Why Texas Does Not Protect Self-Settled Trusts
Texas does not have an asset protection trust statute. Under the Texas Property Code, if you create a trust for your own benefit, a spendthrift clause does not stop your creditors from reaching your interest in it. A trust you fund for others, like children, can have real spendthrift protection, but a trust you fund for yourself generally cannot. Texans who want a self-settled trust usually use a trust governed by another state's law.
What the statute says
Texas recognizes spendthrift trusts, in which the trust terms bar a beneficiary from transferring their interest and bar creditors from reaching it before distribution. But Texas draws an exception when the settlor is also a beneficiary: the statute provides that a provision restraining transfer of the settlor's beneficial interest does not prevent the settlor's creditors from satisfying claims from the settlor's interest in the trust estate. In plain terms, you cannot put your own assets in a trust, keep the benefit and shut out your creditors.
What Texas does protect
- Third-party spendthrift trusts. A trust funded by a parent or grandparent for a child can protect the child's interest from the child's creditors.
- Homestead. A Texas homestead is protected by the constitution, within acreage limits.
- Retirement accounts and certain insurance. Texas exempts many retirement plans, life insurance cash values and annuities. See exempt assets in Texas.
- LLC interests. Texas limits a creditor of a member to a charging order in many situations. See charging order protection.
Options for Texans who want a self-settled trust
| Option | Notes |
|---|---|
| Out-of-state domestic trust | Governed by Nevada, South Dakota, Delaware or another statute, with an independent trustee in that state. Whether a Texas court will honor it is not fully settled. |
| Offshore trust | More barriers abroad, more reporting and cost. See domestic vs offshore. |
| Gift to a non-self-settled trust | A trust for a spouse or children that you cannot benefit from, subject to fraudulent transfer rules. |
Why choice of law is contested
A Texas resident who creates a trust under another state's law faces the argument that Texas has a strong policy against self-settled protection and that a Texas court should apply Texas law. Courts consider where the settlor lives, where the assets are, where the trustee is and what the trust document says about governing law. The more real connections the trust has to the chosen state, such as a local trustee and local assets, the better the position. No Texas appellate decision gives a firm rule, so planning should assume the challenge may be made.
The practical takeaway
For a Texan, asset protection usually starts with what Texas already protects and with business structure, then adds an out-of-state trust only for specific exposures. Timing matters at every step. See fraudulent transfer law.
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Book Free ConsultationFrequently asked questions
Can I protect myself with a Texas trust?
A trust you fund for your own benefit does not block your creditors under Texas law. A trust for others can have spendthrift protection.
Is a spendthrift clause the same as asset protection?
A spendthrift clause protects a beneficiary's interest in a trust someone else created. It does not protect your own money placed in a trust for yourself.
Will a Texas court respect a Nevada trust?
Uncertain. Courts weigh several factors, and the law on this is not settled.
Does Texas protect an irrevocable trust for my spouse?
A properly drafted trust for a spouse you cannot benefit from may offer protection, subject to fraudulent transfer and community property rules.