34 So. 3d. 172 (3rd DCA Fla. 2010): Discretionary Trust Protects Beneficiary’s Interest From Creditors
When a trust document provides the trustee complete discretion over distributions to beneficiaries, a beneficiary’s creditor may only reach those distributions that the trustee actually makes to the beneficiary. The court cited section 736.0504(2) of Florida law. The beneficiary’s creditor may not compel a distribution from the trustee or attach any interest in the trust before the trustee makes the distribution.
FAQs About Asset Protection Trusts
How does an asset protection trust work?
In states that allow it, an asset protection trust protects a judgment debtor’s property from execution. The trust owns the property and is prohibited by its terms from distributing income or principal to the judgment creditor. Learn more about asset protection.
What is the cost of an asset protection trust?
A domestic asset protection trust typically costs between $2,500 and $10,000. More sophisticated trusts will be on the higher end of the scale.
Which trust is best for asset protection?
The best type of trust for asset protection in Florida is an irrevocable trust. However, Florida law prohibits self-settled trusts, making a traditional asset protection trust ineffective.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
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