Can I Create an Asset Protection Trust for Myself in Texas?

Texas law generally does not allow individuals to create self-settled asset protection trusts -trusts that allow individuals to shield their own assets from creditors while still benefiting from them. The restriction exists to prevent individuals from shielding assets to evade legitimate creditor claims.

However, amendments the Texas Legislature made to the spendthrift statute in 2013 may have created a back door to creating a self-settled asset protection trusts. Below is a table of contents outlining the key topics covered:

What is an Asset Protection Trust

An asset protection trust, also called a spendthrift trust, is a special trust that protects assets from creditors, lawsuits, or financial risks. Families commonly use these trusts to protect their wealth, business assets, and inherited property.

Spendthrift provisions in a trust restrict beneficiaries from selling, transferring, or pledging their inheritance as collateral. These provisions also protect trust assets by preventing creditors from forcing the trustee to use trust assets to satisfy debts or legal judgments.

Potential Pathways to a Self-Settled Asset Protection Trust in Texas

1. Spendthrift Protection for Trust Property Appointed Back to the Settlor

According to Texas Property Code Section 112.035(d)(2) states that if a settlor becomes a beneficiary only through the exercise of a power of appointment by a third party, then the trust assets remain protected from creditors.

A power of appointment is essentially a power to decide how to dispose of the property in the trust. It allows the power holder to direct who should receive the trust assets. A settlor can grant someone a limited or general power of appointment. A limited power of appointment limits the class of potential recipients to whom the power holder can appoint the property. A general power of appointment does not. Additionally, settlors can specify whether the power holder can exercise the power during his life, or only at death.

For example, suppose a settlor creates a trust to benefit his brother and grants his brother a power of appointment. The settlor can limit the power of appointment, requiring that his brother exercise it in favor of the settlor or his descendants. If the brother exercises this power to transfer the trust assets into an asset protection trust benefiting the original settlor, the resulting trust would receive creditor protection.

2. Spendthrift Protection for Irrevocable Trusts Created for a Spouse

Under Section 112.035(g)(1)-(2), a person is not considered a settlor if they become a beneficiary of an irrevocable trust only after their spouse’s death.

For example, a husband can establish an irrevocable asset protection trust for his wife during his lifetime. The trust can specify that if the wife predeceases him, all trust assets will pass into a new asset protection trust for the husband’s benefit. While the wife is alive, the trust assets remain shielded from creditors, and the husband can indirectly benefit from any distributions made to her. If she passes away first, the assets that pass in trust to him will receive asset protection from creditor claims, even though he initially funded the trust for his wife.

3. Spendthrift Protection for Reciprocal Spousal Trusts

Texas law under Section 112.035(g)(3)(A) provides that a spouse is not considered a settlor of an asset protection trust if both spouses create trusts for each other’s benefit. This provision suggests that spouses could partition their property such that each spouse owns 50 percent of the property as his or her separate property. They could then each a create asset protection trust for each other’s benefit, thereby shielding all their assets.

Doing this is not advisable in situations where estate taxes are a concern because the IRS will disregard reciprocal trusts for transfer tax purposes. But for couples who don’t have estate tax concerns, this may provide a means of achieving asset protection in Texas.

4. Spendthrift Protection for General Power of Appointment Trusts

Under Section 112.035(g)(3)(B), a settlor is not considered a trust’s owner if the trust assets are subject to a general power of appointment held by someone else.

This suggests that a settlor can create a trust for a beneficiary, even someone who is not his spouse, and grant a third party a general power of appointment. If the third party exercises the power of appointment in favor of an asset protection trust for the settlor, creditors would not be able to reach the assets in the resulting trust. This would be the case even though the settlor created the original trust.

For example, a settlor can create a trust for a friend, granting a third party a general power of appointment. If the third party later exercises this power to direct assets into an asset protection trust for the settlor, the assets remain shielded from creditors

Important Considerations for Married Couples

A settlor must fund a trust for a spouse with separate property assets. This means spouses must partition community property. Partitioning community property has serious ramifications. Fifty percent of first marriages end in divorce, and the divorce rate for subsequent marriages is higher. When you partition assets and transfer them to an irrevocable trust for your spouse, you can’t take those assets back.

The same goes for irrevocable trusts created for any other beneficiary. When you transfer assets to an irrevocable trust, they are no longer yours. You should not give away assets you might need in the future for your own support.

Risks of General Power of Appointment Trusts

Giving someone a general power of appointment is risky. It gives the power holder enormous power to dispose of the assets as they wish. Additionally, assets subject to a general power of appointment would be included in the power holder’s estate when he or she dies. This means someone granted a general power of appointment must be willing to use some of his or her estate tax exemption to help the settlor achieve his asset protection goals.

Grantors should not transfer assets to an irrevocable trust as a means to avoid the claims of creditors. Irrevocable trusts will not be effective to shield a settlor’s assets from persons or other entities who currently have a claim against the settlor.

Asset Protection Without an Asset Protection Trust in Texas

Texas law already provides a good deal of asset protection for certain types of assets even without going through the trouble of creating a trust. For more information read: What Assets Are Protected From Creditors In Texas?

For additional protection, it is always wise to ensure you have adequate automobile and home insurance, as well as an umbrella policy. Creating an LLC and observing corporate formalities will protect your personal assets from business liabilities.

And finally, this is a relatively new statute. I could not find any case law elaborating on it. I discussed it with a colleague who reviewed the legislative history on the bill and found that there was no explanation or discussion of subsection (g) in the record that is of note. So while the statute seems to create a back door to a self-settled asset protection trust, we currently have no guidance on how it will develop.

If you are considering asset protection, consult with an experienced estate planning attorney who can advise you on what strategies are right for you.

This article was originally posted on May 17, 2019, and updated on January 30, 2025.