Will a Domestic Asset Protection Trust Work in Arizona?

Summary:  Arizona does not permit self-settled asset protection trusts, but an alternative exists.

An asset protection trust is created when a person called a trustor transfers ownership of an asset into an irrevocable trust, which is managed by a trustee for benefit of one or more beneficiaries.  The assets you contribute to an irrevocable trust are generally protected from your future or unknown creditors.  The catch is that you cannot name yourself as both trustee and beneficiary like you would normally in a revocable living trust for probate avoidance.  In other words, you cannot self-settle your own irrevocable asset protection trust and retain the ability to make distributions back to yourself.  This arrangement does not provide any asset protection and is against public policy in all 50 states.

However, approximately 16 states now permit self-settled asset protection trusts in some variation.  The most well-known are Alaska, Nevada, Wyoming, South Dakota, and Delaware.  Unfortunately, the full faith and credit clause of the U.S. Constitution makes it unlikely an Arizona court would respect the governing law of a self-settled asset protection trust established in one of these states for an Arizona resident.  Foreign asset protection trusts avoid this problem in theory, but if the full protection of the trust is triggered by an actual threat, case law has shown the beneficiary also loses access to the trust assets unless willing to move permanently outside of the United States.  This is an unintended consequence most people are not willing to accept.

Although Arizona law does not permit self-settled asset protection trusts, an Arizona trustor may still obtain the desired creditor protection by establishing the trust in Arizona, excluding the trustor as an eligible beneficiary, and relying on spendthrift provisions to protect the trust assets from creditors of the eligible beneficiaries. 

This type of irrevocable trust may be referred to as a hybrid asset protection trust because it may be drafted to include a provision giving an independent person or company called a trust protector the power to move the trust to another state or country that permits self-settled asset protection trusts.  This change of governing law might permit the trust protector to add you as an eligible beneficiary later.