Self-Settled spendthrift trusts

Recognized in several states, this type of trust allows the settlor to be a beneficiary while potentially achieving certain income tax, estate tax, or asset protection planning objectives.

by Todd Mayo, Senior Wealth Strategist, Advanced Planning Group 09 Mar 2023

A self-settled spendthrift trust is an irrevocable trust in which the settlor is a beneficiary and the settlor’s creditors generally can’t reach the trust property. Several states —including Delaware, Nevada, New Hampshire, South Dakota, Tennessee, and Wyoming—recognize self-settled spendthrift trusts.1 A self-settled spendthrift trust ordinarily has a trustee in such a state, so that it can avail itself of the state’s trust laws, including the laws recognizing self-settled spendthrift trusts. Although they are sometimes called asset protection trusts, self-settled spendthrift trusts potentially can play an important role in income and wealth transfer tax planning.

Many states don’t recognize self-settled spendthrift trusts. Notably, these states include California, Florida, Massachusetts, and New York. The Uniform Trust Code (UTC) doesn’t recognize self-settled spendthrift trusts. The UTC has been adopted by more than 30 states, but some of them depart from the UTC and recognize self-settled spendthrift trusts. In states that don’t recognize self-settled spendthrift trusts, a settlor’s creditors typically can reach some or all of the property in an irrevocable trust in which the settlor is a beneficiary. For example, under the UTC, a creditor of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.2

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1 12 Del. C. §§ 3570-3576; Nev. Rev. Stat. §§ 166.010-166.170; N.H. RSA 564-B:5-505A; S.D. Cod. Laws §§ 55-16-1 - 55-16-16; Tenn. Code Ann. § 35-16-101; Wyo. Stat. §§ 4-10-502 and 4-10-510 – 523; and Wyo. Stat. §§ 4-10-504 and 4-10-506(c). Several offshore jurisdictions—including Bermuda and the Cayman Islands—also recognize self-settled spendthrift trusts. For an individual who’s a US person for income tax purposes, creating and funding an offshore trust raises various tax issues that usually aren’t present when creating and funding a US-situs trust. For example, the settlor of an offshore trust may have to recognize any gain in the property transferred to an offshore trust upon the transfer of the property to the trust. IRC § 684(a). In this whitepaper, we’ll focus on US-situs trusts that are domestic trusts for US tax purposes.
2 UTC § 505.

Purpose of this material.
The information on this page and in the attached document is provided for informational and educational purposes only. It should be used solely for the purposes of discussion with your UBS Financial Advisor and your independent consideration. UBS does not intend this to be fiduciary or best interest investment advice or a recommendation that you take a particular course of action.

No tax or legal advice.
UBS Financial Services Inc., its affiliates and its employees do not provide tax or legal advice. You should consult with your personal tax and/or legal advisors regarding your particular situation.

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