A self settled trust is one in which the settlor or grantor is also a beneficiary. For centuries, the rule has been that a self settled trust cannot shield the grantor's personal assets from the grantor's liabilities.
The Self Settled Trust Doctrine
The long standing black letter rule of self settled trusts is that they do NOT protect the grantor's assets from the grantor's creditors.
For centuries under old English law, a self settled trust was disregarded for creditor claims. See e.g., Stat. 3 Hen. VII, c.4. (1487), providing, “[a]ll deeds of gift of goods and chattels, made or to be made in trust to the use of that person or persons that made the same deed or gift, be void and of none effect.” Transferring your own property to a trust for your own benefit was regarded as a kind of what we would now call a fraudulent conveyance ("Fraudulent deeds of gift") (The Fraudulent Conveyances Act 1571 (13 Eliz 1, c 5), also known as the Statute of 13 Elizabeth).
Modern U.S. Trust law has long held to the same view. “[w]here a person creates for his own benefit, a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.” (The Restatement (Second) of Trusts Section 156(2) (1959)). “A restraint on the voluntary and involuntary alienation of a beneficial interest retained by the settlor of a trust is invalid.” Restatement (Third) of Trusts Section 25.
In short, under the Self Settled Trust Doctrine you can't put your own assets into a trust for your own benefit and prevent your creditors from reaching such assets. Under the classic black letter rule, there is no such thing as a self settled asset protection trust.
The Clever Work Around
In general, assets held in a Trust are protected from the creditors of certain non-grantor beneficiaries under a number of strategies. Spendthrift provisions specifically prevent a Trustee from distributing trust assets to or for the benefit of the creditors of an estate. Discretionary powers give the Trustee the ability to make or not make distributions. These and other
The laws vary significantly from state to state. If you have property or people in more than one state, the complexity and probability of failure goes up significantly.
The property has to be domiciled in the state.
You must use a trustee in the state.
Bankruptcy Code 548(e)(1) provides the bankruptcy trustee with a 10-year look-back period, during which property fraudulently transferred to a DAPT may be unwound. At least one recent bankruptcy court decision confirmed that, in cases of transfers to a Domestic Asset Protection Trust with obvious subjective fraudulent intent, a bankruptcy trustee may reach such property. Waldron v. Huber (In re Huber), 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013).
You can get superior domestic asset protection through other means.
Timing is everything. Protecting against existing creditors flies in the face of ubiquitous laws prohibiting fraudulent conveyances. Fraudulent conveyances simply don't work. For a conveyance to work, it must not be fraudulent. The most effective (and least expensive) asset protection is against future and unknown creditors.
Self Settled Asset Protection Trusts