What to Know About Self-Settled Trusts

Are you concerned about your assets and your beneficiaries? How can you protect them? What types of programs are available and to protect which assets? Each of these questions is valid, and the answers to them might lead you to learning more about self-settled trusts.

You have worked hard your entire life for what you have. You don’t want these assets to be simply distributed at random or end up in the hands of the state when you pass away. There are so many legal and financial questions as you get older, but it is essential to know that there are no concrete answers to your questions, and options for preserving your assets and honoring your wishes. The key is to know where to go and who to seek for answers. 

If you’d like to plan for your assets, you’re in the right place. First, we will discuss self-settled trusts. Then, the information we provide will guide you in determining if this type of trust is something you should plan for as you get older.

What Is A Self-Settled Trust?

A self-settled trust (or “self-settled asset protection trust”) offers some protection for your wealth and assets accumulated throughout your life from future creditors. This type of trust can be used to protect real estate, personal property, bank accounts, businesses, and other assets from future creditors. 

This protection allows you to pass this property on to your beneficiaries after you pass on. Essentially, this trust prohibits future creditors from collecting said money and assets from you by transferring your assets into the trust and, technically, out of your possession.

It is essential to understand that this type of trust does not offer all assets protection and has many limitations. For example, rules vary by state, and not all states allow for self-settled trusts.

How Does A Self-Settled Trust Work?

The person who creates the trust is considered the grantor. This grantor signs a legal document permanently transferring certain assets into the trust. Once signed, no amendments or changes are possible. Thus, this trust is a permanent, irrevocable decision that the grantor cannot change. 

This permanency may seem very strict, and it is. However, this strict reassignment of assets and its permanent nature make asset ownership no longer the grantor’s property. Instead, the assets permanently belong to the trust. As a result, the trustee(s) outlined in the document may have the ability to disburse discretionary payments to the grantor. To create a self-settled trust, you need an attorney, since this type of trust is complex and laws vary by state. The attorney’s role is to help you determine which future creditors you’d like to protect assets from and ensure that all documentation is explained in plain terms and filled out correctly, as well as handle any exceptions in a timely manner. As a side note, you cannot protect your assets from current creditors. 

Limitations of a Self-Settled Trust

Determine if your state allows self-settled trusts. If your state doesn’t allow the trust, you can opt to have an allowable state govern the trust. The trustee can be a person or a corporate trustee, but it cannot be the grantor. The trustee should be in the same state as the trust. The grantor may be a beneficiary to the trust.

The trust document itself needs to detail if there will be any distributions from the trust to the grantor or any beneficiaries before the grantor’s passing. In some cases, the distribution may be up to the decision of the trustee.

Some assets are not able to be protected with a self-settled trust depending upon the state law applicable to the trust. The following list of exception creditors includes assets that may not be protected:

  • Child support
  • Alimony
  • Spousal support
  • Taxes
  • Some medical services or supplies
  • Possible judgments

The trust will not support any assets fraudulently transferred to the trust.

Why Do You Need A Self-Settled Trust?

If you feel you are at risk of future creditors, it is a good idea to create a self-settled trust. Elderly individuals may want to build a self-settled trust, but they aren’t the only population this can benefit. 

Individuals who work in high-risk positions may want to consider this trust. For example, the trust would protect assets from work-related claims. Another reason may be if you are at risk of being sued for a personal injury claim. This type of trust is particularly beneficial if you have a career where you could be subject to a lawsuit, such as a lawyer, doctor, etc.

Do you have a residence that you want to be sure your beneficiaries receive? Or perhaps you have a business that needs future protections for your beneficiaries? If you are in a state that allows a self-settled trust, you can enter these assets into a self-settled trust to protect them from creditors.

Next Steps For Your Self-Settled Trust Planning

Not all states allow self-settled trusts. With ProvenLaw, you can work through these complexities together with expert legal counsel and get the help you need to decide on the delicate estate planning choices you will need to make to ensure that your loved ones are well cared for in the event of your passing.

Whether you need to adjust an existing trust or are looking to create a new one, please contact us for your complimentary personal consultation and we’ll get you on the road to peace of mind.