A self-settled trust is an irrevocable trust that is established by an individual (settlor) where the individual is also the beneficiary of the trust. Irrevocable trusts offer great asset protection because the assets are held and controlled by the trust, and therefore considered out of the reach of either the settlor’s or the beneficiary’s creditors. Estate planners create the irrevocable trusts to “shelter” assets from estate taxes.  The use of these “shelter trusts” as asset protection tools is often overlooked.

An irrevocable trust is normally set up by a settlor to remove assets from their estate for estate tax purposes or to remove assets from a creditor’s reach.  Provided that the fraudulent conveyance laws are not violated, assets can be “given” to an irrevocable trust and they will be outside the reach of settlor’s creditors.

The downside of many irrevocable trusts is that you give up control of the assets placed in the trust. It has to be noted that the settlor has irrevocably given the assets to the trust.  If the settlor has truly given the assets away, he or she won’t get any future benefit out of the assets.  The beneficiary of the trust will get the benefit.

Making yourself the beneficiary helps you regain control of assets placed in an irrevocable trust, and so would seem to be a great way to keep your assets safe from creditors. But if the assets can be used directly or indirectly by the settlor, i.e., the settlor gets the benefits from the assets in the trust, that’s not really giving the benefits away.  That’s not fair to the settlor’s creditors.  The courts have recognized that the creditors are getting cheated, so they have said that a self-settled trust isn’t going to be upheld.  The settlor’s spouse is considered in the same class as the settlor, so if the spouse can get benefits from the irrevocable trust, the courts will still consider the trust a self-settled trust.

Government doesn’t like to let people escape their creditors. Therefore it is generally against public policy to set up any self-settled trust, because it is seen as an attempt to take assets out of the reach of the settlor’s creditors. So taking your assets and putting them directly into an irrevocable trust while making yourself the beneficiary is usually not allowed.

There are a couple of exceptions. One is through some state-sponsored asset protection trusts.  A dozen or so states have passed laws which allow an out-of-state resident to bring assets into a trust that will protect the assets from the settlor’s creditors, and the settlor can be the beneficiary of the trust.  These types of trusts are known as asset protection trusts, legacy trusts, or by a half dozen other names.  There are lots of rules and regulations associated with the asset protection type trusts, and they are a topic for another article.

Surviving Spouse Trusts

The second exception is the death exception. The laws are designed to prevent you from doing lots of things to get out of paying your creditors.  However, the laws will cut you some slack if you are willing to die to achieve your goal.  Yes, die as in death. Self-settled trust rules let the settlor or the settlor’s spouse get the benefits of the trust after the other spouse dies if the trust is set up properly. 

This type of trust is initially set up as a revocable living trust established by a husband and wife.  The trust can be structured so that at the death of either spouse, the trust will instantly become an irrevocable trust.  The surviving spouse can be the beneficiary of the newly created irrevocable trust and the assets in the trust can be outside of the reach of both the deceased and surviving spouses’ creditors.

Although technically a self-settled trust is being created, death allows the trust to be created and the surviving spouse to get the benefit of the trust assets.  Under certain conditions, the surviving spouse can even be the trustee (controller) of the assets.  Good estate planning will take into account the asset protection of the family assets as well as a transfer of wealth.

Don’t overlook the asset protection of irrevocable trusts and the exceptions that will let you establish one. Get the benefit of the assets placed into your trust while protecting them from creditors.

4 Comments
  1. Thank you,this video was, and still is a very important survival tool

  2. When did self settled trusts begin to be used? My mother set up an irrevocable trust for my mentally challenged brother in 1988, with my sister and I as trustees. The state is now calling it a self settled trust because it is name with his name. Is this right?

  3. Philomena,
    The concept of self-settled trusts and the IRS and court’s position on them is a lot older than your mother and brother.
    Your brother’s trust should not be a self-settled trust (from what I understand). Your mother set it up for your brother and she funded it. Your brother is the beneficiary, not your mother. To be self-settled, the guy that sets it up and funds it has to be a beneficiary. The rub comes when you set up the trust, you fund it, and you are the beneficiary. That’s a self-settled trust. Some attorneys will get cute and have someone else, usually the attorney, set it up, then you fund it and are the beneficiary. That is generally cheating and will not work, but if mother sets it up for son, transfers property irrevocably into it, and doesn’t get a benefit out of it, then the state would have a hard time arguing that it was a self-settled trust. There may be one exception. If the son is a minor and the trust could be used to discharge mother’s “support obligations” the state may say she is getting a benefit out of it. Parents are obligated for food, shelter, clothing, and a basic education for minors. If the trust will pay for those things for a minor, there may be a problem. Usually the trust has a provision that says that the trust cannot be used to discharge support obligations.
    The name of the trust should have nothing to do with whether or not it is self-settled.
    There may be an argument that the trustees are “controlled persons,” but if the trust is written properly, you and sister should be able to be the trustees and still have mother get no benefit out of the trust. A non-controlled person would be a better choice as trustee, but that shouldn’t be necessary.

  4. I’ve watched a lot of your videos, and they’ve proved very useful. Hopefully you or someone else can directly help me with my trust today.

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