Traditionally, if a grantor (the person who created a trust) was also a beneficiary of the trust, there was no protection from the creditors of the grantor. In other words, if you created a trust but were also a beneficiary of the trust, generally speaking, your creditors could "pierce the veil" of the trust and get at the assets.
Because of this general rule, people who wanted asset protection while still having access to the assets would have to set up "asset protection trusts" in foreign countries. There were two main problems with this approach. One, such trusts were expensive to form and maintain. Second, there was always a risk that you would not get your assets back.
This all changed in 1997 when Alaska created the first "Domestic Asset Protection Trust." The idea was simple, establish, by law, a trust where the grantor could also be the beneficiary but the law provided for asset protection in certain cases. At first, people were understandably nervous as to whether such a trust would "work." After all, it was a major shift in American law. Further, how would such an Alaska state law "work" with respect to other states and to federal law? As time progressed and challenges were made, the Domestic Asset Protection Trust law began to develop. Further, as other states saw the potential revenue that came from having an asset protection trust law, other states decided to create their own domestic asset protection trusts. Each state had its own nuances -- who had to be the trustee; how long must the assets be in the trust before they were outside the reach of creditors, etc.
As lawsuits become more common in the US, so does the desire for asset protection planning. Hence, the number of domestic asset protection trusts has increased dramatically in the last few years and will likely continue to increase. Likewise, states will continue to vie for the asset protection trust business. This is still a very dynamic area of the law. For instance, Utah has just revised its asset protection trust law to provide for a much more competitive law. Please check the Utah subpage for more information.
When it comes to asset protection trusts, because the grantor is also a beneficiary, generally speaking, the trust is taxed as a "grantor trust," meaning that all of the assets in the trust are still taxed as if owned by the grantor.
Please note that this site is designed to provide very basic, general information. It does not take the place of solid legal and accounting advice.
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