Estate Planning Lawyer
Asset protection trusts continue to be controversial in the United States. Most states still do not allow their formation due to concerns that people could use the trusts to lend legitimacy to wrongful attempts at avoiding creditors. Nevertheless, as accurate information about the process becomes more prevalent, more states allow asset protection trust formation within their jurisdictions.
If you are interested in forming an asset protection trust, it can be helpful for you to know where they are allowed. People who reside in a state where asset protection trusts are not allowed may nevertheless be able to form one in another jurisdiction. However, this makes the trust more vulnerable.
History and Locations
Asset protection trusts are a relatively recent estate planning tool. It’s only a little over 20 years ago, since 1997, that Delaware and Alaska became the first two states in the country to allow asset protection trusts. Over the next two decades, 15 states followed, including Nevada, Rhode Island, South Dakota, West Virginia, Tennessee, Hawaii, and Ohio. It may be worthwhile to note that asset protection trusts have yet to be approved by the four most populous states in the country: California, Florida, New York, and Texas.
Creation and Vulnerabilities
If you live in a state that doesn’t allow asset protection trusts, it doesn’t necessarily mean that you can’t start one. You may be able to create a trust in a different state where the laws are more favorable. You should be aware, however, that a trust created in a state other than the one where you reside may be vulnerable. This is because of recent court rulings holding that one state doesn’t have the right to limit the jurisdiction of another.
Rules and Exceptions
Despite the potential vulnerability, it may be in your interest to create an asset protection trust in a state other than the one where you live because you might not have to pay income tax on it. South Dakota assesses no state income taxes at all, and Delaware only taxes the asset protection trusts of its own citizens.
Most states that allow asset protection trusts require an Affidavit of Solvency at the time of its creation attesting that you still have sufficient money to live following the transfer of assets into the trust. However, two states (South Dakota and Nevada) do not require this.
Exceptions to the inaccessibility of asset protection trusts may apply to certain types of debt, such as alimony or child support. However, this exception may be limited in some states (e.g., South Dakota) and nonexistent in others (e.g., Nevada).
Because the laws vary across jurisdictions, some states are more favorable than others. Because asset protection trusts are irrevocable, they should only be created with the assistance of an attorney.