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Self Settled Trust

Self settled trust is a type of trust in which the settlor is also the person who is to receive the benefits from the trust. These are spendthrift trusts that the settlor forms for his or her own benefit. In such trusts, the settlor and beneficiary are one and the same person. This is done for protecting the trust assets from creditors. Currently 13 states offer self settled trust legislation.

In the beginning

Trusts were first derived under the Statute of Uses in England in1535. Prior to 1535, the legal real property practice was for landlords (landholders) to pay a type of land-royalty fee to the King. As you mayknow, land in England was fundamentally owned by the King and landlordscould buy leaseholds from the King in his capacity of freeholder.These leaseholds could span a period of years exceeding 99 years.Oddly, the real property laws of England and many of its then colonies still use this land ownership of freehold and leasehold. Under KingHenry VIII’s reign these payments were exacted from landholders andupon the death of a landholder the King could exact additional fees,like an inheritance tax, from the heir. Landholders began  leaseholds into the name of one individual but for the benefit of another. This transactional party above would be termed the cestuique use and become the person benefiting from the use of the land, butwas neither the initial landholder nor the heir of the landholder.Under this plan, there arose a type of land ownership termed “use”. This idea caught on quickly across the English country side and it wasnot long before the courts of England recognized this use right allowing the landholder to transfer possession of the land to oneindividual for use of the land while transferring legal title to another. Transferring title to land to two or more individuals, thelandholder was also able to avoid other fees such as marriage fees andother fees associated with the death of a landholder. If the propertywas held in other persons’ names, a landholder could also avoid losing the property due to debt or felony conviction. By the end of thefifteenth century, almost all of the land in England was owned in use.

Like any government that depends on revenue generation to run its country, England was no different. The King, King Henry VIII at that time, was a very determined monarch and personally pushed through Parliament a special law designed to stop this loss of money for the Realm. This law was termed the Statute of Uses. This legislation terminated the short historic bifurcating of land rights between use and title, as I noted above. This legislation also acted to transfer full title to land automatically to the individual that was using the land as well as a reinstatement of the draconian feudal rule of primogeniture, which held that land should go to the oldest son upon the death of the landowner. Predictable, landholders vigorously abhorred this legislation and after a protracted and focused lobbying by the landholders the King scrapped the legislation. However, just five years later, Parliament enacted the Statute of Wills which gave rights to the landholders to pass property at their own discretion in the form of a written will and testament. Parliament did not rescind the Statute of Uses. Now not only were the landholders appalled but the courts were equally enraged.
Somewhat similar to modern circumstances, landholders began a period ofcreativity by finding and exploring loopholes in the legislation andthe court also responded by using strict construction of theunfavorable legislation by allowing landholders to place property inthe title of another individual while simultaneously retaining use ofthe property for their own use, benefit and profit. It was ultimatelythe courts that expanded this practice of the landholders into aconcept of trust whereby a vehicle labeled a land trust allowed oneindividual to hold title to the land for the benefit of another individual who may direct the management and use of the land. The courts went on to reason that a trust allows the landholder to have some ability to use the land and that the person who received the transfer of the land performed no labor on the land and had no realfunction to the land, except to hold title. Thus, this individualbecame known as the “trustee”. The courts further reasoned that the trust was recognized in the courts of equity, but not in the courts oflaw. Thus, trusts had no jural ability to be sued or to sue in courtsof law. This notion still exists in England as well as the UnitedStates.
From 1535 to 2010
This equity v. legal fiction above has presence in today’s world.Traditionally, a litigant can not file against a trust because thetrust lacks any legal recognition in courts of law. This non-existentlegal entity status causes the litigant to bring a claim against thetrust indirectly by suing the trustee under the trustee’s personalcapacity. The trustee may seek some type of reimbursement from thetrust after the litigation is concluded for fees and costs and hope thetrust will have sufficient assets to meet these reimbursements.Currently, all states of the United States via legislation, with theexception of Mississippi and West Virginia, have modified thistraditional law by adopting either the Uniform Trust Code or theUniform Probate Code, or similar statutes, separating the trust entityfrom the trustee, severing the liability of the trust from theliability of the trustee, and allowing suit against the trustee in itsrepresentative capacity as opposed to its personal capacity.
Modern trust law evolves from state legislation and state case law andallows an individual to protect much more than land ownership and landuse. These recent Domestic Asset Protection Trusts, DAPT, are truststhat protect a variety of real and personal, tangible and intangible,assets from creditors, some states also include as a future spouse.DAPT allows the individuals establishing the trust and funding thetrust, settler, to include themselves as a possible beneficiary of thetrust; which trusts are also called “self-settled trusts”. DAPT arean excellent estate planning instrument that should not be overlooked,a viable form of real asset protection to shield against attacks ofthe settlor’s future spouse and other creditors with the provisionthat the DAPT does not violate a particular state’s fraudulent transferlaws. DAPT would have had significant use for our currentadultery-minded mega movie and sports stars. DAPT requires nodisclosure of the trust structure and no disclosure of what assets areplaced within the trust. If, for example, a mega-star set up a DAPT inone of the states that permits this type of DAPT before marriage, upona dissolution of marriage the assets are protected from thenon-adulterer spouse and lesser income earning spouse and will not be apart of an equitable distribution. Therefore, public knowledge of theseassets are not revealed in court records, the outcome will besignificantly better than an antenuptial agreement which may be publicand may fail in a divorce proceeding.
DAPTs are utilized by individuals, entities, and families as an inherentpart of their financial, income and asset lifetime perpetual efforts tobring about a diminishment of fear, uncertainty and doubt over theprofessional management and preservation of these three types of assetsduring your life, while assets are in probate or administrations andafter death, probate or administration. These fear factors exist withus in our everyday lives. According to Enrichment Journal on thedivorce rates in America, the divorce rate in America for firstmarriage is 41%; the divorce rate in America for second marriage is60%; the divorce rate in America for third marriage is 73%.
CONCLUSION:
While DAPTs have their place in traditional estate and asset protection planning, they are certainly not the end all to be all. They can be an instrumental tool in a planner’s toolbox. Americans are the most litigious society on the planet. Just a simple innocent act can cause injury or damage which can findits way into our court system and from there a claim against you withsubsequent interrogatories asking intrusive personal questions to theplaintiff and the plaintiff attorney can determine how deep are yourfinancial pockets. Proper and legal DAPT planning can help to protectpersonal assets from legal threats, including threats arising frombusiness, professional and commercial activities; regulatory liability;and personal and family activities. DAPT planning is also necessaryeven when you have insurance; such as the policy narrow coverage scope,exclusions, too small of coverage, premiums increasing each year,insurance companies dropping you without any warning or known reason,and insurance carriers going bankrupt.