Domestic asset protection trusts can offer shelter from creditors as well as from estate tax. In states that offer these trusts (so far, Alaska and Delaware), creditors can’t touch assets that have been transferred into the trust, assuming the transfer was not a scheme designed to thwart known creditors. What’s more, to determine which assets should be included in a decedent’s taxable estate, the IRS looks to see which assets can be accessed by creditors. Because the assets in domestic asset protection trusts are not available to creditors, they may not be considered part of the trust creator’s taxable estate.
To create this type of trust, asset transfers must be “completed gifts,” so that the trust owns the assets. Although this removes the assets from the trust creator’s control, he can name himself a “discretionary beneficiary.” This means that income from the trust can be distributed to the trust creator, if the trustee deems it necessary. For a complete guide on how to set up a trust, go to our publications section of our website: https://www.fedweek.com and click on The Handbook of Trust for more details.