Most people know that offshore trusts protect assets, but do domestic trusts protect assets? Before we answer that question, let’s look at three domestic trusts commonly used in the U.S.

    1. LIVING TRUST – this is the most known and used trust in America. In a living trust you are both the trustee and a beneficiary of the trust. It’s created by many for estate planning purposes such as to avoid probate and minimize estate tax liabilities. A living trust is a revocable trust. That means you can change or revoke the trust at any time. A living trust absolutely does not protect assets for you. After losing a lawsuit, the court can simply order you to hand the assets over to your judgment creditor.
    2. SELF-SETTLED SPENDTHRIFT TRUST – this type of irrevocable trust is set up primarily for asset protection. The settler of a self-settled spendthrift trust is not the trustee of the trust but is a beneficiary of the trust. The trustee is not allowed to use trust assets to pay creditors of the settler. And since you are a beneficiary and most states don’t recognize this type of trust, the courts can simply order the trustee of the trust to pay the judgment creditor what you are entitled to as a beneficiary. You might ask, so how does this protect assets? Well, the law in a few states in the U.S. allows self-settled spendthrift trust to protect your beneficial interest. These states are Alaska, Nevada, Delaware and South Dakota. However, unless the lawsuit is brought on in one of those states, your trustee resides in one of those states, and all trust assets is located in those states, courts in another state will disregard the protection of the trust. This type of trust has failed in many cases around the country.
    3. NON-SELF-SETTLED IRREVOCABLE TRUST – this is another widely used trust for estate planning purposes. To be truly an irrevocable trust, you may not be the trustee or a beneficiary of the trust. In addition, you may not change or revoke the trust. Since you don’t benefit from the trust assets, the assets inside the trust are no longer considered to be yours. Therefore, your judgment creditor may not seize the assets inside the trust to satisfy a judgment against you. Irrevocable trusts have been tested in courts for decades and it has held up in all cases when set up properly and ahead of any lawsuits. Its asset protection quality is unquestioned. The downside, however, is that the trust is irrevocable and you cannot be a beneficiary. There is little point in asset protection when you have to gift those assets away while you’re still alive even though they are going to someone you wish to receive them ultimately.

Special Power of Appointment Trust

So is there a way to get around the downside of an irrevocable trust? Well, yes, it’s called a Special Power of Appointment Trust (sometimes called a SPA Trust for short). Like an irrevocable trust, a Special Power of Appointment Trust cannot be revoked or changed by you. You may not be the trustee or a beneficiary of the trust. However, you retain and may exercise a special power to appoint another beneficiary including yourself in the future. You can even give your special power of appointment to another person if you wish.

In other words, after you set up and fund a Special Power of Appointment Trust and appoint someone you want as the initial beneficiary, the assets inside the trust are no longer yours so your judgment creditors cannot touch those assets. After the civil dispute or lawsuit is resolved, you can, if you wish, exercise your special power of appointment and appoint yourself as the beneficiary. Once you are a beneficiary of the trust, you can then receive trust assets into your own possession if you choose.

Advantages of the Special Power of Appointment Trust:

Here are the numerous advantages of the SPA Trust:

  • There is no tax liability when you fund (transfer assets into) the trust. There is no tax liability when you take assets out of the trust after you are made a beneficiary. It’s completely tax neutral.
  • Anyone other than you, the settler, can serve as the trustee.
  • Anyone other than yourself or your estate may be made an initial beneficiary of the trust.
  • The trust can be created for residents of any state and the trustee can reside in any state.
  • The trust is created as such that it doesn’t pay income tax (as an intentionally defective grantor trust or in another words, an incomplete gift for tax purposes). All income generated by assets inside the trust is passed through to you, the settler. You pay income tax on that income on your personal income tax return.
  • You may transfer your home into the trust and keep all the income tax benefits such as capital gain exemption and mortgage interest deduction for yourself.
  • Any assets can be held by the trust including shares of a S corporation. However, we advise that you don’t place “hot” assets inside the trust. Hot assets are those assets that can incur liabilities such as vehicles, rental properties and operating businesses. If you wish to protect a hot asset, you might consider placing a LLC between the asset and the trust or using an equity stripping lien instead.
  • If you wish to have direct control over the assets in the trust, the trust can form and own a LLC and then appoint you as the manager of the LLC. Assets are then transferred into the LLC. As the manager of the LLC, you can manage the assets on an active basis even though you are not the trustee or owner of the LLC. This works well when you don’t want the trustee to deal with the day-to-day management of the assets.
  • Special Power of Appointment Trust has been challenged in courts around the country. There have been numerous court cases proving its effectiveness.
  • Once the trust is created, you can continue to transfer assets into the trust over time without restrictions.
  • There is no ongoing annual renewal fee or legally required formality for the trust.


If the Special Power of Appointment Trust is that flexible and effective, why should anyone consider using an asset protection LLC? Well, the Special Power of Appointment Trust is not for everyone. There are many instances where an asset protection LLC makes more sense. Here are some situations where an asset protection LLC works better:

  • You don’t have anyone you can trust. To make the Special Power of Appointment Trust work, you must appoint a trustee and a protector other than yourself. You might not have someone you can trust to be the trustee or protector. On the other hand, you can be the manager of your own asset protection LLC to control and manage your assets.
  • You might wish to take in a business partner to jointly operate your assets in the near future. If you think there is a chance that you might take in a business partner or sell a partial interest in your assets such as real estate, you might want to hold the assets in a LLC.
  • You might not wish to place some assets into the trust. For instance, you might have an operating business with assets. You might not want to place the ownership of that operating company into the trust. An asset protection LLC is more appropriate instead.
  • You need to show ownership of the assets frequently such as needing to show a high net worth for bank credit. You can include assets in a LLC owned by you in your net worth statement but you cannot include assets inside an irrevocable trust as part of your net worth.

Even though you are able to make yourself a beneficiary of a Special Power of Appointment Trust down the road, you don’t want to do that often to set precedence for your potential adversary to challenge. A Special Power of Appointment Trust is a powerful asset protection tool especially when used alongside an asset protection LLC (or in combination with an asset protection LLC).


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DISCLAIMER: All information contained in this website is for education purpose only. Asset Protection Consulting Group, Inc. and their agents cannot and will not render any legal or tax advice of any kind, unless said agent is duly licensed by the applicable state and/or federal authority to give said advice.

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