9076 / What issues should an individual consider when establishing a domestic asset protection trust?

Because of the public policy concerns surrounding these trusts, and the fact that not every state authorizes their creation, a creditor may challenge the validity of a trust established in a state other than the settlor’s state of residence by claiming that the laws of the settlor’s state of residence should apply. The trust must clearly specify which state law will govern. Further, in order to minimize the potential success of such a claim, a trustee who is resident in the state where the trust was formed must be chosen—merely directing a nonresident trustee to apply the laws of the state could be insufficient. If possible, the assets should actually be transferred to the state in which the trust is formed (meaning that real estate located in another state may not be an ideal trust asset).

A valid and enforceable asset protection trust should avoid even the appearance that the assets were fraudulently transferred into the trust in order to evade the claims of a specific creditor. Often, preexisting creditors may reach the assets despite the presence of a valid trust (see Q 9080, Q 9083 and Q 9088 for a discussion of situations in which assets held in an asset protection trust may be reached). The issue may result in litigation even if the settlor could reasonably foresee that the claim or liability would arise in the future.

The settlor should also be aware that most state laws will not allow a domestic asset protection trust to shield assets from claims for child support.