Self-settled trusts, or asset protection trusts, are an important tool to be aware of when going through the estate planning process. In self-settled trusts, the grantor and the beneficiary are the same person.
In these arrangements, the trust assets are protected from creditors, while the grantor continues to maintain control of the trust. The typical arrangement involves funding a trust with cash or property, and specifying that funds are to be distributed over time or when a certain event occurs. An independent third party is named as the trustee and is made responsible for carrying out the terms, all of which are laid out in the trust.
These trusts are frequently set up in Alaska, and the reason is because of several favorable provisions under that state’s law. At present, Alaska is one of eight states that protect self-settled trusts. Under Alaska law, trust assets are not subject to creditor claims unless the original transfer was intended to defraud creditors or cause the grantor to go bankruptcy.
Another benefit under Alaska is that trusts can continue for several generations, and so reduce estate tax. Alaska law also protects assets from ex-spouses, and does not impose and state income tax, protecting income retained by the trust from taxation. The latter provision does not mean that an Alaska trust would not be subject to state income tax in the state where the grantor resides, though.
There are other things to take into consideration with asset protection trusts. In our next post, we’ll continue looking at this topic, as well as other the difference between domestic asset protection trusts and offshore asset protection trusts.
Source: Business Management, “Estate planning: Why Alaska trusts are not half-baked,” August 7, 2012