What is an Asset Protection Trust?

Asset Protection Trust DefinitionAsset Protection Trust Definition

Key Takeaways

  • Asset protection trusts are irrevocable trusts designed to shield assets from creditors and lawsuits. They remove assets from personal ownership and put them under an independent trustee's control.
  • Domestic asset protection trusts (DAPTs) are formed under U.S. state laws that allow them, while foreign asset protection trusts (FAPTs) are set up in countries with favorable trust laws.
  • Asset protection trusts provide powerful creditor protection but involve tradeoffs like loss of control, costs, and complex setup. The protection varies by type and jurisdiction.
  • Cash, investments, real estate, businesses, and other assets can fund these trusts. But transfers may trigger taxes and require legal advice.
  • The costs can be high - $5,000 to $25,000+ in the first year for legal and setup fees. Ongoing administrative and trustee fees also apply annually.

What are the Types of Asset Protection Trusts?

Asset protection trusts can be broadly categorized into two main types: Domestic Asset Protection Trusts and Foreign Asset Protection Trusts. Both serve to help protect assets from creditors but operate under different jurisdictions and legal frameworks.

When choosing between a Domestic Asset Protection Trust and a Foreign Asset Protection Trust, one must consider factors like the degree of control desired, the level of asset protection needed, tax implications, and the legal frameworks governing these trusts in different jurisdictions.

1. Domestic Asset Protection Trusts (DAPTs):

A Domestic Asset Protection Trust is established under the laws of specific states within the United States that permit the creation of such trusts. Not all states allow for the formation of Domestic Asset Protection Trusts. Those that do provide varying degrees of asset protection.

  • Jurisdiction: Formed under the laws of states which permit the creation of Domestic Asset Protection Trusts.
  • Control: Allows for the settlor (the individual establishing the trust) to be a discretionary beneficiary.
  • Flexibility: Domestic Asset Protection Trusts typically have flexible structures, allowing for adjustments based on individual needs and circumstances.
  • Taxation: Assets within a Domestic Asset Protection Trust are subject to U.S. taxation.
  • Protection: Offers protection against future creditors but might be susceptible to claims from existing creditors.

2. Foreign Asset Protection Trusts (FAPTs):

Foreign Asset Protection Trusts are based outside the United States in jurisdictions with favorable asset protection laws, typically in countries known for strong privacy and asset protection legislation. A Foreign Asset Protection Trust is also called an Offshore Asset Protection Trust.

  • Jurisdiction: Established in foreign countries known for robust asset protection laws.
  • Control: The settlor often relinquishes more control, with a foreign trustee overseeing the trust.
  • Flexibility: They might offer more varied structuring options based on the jurisdiction's legal frameworks.
  • Taxation: U.S. citizens are required to report Foreign Asset Protection Trusts to the IRS, and they are subject to U.S. taxation on income generated globally.
  • Protection: Typically, a Foreign Asset Protection Trust offers enhanced protection against present and future creditors due to stringent foreign laws and the additional legal and logistical hurdles that creditors must overcome.

Foreign Asset Protection Trusts can safeguard assets from U.S. court seizure but expose them to potential economic and political risks in offshore jurisdictions.

Consulting with an estate planning attorney or financial advisor who specializes in asset protection is crucial to determining the best type of trust to align with one's financial goals and needs.

How do Asset Protection Trusts Work?

Asset Protection Trusts work by legally isolating assets from personal ownership, thus shielding them from various financial risks and liabilities while being managed by a trustee for the benefit of designated beneficiaries. Here's an overview of how they operate:

Creation and Funding of the Trust:

  • Settlor: The individual who creates the irrevocable trust and transfers assets into it.
  • Trustee: A person or entity assigned to manage the trust assets according to the trust agreement.
  • Beneficiaries: Individuals or entities designated to receive benefits from the trust.
  • Funding: The settlor transfers ownership of assets (e.g. real estate, investments) to the trust.

Legal Ownership and Control: The trustee holds legal title to the assets once assets are transferred. The trustee has a fiduciary duty to manage assets in the best interest of the beneficiaries as per the trust agreement. The settlor may retain some level of control or benefit but usually relinquishes direct control over the assets.

Protection Mechanism: The transferred assets are generally protected from the settlor's creditors because the settlor no longer owns them. If a creditor attempts to access the trust assets, they usually find it challenging because the trust, as a separate legal entity, is not liable for the settlor's personal debts.

Distribution to Beneficiaries: The trust agreement outlines how and when the trust assets or income derived from them will be distributed to the beneficiaries. The trustee oversees and manages these distributions according to the trust document and applicable laws.

Taxation and Reporting: Asset Protection Trusts can have different tax implications based on their structure and jurisdiction. The settlor is usually required to report the trust and may be liable for taxes, depending on local laws, trust type, and other factors.

Trust Termination: Depending on the trust agreement, the trust may terminate at a specified time, upon a specific event, or after fulfilling its intended purpose, distributing the remaining assets to the beneficiaries as per the trust's terms.

Important Considerations:

  1. Timeliness: Creating an APT after a claim may be considered a fraudulent transfer and be voided by a court.
  2. Jurisdiction: The protection the trust offers varies with jurisdiction; some provide more robust asset protection than others.
  3. Legal & Financial Counsel: Seeking professional advice is crucial to navigating legal intricacies and tax implications and ensuring the trust serves its intended purpose.

What is the difference between an asset protect trust and a living trust?

An asset protection trust is an irrevocable trust designed to shield assets from creditors. In contrast, a living trust is a revocable trust used primarily for probate avoidance and simplified estate administration after death.

The critical difference is that an asset protection trust involves giving up asset control to an independent trustee for creditor protection purposes. Compared to a living trust which allows the grantor to retain control over the assets during life. Asset protection trusts provide strong creditor protection but are more complex and expensive to establish than most living trusts.

What Assets Can be Used to Fund an Asset Protection Trust?

An Asset Protection Trust can be funded with a diverse array of assets, though the specific types of assets that can be used might depend on the jurisdiction, the trust's terms, and the trust's objectives. Here's an overview of the types of assets that are typically used:

  • Cash and Cash Equivalents: Liquid assets like cash, money market accounts, and other cash equivalents.
  • Investment Assets: Stocks, bonds, mutual funds, and other securities.
  • Real Estate: Residential, commercial, and other real estate property types.
  • Business Interests: Ownership interests in businesses, including stocks in privately held companies.
  • Intangible Assets: Intellectual property rights such as patents, trademarks, and copyrights.
  • Personal Property: High-value personal property such as art, jewelry, and collectibles.
  • Life Insurance Policies and Annuities: The benefits of life insurance policies and annuities.
  • Retirement Accounts: While generally protected, in some structures and jurisdictions, Individual Retirement Accounts (IRAs) and other retirement assets can potentially be assigned to trusts. However, transferring retirement accounts can have significant tax implications and may not always be advisable or permissible.

Special Considerations:

  • Valuation: It's crucial to value transferred assets accurately, especially for non-liquid assets like real estate and personal property.
  • Tax Implications: Transferring assets into a trust can trigger tax consequences, so consulting with tax professionals is crucial before funding a trust.
  • Legal Constraints: There might be legal restrictions or consequences related to transferring certain types of assets, necessitating legal counsel to ensure compliance with applicable laws.

Due diligence, proper valuation, and professional advice are imperative when selecting and transferring assets to ensure the trust's legality, tax efficiency, and effectiveness in achieving its asset protection objectives.

What are the Benefits of Asset Protection Trust?

An Asset Protection Trust (APT) offers several benefits that revolve around safeguarding assets, managing wealth, and providing financial stability. Here are the main advantages:

  1. Protection from Creditors and Lawsuits: These trusts help protect assets from future creditors and legal judgments, ensuring the settlor's wealth is preserved. By transferring assets to a trust, owners create a legal barrier, making it difficult for creditors to access the assets.
  2. Wealth Preservation: APTs allow wealth preservation for chosen beneficiaries, ensuring assets are passed down according to the settlor's wishes. These trusts help protect against unforeseen financial risks and uncertainties, preserving wealth for future generations.
  3. Estate Planning: An APT allows the settlor to structure how and when beneficiaries receive assets or income, offering a strategic approach to estate planning. Allowing for a quicker and more private transfer to beneficiaries upon the settlor's passing.
  4. Tax Benefits: Some Asset Protection Trusts can offer tax advantages, potentially reducing estate and gift taxes. Depending on the jurisdiction, there might be additional tax benefits, especially with trusts formed in states with favorable trust laws.
  5. Financial Privacy: APTs offer a level of confidentiality regarding the trust's assets and beneficiaries, providing an additional layer of privacy. The financial and asset details are generally kept private, with certain trusts offering more discretion than others.
  6. Flexibility and Control: Asset Protection Trusts can be structured to suit individual needs and objectives, offering flexibility in asset management. Certain trusts allow the settlor to retain a degree of control over the trust assets and to be a discretionary beneficiary.
  7. Medicaid Planning: Transferring assets to a Medicaid Asset Protection Trust can be a strategy used to preserve Medicaid eligibility while ensuring assets are used according to the settlor's wishes.
  8. Long-term Care Planning: It aids in planning for potential long-term care needs without exhausting all personal assets.

What is a Medicaid Asset Protection Trust?

A Medicaid Asset Protection Trust (MAPT), also known as a Medicaid trust, is a particular type of irrevocable trust designed to help individuals qualify for Medicaid long-term care benefits by sheltering assets. The overarching aim of a MAPT is to preserve assets for beneficiaries, typically the children of the person entering long-term care, while allowing the individual to qualify for Medicaid benefits.

What are the Potential Drawbacks of an Asset Protection Trust?

While Asset Protection Trusts have numerous benefits, they also come with potential drawbacks that need careful consideration:

  1. Costly Setup and Maintenance: Establishing an Asset Protection Trust, especially a foreign one, can be expensive due to legal fees, trustee fees, and other administrative costs. Ongoing management and compliance can incur additional fees, potentially diminishing the financial benefits.
  2. Complex Legal Process: Navigating the legal landscape to set up the trust accurately and effectively can be intricate and challenging. Mistakes during the setup process can lead to legal issues and compromise the effectiveness of the trust in protecting assets.
  3. Loss of Control: Transferring assets into a trust often means relinquishing direct control over those assets. While some trusts allow for a degree of retained control, there might be restrictions on how assets are managed or distributed.
  4. Limited Asset Protection: Not all assets might be fully protected; specific claims, such as those from existing creditors or spousal and child support claims, may still access the assets. The degree of effective protection also varies depending on the jurisdiction and type of trust established.
  5. Tax Implications: Despite potential tax benefits, there can also be tax complications and liabilities, especially with foreign trusts. Reporting requirements for the IRS can be stringent, and failure to comply can lead to severe penalties.
  6. Regulatory Scrutiny: Asset Protection Trusts, mainly those established offshore, can attract scrutiny from tax authorities and regulators due to tax evasion and money laundering concerns. Increased regulatory attention can lead to more stringent reporting requirements and compliance checks.
  7. Limited Accessibility: Accessibility to the assets can be limited once they are in the trust, depending on the trust's terms and conditions. Depending on the type of trust, accessing the assets might be cumbersome, especially in times of immediate need.
  8. Irrevocability: Many Asset Protection Trusts are irrevocable, meaning once they are established, they cannot be easily altered, amended, or terminated without the consent of the trustee and/or the beneficiaries. This irrevocability can be problematic if the settlor's circumstances or intentions change after establishing the trust.

When considering an Asset Protection Trust, weighing the benefits against these potential drawbacks is crucial. Professional advice from an estate planning attorney or financial advisor is imperative to fully understand the implications and structure the trust effectively.

How Much Does an Asset Protection Trust Cost?

The costs of setting up and maintaining an asset protection trust can vary, but some typical fees include:

Initial legal fees - To properly establish an asset protection trust, most attorneys will charge between $5,000-$10,000 on average. High asset trusts or complex situations may be $15,000+.

Trustee fees - If you use a professional corporate trustee, their annual fees could range from 0.25% to 1.5% of assets under management. Minimums often apply.

Administration expenses - A trust will require tax filing, accounting, record keeping, and other administrative fees over time. Estimate $2,000-$5,000 per year.

Title and transfer costs - Expenses will be incurred to retitle assets like real estate, bank accounts, and investments in the name of the trust. Budget 1-3% of assets.

Ongoing legal advice - Most A.P. trusts require periodic reviews, updates, and guidance from an attorney at added cost.

Estimated first-year costs could total $5,000-$25,000 between setup and asset transfers, with annual costs typically ranging from $7,000-$15,000 depending on trust assets and complexity.

Is an Asset Protection Trust Right for You?

Whether an Asset Protection Trust (APT) is "worth it" depends on individual circumstances, goals, and the specific concerns one is trying to address. Below are several considerations that can help determine if establishing an APT is a suitable choice:

  • Risk Exposure: Individuals with significant risk exposure due to their profession or business activities might find an Asset Protection Trust essential for protecting personal assets. Those with lower risk profiles might not benefit substantially from the protections afforded.
  • Estate Planning Objectives: Individuals with specific estate planning goals, like wealth preservation and structured distributions to beneficiaries, might find APTs beneficial. Those without complex estate planning needs may find more straightforward, less costly estate planning tools more appropriate.
  • Tax Implications: An Asset Protection Trust can be worthwhile if it offers significant tax benefits or efficiencies, especially for those with considerable tax liabilities. However, the potential tax complications and liabilities, particularly with foreign APTs, should be thoroughly evaluated to avoid unintended consequences.
  • Privacy Concerns: For those prioritizing financial privacy and discretion, the confidentiality provided by APTs can be invaluable. If privacy is not a significant concern, the benefits of an Asset Protection Trust may be less relevant.
  • Legal and Compliance Obligations: The legal protections afforded by an Asset Protection Trust can be crucial for those in litigious environments or industries, making the trust worth the investment. The complexity and stringent legal and compliance requirements of APTs may not be justified for those with less exposure to legal risks.

Establishing an Asset Protection Trust can be worth the investment for individuals with significant assets, high-risk exposure, complex estate planning needs, and specific financial goals. Balancing the potential advantages against the drawbacks, costs, and compliance requirements is crucial to making an informed decision.

It is essential to consult with a qualified financial advisor and an estate planning attorney to assess whether the benefits of an Asset Protection Trust align with one's circumstances, financial objectives, and risk profile.

Remember, there are different types of trusts you can use depending on your needs and financial situation. It is important to take the time to thoroughly research setting up a trust and consider all available options, taking into account your financial objectives, family, and personal preferences.

Live More & Worry Less

Live More & Worry Less

We have financial professionals ready to assist you on your retirement journey.

Related Trust Articles


Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.