The asset protection trust is one of the most powerful manifestations of an irrevocable trust. Unlike other irrevocable trusts, though, the asset protection trust is set up to benefit the trust's creator (called a self-settled trust). In short, an asset protection trust is a way for someone to relinquish legal ownership of assets—and thereby shield themselves from creditors, who can only reach assets of the debtor—but still benefit from the assets.
Only a minority of states (including Nevada) allow these self-settled trusts, called domestic asset protection trusts.
To enjoy the benefits of domestic asset protection trusts, the trust typically has to have the following attributes:
- be irrevocable (once you put your money in, the terms you set in the trust for asset distribution cannot be changed (with limited exceptions), and you cannot take the assets back except in accordance with the terms of the trust);
- include a spendthrift clause (a provision that prevents the beneficiary from assigning his or her rights in the assets of a trust, which in turn protects the assets from creditors seeking the same);
- at least one trustee must be a Nevada resident, bank, or trust company;
- the settlor/beneficiary cannot be the trustee.
Nevada is generally regarded as the best place to establish a domestic asset protection trust because it has the shortest seasoning period (two years after the assets are put in the trust, they are safely protected), there is no state income or corporate income tax, and there is no exception for certain categories of creditors—no creditor can reach your assets, be it a divorcing spouse, alimony, child support, bankruptcy—none of it pierces your trust if it is set up right.
This makes the domestic asset protection trust one of the most powerful vehicles for asset protection.