The Delaware and Alaska Asset Protection Trusts

April 13, 2006

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Setting up an asset protection trust is a complicated matter, but offers incredible benefits when executed correctly.

Because of the nature of a trust, it serves as a good asset protection device. In the last decade, nearly a billion dollars has flowed out of the United States and into offshore trusts situated in Nevis, St. Kitts, the Bahamas, the Cook Islands and other offshore jurisdictions. Why? The primary reason is that, unlike most states, these jurisdictions do not prohibit the use of a self-settled spendthrift trust.

In an effort to capture some of this investment capital, Alaska, in mid-1997, modified its trust statutes to legalize a spendthrift clause in a self-settled trust. Not to be outdone and, in particular, to preserve its status as the premier site for business and investment, Delaware immediately followed Alaska's lead with a similar change.

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When, in mid-1997, Alaska and Delaware modified their trust statutes to legalize a spendthrift clause in a self-settled trust, they created a significant departure in American law. Up until that time, the only effective way to create a self-settled spendthrift trust was to form it offshore, outside of U.S. jurisdiction.

Alaska and Delaware also eliminated the rule against perpetuities. This antiquated rule limits the duration of a trust to the life of some person living at the time the trust is created, plus 21 years. As a result, the Alaska and Delaware asset protection trusts can continue indefinitely.

Missouri has a more limited exception to the rule that makes a self-settled spendthrift trust invalid. In that state, the exception does not apply where the trustor is the sole beneficiary of either the income or the principal, or the beneficiary of a fixed portion of the income or the principal. This exception has existed since the 1980s. However, because of the limited nature of the exception, Missouri has not been considered a significant option for opening an asset protection trust.

Among the issues that impact these asset protection trusts, you'll need to examine: