The Estate and Gift Tax Implications of Self-Settled Domestic Asset Protection Trusts: Can You Really Have Your Cake and Eat It Too?

Phyllis C. Smith, Florida A&M University College of Law

Abstract

Self-settled asset protection trusts are wealth preservation trusts coupled with the spendthrift provisions. This type of trust permits the settlor to have the benefit of treating the trust as a separate entity thereby protecting his assets from creditors while maintaining a pecuniary interest, as well as some level of control over what ultimately happens to the trust property. By providing asset protection from potential creditors while still having the ability to maintain a beneficial interest in the trust, the settlor can essentially "have his cake and eat it too." The typical domestic self-settled asset protection trust may not be treated as an asset of the settlor for creditor claims. Whether these assets should be treated as owned by the settlor for the purpose of inclusion in the gross estate of the decedent for estate tax purposes is the focus of this Article. The author asserts that it is appropriate to include certain property settled in a domestic asset protection trust ("DAPT") in the settlor's gross estate for estate tax purposes because of the control the settlor retains over the trust assets up until his death.