Today's society is highly litigious, making asset protection crucial. Wealthy individuals protect their assets from legal threats and creditors and ensure they benefit from them in the long run through self-settled asset protection trusts (SSAPTs). A few jurisdictions authorize SSAPTs, but it comes with its own risks. If you are interested in SSAPTs, you should speak to your bankruptcy attorney to understand the meaning of the trust, how it works, the process of making one, and the risks involved in deciding if it suits your situation.

SSAPT Definition

A self-settled asset protection trust (SSAPT) is a legal agreement where a person known as a grantor establishes a complex trust to protect their assets from future creditors. The grantor will enjoy the benefits from the assets and the protection accrued to the assets from the creditors.

An SSAPT enables the grantors to protect their assets from future creditors or judgments, which give up control of the assets. For instance, despite transferring their home, they will still have the liberty to live in the house.

How SSAPTs Work

The SSAPT allows you to protect your personal property, real property, bank account and business from future creditors while safeguarding specific benefits from the assets.

You, the grantor, establish a trust that transfers ownership and control of assets from the grantor to the trust while allowing you to be a beneficiary.

The SSAPT works as follows:

Making a Trust

The first step towards an SSAPT is to build trust. The procedure requires you, the grantor, to choose a trustee and decide which of your assets to be transferred into the trust. You should create trusts in a jurisdiction with statutes that recognize SSAPTs and offer the necessary legal protection for the assets under the trust. States like Alaska offer favorable laws for asset safety under the trust.

Picking a Trustee

The trustee plays a critical role in an SSAPT. The trustee can be a family member, a natural person, or an entity like a bank or a trust firm. The chosen trustee must manage the assets under the trust, ensure they are protected, and distribute them according to the specifics of the trust.

The trustee must also be independent of the grantor to ensure that the assets are separated from the grantor’s control or that the grantor does not exercise any control over them.

The role of the trustee is to manage and invest the assets and distribute the income generated to the listed beneficiaries. You, the grantor, will benefit from the income distribution or other benefits accrued from the trust, including the right to live in a home listed under a trust while ensuring future creditors cannot foreclose the home of other trust assets.

Grantor Responsibilities as a Beneficiary

You, the grantor, can be a beneficiary under an SSAPT. Although you lack direct control over the trust assets, you will still derive benefits from the assets in the trust.

You are entitled to income distribution and other benefits enjoyed by the trust beneficiaries. However, you cannot access or withdraw the principal from the trust. If you had access to the capacity to withdraw the principal, the assets in the trust would not be safe, negating its benefits. Thankfully, because you cannot access the principal, it remains protected, and you can continue receiving income and other benefits.

Protection From Creditors

The primary goal of an SSAPT is to safeguard your assets, businesses, and properties from future debt collection activities by creditors. If you face a bankruptcy suit or are susceptible to claims by creditors, the assets under the trust will remain protected from claims or debt collection activities.

However, you should know that the protection you enjoy from SSAPT is not absolute. Several factors determine the level of security. One of the factors is jurisdiction. You will enjoy better protection in Alaska and Nevada because these states have enacted better asset protection laws than other jurisdictions. Other jurisdictions offer little or no protection under the trust.

Another factor that is considered is deceptive transfers. When you place assets under the trust to defraud your creditors, the court will revoke the transfer and allow creditors to access the holdings for debt collection. For instance, if you transfer your assets to an SSAPT days before declaring bankruptcy, your creditors can challenge the transfer in a bankruptcy court and convince the court that it was deceptive. If the evidence shows that you transferred to defraud creditors, the court can withdraw the protection you enjoy, giving lenders access to your assets. Therefore, do not commit fraud, hoping that SSAPT will protect you.

Also, you should know that SSAPT will not protect against privileged claims like alimony, tax liabilities, and child support. Therefore, if you have any of these privileged claims filed against you by a lender, the protection from the trust will not apply.

Permanent Trust

Most SSAPTs are irrevocable. So, once the assets are transferred or moved into the trust, you, the grantor, cannot take the assets back or modify the trust terms. The condition is vital as it reinforces that the transferred assets are no longer under your control, and therefore, creditors cannot access, seize, and auction them to recoup the funds you owe. Although you will still receive income distribution and enjoy benefits like living on the property, you cannot terminate the trust or reclaim assets simply because of a change in your financial situation.

Income Issuance and Access

You cannot access the trust’s principal. Nevertheless, you will receive income accruing from the asset investment. The income is usually rent, dividends, interests, or returns from assets held under SSAPT. While the trust protects your assets, you will benefit from the revenues generated from asset investments. Nevertheless, the trust terms will define how you will receive the income.

States that Allow SSAPTs

Initially, most states did not allow SSAPTs due to the fear that individuals would make trusts to unfairly avoid creditors by transferring assets into the trust before filing for bankruptcy. Nevertheless, many states have recently enacted statutes permitting some SSAPTs to protect assets from future lenders.

The jurisdictions that authorize SSAPTs include:

  • Ohio
  • Nevada
  • Utah
  • Alaska
  • Michigan
  • Delaware
  • Rhode Island
  • New Hampshire
  • Missouri
  • Mississippi
  • Oklahoma
  • South Dakota
  • Wyoming
  • Tennessee
  • West Virginia
  • Virginia

Making a Self-Settled APT

When you want to create an SSAPT, you require the assistance of an experienced bankruptcy attorney. Your attorney must have experience drafting SSAPTs and must be licensed to practice law in your state or where you want to build the trust. SSAPTs are technical, as they are authorized in a few jurisdictions. Besides, if the SSAPT is not drafted well, it could exclude some of your assets from protection or provide insufficient protection, exposing them to creditors.

When making your trust, you should consider several factors, including:

  1. Your Creditors

Before making your SSAPT, you should identify the creditors from whom you want to safeguard your assets. However, you should know you cannot use the trust to protect against existing creditors. SSAPTs only safeguard assets from future creditors. Many grantors attempt to defraud creditors through trusts by making one day or months before declaring bankruptcy. The law recognizes that some people will try to engage in fraud, thus establishing a waiting duration before the trust becomes operational. So, if the trust's goal was to evade current creditors before declaring bankruptcy, the waiting period will ensure you do not exploit the SSAPT to defraud existing creditors.

  1. State Statutes

When writing your trust, remember the statute that regulates or governs it. Many states in the US do not allow these kinds of trust. You do not need to be a state resident to create trust. You can belong to a state that does not provide for these trusts but creates one in another jurisdiction that allows them.

  1. Your Assets

Your choice of assets to enter the trust must be well thought out. Talk to your bankruptcy attorney to review your assets, properties, bank accounts and business to identify those that are easily transferable to the trust. State laws have few restrictions on stock transfers. Therefore, transferring the assets to the SSAPT becomes easy, particularly when creating one in another state.  When transferring real property into a trust, you should do it in your state because transferring these immovable assets can be challenging. Therefore, consider the assets you want to transfer and evaluate the challenges you will likely face to find a solution to streamline the transfer process.

  1. Your Trustee

Another consideration you should make when creating a trust is your choice of a trustee. You must decide whether you should appoint an individual or an institution. Many states bar you, the grantor, from becoming a trustee, so you must consider other parties.

  1. Funds Accessibility

You must set SSAPT terms because they will determine the beneficiaries of the income and the type of payments the beneficiaries will receive. You must be careful when crafting these terms, mainly if it is your time. You will benefit from the trust in the long run and do not want to set payment conditions that will hurt you or your financial situation. Your attorney has helped other clients develop terms for accessing the income from the trust. They know which terms are favorable and unfavorable once. Therefore, your bankruptcy attorney should craft the terms and consider your input.

Reasons for Creating an SSAPT

An SSAPT helps you protect the wealth you have created. Most individuals who establish these trusts are high-net-worth persons who do not want to risk the loss of their assets to future creditors or litigations and wish to recover from any losses incurred in the line of business.

You do not require an SSAPT if future creditors do not threaten you. Nevertheless, other factors apart from creditors could threaten these assets, making it necessary to have a trust.

One of the factors that necessitates the need for trust is a high-risk career. When a lawyer or real estate developer is in a high-risk business, you risk losing the property to litigation when the court uses your assets to compensate individuals who win litigations against you. Luckily, when you set up a trust to protect your assets, the risk of losing it to future claims settlement is minimal.

Similarly, as a business owner, you will require trust. Businesses are prone to changing economic times. Even if your business is doing well now, it could run into trouble in the future, forcing you to rely on creditors to stay afloat. If the conditions do not change, creditors could come for the business to recover their losses. Luckily, you will not lose your business if you have put it under an SSAPT. Further, legal claims are common in the business industry. Losing a claim means paying compensation to the accuser or claimant. With the business listed under a trust, the court cannot auction the business to compensate claimants, thus protecting your business.

Lastly, you need an SSAPT if you are worried about future injuries or accidents. If the nature of your work makes you susceptible to personal injury lawsuits that could drain your bank accounts or wealth, you should establish a trust to safeguard your wealth or properties from reimbursing plaintiffs.

Creditors Who Can Access Your Assets

An SSAPT does not protect you from every other future creditor. Certain factors, like the trust terms and the state law under which you created the trust, can limit how much the trust will protect your assets. If state law guarantees some creditors’ rights to access your trust assets, certain creditors can access your assets when need be. Circumstances when creditors can access protected assets include:

Payment Of Taxes

When the state law under which you have created your SSAPT allows the state to use protected assets to pay tax liabilities, the taxman will have access to your assets listed in a trust. When you default on taxes or have tax arrears, the law could allow the taxman, who under the circumstances is a creditor, to use the assets in the trust to recover unpaid taxes.

Also, creditors can access your protected assets when a court issues a judgment requiring you to settle creditors. For instance, if, during a divorce case, the court rules that you should pay child or spousal support, an SSAPT will not protect your assets from the settlement. Many of these judgments are public policies, and a trust cannot go against public policy, giving creditors access to the secured assets.

Lastly, the court can pronounce itself giving creditors access to property or assets listed under a trust. The court grants access to the assets to enable the settlement of claims that would not be paid if the protection remained in effect.

Risks Associated with SSAPTs

Even though beneficial, SSAPTs come with inherent risks. This must not discourage you from creating trust. Instead, you should understand these risks before settling on one. The common risks associated with trusts are:

  • Increased scrutiny from creditors and other parties interested in taking away your assets
  • Increased legal vulnerability
  • The trust can be easily compromised due to documents written in lousy language, trust created in the wrong jurisdiction, or unmet standards.

Other Means of Securing or Protecting Your Assets

You can choose many options for protecting your assets besides the trust. You should consult your bankruptcy attorney about the perfect method that you can use to protect your assets, depending on your circumstances. The following are some of the options you can consider when you want to protect your assets:

  1. Prenuptial Agreements

A prenuptial or premarital agreement is a written contract by a couple before marriage to protect one's assets acquired before marriage from being divided during divorce. This agreement protects not only your property but also your rights to the property you acquired before entering the marriage. When the marriage fails and the couple files for divorce, the property you acquired during the subsistence of the marriage will be shared according to the court's rules and procedures.

  1. Umbrella or Professional Insurance

An umbrella or professional insurance acts as an extra safety net, offering financial protection when you are held responsible for an accident or an incident exceeding the limits of your primary policies. The insurance will compensate the wronged party and protect your assets from being used to settle the claim.

  1. Limited Liability Corporate Structure

A limited liability corporate structure, mainly referred to as a limited liability company, is an arrangement that protects your personal property from any lawsuits and creditors by legally separating your assets from your business assets. In this arrangement, the liability can be limited according to the shares one owns in the company, or if it is a partnership, it can be restricted according to the capital contribution to the business.

Find a Competent Bankruptcy Attorney Near Me

Protecting your wealth from future creditors not only gives you a sense of security in the coming days but also acts as a guarantee of a better tomorrow. A self-settled APT assures you that your already accumulated wealth will be protected in case of any bad dealings with the creditors that lead to a loss or any lawsuit filed against you or your business that will require you to use your wealth to settle it. We at Los Angeles Bankruptcy Attorney have a team of attorneys experienced in drafting SSAPTs that are watertight, guaranteeing you the security your assets need. Contact us at 424-285-5525 for a free consultation.