Texas law generally does not allow individuals to create a traditional self-settled asset protection trust, meaning a trust that allows the person who contributed the assets to continue benefiting from them while shielding those assets from that person’s creditors. The general rule exists to prevent a person from transferring assets to a trust for their own benefit and using a spendthrift provision to defeat legitimate creditor claims.
Texas Property Code Section 112.035 contains important exceptions and technical provisions involving powers of appointment and certain irrevocable spousal trusts. Those provisions may affect whether a person is treated as a settlor for spendthrift purposes in a particular structure. They do not create a simple, general-purpose asset protection trust for someone who wants to retain access to their own assets.
Can I Create an Asset Protection Trust for Myself in Texas?
Usually, no. Under the general rule, when a settlor is also a beneficiary of a trust, a spendthrift provision does not prevent the settlor’s creditors from reaching the settlor’s interest in the trust estate. This is why a revocable living trust is useful for probate avoidance and incapacity planning, but it is not a creditor-protection device for the person who creates it.
The analysis can become more complex in limited circumstances. The current statute addresses a settlor whose beneficial interest was created by a third party’s exercise of a power of appointment, as well as certain irrevocable trusts involving spouses and property subject to another person’s general power of appointment. These arrangements should be evaluated by counsel before assets are transferred because the language, funding, tax treatment, marital-property issues, creditor facts, and timing all matter.
What Is an Asset Protection Trust?
An asset protection trust is often discussed alongside a spendthrift trust. A spendthrift provision generally restricts a beneficiary from selling, transferring, or pledging a future trust interest as collateral before the trustee makes a distribution. It can also limit a beneficiary’s creditors from forcing the trustee to use undistributed trust assets to satisfy the beneficiary’s debts.
That protection is strongest when someone other than the beneficiary created the trust for that beneficiary. It is different from a trust created and funded by the person seeking protection for themselves. The label “asset protection trust” does not decide the issue; the trust terms, the source of the assets, the beneficiary’s rights, and the applicable law do.
The General Texas Rule for Self-Settled Trusts
Under the Texas spendthrift statute, if the settlor is also a beneficiary of the trust, a restraint on transfer does not prevent the settlor’s creditors from satisfying claims from the settlor’s interest in the trust estate. In other words, a person generally cannot protect assets from their own creditors merely by placing those assets in a trust while continuing to benefit from them.
This rule is especially important for people considering an irrevocable trust after a claim has arisen or a lawsuit is foreseeable. Transferring assets to hinder, delay, or defraud creditors can create additional legal exposure and is not a legitimate asset-protection strategy.
Limited Statutory Provisions That May Affect Settlor Status
Section 112.035 has technical provisions that may affect whether property is treated as contributed by a settlor for purposes of that section. These provisions are not a do-it-yourself planning checklist. They are narrow rules that must be read with the complete trust instrument and other state and federal law.
1. Property Appointed to the Settlor by a Third Party
The statute provides that a settlor is not considered a beneficiary solely because the settlor’s interest was created by a third party’s exercise of a power of appointment. A power of appointment is a power to decide who will receive specified property. It may be limited to a defined group of permissible recipients or, in some circumstances, be general.
For example, a trust may give a third party the authority to appoint property among a class of people. Whether a later appointment for the original settlor creates creditor protection is not a question that can be answered from the statute alone. It depends on the terms of both trusts, the scope and exercise of the power, the source of the assets, and the surrounding facts.
2. Certain Irrevocable Trusts for a Spouse
Section 112.035 also addresses certain irrevocable inter vivos marital trusts and irrevocable trusts for a settlor’s spouse where the settlor becomes a beneficiary after the spouse’s death. The provisions may apply to particular marital trust designs, including trusts that receive specific tax treatment. They do not mean that spouses can casually transfer jointly held assets and expect all creditor concerns to disappear.
Texas community-property law, divorce risk, estate and gift tax consequences, control over the transferred assets, and the future needs of both spouses are all important. Once separate property is transferred to an irrevocable trust, the settlor may not be able to simply take it back.
3. Trusts Involving a General Power of Appointment
The statute also addresses property that is subject to a general power of appointment in another person. A general power of appointment can give its holder broad control over where property goes. That authority can have substantial estate, gift, creditor, and fiduciary consequences for the person who holds it.
Giving someone a general power of appointment is not a routine solution to a creditor concern. It can give the power holder significant authority over assets and may affect tax treatment. Any structure relying on this provision should be designed and reviewed by attorneys with relevant trust, tax, and asset-protection experience.
Important Considerations for Married Couples
A spouse funding an irrevocable trust must consider whether the assets are separate or community property. Partitioning community property has serious ramifications. It can change ownership rights and can materially affect a future divorce, death, or creditor claim. A transfer to an irrevocable trust can also reduce a person’s ability to use or recover the assets later.
The same caution applies to irrevocable trusts created for other beneficiaries. Do not give away assets you may need for future support. A trust that sacrifices needed liquidity, creates tax problems, or relies on an uncertain interpretation is not sound planning simply because it includes a spendthrift clause.
What an Asset Protection Trust Cannot Do
- It cannot reliably protect a settlor’s beneficial interest from the settlor’s creditors merely because the trust uses spendthrift language.
- It cannot erase a legitimate existing creditor claim or make an improper transfer permissible.
- It cannot replace appropriate insurance, business planning, or statutory exemptions.
- It cannot be evaluated apart from its tax, marital-property, control, and administration consequences.
Asset Protection Without an Asset Protection Trust in Texas
Texas law already provides meaningful protection for certain types of assets without creating a complex trust. For more information, read: What Assets Are Protected From Creditors in Texas?
For additional protection, it is often wise to maintain adequate automobile and home insurance, consider an umbrella policy, and use appropriate business entities while observing corporate formalities. The right approach depends on the assets, liabilities, insurance coverage, business activity, and family circumstances involved.
Frequently Asked Questions About Texas Asset Protection Trusts
Does a revocable living trust protect my assets from creditors in Texas?
Generally, no. Because the person who creates a revocable living trust typically remains able to benefit from and control the trust property, it does not generally protect that person’s assets from that person’s creditors.
Can an irrevocable trust protect assets from creditors in Texas?
An irrevocable trust may provide protection for a beneficiary when it is properly structured and funded by someone other than that beneficiary. It does not automatically protect a settlor who retains a beneficial interest, and the facts, timing, and trust terms matter.
Can I transfer assets to a trust after being sued?
Transferring assets after a claim arises can create serious legal issues. Do not transfer property to hinder, delay, or defraud a creditor. Obtain individualized legal advice before taking any action involving a pending or anticipated claim.
Talk With a Texas Asset Protection Attorney
Asset protection planning must be completed before a problem arises and must fit the client’s actual circumstances. If you are considering asset protection, consult with an experienced asset protection attorney who can advise you on strategies that are appropriate for you.
