Spendthrift trusts are overseen by a trustee, who manages the funds and distributes them to a beneficiary on behalf of the trust creator. They are usually created in order to prevent the beneficiary from making unwise use of the trust funds.
In a spendthrift trust, the beneficiary is limited to only those funds which have already been transferred to them, and may not utilize the general trust funds. Creditors are also prohibited from collecting on the general trust funds, though they may collect on whatever funds that have been distributed to the beneficiary.
What is a “Self-Settled” Spendthrift Trust?
A self-settled spendthrift trust is where the trust creator is also the sole beneficiary of the trust. A trustee is still appointed, but the funds are directed back to the person who created the trust. They are also known as “self-designated trusts”, and are sometimes called “Alaska trusts”, since the state of Alaska was one of the first states to allow such types of spendthrift trusts.
As mentioned, creditors who seek to collect money or property from the trust funds are limited to only those trust interests that have already been transferred. Due to this special feature of spendthrift trusts, many people began unscrupulously setting up self-settled spendthrift trusts in efforts to dodge collection efforts by creditors. As a result, self-settled trusts are heavily regulated and are only available in a few states.
Which States Allow Self-settled Trusts?
Alaska was the first state to allow self-settled trusts, and Nevada also allows them. Alaska state law imposes a four-year wait period before self-settled trusts are protected from creditors, while Nevada requires a two-year wait. Also, in Nevada, the trust creator can also serve as trustee of their own self-settled trust, but they will be subject to further restrictions on self-distributions from the funds.
Some other states have statutes that allow self-settled trusts. These statutes refer to the trusts as “Domestic Asset Protection Trusts”, and are called DAPT statutes. They are similar from state to state though they may be applied differently in each jurisdiction.
If your state does not have a DAPT statute, then self-settled spendthrift trusts are not allowed. States that do have some form of DAPT statutes are:
- New Hampshire
- Rhode Island
- South Dakota
While there is a potential for abuse of self-settled trusts, they are also valuable for estate planning purposes and can be very helpful in protecting one’s trust assets.
Do I Need a Lawyer to Create a Self-settled Trust?
It is a good idea to hire a lawyer to help you draft your own self-settled spendthrift trust. DAPT statutes are very strict and any indication of a sham account can lead to a presumption of fraud.
An experienced estate planning lawyer can help you draft a trust that meets your needs while fitting into the statutory limitations. DAPT law also tends to evolve quite rapidly, and a lawyer can keep you updated with any changes in the laws of your area.