Trusts have been used for centuries to hold and transfer wealth. The basic structure dates back to English common law, where landowners would transfer property to trustees who would manage it for the benefit of family members. The concept has evolved over time, but the fundamental mechanism remains the same.
Not all trusts protect assets from creditors. In fact, most do not. The word trust appears in estate planning documents everywhere, and people assume that because their assets are in a trust, those assets are safe. This assumption leads to costly surprises when a creditor comes calling and discovers that the trust offers no barrier at all.
Understanding what is a trust to protect assets requires distinguishing between trusts that provide real creditor protection and trusts that provide none.
How Trusts Work
A trust is a legal arrangement where one party holds assets for the benefit of another. Three roles define every trust.
The settlor creates the trust and transfers assets into it. This is the person whose wealth funds the trust and whose intentions shape how it operates.
The trustee manages the assets and makes distributions according to the trust terms. The trustee holds legal title to the trust property and has fiduciary duties to the beneficiaries.
The beneficiaries receive distributions from the trust. They have a beneficial interest in the trust assets even though they do not hold legal title.
These three roles can overlap in some trusts, and who occupies each role determines whether the trust provides any creditor protection.
Why Most Trusts Do Not Protect Assets
Revocable living trusts are the most common type of trust in America. Estate planning attorneys create millions of them every year. They are useful tools for avoiding probate, providing for incapacity, and organizing an estate for efficient transfer at death.
They offer zero creditor protection.
Because the settlor can revoke the trust at any time and reclaim the assets, courts treat those assets as personally owned. The trust is essentially transparent for creditor purposes. A judgment creditor can reach through the trust and seize the assets inside just as easily as if they sat in a personal bank account.
Many people mistakenly believe that any trust provides protection. They create a revocable living trust, transfer their assets into it, and assume they have accomplished something meaningful for asset protection. They have not. The revocable trust serves important estate planning functions, but shielding assets from creditors is not one of them.
Traditional Irrevocable Trusts
Irrevocable trusts offer more protection than revocable trusts, but the protection has historically been limited in an important way.
A trust created by parents for a child protects those assets from the child’s creditors. The child did not create the trust or fund it. The child is simply a beneficiary. Creditors of the child cannot reach assets that the child never owned and never contributed.
But traditional irrevocable trusts did not protect assets from the settlor’s creditors. If you created the trust and funded it with your own assets, your creditors could still reach whatever interest you retained. This was true even if the trust was irrevocable. The rule was straightforward: you cannot shield your own assets from your own creditors by putting them in a trust for your own benefit.
This rule made sense from a creditor’s perspective. It prevented people from placing assets just beyond reach while continuing to enjoy them. But it created a gap for people who wanted to protect assets they had accumulated themselves.
The Domestic Asset Protection Trust
The Domestic Asset Protection Trust changed the rules for self-settled trusts. State legislatures in Wyoming and other jurisdictions enacted statutes that specifically override the traditional rule.
Under these statutes, you can create a trust, fund it with your own assets, remain a discretionary beneficiary, and still receive creditor protection. The DAPT allows the settlor to benefit from the trust while shielding those assets from future creditors.
Assets inside the trust are owned by the trust, not by you personally. Creditors who obtain judgments against you can pursue your personal assets. They cannot pursue assets owned by a separate legal entity that you do not control.
This is the trust specifically designed to protect assets you contribute yourself. It fills the gap that traditional trust law left open.
What Makes a DAPT Work
Not every trust that calls itself an asset protection trust actually provides protection. Certain requirements must be met for the structure to work.
The trust must be irrevocable. If you can revoke it and take assets back, creditors can force you to do exactly that. The irrevocability is what creates the separation between you and the trust assets.
A trustee in the DAPT state must administer the trust. Wyoming requires at least one trustee who is a Wyoming resident or a trust company licensed in Wyoming. This gives the state jurisdiction over the trust and ensures that Wyoming law governs.
The trust must include a spendthrift provision. This provision prevents beneficiaries from assigning their interest to creditors and prevents creditors from attaching the beneficiary’s interest directly.
Transfers must occur before any creditor claims arise. Fraudulent transfer laws still apply. If you move assets into the trust after a creditor has a claim against you, that transfer can be reversed. The protection works only for transfers made while you are solvent and before any liability exists.
These requirements distinguish effective protection from wishful thinking. A trust that fails to meet them is just a document. A trust that meets them is a real barrier between your wealth and future creditors.
Choosing the Right Trust for Your Goals
Different trusts serve different purposes. Choosing the right one depends on what you are trying to accomplish.
Revocable trusts work for estate planning and probate avoidance. They keep your affairs private, provide for incapacity, and ensure a smooth transfer of assets at death. They do not protect assets from creditors.
Irrevocable trusts for beneficiaries protect inherited wealth. If you want to leave assets to children or grandchildren in a way that shields those assets from the beneficiaries’ creditors and divorcing spouses, an irrevocable trust accomplishes that goal.
DAPTs protect your own assets from your own creditors. If you want to shield wealth you accumulated yourself while remaining a beneficiary of that wealth, the DAPT is the structure designed for exactly that purpose.
The Right Answer Depends on the Question
What is a trust to protect assets? It depends on whose assets and whose creditors you are concerned about.
For protecting inherited wealth from a beneficiary’s creditors, traditional irrevocable trusts work well. For protecting wealth you accumulated yourself from your own future creditors, the DAPT is the answer.
Understanding the distinctions prevents relying on structures that offer no real protection. The revocable trust in your filing cabinet may be excellent estate planning. It is not asset protection. Knowing the difference matters when creditors come looking for what you have built.