Are the Assets in Your Trust Accessible to Creditors?
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A question we’re often asked is whether a trust provides asset protection – can my creditors reach the assets in my trust? The answer is usually yes – most estate planning trusts do not provide asset protection for the person who created the trust (the settlor). Generally, if the settlor can use the trust’s assets, then the settlor’s creditor can reach the trust’s assets. However, a special type of trust, called an asset protection trust (APT) may protect the trust’s assets even though a settlor has limited access to the trust’s assets.
Fewer than 15 states have provisions for an APT. Oregon and Washington do not, but Alaska has provisions for an APT. Alaska law provides that a settlor can create a trust that includes a provision that the beneficiary’s interest may not be “voluntarily or involuntarily transferred before the distribution is paid or delivered to the beneficiary” (this is called a spendthrift provision). This provision prohibits a creditor that existed at the time and after the APT was created from using the APT’s assets to pay the creditor’s claim unless an exception applies. If a settlor receives a distribution from the APT, then the creditor may be able to access that distribution.
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