Gideon Rothschild, asset-protection expert and member of the New York law firm Moses & Singer, reports that Utah has just joined the growing number of states providing self-settled trusts for asset protection.
Until recently, high-net-worth individuals had to go offshore for such trusts. In 1996, Alaska became the first state to enact legislation intended to offer the same benefits onshore. Delaware, Nevada and Rhode Island quickly followed. On March 22, Utah became the latest state to allow self-settled trusts; the law will apply to trusts created on or after May 5. We're told that South Dakota may soon follow suit.
Self-settled trusts are created for the benefit of the settlor (as well as third-party beneficiaries). Until 1996, the rule adopted in every state (with limited exceptions in Colorado and Missouri) was that a trust created for the benefit of a settlor was reachable by the settlor's creditors to the maximum extent that the trustee had the discretion to distribute to the settlor. It is this principle that these five states and the dozens of offshore jurisdictions have reversed.
An estimated 1,000 self-settled trusts have been established domestically since 1996 — including billions of dollars of assets. Rothschild reports that trillions of dollars have been transferred to offshore trusts.
The states permitting self-settled trusts are responding to increasing client interest in asset protection — and so should estate planners. It may not be long before a client sues a planner for failing to present these opportunities, especially if the client has significant exposure to lawsuits or creditor risks and resides or has an estate plan in one of the five states with self-settled trust laws.
In addition to creditor protection, self-settled trust laws offer potentially significant estate-tax-savings opportunities. The ability to make lifetime transfers to a self-settled trust while remaining a beneficiary will enable many clients who were reluctant to make irrevocable transfers to utilize their lifetime exemptions more effectively.