high net worth
Self-settled trusts seem to offer the
impossible: They remove assets
from an individual’s estate while still
allowing him to benefit from them.
By Martin M. Shenkman
Self-settled trusts are hot. One boutique trust com- pany acknowledged that it washandlingmorethan20
of these trusts a month but expected
the number to proliferate as 2012
winds to a close. A major financial
institution in Delaware unofficially
confirmed that it worked on such
Self-settled trusts sound like
estate-planning nirvana to some, but
as with all sophisticated planning
tools, the devil is in the details.
Self-settled trusts are also known
as domestic asset protection trusts.
These are irrevocable trusts for
which the same individual is both
the person setting up the trust (the
settlor) and also a discretionary beneficiary of the trust.
The estate-planning magic of the
technique is that if you can gift assets
to this type of trust and remain a
beneficiary, you may achieve the
seemingly impossible goal of removing assets from your estate while still
being able to benefit from them.
As with many sophisticated
estate-planning strategies, however,
there are risks, complexities and lots
of details that have to be tended to.
There is also a lot of controversy
over whether self-settled trusts are
YEAR-END GIF T CHALLENGE
In seeking to take advantage of the
$5.12 million supersize gift exemption in 2011 and 2012, the biggest
hurdle that many people faced was
the fear that if they gave that much
wealth to their heirs, they might run
out of money themselves.
But if a wealthy client gives the
gift to a self-settled trust, and not
outright to heirs, he or she might
accomplish both goals. The trust
could name not only the client’s
children as beneficiaries but also
the client’s spouse or partner and
all descendants, as well. Giving distributions to the spouse or partner
could create more security.
These types of spousal/family
trusts (sometimes called spousal
lifetime access trusts) have become
popular, but they do not offer
enough security for many people.
After all, the rate of divorce is high
— and there is a risk that the spouse
might die before the client.
SE T TING THEM UP
The number of states permitting
these trusts has grown to 14 since
Alaska first allowed them nearly 15
years ago. But most are set up in four
states: Alaska, Delaware, Nevada or
If a client lives in one of those 14
states, and the assets are located in any
of the self-settled-trust states, your
plan has a great likelihood of success.
But if the client lives in New York,
which does not permit such trusts,
December 2012 Financial Planning 51