A self-settled trust is a type of trust in which the trust creator or “settlor” is also the person who is to receive economic benefits from the trust during his or her lifetime. The simplest type is the standard Revocable Living Trust (RLT). There, the same person is the trust’s settlor, trustee and a beneficiary.
RLTs are typically created as part of an estate plan to manage assets during the settlor’s lifetime, avoid the necessity of a guardian if the settlor becomes incapacitated and ultimately avoid probate upon the settlor’s death. Some settlors want to enhance these benefits by structuring the trust to exempt its assets from the claims of their creditors.
Smart Business spoke with Brian R. Price, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC., about self-settled trusts, their advantages and disadvantages, and the importance of working with an experienced attorney when establishing such a trust.
What should be included in a self-settled trust?
It’s important to include the terms upon which various individuals can receive funds. That should include the trust creator as well as the terms for the ultimate disposition of the trust funds at some point in time, whether before or after the creator’s death. Designating successor trustees is also a crucial component of any trust.
How should a spendthrift provision be utilized?
A spendthrift provision typically prohibits a trust beneficiary from selling, assigning or otherwise disposing of his or her interest in the trust and at the same time prohibits the trustee from honoring claims by third parties to satisfy the settlor’s/beneficiary’s legal obligations from the trust assets.
Can a self-settled trust’s assets be exempt from claims of the settlor’s creditors?
At least 15 states have enacted legislation to permit settlors to create a trust from which they may receive discretionary distributions while exempting the trust assets from the claims of some, but not all, creditors.
To qualify for creditor protection under these states’ laws, the trust generally must be irrevocable, administered by a trustee in the state adopting the protective legislation and created at a time when there are no pending or threatened legal actions against the settlor/beneficiary.
Even in these jurisdictions, the trust assets are not protected from claims for spousal or child support and alimony, or from certain tort or governmental claims. And even if properly formed and administered under a state’s asset protection trust laws, such a trust may not be exempt from claims in a bankruptcy proceeding against the trust’s settlor/beneficiary.
What are some disadvantages?
The possibility that a federal bankruptcy court may ignore the state laws makes the use of such trusts a risky proposition.
It is an open secret that states with favorable self-settled trust laws hope to attract trust business, and their compensation comes from the creators and the trust’s funds. A cottage industry of specialists promotes the concept and they need to be paid as well.
Do some of these trusts actually provide benefits to the settlor/beneficiaries?
The promoted benefits are attractive to many people who believe that because they have amassed a certain degree of wealth, they are the targets of predators. In this regard, trusts of this sort may provide psychological benefits to the trust settlors.
Additionally, the mere existence of such a trust may intimidate creditors who don’t want to pay the costs of trying to extract money from the trust. This is particularly true if the trust is created in a far away place where obtaining jurisdiction over the trust makes matters even more difficult.
How should someone go about creating a self-settled trust?
Anyone interested in creating such a trust should ask what type of benefits he or she can reasonably expect from the trust. Many self-settled trusts are created either by non-legally trained individuals or trustees who aren’t well-versed in the area. It’s important to seek an attorney who is experienced with the technicalities of self-settled trusts.
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