Let’s face it: The goal of the modern day asset protection trust is to preserve and protect your assets for your own use and benefit during your lifetime. “Having your cake and eating it too” – in a financial sense. This is the very definition of a self-settled trust. Self-settled trusts began as a protective strategy almost 1000 years ago. Over the past few centuries, beginning with the Statute of Elizabeth (enacted in England in 1571 as the origin of modern day fraudulent transfer statutes), public policy has eroded the traditional protective nature of the self-settled trust to the point where, today, absent a contrary statute, one cannot establish a trust for one’s own benefit and obtain any asset protection benefit. In general, the ability of a trust to provide effective asset protection depends upon the relationship to the trust of the person for whom protection is sought (i.e., settlor-beneficiary or nonsettlor-beneficiary), and the nature and extent of that person’s interest in and/or controls over the trust.
If the trust is otherwise valid, general public policy in the US (and in many other common law countries) permits a creditor of the settlor-beneficiary to reach the trust assets to the extent of the maximum property interest potentially available to the settlor-beneficiary under the trust instrument.
EXAMPLE: X settles trust which provides that he is one of several discretionary income beneficiaries, remainder to Z. X’s creditor can reach all of the income, but none of the principal of the trust (because the trustee cannot distribute any principal to X).
EXAMPLE: X settles a trust which provides that he is one of several discretionary beneficiaries as to income and / or principal. Even though no beneficiary has a fixed interest in the trust, X’s creditor can reach the entire trust, since the trustee could conceivably exercise its discretion in X’s favor, and distribute the entire trust to X.
Similarly, public policy in the US (and in many other countries) will not allow a self-settled spendthrift trust to afford protection for a settlor-beneficiary.
What’s the Solution?
Set up the trust in a place where the laws permit a settlor to “have their cake and eat it too”. Currently, 18 U.S. states (19 as of January 1, 2020) purport to offer such laws. Do they actually work? When push comes to shove, they do not. A “result-oriented judge” can contrive a way to get at the trust assets. The only thing that works is to remove the power from the U.S. court system to reach the trust assets. We do that by establishing the trust in an offshore jurisdiction with favorable laws for trust settlors.
We use the Cook Islands (for almost 3 decades), since that country will not recognize U.S. court judgments. The ramification of that? In order to have any hope of reaching trust assets, the plaintiff would have to hire lawyers in the Cook Islands and start over in that court. It’s at best an extreme uphill battle, and, if the trust is properly structured, the trust protector will be able to move the trust out of the Cook Islands to another country – requiring the plaintiff to once again start over. This always end up in a settlement discussion favorable to the settlor.”