Asset Protection Trusts: What They Do and Don't Do for Tax
Self-settled trusts that shield assets from future creditors in the states that allow them, why they usually change nothing for income tax, and how they compare with the protections Florida already gives.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A domestic asset protection trust is an irrevocable trust you create for your own benefit under the law of a state that shields its assets from your future creditors — about twenty states. It is a creditor tool, not a tax tool: it is usually a grantor trust, so you still pay income tax on its earnings.
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What does it do?
| Feature | Rule |
|---|---|
| Who sets it up | The person whose assets are protected, who can remain a discretionary beneficiary |
| Protection | After a waiting period (two to four years in most states), creditors generally cannot reach trust assets |
| Trustee | An independent trustee in the trust state, with local administration |
| Look-back | Transfers made to defeat existing or foreseeable creditors are fraudulent and reversible |
| Exceptions | Child support, alimony, and sometimes pre-existing tort claims, depending on the state |
| Cost | Trustee fees, legal setup, and ongoing administration |
What does it do for tax?
Usually nothing. The trust is typically a grantor trust: income, gains, and deductions appear on your personal return. For estate tax, a trust drafted as an incomplete gift keeps the assets in your estate (so they get a step-up at death); one drafted as a completed gift removes them, uses exemption, and forgoes the step-up. Some non-Florida residents use incomplete-gift non-grantor trusts in no-tax states to avoid their home state's income tax; a Florida resident has no state income tax to avoid.
Why are Florida residents in a grey area?
Florida has no asset protection trust statute and generally does not recognize self-settled spendthrift trusts. A Florida resident who creates a Nevada trust is relying on a Florida court applying Nevada law to a Florida debtor — a question courts have decided against debtors in some cases, particularly in bankruptcy, where federal law allows a ten-year look-back for self-settled trusts created to hinder creditors. The protection is strongest when the assets, the trustee, and the administration are actually in the trust state.
What does Florida already protect?
Homestead (unlimited value, with acreage limits), tenancy by the entirety for married couples, qualified retirement plans and IRAs, annuities and life insurance cash value, wages of the head of family, and 529 plans — some of the broadest exemptions in the country. For many Florida business owners, the combination of these exemptions, an LLC for the business, adequate liability insurance, and an umbrella policy provides more certain protection than an out-of-state trust.
Frequently asked questions
Can I move money to the trust after a lawsuit is filed?
No. A transfer made to put assets beyond a pending claim is a fraudulent (voidable) transfer that a court can unwind, and in bankruptcy a transfer to a self-settled trust made with that intent can be undone for ten years.
Does the trust protect against the IRS?
Generally no. State spendthrift and asset protection statutes do not bind the IRS, which can pursue trust assets through federal tax liens and nominee, alter-ego, or fraudulent-transfer claims.
Can the trust hold my business?
It can hold LLC interests; the operating business remains exposed to its own creditors regardless.
Is an offshore trust better?
Offshore trusts in jurisdictions that do not recognize U.S. judgments offer stronger protection at higher cost, with extensive U.S. reporting (Forms 3520 and 3520-A) and reputational considerations.
Official sources
The IRS explains: “If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust.” — Internal Revenue Service, Abusive trust tax evasion schemes - Questions and answers, https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-questions-and-answers
Florida law provides: “All of the disposable earnings of a head of family whose disposable earnings are less than or equal to $750 a week are exempt from attachment or garnishment.” — Florida Legislature, The 2026 Florida Statutes, Chapter 222 — Method of Setting Apart Homestead and Exemptions, https://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0222/0222.html
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk maps the tax treatment of any trust before it is funded and coordinates with asset-protection counsel on the rest. See pricing or book a free fit call.
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U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
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