Asset Protection Trust

What Is an Asset Protection Trust?

Asset protection trusts (or APT) are financial-planning trust vehicles that protect an entity’s money or other assets from creditors. Specifically, asset protection trusts can provide some of the most robust legal and financial protection from lawsuits and adverse legal judgments against an individual’s or couple’s estate.

An asset protection trust also has the ability to prevent expensive litigation costs, and to positively influence settlement negotiations and their outcomes, due to the shielding of assets from the courts.

Further, asset protection trusts can help to limit the total amount or value of a given entity’s assets, with the purpose of enabling them to continue qualifying for Medicaid benefits, particularly those relating to nursing home care for older individuals.

How Do Asset Protection Trusts Work?

Asset protection trusts work, first and foremost, by being irrevocable trusts. In the case of revocable asset protection trusts, the assets still legally belong to the grantor. This means that they could be considered for tax purposes, or pursued by creditors or lawsuits (whether substantive or frivolous).

Irrevocable asset protection trusts, by contrast, provide much more protection. This is due primarily to the fact that the assets are not owned or even controlled by the grantor in question. The money and other assets within an irrevocable ATP legally belong to the trust, meaning that they are generally shielded from tax burdens, as well as protected from creditors and lawsuits.

There are, in turn, two types of ATPs: domestic asset protection trusts and foreign asset protection trusts.

Domestic asset protection trusts are formed with regard to the law of a specific US state. Some states have particularly aggressive legal restrictions and parameters, but still allow individuals the relative stability provided by the United States.

On the other hand, foreign asset protection trusts work outside the United States, and are often referred to as “offshore trusts”. These operate in a number of popular jurisdictions, such as the Cook Islands, the Cayman Islands, the Seychelles, and Nevis, among others.

Depending on the nature and value of the assets in question, there are pros and cons to both domestic and foregin asset protection trusts. As we’ll see in more detail below, the strongest moat or fortress of protection around an individual’s or couple’s assets is arguably a specific type of foregin asset protection trust.

What Are the Benefits of Asset Protection Trusts?

Asset protection trusts offer many legal and financial benefits. ATP benefits include (but are not limited to) the following:

  • Protect an entity’s assets against lawsuits or creditors
  • Safeguard money or other assets for beneficiaries
  • Provide legal and financial privacy
  • Lower onerous tax burdens
  • Popular vehicle for estate planning
  • Helps to lower overall asset value
  • Can help maintain Medicare eligibility

How to Fund an Asset Protection Trust

Two particularly salient questions people have about ATPs, both foreign and domestic, are the following: “What can you fund an asset protection trust with?” And, “How do I fund an asset protection trust?”

There are a few primary methods for funding ATPs. Some of the more common assets include (but are not limited to) the following:

  • Cash
  • LLCs
  • Real estate
  • Cryptocurrency assets
  • Intellectual property
  • Paintings and other art objects
  • Vehicles or airplanes

In order to use these to fund an irrevocable asset protection trust, the money and assets must be signed over to the trust itself. In other words, they are no longer owned or controlled by the grantor – now the previous owner – of the assets.

Should You Start an Asset Protection Trust?

When judging how best to serve and protect your money and other assets, a few key considerations exist.

For one, asset protection trusts are typically best suited for very wealthy individuals or couples, or for business owners. These two categories are, of course, not mutually exclusive. Business owners can also be wealthy individuals, and vice versa.

The amount of the total asset value (as well as its ultimate purpose) will largely determine whether an ATP is right for a given person or family.

How Do I Start an Asset Protection Trust?

In order to set up an irrevocable asset protection trust, a person (or couple) will need to consult with an attorney that specializes in ATPs.

Your lawyer will walk you through the primary steps to starting an irrevocable asset protection trust. These steps may include some of the following key considerations:

  • Defining the purpose of the trust
  • Listing all the intended beneficiaries
  • Determining how much money will be assigned to the trust
  • Figuring out which of your other assets need to be protected
  • Deciding on domestic or foreign asset protection

Asset Protection Trusts — Frequently Asked Questions

What is the best trust for asset protection? In general, if you are looking for the most robust and difficult-to-penetrate trust to protect your assets, you should consider a multi-entity offshore asset protection trust. One example of this type of ATP is the combination of an offshore trust with that of an offshore LLC. Based on prior court proceedings and verdicts, case law reveals time and time again that this is one of the most effective, legal, and financial asset protection strategies in existence.

Which states allow asset protection trusts? As of 2020, a total of 17 different US states allow for domestic asset protection trusts (or DAPTs). These states are:

  • Alaska
  • Delaware
  • Hawaii
  • Michigan
  • Mississippi
  • Missouri
  • Nevada
  • New Hampshire
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Virginia
  • West Virginia
  • Wyoming

What is an asset preservation trust? Fundamentally, an asset preservation trust is a type of legal and financial device that’s utilized to limit personal assets for the purpose of maintaining eligibility for Medicaid’s nursing home assistance.

What is an irrevocable asset protection trust? It is important to distinguish between revocable asset protection trusts and irrevocable asset protection trusts. The key distinction is that irrevocable asset protection trusts are not reversible, alterable, or otherwise extinguishable after they are created (outside of extremely rare circumstantial exemptions).