Asset protection is the process of arranging your financial affairs so that it is more difficult for your property to be taken away from you by creditor claims or lawsuits. We hear about asset protection trusts in celebrity divorce proceedings or when a wealthy businessman engages in estate planning strategies to give money away to heirs or charitable organizations. However, asset protection isn’t reserved for the rich and famous; it’s a valuable tool for anyone that’s amassed even modest wealth.
Asset protection solutions can help protect assets such as funds held in bank accounts, cryptocurrency, real estate, stocks, investments, business interests, and more from potential legal threats. If you find yourself involved in an ugly lawsuit over a car accident or other legal issue, a Domestic Asset Protection Trust (DAPT), a type of self-settled trust, allows you to protect your hard-earned assets from legal action. Unlike other trusts, a self-settled DAPT will enable the trust’s creator to also serve as the beneficiary, making DAPTs a simple and flexible option for clients who want personal protection from creditors and lawsuits.
Which States Allow Self-settled Trusts?
Unfortunately, this attractive option isn’t available in all states. It’s essential to know which states allow DAPTs, what to consider when selecting a state for protection, what are the best asset protection states in the U.S., and the best states for LLC asset protection. If you are looking to shield your assets from future creditors and lawsuits, a DAPT represents the most cost-effective strategy to accomplish your goal.
As states above, only a handful of states allow the creation of a DAPT, which include:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
The obvious downside of forming a DAPT is its lack of recognition across all states. If you live or get sued in a state that does not offer explicit protections to DAPTs, there is a risk that your assets may not be protected, although the legal waters are murky here. In some circumstances, however, those risks are worth it. You should always consult with an attorney specializing in asset protection before making a decision.
What to Consider When Picking a State for Asset Protection?
There are several factors to consider when selecting a state for asset protection, including state income taxes, the state’s statute of limitations for future creditors, the state’s statute of limitations of discovery for pre-existing creditors, spouse/child support exceptions for creditors, and any other pre-existing torts/exceptions for creditors.
Moreover, clients should consider the purpose of the trust. During a consultation with an asset protection attorney, you should ask yourself, “From which creditors do you want to protect your assets?” “Who will be the trustee of the trust?” “What property will be put in the trust?” and “What payments do you expect to get from the trust?”
Your reasons for creating the trust should not be to avoid current claims and creditors. The trust can shield your assets from potential future creditors, and most states have a waiting period of two years or more. Additionally, you will need to choose an individual or corporate trustee who resides in the state where the trust is created in many cases. Next, while assets like cash, stocks, cryptocurrency, or bonds may be easy to move from state to state, you can’t move real estate, which is an important consideration. Lastly, trusts limit your access to funds so that you can only receive distributions from the trust.
The Five Best Asset Protection States
Below we outline the details regarding what are generally considered as the best states for setting up a domestic asset protection trust:
Alaska (Best for Creditor Protection)
Alaska was the first state in the U.S. to allow self-settled asset protection trusts. Alaska’s asset protection trust laws continue to be some of the best in the U.S. One of the main benefits of Alaska DAPTS is protection from creditors. Unlike other states’ DAPT laws, Alaska has no special group or “class” of creditors, which means creditors must prove “actual fraud” before assets from the trust can be attached in a judgment.
Additionally, Alaska’s DAPT has a provision wherein creditors cannot seek a court order to attach assets or distributions in the trust. Neither can they seek a court order compelling the trustee to provide a distribution for the creditor.
One important drawback for Alaska is its relatively long statute of limitations, which is set at four years after the trust assets were granted. Those hoping to protect their assets from creditors in a timely fashion may want to consider some of the other alternatives.
Delaware (Best for Gifting)
Delaware is another excellent option for this type of trust. A grantor in a Delaware DAPT may assign themselves as a discretionary beneficiary of the trust to get assets back in an emergency or possibly mitigate gift tax, when applicable. Delaware Asset Protection Trusts also have the support of the of the Delaware Chancery Court which tends to rule in favor of respecting DAPTs against creditors.
A federal transfer tax may occur in some states if the grantor makes a gift that incurs gift tax and lives at least three years after making the gift. In these cases, their estate may have to pay the estate tax. However, if the gift is made through a Delaware DAPT, the transfer taxes may be avoided.
Similarly, if a grantor’s state of residence imposes an inheritance tax, they may be able to reduce that by making a gift before their death. Delaware also provides a three-year seal for trust privacy, but judges can order sealing for a longer period. Just like Alaska, Delaware has a four year look back period for future and pre-existing creditors.
Nevada (Best Overall)
Nevada generally ranks amongst the best states for asset protection. It was one of the first states to pass legislation allowing for the formation of self-settled trusts and is the shining star of the asset protection community. Nevada has a standard two year statute of limitation, and generally does not require an affidavit of solvency when funding the trust. Nevada also has a “clear and convincing” standard of proof for voidable transfers claims.
With no state income, estate, and inheritance taxes in Nevada, it’s an attractive place to open a DAPT. Nevada Spendthrift Trusts are not subject to a personal or corporate state income tax and are not subject to other states’ income taxes. In Nevada, the rights and privileges of a DAPT are clearly defined by statute and do not depend on court decisions or interpretations for the validity of the trust. Unlike most other states, a DAPT in Nevada even protects against debt from child support and alimony claims.
What’s more, the state of Nevada does not charge registration fees, annual reporting fees, or any other recurring fees for the trust to remain valid. In addition, the trusts are also not required to maintain a resident agent in the state of Nevada. Overall, Nevada tends to be the most favorable DAPT jurisdiction in the U.S.
South Dakota (Best for Privacy)
South Dakota has favorable laws for those planning to protect assets for multiple generations. South Dakota has no state income tax or capital gains tax, so assets within a trust can be sheltered from certain state taxation. A DAPT establish in South Dakota can potentially last forever as the state has no set perpetuity period.
The South Dakota State Government has worked to promote the use of DAPTs in the state by means of a Trust Company Task Force as well as support from the State Legislature. South Dakota also reigns supreme in terms of privacy, as it is the only state in the country with a total seal forever, providing the best trust privacy statute in the United States. Total seal means public disclosures are avoided in case there is ever litigation over the trust in a South Dakota court.
Finally, South Dakota has industry-leading directed trust provisions that enable trustees to work with outside investment managers and nontraditional assets in trusts.
Wyoming (Best for Settlor Control)
The state of Wyoming is a highly regarded option for domestic asset protection trusts. Domestic asset protection trusts in Wyoming are actually known as “qualified spendthrift trusts.” While the state’s trust laws are similar to many of the other states discussed in this article, it also offers several unique advantages.
While a Wyoming DAPT must be an irrevocable trust, the settlor can maintain a very high degree of control over the trust assets regardless. For example, the settlor of a Wyoming DAPT can retain the power to veto distributions from the trust, appoint and remove trustees and trust protectors, the right to receive income retained in the trust, as well as the right to receive distributions based on the initial value of the trust.
A self-settled trust in Wyoming protects you and your beneficiaries from the claims of creditors, which helps ensure that your wealth is passed on throughout the generations. A unique advantage to Wyoming is the opportunity to create a purpose trust. Unlike a traditional trust, these trusts are designed to fulfill a unique goal you may have, such as preserving an art collection.
Wyoming trust law allows a private trust company, approved by the Wyoming banking commission to act as trustee. While most states limit the number of years a trust may exist, Wyoming allows a trust to last for 1,000 years, providing greater asset protection and may avoid estate taxes. Wyoming has a four year look back period for future and pre-existing creditors and has no established seal in case of litigation. Trust documents sealed at judge’s discretion.
Best States for LLC Asset Protection
If you decide to form a Limited Liability Company (LLC), you’re likely concerned with liability protection for your personal assets from your business’s creditors and legal liabilities. Generally, your LLC is considered a separate legal entity and as its owner, you are not personally liable for its debts or legal liabilities. Yet there are numerous exceptions under state and federal laws.
For example, with an LLC, your home, car, or bank account would be safe from a business creditor, while your business assets would not be safe. Additionally, you may still be personally responsible for your own conduct that harms third parties, LLC loans that you personally guaranteed, or payroll taxes that your LLC failed to pay to the IRS. It is essential to put together asset protection strategies before any claim or judgment surfaces against your LLC. A DAPT can be the perfect solution to safeguard you from harm; however, only a small handful of states offer protection to single-member LLCs:
- South Dakota
Creating an Asset Protection Trust
If you’re considering DAPTs or other forms of asset protection, it’s essential to speak to a law firm that understands your legal needs and how to best achieve them. At Blake Harris Law, we have considerable experience helping our clients set up Domestic Asset Protection Trusts and other forms of asset protection structures. In doing so, we help our clients shield their wealth from future lawsuits, creditors, and other legal threats.
Our team is the perfect choice if you’re searching for qualified legal professionals that can help you develop robust asset protection solutions for you and your family. If you would like to discuss what kind of asset protection is right for your situation, please contact Blake Harris Law to schedule a free, no-obligation consultation.