Cummings & Lockwood Estate Planning FAQs

A trust designed to protect the assets the grantor has transferred to it.  This type of trust is technically referred to as a “self-settled irrevocable spendthrift trust.”  The trust is self-settled because the grantor is also a beneficiary of the trust.  The trust cannot be revoked by the grantor.  Finally, the trust contains spendthrift protection, meaning that the creditors of a beneficiary cannot attach the assets of the trust.

APTs have the distinct advantage of permitting the Trustee to make distributions to or for the benefit of any one or more of the trust beneficiaries.  Consequently, if a beneficiary had creditor concerns, including the grantor, the Trustee can economically benefit the beneficiary without the beneficiary receiving trust assets (for example, making a mortgage payment or paying litigation fees).  An LLC or LP must make its distributions directly to its owners, instead of for their benefit, which allows creditors to collect such distributions.

Domestically, the trend has been one state per year has added APT legislation.  Unless you live in a state that has such legislation, the general sentiment is that there are four top tier states, which are (in alphabetical order) Alaska, Delaware, Nevada and South Dakota.  In 1996, Alaska was the first state to authorize APTs.  However, foreign jurisdictions have permitted APTs even earlier.  Two of the most common foreign jurisdictions used are Nevis and the Cook Islands, although there are many others.

Other than their geographic location and specific legislation, the primary difference is that the Trustee of a foreign APT is not subject to the laws of any state in the United States of America.  There is a concern that the United States Constitution may require an asset protection state to honor judgments from her sister states.  The widely-held view is that this will not be the case.  However, as of 2024, no case has examined this issue. Establishing an APT outside the United States should eliminate this possible risk.