Insights

What the Asset Protection Trust Cases Actually Punish

By Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA · October 29, 2026

Every reported decision against a domestic asset protection trust turned on how the trust was drafted, funded or run. The pattern is consistent, and it is avoidable.

Attorneys in states without an asset protection trust statute often ask how a self-settled trust formed under another state's law will hold up if the client is later sued. I went through every reported United States decision I could find on a domestic asset protection trust, meaning a trust in which the person who funded it is a discretionary beneficiary under a state statute that permits that. There are fourteen: three for the trust, ten against the settlor, and one mixed result in which the trust assets were not reached but the trust's income was counted in setting child support.

The headline is not the score. It is that every adverse decision turned on something the settlor or the drafter did. I have found no reported case in which a creditor reached the assets of a trust that was drafted by counsel to the statute, administered by an independent trust company in the trust state with no role for the settlor, and funded by a solvent settlor, with a minority of his wealth, before any claim existed.

Timing decides most of the cases

Kilker, Huber, Wacker, Netter and Wheeler all involved funding after a claim existed or while one was gathering.¹ In Kilker, a California soil engineer moved virtually all of his property into a Nevada trust four years after doing the work that produced the claim against him. In Huber, a Washington developer created an Alaska trust in September 2008, as the housing market collapsed and his loans were failing, and moved about 71 percent of his wealth into it. In Wheeler, an Oklahoma debtor transferred two houses to his trust's company after a five million dollar judgment and never told his lawyer about the judgment. The two clean creditor cases that the trust won, TrustCo Bank v. Mathews and In re CES 2007 Trust, involved trusts funded years before the debt existed.²

Settlor control defeats the trust

The settlor or his family controlled the trust in Mortensen, Kilker, Huber, Dahl, Erskine, Magliarditi, Huckaby and Chapman, and the settlor held an advisor role in Netter.³ Brothers, sons, stepdaughters, employees and a surveyor the settlor had worked with served as trustees. In Huckaby, two California residents named themselves trustees of their own Nevada trust, which meant the trust never met Nevada's own requirement of a Nevada trustee. In Chapman, the settlor served as investment trustee and had picked the "independent" trustee himself, and the Alaska Supreme Court let the family court impute the trust's business income to him for child support. The South Dakota statute permits a settlor to keep certain roles. The trusts I design do not use them.

The drafting failures were severe, not subtle

Mortensen drafted his own trust from a template and recited that its purpose was to protect the trust estate from creditors' claims; the bankruptcy court quoted that language back to him as evidence of intent. Dahl's Nevada trust called itself irrevocable and, in the same paragraph, reserved to him any power whatsoever to alter or amend it; the Utah Supreme Court held that an unlimited power to amend includes the power to revoke. Erskine named himself trustee, made the trust expressly revocable during his life, gave his own interest no spendthrift protection and never signed the affidavit the Tennessee statute requires. None of these is a close call. They are trusts that failed their own statutes.

Marriage and land are the recurring soft spots

Dahl, Netter and Chapman were family cases, and Klabacka, the one favorable divorce decision, was won only after a remand to trace whether community property had gone into the trusts.⁴ In Dahl, the wife contributed the marital home without ever signing. In Netter, a Connecticut husband funded three South Dakota trusts with marital assets as the marriage deteriorated, and the court described the funding as secret. For a married client the lesson is simple: fund during a stable marriage with the spouse's informed written consent and independent counsel, or fund only from documented separate property.

Land has its own rule. In Wacker, Montana land was deeded directly into an Alaska trust while a counterclaim was pending, and in Huckaby, California land was deeded directly into a Nevada trust. Real property is governed by the law of the state where it sits, so out-of-state land should go into a limited liability company first and the trust should hold the membership interest.

What a clean trust looks like

• Before funding: documented assets, liabilities, income and cash flow; litigation, judgment and lien searches; questions about latent professional and business exposure; a signed solvency affidavit; and a transfer of a minority of net worth, leaving enough outside the trust to live on and to meet every foreseeable obligation. The residence stays out.
• In the instrument: estate planning counsel drafts and independent South Dakota counsel reviews. The trust is irrevocable, names South Dakota law, contains a spendthrift clause and names a qualified South Dakota trustee. The settlor holds no power to amend or revoke and no fiduciary or advisory role, and an independent trust protector cannot add to the settlor's benefit. The recited purposes are estate, family and succession planning.
• In funding: real estate and operating businesses go into a limited liability company first, usually in Wyoming because charging order relief is the creditor's exclusive remedy there, and the trust holds the interest. Transfers are documented and recorded when made, which under South Dakota law starts the six-month discovery period at once.⁵
• In administration: the trustee holds the assets in South Dakota, keeps the books there, makes every distribution decision there and files the returns from there. The settlor has no personal use of trust property, receives no routine distributions, and never commingles trust and personal funds.

One risk survives even perfect drafting. If the settlor later files for bankruptcy, section 548(e) of the Bankruptcy Code allows the trustee in bankruptcy to avoid transfers to a self-settled trust made within ten years with actual intent to hinder, delay or defraud creditors, whatever the trust state's shorter period says.⁶ The defense is the record: documented solvency, a minority transfer and legitimate purposes. That record is what separates the trusts courts respect from the trusts in the adverse cases.

More insights from Terry L. Turnipseed