The Serious Risks Of Self Settled Trusts
While establishing self settled trusts in the place of more conventional asset protection plans is trendy these days, there are some serious setbacks that could do more harm than good.
The most appealing aspect of a self settled trust is that the grantor and beneficiary are the same person, unlike in a more traditional trust. This means that the grantor and beneficiary can benefit from the assets in the trust but cannot legally transfer any of the proceeds to debtors.
Many people open foreign asset protection trusts under the false assumption that moving their assets overseas will help shield them from creditors.
While it’s true that judges in US courts do not have jurisdiction over assets tucked away in foreign asset protection trusts, there are ways that the courts can still dole out punishment for any perceived wrongdoing.
For instance, if the IRS has deemed that you owe taxes and the court can prove you have enough money placed in a foreign trust to cover your tax liability, then you might be penalized for not repatriating money and paying the IRS.
A judge can order that someone move his or her funds from a foreign trust back into the country.
Domestic asset protection trusts – which is one type of common self settled trust – is not recognized in every state, making people vulnerable both legally and financially.
States often differ in their regulations surrounding domestic asset protection trusts. If a state doesn’t legally recognize this type of trust, any assets that are put in that type of trust are not protected from debt collectors.
While some states do recognize domestic trusts as part of their legislation, I said that asset protection is still not guaranteed, particularly when it comes to bankruptcy.
Creditors have and can submit an involuntary bankruptcy petition to the courts that are located in states that legally recognize domestic asset protection trusts. This has the potential to place your assets at risk.
Although self-settled trusts might seem appealing to many, the risk that your assets will be exposed while in this trust is far too great without the support of federal and state. Contact an experienced asset protection attorney to learn more about non-self settled trusts.