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Domestic US Trusts

Florida Self Settled Trust

The question among Asset Protection specialists and Estate Planners regarding self-settled trusts is whether or not in the end the trust can be pierced by creditors.  The state of Florida provides some options that other states do not recognize when it comes to asset protection and estate planning, but his does not mean that a self-settled trust will stand up to the test.

There are four common arguments to self-settled trusts.  Much of the outcome and determination is a state-by-state decision.

1.  Argument #1

Conflict of Law Arguments – Attorneys now argue in court that the laws of the settlor’s state of domicile would govern the rights of the settlor’s creditors rather then the law the law of the state in which the trust was created.

Many states require significant assets to be located in the state due to the Restatement (Second) of Trusts, Section 269, which allows a trust instrument to select the state whose law is to govern.  This relates to both inter vivos and testamentary transfers, provided that the state whose law is selected has a “substantial relation to the trust” and that the application of its laws does not violate a strong public policy of the state. Delaware, Alaska and Nevada all support this premise.  They also require that the trust be maintained by a trustee in the state or a trust company located within the state.

In Togut v. Hecht, 303 F.3rd 1261 (11th Cir. 2002) the Bankruptcy Court held that that the settlor’s choice of governing law in a trust agreement controls conflicts of law principles.

2.  Argument #2

The Full Faith and Credit Clause of the United States Constitution Arguments – Many attorneys argue that the Full Faith and Credit clause will require the courts to enforce a judgment in favor of an out-of-state settlor’s creditors rendered by a court in another state against the settlor and the trust. 

The Restatement (Second) of Conflicts of Laws, Section 93, provides that, with certain exceptions, a valid judgment rendered in one state of the United States must be recognized in a sister state.

This comes down to jurisdictional issues, which is often the case in asset protection.  This means that the asset protection planner or attorney must have good knowledge of all of the states.

3.  Argument #3

The Supremacy Clause of the US Constitution -   This requires that federal law (such as federal bankruptcy law) override conflicting state law and, therefore, the trust legislation must give way, which affords no asset protection. 

Under Section 541(c)(2) of the US Bankruptcy Code, a spendthrift clause is enforceable if it is “enforceable under applicable non-bankruptcy law.”  However, federal bankruptcy laws do not necessarily conflict with state laws because federal bankruptcy laws use state laws to determine the interest of settlors and beneficiaries of a trust.

4.  Argument #4

Fraudulent Conveyance Laws -   If the transfer of assets to a trust constitutes a fraudulent conveyance under applicable law, creditors may void the transfer of property to the trust and therefore the trust will provide no asset protection.