The Risk of a Self Settled Asset Protection Trust

As a high-net-worth individual, you want your asset protection trusts to do two things: keep your assets safe against legal threats and creditors, and benefit you and your family for a long time to come. At first glance, a self-settled asset protection trust could seem like just the instrument for your needs.

In truth, however, a self-settled asset protection trust comes with certain inherent risks that more traditional trust vehicles don’t have. This isn’t to say self-settled trusts are never wise choices or that you should always avoid them. But it’s important to understand the full implications of both trust types before settling on one or the other.

What is a Self-Settled Asset Protection Trust?

A self-settled asset protection trust (APT) is a trust in which you, the settlor, are also the sole beneficiary or one of the beneficiaries for the trust instrument.

For example, you might set up a self-settled trust and have $10 million placed into the trust vehicle. That offshore asset protection trust then pays you a regular dividend. Because you receive money regularly from the trust, you are also one of the beneficiaries.

Self-Settled vs. Traditional Trusts

You can also understand self-settled asset protection trusts by comparing them to traditional trusts. With a traditional trust, you are not one of the beneficiaries.

For instance, you might set up a long-term asset protection trust for the benefit of your grandchildren. Under the terms of the trust, you agree to provide the trust with $20 million in funds, and the trust maintains that money until your grandchildren are grown. 

Once they reach a certain age, the trust (or the trustee) will then distribute dividends or other assets to your grandchildren per the trust documents.

The big difference between self-settled and traditional trusts is just whether or not you are a beneficiary. If you are, it’s a self-settled trust, and if you are not a beneficiary, it’s a traditional trust.

What Are the Risks of a Self-Settled Asset Protection Trust?

A self-settled asset protection trust might seem like a great idea. After all, don’t you want your assets to continue to benefit you personally?

That might be true in some cases but not in others. For example, if the purpose of your trust is to solely benefit other people or parties, like your kids, your spouse, your alma mater, or something else, a self-settled asset protection trust doesn’t make a lot of sense.

Furthermore, an asset protection trust that is self-settled comes with a few extra risks.

Increased Scrutiny

For starters, a self-settled asset protection trust almost always comes under greater scrutiny from legal opponents, creditors, and others who may wish to take your wealth away from you. 

Thanks to the nature of a self-settled trust (i.e., you are a beneficiary), most look upon self-settled asset protection trusts with a bit more suspicion compared to regular trusts.

Imagine a circumstance where you are on the hook for a major tax bill or an old debt that a creditor has finally come to collect. If you’ve put most of your assets into a self-settled asset protection trust, the judge brought into the disagreement might squint their eyes at you and wonder whether you really set up the trust for a purpose other than payment evasion.

You can also think of self-settled asset protection trusts as perceptually less innocent financial vehicles. Even if your motives for setting up a self-settled trust are completely innocent, you’ll have a harder time convincing the courts, judges, and even the general public that that’s the case. It will be harder to prove that you set up the self-settled trust for non-personal gain in some form or fashion.

(Potentially) Greater Legal Vulnerability

Because of the above risk, self-settled asset protection trusts are oftentimes more vulnerable in a legal sense than traditional trusts.

Imagine a circumstance where you put $20 million into a traditional foreign or offshore asset protection trust. You are not the beneficiary of that trust. If a creditor or lawsuit plaintiff comes after that money, it will be very, very difficult for them to prove that you have any sort of control over those funds, especially if you worked with Dominion to make sure your trust is airtight.

Since you don’t benefit from the trust, and you aren’t the trustee, your name could theoretically be nowhere near that trust vehicle. Any legal or financial opponents you might face will have a higher burden of proof.

In contrast, if you are a beneficiary of a self-settled asset protection trust, your name is right there on the documents. It could be easier, in theory, for a legal or financial opponent to get a hold of your assets or force you to give up your assets if there’s a loophole or other potential threat vectors they can exploit.

Harder to Make Airtight (in Some Cases)

The other side of the above point is also true: self-settled asset protection trusts are more difficult to make airtight and legally defensible in certain cases.

That’s not to say it’s impossible. If you come to Dominion and a self-settled asset protection trust is what you need, we can work with you to get the job done. But it will require greater diligence, more research, and more careful planning to get it right.

When you set up a self-settled asset protection trust with Dominion, our job is to reduce the risk of that trust becoming compromised. Will need to do things like:

• Ensure the trust documents are written in the perfect language
• Guarantee the trust is set up in the right jurisdiction(s)
• Set up day-to-day administration to ensure that the right standards are met

All of this is certainly possible. It’s just more difficult because there is, as noted above, a greater overall level of suspicion associated with self-settled asset protection trusts, rightly or wrongly.

Is a Self-Settled APT Right for You?

A self-settled APT might be ideal in instances where you need your money to be secure and you need to reap the benefits of that money consistently. For example, maybe you need to set up an asset protection trust that guards your wealth against legal threat vectors, but also provides you with regular dividends. You've worked hard for decades and now want to live off your assets to enjoy your golden years.

In these cases, a self-settled asset protection trust might be just the ticket. However, whether or not this kind of APT is desirable depends on things like your jurisdiction, your potential legal liabilities, your previous career, and how much money you have to protect overall. 

Working with legal and financial specialists at Dominion can help you understand the full breadth of options available to you.

You may think that a self-settled APT is the only choice you have, but there are many alternative means to protect your assets and use those assets for your own benefit without drawing so much mistrust.

Say you’re a high-profile individual with a lot to lose. An offshore APT could be the key to protecting your wealth. If done right – like in the Cook Islands – it’s been airtight in court. Never been cracked.

Then you’ve got your irrevocable life insurance trust, or ILIT. Not only can this bad boy shield your beneficiaries from estate taxes, but it also comes with some pretty sweet tax benefits while you’re still kicking. If you’ve got a hefty estate, this one’s definitely worth looking into.

Domestic asset protection trusts, or DAPTs, are another option. States like Nevada and Delaware have some pretty favorable laws in place for these, so if you’re mainly concerned about creditors within the US, this could be your ticket.

We Handle Self-Settled Asset Protection Trusts at Dominion

Despite the increased risk, a self-settled asset protection trust may be the ideal solution for your overall asset protection or financial stability goals. If you're a high-net-worth individual like a doctor, entrepreneur, or anyone else, you can reach out to us about setting up a self-settled trust domestically or in a foreign country.

With our help, your self-settled APT will be legally defensible, financially secure, and productive depending on your unique needs. Contact us today to get in touch with one of our specialists and explore your options.