1. Asset Protection Trust

Asset Protection Trust

Author: Real Estate Holding Company

Published Jul 11th, 2023Updated Feb 14th, 2024
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An asset protection trust is a type of trust that offers the most protection from creditors or lawsuits. While it will not be necessary for most people to use this complex and binding of a trust, it can be instrumental in your estate planning to ensure your beneficiaries are taken care of and that your wealth is protected while you are still alive.

How Asset Protection Trusts Work?

Many people choose to use revocable living trusts as part of their estate planning to ensure a smoother transition for their beneficiaries and to avoid a lengthy and costly probate. As the name implies, these trusts can be revoked and changed at any time by the grantor and offer little to no protection against creditors, lawsuits, or litigation. An asset protection trust (not to be confused with an asset preservation trust that has limits on how much you can transfer in) is different in that it’s irrevocable, and it’s the permanent nature of the trust that makes it so effective for protection.

With an irrevocable asset protection trust the grantor is no longer considered the owner of the trust - the trustee is - and the grantor’s name no longer comes up as associated with the assets. So, if you are the target of a lawsuit or litigation, the assets that you’ve protected in the trust will be untouchable by these creditors and you therefore have much less to lose. It does, however, mean that you give up some control of these assets and if you later change your mind and want them out of the trust, you can’t do anything about it.

Two Types of Asset Protection Trusts

There are only two types of asset protection trusts and whichever you choose, it’s strongly recommended that you retain the help of an estate attorney.

Domestic Asset Protection trusts

Domestic asset protection trusts are set up in the U.S. in one of the 17 states that currently allows them (although it’s generally thought that more states will start adding them). They are Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.

Your trust does not have to be in the state you live in and a good estate attorney will be able to advise you on the most advantageous state. There are few reasons you might choose a domestic trust such as protecting personal assets for future beneficiaries or Medicaid planning.

Foreign Asset Protection Trusts

Foreign asset protection trusts (sometimes called offshore trusts) are set up under another country’s jurisdiction and are therefore subject to their laws. Common jurisdictions for this type of trust are the Cook Islands, Seychelles, or British Virgin Islands. These trusts are almost always more expensive to set up and maintain, but carry more privacy protection for you and your assets. Additionally, many of these jurisdictions don’t enforce U.S. judgements.

Benefit of Asset Protection Trusts

Protection from lawsuits and creditors: This is the number one benefit of this type of trust. When creditors or lawsuits attempt to go after your assets, anything that you have protected in the trust will be off limits to them because you will no longer be the legal owner - the trustee will be.

Ensures assets for beneficiaries: If your property and other financial holdings are in an asset protection trust as part of your larger estate plan, you can rest easy knowing your beneficiaries will get the full amount you leave them.

Privacy: Since these trusts transfer the ownership out of your name and into your trustee’s, there will be no connection with the asset and your name. You can add further privacy by first moving your assets into an LLC before placing them into a trust.

Lower taxes: There’s no way to get out of taxes completely, but using this kind of trust can help reduce capital gains tax for your beneficiaries.

Help with Medicaid qualification: If you know you need Medicaid coverage, but don’t qualify, you can move some of your assets into one of these trusts to reduce your total taxable wealth.

Funding an Asset Protection Trust

You can fund an asset protection trust with just about any kind of wealth, but you’ll need to be 100% sure that you want to move it into the trust because anything you do cannot be undone. This is why it’s important to seek out professional advice when starting one. Some common ways of funding this kind of trust are:

  • Cash
  • LLCs
  • Real estate
  • Assets
  • Crypto
  • Intellectual property

Should You Start an Asset Protection Trust

Asset protection trusts are certainly not right for everyone and with their complexity come high costs for getting it started and maintaining it, especially if you are using an offshore trust. Most people who use this type of trust are fairly wealthy or have a large amount of business holdings they want to be personally protected from.

What are the steps to get started?

The first step is to write out the trust document. Because of its comprehensive and irrevocable nature you will want the assistance of a lawyer to do this. By taking your time and spending some money for professional advice you’ll be assured that everything is laid out correctly. You’ll need to choose a trustee and name your beneficiaries as part of this process, as well as lay out any instructions for your trustee on how to manage your assets.

The next step is to fund the trust. This should also be done with the assistance of an attorney and possibly your financial planner because once the assets are in the trust, there is no taking them out. You may also want to consider forming an LLC before you transfer property into the trust for added protection.

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